Going...Going...Gotcha!

Edwin Stoddard, a computer systems analyst in McKenney, Virginia, loves bidding at online auction supersite eBay, successfully buying computer components and software. So when he was looking for a digital camera, he went directly to eBay, where he found a seller auctioning off 15 Sony digital cameras with a beginning bid of $400. He placed a bid of $542.

When the auction closed, Stoddard got an e-mail from the seller, a man named Robert Guest, who notified him that he was one of the successful bidders and instructed him to send $557 (including shipping) via a postal money order. Guest gave him a post office box address and said to expect the camera in three days.

"I waited. And I waited," says Stoddard. "I started to get a funny feeling about it." Two weeks later, he got an e-mail from someone else who had successfully bid on one of Guest's 15 cameras. "He hadn't received anything and wondered if I had," remembers Stoddard. Then he got another, similar e-mail from another bidder, and then another. Over the next three weeks he heard from ten other buyers.

The group discovered that Guest had held prior auctions for watches and jewelry, and his eBay feedback ratings contained glowing reviews. But this impressive résumé turned out to be a front for a big-time scam. Over 30 people had sent him money without receiving a thing, and the comments in his feedback page were from people who never bought his wares.

Altogether, Guest's scam netted him $37,000. But after two months of swindling, he got caught by federal and local government officials. Guest, a former pizza delivery manager from Blue Jay, California, said he used the stolen funds to feed his addiction to video poker. He's serving 14 months in prison for fraud and has been ordered to pay over $100,000 in restitution to his victims.

Scams on the Rise

As Guest's case illustrates, online auction fraud is booming. It ranks as the most common type of Web scam and accounts for more than half of all consumer complaints on the Internet, according to the Federal Trade Commission. In fact, the number of complaints rose from 100 or so in 1997 to 10,700 in 1999. "Anytime there's rapid growth in an industry, you also see rapid growth in fraud," says FTC Assistant Director Paul Luehr.

Most reported scams involve person-to-person auction sites, but fraudulent activities are becoming more sophisticated and are spreading to business-to-business auction sites, as well. B2B auctions--which can involve large-scale sales of raw materials and office equipment--provide opportunities for increasingly large frauds. In one recent case, i-Escrow, a Web-based escrow service, stopped a six-figure sale of satellite equipment to a buyer who tried to pass off a forged check. I-Escrow noticed discrepancies after the buyer's own information raised suspicions.

"B2B fraud is really coming to life," says Vince Gottman, senior director of customer support at i-Escrow. "Three years ago, most online auction purchases averaged about $20. Today, it's not unusual for [i-Escrow] to handle $100,000 to $200,000 deals."

Most of the major auction sites, such as Amazon Auctions, Auctions.com, eBay, and Yahoo, are taking steps to prevent fraud--albeit fewer than they could and should take. Government agencies are entering the fray as well, but they lack the finances and the personnel to chase every con artist. As a result, some victims have begun resorting to online vigilantism: warning potential victims and following scammers' digital tracks as the crooks change e-mail identities or acquire extra ones (see "Site Guardians").

For the unscrupulous, the anonymity of the Web makes perpetrating fraud at an auction site alluring, and this anonymity will attract more-sophisticated con artists, too. You take risks whether you're the seller or the buyer. Should you stop using auction sites altogether? Not necessarily. You can protect yourself by being a smart shopper, by reading the transaction terms, and by knowing how to negotiate an auction sale (see "Auction Tips").