Interesting article in the most recent issue of Fortune that discusses the fraud that goes on at eBay, and what are the economic/legal incentives for why eBay does not intervene. Thought this would be particularly timely given that regulatory focus that the government is now giving to cyber-crime (which includes online auction fraud), and the number of scams we Prime members see ourselves.
Regards.
----------------------------------------------
eBay's Worst Nightmare
Scammers like him are ripping off users. eBay could do more to stop them.
FORTUNE
Monday, May 12, 2003
By Melanie Warner
Sitting in his eight-by-ten cell in a federal prison in North Carolina, Michael Paul Jackson, 23, still marvels at how easy the whole thing was. Several years ago when he decided to post fake auctions on eBay "selling" products he didn't own, Jackson knew, in some recessed corner of his mind, that one day he'd probably get caught. He just didn't imagine it would take four years. "I never knew how easy it was to manipulate people," Jackson said in a recent phone interview. "It was like taking candy from a baby."
All told, he stole $120,000 from more than 100 eBay users, most of whom won't get any of it back. A student at Radford University, Jackson would get photos of laptops and digital cameras from other people's auctions or elsewhere on the Internet and pretend that he owned those items. If the product retailed for $2,500, he'd sell it for $1,500, offering a killer deal people found hard to resist. When someone "won" one of his auctions, he'd ask for a bank check or money order and within a week or two the payment would show up in his post office box. Jackson was having the time of his life. He bought his girlfriend diamond rings and went on trips to Europe. He wasn't even trying all that hard to disguise himself--he registered with the Post Office using his real name and had people make the checks out directly to him.
Welcome to the dark side of eBay. Every day shifty opportunists like Jackson lure hundreds of unsuspecting users with auctions that appear legitimate but are really a hollow shell. They hop from user ID to user ID, feeding the system with fake information and stolen credit cards so that eBay can't tell who they are. Sometimes, like Jackson, they go on for years and are shut down only after law enforcement decides to get involved, which is something that's been happening with increased vigor over the past year. In response to a dramatic increase in auction-fraud complaints, on April 30 the Federal Trade Commission banded together with the National Association of Attorneys General to announce Operation Bidder Beware, a nationwide crackdown and consumer-education campaign. Last year the FTC logged 51,000 auction-fraud complaints, double the number in 2001. "It's one of our top priorities," says Barbara Anthony, Northeast regional director at the FTC. "It jeopardizes the e-commerce marketplace and the confidence consumers have in the Internet." These numbers include auctions on Yahoo.com and other sites, but the bulk of them are on eBay, which boasts 85% of the online auction market.
That isn't the picture of eBay most people are used to seeing. One of the dot-com era's most remarkable success stories, eBay now represents 2% of all of U.S. e-commerce and is one of the most significant technology companies created in the past ten years. Unburdened by costly warehouses, huge shipping facilities, or armies of customer-service people, eBay is a profit machine. Last year the San Jose company had earnings of $250 million, to-die-for profit margins of 20%, and a gravity-defying stock--up a stunning 90% since last May. But the very thing that makes eBay so wildly profitable, its hands-off business model, also leaves it vulnerable to fraud. Because the site is not so much an auction house as it is a swap meet, the company is purposely not watching everything that happens. It provides the virtual campground and then steps out of the way. Everything else depends on good will between users. "eBay is built on a belief that people are basically good," reads the Community Values section of eBay's site. Ah, if only.
While it's true that the vast majority of transactions on eBay come off without a hitch, fraud may be more prevalent than the company lets on. The company reports that only 0.01% of all completed auctions are fraudulent, but the numbers don't include everyone who's been a victim of fraud. They're drawn from people who go through eBay's fraud-insurance claim process. That doesn't incorporate victims who for whatever reason fail to complete the process, or those who don't start it in the first place because they don't see the point of applying for the maximum $175 reimbursement when they've lost, say, $3,000. The numbers also don't convey the fact that in some areas of eBay you're much more likely to be ripped off than in others. In the computer and consumer electronics category, for instance, theft could represent as much as 5% of all auctions, according to the fraud victims-turned-cybersleuths with whom FORTUNE spoke. Driven by anger about having been scammed, these people spend as much as several hours a day combing eBay for suspicious auctions and either reporting them to the company or shutting them down themselves by becoming the winning bidder--and not sending money. eBay vehemently disputes their figures. "Ridiculous," exclaims Rob Chesnut, eBay's fraud chief, who nonetheless declines to offer his own numbers for category-specific fraud.
On some level the exact fraud numbers don't even matter. The one person who doesn't get his PalmPilot doesn't care that 99 other people did. He quickly becomes disillusioned and loses faith in eBay, which is not what you want happening on a system that requires a sense of trust to operate. It's fair to say that fraud is just a thorn in eBay's side today, but if discontent continues to spread among victims groups and those who hear their horror stories, it could harm eBay's sterling reputation. "On a scale of one to ten, I'd give eBay a two for dealing with fraud. I got nothing from eBay--no support, nothing. I couldn't even submit a fraud claim because it was past the allotted time to file," says victim Mindy Bollinger, who hasn't been back to eBay since she was conned out of $1,400 last year. Gary Weintraub, who lost $10,000 trying to purchase a 1981 DeLorean (he got most of it back), certainly won't use eBay to buy a car again. "I'd only buy something small, like under $50," he says.
It's a vexing dilemma for eBay. On the one hand the company naturally wants to reduce the incidence of fraud. Yet the danger is that if it becomes too active or vocal about it, that could leave the company more vulnerable to lawsuits. Every time eBay's been taken to court over shady doings on its system, its status as a passive provider of a marketplace has shielded it from legal responsibility. "Were eBay to get more actively involved in fraud," says Scott Feldmann of law firm Crowell & Moring in Irvine, Calif., "it [would] run the risk of losing this immunity, because they [would] start becoming more of an agent for one side or the other." Chesnut, a former assistant U.S. attorney, disagrees and insists that the activities of his fraud team will have no effect on eBay's immunity.
This legal snarl may help explain why eBay has been slow to react to its fraud problem. Critics charge that there are many holes and backdoors to fraud that eBay has not fixed. The site, for instance, is still lacking helpful information that would educate users on how to identify fake auctions. There is no rundown of obvious red flags for scams or hints on how to do thorough research on other people using the feedback system. And some victims charge that eBay is unnecessarily draconian about not letting users post warnings to other people about suspicious auctions.
Chesnut says that within the past year eBay has started to take a more active approach to fraud. Instead of waiting for information to be brought to it by angry users, eBay's fraud department now does its own investigations. Last year Chesnut beefed up his team and created software to do things like monitor auction listings and catch the duplication of contact information. "At this point there's probably more people we suspend on our own than from alerts from the community or law enforcement," he says.
It's a good start, but critics don't think it's helped much. eBay's biggest flaws, they say, lie in its feedback system, the much-touted self-policing mechanism that's supposed to be eBay's first and last line of defense against fraud. Feedback consists of users' evaluations of each other after a transaction. The intent is to elevate the good guys and weed out the bad, but it doesn't always work."People are still manipulating feedback to make themselves look good," says Rosalinda Baldwin, who runs the watchdog site Auction Guild.
Want proof? Check out the feedback Jay Nelson got on his now defunct "skunkker" ID. A 35-year-old Illinois native who stole $200,000 on eBay, Nelson is now in prison in New Hampshire. "Skunkker" had 100 positive comments: "Excellent communication AAA+++ eBayer!!!," "THIS IS WHAT EBAY IS ALL ABOUT!!!!," and "highly recommended" are three typical ones.
To pull that off, Nelson used multiple user IDs to buy his own auctions, generously giving himself rave reviews. He also created the illusion of authenticity by initially selling computers legitimately at crowd-pleasing discounts. In other instances, he purchased lots of low-priced items and promptly paid sellers. That generated favorable reviews. But anyone checking his feedback couldn't tell that he was buying $10 boxes of golf balls, not selling $2,000 computers. And by the time negative feedback started rolling in from his subsequent fake auctions, Nelson was on to a new identity. eBay has since added a feature to feedback that lets you see whether the person in question was a buyer or a seller, but because of the lack of education among the site's users, most eBayers don't know how to use the tool to spot suspicious trends.
Keeping the feedback system free of loopholes is no easy task for eBay, as con artists are constantly devising new ways to manipulate it. Teresa Smith, a 26-year-old from Springfield, Mass., was particularly clever. After her first account was suspended, she talked two eBay users into working for her in what they thought was a real computer business. Both users had good feedback records, so Smith's victims never saw what they were walking into. "I don't know how you could guard against that kind of fraud," says Jean Zaniewski, an agent with the U.S. Postal Inspection Service who worked on Smith's case. "[The user whose account Smith used] was convinced she was for real. He'd gotten a computer from her at a good price, and Teresa's a very good talker." After pulling off one of the largest eBay scams ever--collecting more than $855,000 from 330 people--Smith turned herself in to the Boston U.S. Attorney's office last October.
Many of Smith's victims have subsequently organized on the Internet and become vocal critics of eBay. They think that if users were able to get more sophisticated information about a person's feedback, it would help buyers spot scams. John Allred, a San Francisco resident who lost $3,000 to Smith, wishes, for instance, that he could have seen the different price categories Smith's sales fell into. That would have allowed him to notice that "shadowsb" had suddenly switched from selling concert memorabilia for under $10 to high-end Apple computers for $2,000 and $3,000. "If eBay had provided me with a little more information, I would have come to a different conclusion about the auction. There are simple steps they could be taking to keep fraudulent sellers from wreaking havoc, but they don't," seethes Allred.
This sort of information might also help buyers determine if an account had been hacked into. Crooks look for a user ID with good feedback that has been dormant and then take it over, changing the e-mail and mailing addresses. Smith herself can spot that game quickly. After she turned herself in, she commenced a remorseful crusade to, as she puts it, "help other people avoid going through what I caused for so many." Several times a week she sends e-mails alerting eBay to suspect auctions. Often she's right, and days later the account is suspended.
Smith, who will start serving jail time next month, has a few ideas about how eBay could make it harder for people like her to steal. Most notably, she thinks the company should eliminate presales, a feature in which payment is due on an auction immediately but the item won't ship for as long as four weeks. Believing their computer was on its way from Smith's distributor, many of her victims waited six weeks before posting feedback warnings to other users.
eBay says it has looked at both the issue of categorizing feedback and presales, but that there's no easy answer. The problem for eBay is that those decisions have to be weighed against the impact they will have on legitimate sellers, who are the folks that pay the listing fees and are the financial lifeblood of the company. For example, Chesnut says that some sellers would be unhappy if eBay published how much their item sold for. The company also isn't likely to do away with presales for fear of angering sellers who auction things that can't be shipped right away, such as custom-built computers and tickets for concerts and sporting events.
Yet if it doesn't close some of the loopholes, eBay's fraud problem is likely to get worse, and its image will suffer. "eBay makes it look like you're in happy Internet-land where everything's safe, but you're not," says Jay Nelson. eBay will certainly remain a dominant player in e-commerce, but when your brand is as important to sales as it is for eBay, doing more to protect your customers from people like Nelson should be a top priority.
Regards.
----------------------------------------------
eBay's Worst Nightmare
Scammers like him are ripping off users. eBay could do more to stop them.
FORTUNE
Monday, May 12, 2003
By Melanie Warner
Sitting in his eight-by-ten cell in a federal prison in North Carolina, Michael Paul Jackson, 23, still marvels at how easy the whole thing was. Several years ago when he decided to post fake auctions on eBay "selling" products he didn't own, Jackson knew, in some recessed corner of his mind, that one day he'd probably get caught. He just didn't imagine it would take four years. "I never knew how easy it was to manipulate people," Jackson said in a recent phone interview. "It was like taking candy from a baby."
All told, he stole $120,000 from more than 100 eBay users, most of whom won't get any of it back. A student at Radford University, Jackson would get photos of laptops and digital cameras from other people's auctions or elsewhere on the Internet and pretend that he owned those items. If the product retailed for $2,500, he'd sell it for $1,500, offering a killer deal people found hard to resist. When someone "won" one of his auctions, he'd ask for a bank check or money order and within a week or two the payment would show up in his post office box. Jackson was having the time of his life. He bought his girlfriend diamond rings and went on trips to Europe. He wasn't even trying all that hard to disguise himself--he registered with the Post Office using his real name and had people make the checks out directly to him.
Welcome to the dark side of eBay. Every day shifty opportunists like Jackson lure hundreds of unsuspecting users with auctions that appear legitimate but are really a hollow shell. They hop from user ID to user ID, feeding the system with fake information and stolen credit cards so that eBay can't tell who they are. Sometimes, like Jackson, they go on for years and are shut down only after law enforcement decides to get involved, which is something that's been happening with increased vigor over the past year. In response to a dramatic increase in auction-fraud complaints, on April 30 the Federal Trade Commission banded together with the National Association of Attorneys General to announce Operation Bidder Beware, a nationwide crackdown and consumer-education campaign. Last year the FTC logged 51,000 auction-fraud complaints, double the number in 2001. "It's one of our top priorities," says Barbara Anthony, Northeast regional director at the FTC. "It jeopardizes the e-commerce marketplace and the confidence consumers have in the Internet." These numbers include auctions on Yahoo.com and other sites, but the bulk of them are on eBay, which boasts 85% of the online auction market.
That isn't the picture of eBay most people are used to seeing. One of the dot-com era's most remarkable success stories, eBay now represents 2% of all of U.S. e-commerce and is one of the most significant technology companies created in the past ten years. Unburdened by costly warehouses, huge shipping facilities, or armies of customer-service people, eBay is a profit machine. Last year the San Jose company had earnings of $250 million, to-die-for profit margins of 20%, and a gravity-defying stock--up a stunning 90% since last May. But the very thing that makes eBay so wildly profitable, its hands-off business model, also leaves it vulnerable to fraud. Because the site is not so much an auction house as it is a swap meet, the company is purposely not watching everything that happens. It provides the virtual campground and then steps out of the way. Everything else depends on good will between users. "eBay is built on a belief that people are basically good," reads the Community Values section of eBay's site. Ah, if only.
While it's true that the vast majority of transactions on eBay come off without a hitch, fraud may be more prevalent than the company lets on. The company reports that only 0.01% of all completed auctions are fraudulent, but the numbers don't include everyone who's been a victim of fraud. They're drawn from people who go through eBay's fraud-insurance claim process. That doesn't incorporate victims who for whatever reason fail to complete the process, or those who don't start it in the first place because they don't see the point of applying for the maximum $175 reimbursement when they've lost, say, $3,000. The numbers also don't convey the fact that in some areas of eBay you're much more likely to be ripped off than in others. In the computer and consumer electronics category, for instance, theft could represent as much as 5% of all auctions, according to the fraud victims-turned-cybersleuths with whom FORTUNE spoke. Driven by anger about having been scammed, these people spend as much as several hours a day combing eBay for suspicious auctions and either reporting them to the company or shutting them down themselves by becoming the winning bidder--and not sending money. eBay vehemently disputes their figures. "Ridiculous," exclaims Rob Chesnut, eBay's fraud chief, who nonetheless declines to offer his own numbers for category-specific fraud.
On some level the exact fraud numbers don't even matter. The one person who doesn't get his PalmPilot doesn't care that 99 other people did. He quickly becomes disillusioned and loses faith in eBay, which is not what you want happening on a system that requires a sense of trust to operate. It's fair to say that fraud is just a thorn in eBay's side today, but if discontent continues to spread among victims groups and those who hear their horror stories, it could harm eBay's sterling reputation. "On a scale of one to ten, I'd give eBay a two for dealing with fraud. I got nothing from eBay--no support, nothing. I couldn't even submit a fraud claim because it was past the allotted time to file," says victim Mindy Bollinger, who hasn't been back to eBay since she was conned out of $1,400 last year. Gary Weintraub, who lost $10,000 trying to purchase a 1981 DeLorean (he got most of it back), certainly won't use eBay to buy a car again. "I'd only buy something small, like under $50," he says.
It's a vexing dilemma for eBay. On the one hand the company naturally wants to reduce the incidence of fraud. Yet the danger is that if it becomes too active or vocal about it, that could leave the company more vulnerable to lawsuits. Every time eBay's been taken to court over shady doings on its system, its status as a passive provider of a marketplace has shielded it from legal responsibility. "Were eBay to get more actively involved in fraud," says Scott Feldmann of law firm Crowell & Moring in Irvine, Calif., "it [would] run the risk of losing this immunity, because they [would] start becoming more of an agent for one side or the other." Chesnut, a former assistant U.S. attorney, disagrees and insists that the activities of his fraud team will have no effect on eBay's immunity.
This legal snarl may help explain why eBay has been slow to react to its fraud problem. Critics charge that there are many holes and backdoors to fraud that eBay has not fixed. The site, for instance, is still lacking helpful information that would educate users on how to identify fake auctions. There is no rundown of obvious red flags for scams or hints on how to do thorough research on other people using the feedback system. And some victims charge that eBay is unnecessarily draconian about not letting users post warnings to other people about suspicious auctions.
Chesnut says that within the past year eBay has started to take a more active approach to fraud. Instead of waiting for information to be brought to it by angry users, eBay's fraud department now does its own investigations. Last year Chesnut beefed up his team and created software to do things like monitor auction listings and catch the duplication of contact information. "At this point there's probably more people we suspend on our own than from alerts from the community or law enforcement," he says.
It's a good start, but critics don't think it's helped much. eBay's biggest flaws, they say, lie in its feedback system, the much-touted self-policing mechanism that's supposed to be eBay's first and last line of defense against fraud. Feedback consists of users' evaluations of each other after a transaction. The intent is to elevate the good guys and weed out the bad, but it doesn't always work."People are still manipulating feedback to make themselves look good," says Rosalinda Baldwin, who runs the watchdog site Auction Guild.
Want proof? Check out the feedback Jay Nelson got on his now defunct "skunkker" ID. A 35-year-old Illinois native who stole $200,000 on eBay, Nelson is now in prison in New Hampshire. "Skunkker" had 100 positive comments: "Excellent communication AAA+++ eBayer!!!," "THIS IS WHAT EBAY IS ALL ABOUT!!!!," and "highly recommended" are three typical ones.
To pull that off, Nelson used multiple user IDs to buy his own auctions, generously giving himself rave reviews. He also created the illusion of authenticity by initially selling computers legitimately at crowd-pleasing discounts. In other instances, he purchased lots of low-priced items and promptly paid sellers. That generated favorable reviews. But anyone checking his feedback couldn't tell that he was buying $10 boxes of golf balls, not selling $2,000 computers. And by the time negative feedback started rolling in from his subsequent fake auctions, Nelson was on to a new identity. eBay has since added a feature to feedback that lets you see whether the person in question was a buyer or a seller, but because of the lack of education among the site's users, most eBayers don't know how to use the tool to spot suspicious trends.
Keeping the feedback system free of loopholes is no easy task for eBay, as con artists are constantly devising new ways to manipulate it. Teresa Smith, a 26-year-old from Springfield, Mass., was particularly clever. After her first account was suspended, she talked two eBay users into working for her in what they thought was a real computer business. Both users had good feedback records, so Smith's victims never saw what they were walking into. "I don't know how you could guard against that kind of fraud," says Jean Zaniewski, an agent with the U.S. Postal Inspection Service who worked on Smith's case. "[The user whose account Smith used] was convinced she was for real. He'd gotten a computer from her at a good price, and Teresa's a very good talker." After pulling off one of the largest eBay scams ever--collecting more than $855,000 from 330 people--Smith turned herself in to the Boston U.S. Attorney's office last October.
Many of Smith's victims have subsequently organized on the Internet and become vocal critics of eBay. They think that if users were able to get more sophisticated information about a person's feedback, it would help buyers spot scams. John Allred, a San Francisco resident who lost $3,000 to Smith, wishes, for instance, that he could have seen the different price categories Smith's sales fell into. That would have allowed him to notice that "shadowsb" had suddenly switched from selling concert memorabilia for under $10 to high-end Apple computers for $2,000 and $3,000. "If eBay had provided me with a little more information, I would have come to a different conclusion about the auction. There are simple steps they could be taking to keep fraudulent sellers from wreaking havoc, but they don't," seethes Allred.
This sort of information might also help buyers determine if an account had been hacked into. Crooks look for a user ID with good feedback that has been dormant and then take it over, changing the e-mail and mailing addresses. Smith herself can spot that game quickly. After she turned herself in, she commenced a remorseful crusade to, as she puts it, "help other people avoid going through what I caused for so many." Several times a week she sends e-mails alerting eBay to suspect auctions. Often she's right, and days later the account is suspended.
Smith, who will start serving jail time next month, has a few ideas about how eBay could make it harder for people like her to steal. Most notably, she thinks the company should eliminate presales, a feature in which payment is due on an auction immediately but the item won't ship for as long as four weeks. Believing their computer was on its way from Smith's distributor, many of her victims waited six weeks before posting feedback warnings to other users.
eBay says it has looked at both the issue of categorizing feedback and presales, but that there's no easy answer. The problem for eBay is that those decisions have to be weighed against the impact they will have on legitimate sellers, who are the folks that pay the listing fees and are the financial lifeblood of the company. For example, Chesnut says that some sellers would be unhappy if eBay published how much their item sold for. The company also isn't likely to do away with presales for fear of angering sellers who auction things that can't be shipped right away, such as custom-built computers and tickets for concerts and sporting events.
Yet if it doesn't close some of the loopholes, eBay's fraud problem is likely to get worse, and its image will suffer. "eBay makes it look like you're in happy Internet-land where everything's safe, but you're not," says Jay Nelson. eBay will certainly remain a dominant player in e-commerce, but when your brand is as important to sales as it is for eBay, doing more to protect your customers from people like Nelson should be a top priority.
