Jolie Rouge
08-05-2002, 11:04 PM
A $300,000 con shows how easy it is to manipulate the system. Is eBay coming clean about fraud?
By David H. Freedman, August 2002 Issue
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• Viruses, Attacks, and Sabotage: It's a Computer Crime Wave - May 15, 2000 Fortune
• Schemers And Scams: A Brief History Of Bad Business - March 18, 2002 Fortune
Jeff Hamm, a slender 30-year-old partial to all-black outfits, spends much of his time pretending to be a young girl or boy. It's his duty, he's good at it, and he carries it out in a long, cramped room whose helter-skelter layout is dominated by the muted glow of websites displayed on several monitors. This is the headquarters of the Oakland County, Mich., computer crime unit. It could pass for a scrappy dotcom, if it weren't for the photographic portraits arrayed on one section of wall, which are unmistakably of the arrest-booking ilk. Most, it turns out, are of convicted "preferential child offenders" -- cop-speak for pedophiles -- whose sordid march toward justice began when they encountered one of Hamm's personae in a chat room.
But on Jan. 22, Hamm's mind wasn't on trolling for perverts. He was staring at the latest e-mail from the Internet Fraud Complaint Center (IFCC), a federal agency that acts as a clearinghouse for online scams. Five reports came in that morning from the IFCC, all involving the same alleged perpetrator: one Stewart Richardson, who operated a small shop just down the road from Hamm's office in White Lake Township. From there, Richardson ran a business selling collectible figurines -- glass, porcelain, and ceramic angels and elves from Hummel and other makers.
Each report described how a buyer had won an online auction on eBay (EBAY), sent money to Richardson, and received nothing in return. The size of the claims quickly caught Hamm's eye: Whereas the typical online auction victim complained of losing $200 or so, these customers were claiming losses of anywhere from $1,000 to $20,000.
Hamm was mulling over the information when his boss, Sgt. Joe Duke, told him that Lt. Ed Harris of the White Lake Police was on the phone. Harris, it turned out, had already received a dozen or so phone calls from enraged Richardson customers around the country. Duke also learned that just five days earlier, Richardson's wife had reported that her husband had left for lunch, cleaned out their bank accounts, and never returned.
The emerging details left Hamm, Duke, and FBI agents pondering the same question: How could so many people have turned over so much money to a man they knew only through an online auction, without any proof that they'd receive merchandise in return -- or even that the merchandise existed?
The answer points to a glaring hole in the eBay user-evaluation system -- in which buyers and sellers post ratings and comments about each other. The feedback system is designed to protect against unscrupulous buyers and sellers. But it also can fail to alert people to fraud -- and can even be used as a central element of the scam itself. It's a situation that might give pause to anyone thinking of purchasing high-value items on eBay, given that eBay itself holds up the rating system as the main, and in some cases only, line of defense against fraud.
Widely considered the crown jewel of Internet companies, eBay turned a profit of $48 million on revenue of $245 million in the last quarter, up 125 and 59 percent from the year before, respectively. The company has never denied that its more than 35 million users are vulnerable to fraud, but it says the problem is minimal. "We do $30 million a day in business, and the great majority of people play by the rules," says eBay spokesman Kevin Purseglove.
Yet eBay is keenly aware that its business is built on trust, and that limiting the amount of fraud on its site is critical to the health of its business. As Richard Trinker, an analyst with Gartner Inc., says, problems with fraud can "have a significant effect on the way people perceive eBay's character." Fraud could damage eBay's reputation to the point where it scares people away from the site.
Not surprisingly, eBay tends not to publicize the details of various frauds perpetrated on its site. The scams that have attracted attention (see "Other eBay Scams.") generally have come to light only after lawyers and prosecutors got involved.
Moreover, evidence suggests that eBay's stated fraud rate -- less than 0.1 percent of all transactions -- represents only a fraction of the problem. For one thing, an untold number of victims simply don't bother to report a fraud, either out of embarrassment, a feeling that the process will be too time-consuming, or a belief that it won't do any good. In addition, fraud can be reported variously to eBay, the IFCC, the National Consumers League, or local police, leading each to end up with low figures. All this is why Robert Posica, an FBI supervisory special agent who co-manages the IFCC, says incidents of fraud on eBay are "vastly underreported."
What's more, eBay doesn't include in its figures fraud claims that its investigators can't or won't confirm; in other words, it isn't fraud until eBay says it's fraud. eBay also won't say what percentage of transactions result in claims of fraud. A survey conducted last year by the National Consumers League's Internet Fraud Watch program, however, found that 41 percent of all online auction buyers claimed to have been bilked in some way by sellers, leading to an average loss of $326. (For its part, eBay says buyers commit more fraud than sellers, as when a buyer uses a stolen credit card.)
Another survey, conducted by the IFCC, found that auction fraud alone accounts for 43 percent of all reported Internet fraud. (eBay has about 90 percent of the online consumer auction market.) "eBay is one of the perfect uses of the Internet," Posica says. "But you have to be smart enough to know who you're dealing with."
For Richardson's customers, that would have required going to the state police headquarters in Lansing, Mich., or searching the state's database of criminals. By the time Richardson turned 18, he was in prison for car theft. Other crimes, including gun theft and assault with intent to murder, kept him there for much of the next decade. After Richardson was released in 1967, he apparently straightened out. He gravitated to a small-time entrepreneurial career, dabbling in real estate and then antiques.
He married and had a daughter, then divorced and married again. By the time he married his third wife, Arlene, in the mid-1990s, he had turned to the collectible figurines business. Richardson specialized in figurines that were no longer available and thus had some cachet among collectors. Inevitably, Richardson discovered eBay.
In February 1998, in what was apparently one of his first forays onto eBay, Richardson bid on and won two auctions. According to eBay's records, he contacted the sellers, furious that they wouldn't ship the items to him until they had his cash in their bank accounts. Who did business that way? he argued. What would prevent them from keeping the money and not sending the merchandise? He soon had his answer: After Richardson backed out of the deals, both sellers posted negative feedback about him.
Richardson quickly learned his lesson. A few days later, he earned praise from a seller for his courteous manner and fast payment, the first in what would be a long and rarely broken string of positive ratings. In a total of more than 6,270 auctions between early 1998 and the beginning of 2002, he earned more than 6,170 positive ratings and only 43 negative ones. Comments like this one -- "Great Seller! Great Merchandise! Speedy Delivery! Highly Recommend!!!!" -- filled his feedback page.
Richardson's eBay and other online dealings -- he also maintained a website -- dominated his business, making his shop more of a warehouse and shipping depot. Neighbors at the strip mall say the local post office often sent over a van two or three times a day to pick up the packages he and his three employees prepared. Most of the items he sold were given to him on consignment, for which he normally kept 40 percent of the selling price, typically in the range of $100 to $500.
To his neighbors, Richardson cut a prosperous, if standoffish, figure. He often wore a coat and tie, rarely struck up conversations, and kept himself busy, sometimes staying at his shop until 9 p.m. At the television repair shop next door, Wayne "Bubba" Laginess said he would hear Richardson get into screaming arguments with his wife, who ran a scrapbook shop two doors down.
In late December, Richardson started to post on eBay an unusually large number of figurine auctions -- well over 100 within a few days. Most were highly sought-after pieces, and described as in excellent condition. They were all part of an estate sale for which Richardson was acting as agent, the postings explained. For that reason, payment from winning bidders had to be received within seven days after the auctions closed, on Jan. 4.
It was like leading lambs to the slaughter.
http://www.business2.com/articles/mag/0,1640,42194,FF.html
By David H. Freedman, August 2002 Issue
Related Articles
• Amazon's Play for eBay - May 22, 2002 Business 2.0
• Making the Most of eBay - June 01, 2002 Business 2.0
• Viruses, Attacks, and Sabotage: It's a Computer Crime Wave - May 15, 2000 Fortune
• Schemers And Scams: A Brief History Of Bad Business - March 18, 2002 Fortune
Jeff Hamm, a slender 30-year-old partial to all-black outfits, spends much of his time pretending to be a young girl or boy. It's his duty, he's good at it, and he carries it out in a long, cramped room whose helter-skelter layout is dominated by the muted glow of websites displayed on several monitors. This is the headquarters of the Oakland County, Mich., computer crime unit. It could pass for a scrappy dotcom, if it weren't for the photographic portraits arrayed on one section of wall, which are unmistakably of the arrest-booking ilk. Most, it turns out, are of convicted "preferential child offenders" -- cop-speak for pedophiles -- whose sordid march toward justice began when they encountered one of Hamm's personae in a chat room.
But on Jan. 22, Hamm's mind wasn't on trolling for perverts. He was staring at the latest e-mail from the Internet Fraud Complaint Center (IFCC), a federal agency that acts as a clearinghouse for online scams. Five reports came in that morning from the IFCC, all involving the same alleged perpetrator: one Stewart Richardson, who operated a small shop just down the road from Hamm's office in White Lake Township. From there, Richardson ran a business selling collectible figurines -- glass, porcelain, and ceramic angels and elves from Hummel and other makers.
Each report described how a buyer had won an online auction on eBay (EBAY), sent money to Richardson, and received nothing in return. The size of the claims quickly caught Hamm's eye: Whereas the typical online auction victim complained of losing $200 or so, these customers were claiming losses of anywhere from $1,000 to $20,000.
Hamm was mulling over the information when his boss, Sgt. Joe Duke, told him that Lt. Ed Harris of the White Lake Police was on the phone. Harris, it turned out, had already received a dozen or so phone calls from enraged Richardson customers around the country. Duke also learned that just five days earlier, Richardson's wife had reported that her husband had left for lunch, cleaned out their bank accounts, and never returned.
The emerging details left Hamm, Duke, and FBI agents pondering the same question: How could so many people have turned over so much money to a man they knew only through an online auction, without any proof that they'd receive merchandise in return -- or even that the merchandise existed?
The answer points to a glaring hole in the eBay user-evaluation system -- in which buyers and sellers post ratings and comments about each other. The feedback system is designed to protect against unscrupulous buyers and sellers. But it also can fail to alert people to fraud -- and can even be used as a central element of the scam itself. It's a situation that might give pause to anyone thinking of purchasing high-value items on eBay, given that eBay itself holds up the rating system as the main, and in some cases only, line of defense against fraud.
Widely considered the crown jewel of Internet companies, eBay turned a profit of $48 million on revenue of $245 million in the last quarter, up 125 and 59 percent from the year before, respectively. The company has never denied that its more than 35 million users are vulnerable to fraud, but it says the problem is minimal. "We do $30 million a day in business, and the great majority of people play by the rules," says eBay spokesman Kevin Purseglove.
Yet eBay is keenly aware that its business is built on trust, and that limiting the amount of fraud on its site is critical to the health of its business. As Richard Trinker, an analyst with Gartner Inc., says, problems with fraud can "have a significant effect on the way people perceive eBay's character." Fraud could damage eBay's reputation to the point where it scares people away from the site.
Not surprisingly, eBay tends not to publicize the details of various frauds perpetrated on its site. The scams that have attracted attention (see "Other eBay Scams.") generally have come to light only after lawyers and prosecutors got involved.
Moreover, evidence suggests that eBay's stated fraud rate -- less than 0.1 percent of all transactions -- represents only a fraction of the problem. For one thing, an untold number of victims simply don't bother to report a fraud, either out of embarrassment, a feeling that the process will be too time-consuming, or a belief that it won't do any good. In addition, fraud can be reported variously to eBay, the IFCC, the National Consumers League, or local police, leading each to end up with low figures. All this is why Robert Posica, an FBI supervisory special agent who co-manages the IFCC, says incidents of fraud on eBay are "vastly underreported."
What's more, eBay doesn't include in its figures fraud claims that its investigators can't or won't confirm; in other words, it isn't fraud until eBay says it's fraud. eBay also won't say what percentage of transactions result in claims of fraud. A survey conducted last year by the National Consumers League's Internet Fraud Watch program, however, found that 41 percent of all online auction buyers claimed to have been bilked in some way by sellers, leading to an average loss of $326. (For its part, eBay says buyers commit more fraud than sellers, as when a buyer uses a stolen credit card.)
Another survey, conducted by the IFCC, found that auction fraud alone accounts for 43 percent of all reported Internet fraud. (eBay has about 90 percent of the online consumer auction market.) "eBay is one of the perfect uses of the Internet," Posica says. "But you have to be smart enough to know who you're dealing with."
For Richardson's customers, that would have required going to the state police headquarters in Lansing, Mich., or searching the state's database of criminals. By the time Richardson turned 18, he was in prison for car theft. Other crimes, including gun theft and assault with intent to murder, kept him there for much of the next decade. After Richardson was released in 1967, he apparently straightened out. He gravitated to a small-time entrepreneurial career, dabbling in real estate and then antiques.
He married and had a daughter, then divorced and married again. By the time he married his third wife, Arlene, in the mid-1990s, he had turned to the collectible figurines business. Richardson specialized in figurines that were no longer available and thus had some cachet among collectors. Inevitably, Richardson discovered eBay.
In February 1998, in what was apparently one of his first forays onto eBay, Richardson bid on and won two auctions. According to eBay's records, he contacted the sellers, furious that they wouldn't ship the items to him until they had his cash in their bank accounts. Who did business that way? he argued. What would prevent them from keeping the money and not sending the merchandise? He soon had his answer: After Richardson backed out of the deals, both sellers posted negative feedback about him.
Richardson quickly learned his lesson. A few days later, he earned praise from a seller for his courteous manner and fast payment, the first in what would be a long and rarely broken string of positive ratings. In a total of more than 6,270 auctions between early 1998 and the beginning of 2002, he earned more than 6,170 positive ratings and only 43 negative ones. Comments like this one -- "Great Seller! Great Merchandise! Speedy Delivery! Highly Recommend!!!!" -- filled his feedback page.
Richardson's eBay and other online dealings -- he also maintained a website -- dominated his business, making his shop more of a warehouse and shipping depot. Neighbors at the strip mall say the local post office often sent over a van two or three times a day to pick up the packages he and his three employees prepared. Most of the items he sold were given to him on consignment, for which he normally kept 40 percent of the selling price, typically in the range of $100 to $500.
To his neighbors, Richardson cut a prosperous, if standoffish, figure. He often wore a coat and tie, rarely struck up conversations, and kept himself busy, sometimes staying at his shop until 9 p.m. At the television repair shop next door, Wayne "Bubba" Laginess said he would hear Richardson get into screaming arguments with his wife, who ran a scrapbook shop two doors down.
In late December, Richardson started to post on eBay an unusually large number of figurine auctions -- well over 100 within a few days. Most were highly sought-after pieces, and described as in excellent condition. They were all part of an estate sale for which Richardson was acting as agent, the postings explained. For that reason, payment from winning bidders had to be received within seven days after the auctions closed, on Jan. 4.
It was like leading lambs to the slaughter.
http://www.business2.com/articles/mag/0,1640,42194,FF.html