BUSINESSWEEK ONLINE: DAILY BRIEFING
November 3, 1998


BIDDING IN AN ONLINE AUCTION? BEWARE OF SCAMS

$1,800 imitation Beanie Babies and bogus computer sales are among the bad deals

If you've ever been to a bazaar or flea market, you know the routine: During all the haggling over price, you check out the quality and authenticity of the goods. Chances are that by the time you hand over your cash, you know what you've bought.

The difference with an online bazaar -- at Web auction sites such as eBay, City Auction, or Haggle Online -- is that you pay your money then wait a few days to see what you've acquired. The system relies more heavily than most business transactions on an unspoken code of honor among buyers and sellers -- a code that's easily, and increasingly, being broken by a class of participants auction users denounce as scam artists and cheats.

Web auctions generated more scam complaints last year --1,152 -- than any other type of online site, according to a report released last spring by the Internet Fraud Watch (IFW), an online arm of the nonprofit consumers' advocacy group The National Consumers League. In fact, the two most widely reported scams during the first half of 1997, the IFW says, were those where bidders never received the item they had paid for, or got items vastly different from what they were promised. Such scams weren't even on the IFW's list just two years ago, the report says. Data for 1998 hasn't yet been compiled, but the IFW says it has fielded an average of 300 fraud complaints a month so far this year, nearly three times the monthly tally in 1997.

The IFW points to the experience of a Youngstown (Ohio) woman, a collector of the stuffed animals called Beanie Babies, to illustrate what can happen. Last February, says Christina, an accountant who wishes to use her first name only, she paid $1,800 for a rare "wingless quacker" Beanie Baby duck she found on eBay. Instead of receiving the limited-edition toy she bought with an express-mailed cashier's check, Christina says, she got an imitation worth less than $10. "I was mortified when I opened the box that finally arrived two or three weeks after I was supposed to get it," she adds. "[The seller] had just cut the wings off a regular quacker and hadn't even bothered to stitch up the seams. I sat there in shock looking at this bird with its stuffing hanging out."

Christina says she had taken precautions before sending her money: She checked out the seller's ratings -- comments on the auction site left by others who had bought from the same person. "Everything was good for the most part," she recalls. "The few negative comments I saw had been retracted a couple of days after they were posted, so I didn't think much about them." Once she received her phony Beanie, however, she took another look at those online endorsements. "Their addresses were the same as [the seller's]," Christina adds. "He was using aliases to post positive comments about himself and bid on his own items."

With that discovery in hand, Christina set off on a Beanie Baby crusade that has led to an increasingly contentious E-mail correspondence with the seller. Working backward from the shipping information that came with her tattered Beanie Baby, she traced the seller to a Las Vegas address. Knowing that many people don't use their real names online, she says she had a friend in Las Vegas look up the seller's marriage license to confirm his identity. She says she also contacted some of the people who had initially given the seller bad ratings on eBay. "Some of them told me they retracted negative comments because he threatened to post bad things about them, which would have made it difficult for these bidders to buy items in the future," Christina adds.

The seller, who likewise insists on anonymity, did not respond to that or any other of Christina's specific allegations. Nor did he grant a Business Week Online request for a phone interview. Instead, he swore via E-mail that "I have not stolen anyone's money." He conceded that "I recently sold a couple of fake Beanie Babies," but contended that they were listed as "known fakes" and added that in one case he had made a refund. He also accused Christina herself of selling fake objects -- a charge she denies.

Unlike many other types of consumer fraud, most online auction scams aren't perpetuated by seedy boiler-room operations, but rather occur on a person-to-person basis. That makes finding and prosecuting con artists extremely difficult.

Christina says she tried, but that "the Las Vegas authorities told me there was really nothing they could do because they weren't experts in Beanie Babies. To this day, I don't have my money back." The investigator in her case was unavailable for comment, but another detective in the fraud division of the Las Vegas police said he handles as many as 80 wire-fraud complaints concurrently, the majority of them involving online auctions. "Because so many of the complaints are from out-of-state residents, we usually advise them to work with their local state and FBI authorities," the detective says.

EBay took action, however. "This particular seller has been indefinitely suspended," says the company's corporate counsel, Brad Handler. "In fact, anyone who receives more than four negative feedback comments is automatically suspended." Handler says the site also works with the National Consumer League, cooperates with law enforcement officials, and provides a 24-hour support team that's reachable via E-mail to field allegations of misuse of the site. "We advise anyone who suspects fraud to file a complaint with their local authorities," Handler says. "Once we receive a copy, we suspend the user immediately."

Despite these precautions, however, the element of anonymity and the ability to morph from one identity into another can make it virtually impossible to completely patrol auction sites. Handler concedes that it would be possible for Christina's seller to simply re-register on eBay under a different name.

One further precaution online bidders can take is to use an escrow service such as that provided by TradeSafe Online Corp., which acts as a middleman between buyers and sellers. Instead of sending cash, check, or money order directly to the seller, online bidders send the amount to TradeSafe, which holds the money until the bidder gets the merchandise and is satisfied with the goods. TradeSafe President Bruce Todesco points to two customers he says avoided making a costly mistake last January, when a seller failed to deliver a computer for their winning bids on an auction site. Instead of losing thousands of dollars -- as Todesco says three other bidders did -- the two that used TradeSafe's services got their money back.

"I used the [escrow] service because I was buying something expensive and there were a few signs that the seller wasn't on the up and up," says Linda Ferver, one of the TradeSafe clients who got her money back. "I would definitely recommend using an escrow when buying anything computer-related."

Ferver says she got suspicious when she saw several auctions running for new computers under different names but using the same language. "I decided to go ahead with the deal, though, after I read [the seller's] ratings, which were positive, and after I got [the seller's] user information and spoke to him on the phone several times."

Police in Gulfport, Miss., where the seller lived at the time of the incident, turned the case over to the FBI. "We had reports from dozens of victims about bogus computer sales," says FBI Special Agent Harry Bowen, one of the investigators on the case. "As far as I know, [other than those who used an escrow service] no one got their money back, and the suspect had already left town by the time we tried to locate him."

Now it's up to Mississippi's U.S. District Attorney's office, which declined to release names and details about the case, to determine whether the seller will be charged with a crime. "This case was the first of its kind in our small office, but we're seeing more and more instances of wire fraud in field offices across the country," Bowen adds. "These days, the Internet is easier to exploit than the usual telemarketing system of making cold calls."

While escrow services might be a godsend for bidders, they can also benefit online sellers -- especially individuals or small businesses (see BW Enterprise, "Entrepreneurs Hitch Their Ventures to Online Auctions"). Since the escrow services accept the bidder's payment on behalf of the seller, they can clear the check or money order before the seller ships the merchandise. Better yet, they accept credit cards. "If you're a big merchant online, you can take credit cards," says Sherman Kwok, president of i-Escrow in San Mateo, Calif. "But what if you're Bob's Birdhouse? We can guarantee that the bidders' funds are there and sellers can get the money in a matter of days, not weeks," Kwok says.

The danger of being passed a bad check is something that i-Escrow member Clay Monroe knows only too well. About a year ago, Monroe, 35, had retired from his position as a computer network administrator for a small Seattle-based company to become an "at-home dad." From his home, he started a part-time business buying, reconditioning, and reselling discontinued personal computers he got from online auctions and local businesses that sell used machines.

In one instance, a bidder in Colorado insisted that the refurbished Apple Macintosh he had "won" in a Monroe auction be sent to him cash-on-delivery (COD) via UPS. While Monroe did receive a personal check for $120 from the bidder, it bounced, and the bidder wouldn't answer Monroe's subsequent E-mail. In following up with UPS and Colorado authorities, Monroe discovered that he was a victim of someone who habitually passed bad checks. The buyer did not reply to an E-mail request for comment from Business Week Online.

"I've been on the short end of the stick with a few people," says Monroe, who adds that he has heard the classic "the check's in the mail" explanation more than once. "That's why I much prefer dealing with i-Escrow," says Monroe, even though it costs him. Although a buyer usually pays the charges associated with using i-Escrow, sometimes a seller picks up the tab. The charges start at $5 for sales of $100 or less. For items up to $5,000, i-Escrow will take a 5% cut. For larger transactions, i-Escrow uses a sliding scale that can be as low as 1%.

If the incidence of auction scams continues to increase, the entire online auction business could suffer. Christina, for one, says she hasn't bid on anything since her experience and doesn't want to buy anything rare over the Internet ever again. And although eBay's Handler says he doesn't think the site would be held liable for damages in the case of a fraudulent transaction, TradeSafe's Todesco says he's not so sure. "If you advertise items and handle the money, too, you are begging for a lawsuit," he says.

At the very least, it pays to be extra-careful. "You can send information online, you can send online instructions for someone to do something -- transfer money, ship a package," Todesco says. "But you're never going to be able to 'virtually kick the tires' " when you buy online.

See the accompanying table: Online Auction Do's and Don'ts

By Stefani Eads, Staff Reporter, and Paul M. Eng, Senior Correspondent, Business Week Online


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