Will Craigslist Have to Crack Down?

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Some agitation for change could emanate from eBay. In a lawsuit brought last year, eBay alleged that Craigslist took illegal steps to dilute its 28.4% stake in Craigslist in a bid to diminish eBay's control over the site. The case is scheduled for trial in late June in Delaware. If the court rules in eBay's favor, the auction heavyweight may be able to nominate one of the three directors on Craigslist's board and hold greater sway over strategy.

A big part of eBay's current strategy is exiting businesses that aren't core to its online retail and auction operations. So one option would be to push for a sale or an initial public offering, analysts speculate. "If it was eBay's decision, they'd definitely want to monetize" their investment, says mergers-and-acquisitions expert Tom Taulli. "There are some cases where you can compel a public offering." And cleaning up the site may very well be a prerequisite to an IPO or a sale to a company like Google (GOOG) or Microsoft (MSFT). "Most mainstream companies don't want to associate with that type of content," Taulli says of erotic services offered through Craigslist. "It would also make it more difficult for an IPO."

Representatives of eBay and Craigslist declined to comment for this story. In the past, Buckmaster and Newmark have often said they don't want to sell—in fact, they'd like to buy back eBay's stake.

new york powwow

Craigslist has already had to become more aggressive in keeping illegal activity off its site. In November, Craigslist signed an agreement with attorneys general of 43 states and the National Center for Missing & Exploited Children (NCMEC) to step up its efforts to combat child prostitution and pornography. Also, it has begun to require erotic-services purveyors to submit credit-card and phone numbers to Craigslist and has agreed to cooperate with law enforcement in tracking down offenders. In May, Craigslist said the number of erotic services ads declined 90% as a result.

Yet many states' attorneys general believe the efforts don't go far enough. Pressure increased in March, when an Illinois sheriff filed a lawsuit accusing the site "of knowingly promoting and facilitating prostitution" and asking the court to award damages and to close Craiglist's erotic services section. Craigslist attorneys from firms Perkins Coie and Wilmer Cutler Pickering Hale & Dorr have filed a motion to dismiss the case.

In April police arrested a man accused of slaying a woman he met through Craigslist. The arrest has heightened public attention on Craigslist and emboldened authorities who want the site to crack down on postings. At a May 5 meeting with Craigslist executives in New York, several attorneys general asked the site to adopt additional measures to ensure user safety and combat prostitution. NCMEC President Ernie Allen suggests that Craigslist should remove pornographic photos, hire staff to screen images, and impose fines on people who violate the site's terms of service. Users upload 10 million new images to the site each month.

"We share the AG's interest in minimizing misuse of Craigslist," Buckmaster wrote in a May 5 blog posting after the meeting. "We're optimistic this goal can be reached while preserving all beneficial aspects of a site relied upon by tens of millions of Americans, and without compromising the quintessentially American values of free speech embodied in our Constitution." Managing that delicate balancing act will only become more difficult as pressure on Craigslist mounts.

Kharif is a senior writer for BusinessWeek.com in Portland, Ore.

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