Fools Team to Fight eBay Scam

Confronted by a dangerous scheme to defraud eBay auctioneers by entering and retracting sky-high bids, Motley Fool members have gathered to share information with each other and with the company.

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By Rex Moore (TMF Orangeblood)
May 2, 2001

A post from "swapusa" on The Motley Fool's eBay (Nasdaq: EBAY) message board sounded the first alert to his fellow posters: "I can buy anything on eBay for minimum bid!"

swapusa -- an eBay PowerSeller with dozens of auctions listed at any one time -- did not reveal exactly how the scam worked, but other posters soon followed up with the details. (swapusa has since shown the board live auctions where the scam appeared to be in progress, then emailed the auctioneers afterward to inform them of what happened.)

The scam
All it takes is two people working together, or one person with two different IDs. Let's say the scammers spot a newly listed item with a  $9.99 minimum that normally sells for around $100. The first person will enter an abnormally high bid -- say, $200.

eBay uses a very helpful proxy bidding system that allows a user to enter the maximum he is willing to pay for an item. The actual bid shown will only be for the minimum amount that will make that user the high bidder, however. Should others come along and bid higher, the system will automatically increase the first user's bid accordingly until his maximum is reached.

In our example, the first scammer's actual bid will be listed at the opening price of $9.99. This is where his accomplice -- or he, himself, using a second ID -- comes in. The second ID will put in a bid for just under the maximum set by the first ID. In this case, let's say ID number two bids $199. That means the current price for the item will now be the $200 bid from ID number one.

At this point, anyone happening upon the auction will see an item worth about $100 selling for $200 and pass on by without placing a bid. The auction will continue along with no more action until just before it expires -- when ID number two suddenly retracts its $199 bid. At that point, the price drops back down to $9.99 and the auction ends with ID number one catching a bargain.

Doing this could make you guilty of one or both of two eBay "bidding offenses:" bid manipulation -- the use of retracted bids to discover an auction's current high maximum bid (which is otherwise confidential) -- and/or bid shielding, whereby one or more bidders temporarily boost an auction to unusually high levels in order to protect lower bids that may not reflect fair value. 

Bids are not supposed to be retracted, except in the case of such "exceptional circumstances" as a seller whose identity cannot be verified or an item that changes in mid-auction. And eBay threatens perpetrators with a warning, suspension, or more, depending on the circumstances and their trading records. Indeed, the company suspended some of the bidders pointed out by swapusa. But that clearly doesn't stop some people from trying.

Potential solutions
With the scam revealed, Motley Fool members set out to offer eBay some solutions. Some suggested bid cancellations should be banned. Others thought that was too drastic, but had other ideas. "In the event that an auction suffers any bid withdrawal, the seller enjoys right-of-first-refusal on the purchase," said JimiH3ndrix.

albaby1 said: "If a bid is withdrawn within the last 24 hours of an auction, and is high enough to suggest a bid-shielding scheme, the seller would receive a notification. I would suggest a percentage threshold, comparing the maximum amount of the withdrawn bid to the final bid amount."

And, from swapusa: "Another potential solution would be to automatically extend an auction another 24 hours if a bid is retracted and give the seller the option of extending it even more. This way, every time a scam artist tries to take advantage of a seller and retract at the last minute, the auction is extended. Of course, the seller still has the option of ending the auction early and making the high bidder the winner."

eBay's response
eBay spokesman Kevin Pursglove says this particular scam pops up from time to time, but "remains a relatively small portion of the complaints that we receive about user activity." However, he says, "We're always open for additional conversations."

The suggestions from message board members have some potential drawbacks, Pursglove says: A 24-hour extension, for example, may chase away legitimate bidders who expect auctions to end on time, and a scam could be carried out during the extension.

Some measures are already in place to guard against bid shielding, such as allowing sellers to block individual bidders and the listing of bid retractions on user profiles. PowerSellers like swapusa, however, say they simply don't have the manpower to monitor all of their auctions for possible fraudulent activity.

"To date," admits Pursglove, "we haven't found the mechanism that brings the greatest benefit to the greatest number of users."

But perhaps the best thing to emerge from this is the education community members are freely providing each other -- especially in a climate where sellers may be loathe to report bidders for fear of punitive "feedback" that could damage their reputations with other users.

The more the eBay community knows about potential scams, the less likely they are to work.

Rex Moore hates domed stadiums, and thinks the retractable roof thing is getting out of hand. At the time of this writing, he owned shares of eBay. View his holdings and the Fool's disclosure policy any time online.

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