Why eBay Alone Draws Fire in Online Auction Probe

Like the biggest object in a shooting arcade, eBay ( EBAY) is a highly visible target.

The Web site has attracted most of the attention during the current controversy over inappropriate, illegal or fraudulent online auction sales. And while its pursuers' crosshairs seem to be trained more on the sellers rather than on the company, eBay and other auction sites will have to deal with the issues in order to keep their brands unsullied.

The latest fusillade slammed into eBay's legal department Jan. 29 (exactly a week after a TSC column about online gun sales), when several federal agencies requested information about possibly illegal transactions conducted on the site. eBay Feb. 26 said it is "fully cooperating" with a federal inquiry into "an investigation of possible illegal transactions in connection with the Company's site."

According to sources, the inquiries have come from several federal agencies, including the FBI and the Bureau of Alcohol Tobacco and Firearms.

"We have a very good reputation for cooperating fully with the authorities," says eBay spokesman Kevin Pursglove.

Federal investigators are more interested in tracking down or frightening off sellers of illegal or fraudulent goods than they are in pursuing suspicions that eBay might be doing anything illegal, say people close to the federal investigation.

"They've been very cooperative," says one person who spoke on condition of anonymity. "We see their operation as something like a place for people to advertise and if the higher-ups see it that way too, then eBay's probably off the hook as far as the federal government is concerned."

A number of eBay transactions have come under fire during the past six weeks, mostly in the course of a fraud investigation by the New York City Department of Consumer Affairs, which said it was looking into sales of bogus baseball memorabilia.

The publication of the Jan. 22 TheStreet.com column on gun sales was followed by eBay's announcement on Feb. 19 of a ban on firearm sales, to take effect this Friday. A second TheStreet.com column on alcohol sales preceded CEO Meg Whitman's remarks on CNET that the company is looking for a way to outsource wine and other alcohol sales to sites such as Virtual Vineyards which are licensed to conduct such sales.

Jeff Roehm, chief spokesman for the Bureau of Alcohol Tobacco and Firearms, would "neither confirm nor deny" that his agency was involved in the eBay investigation. However, in more general terms, he says that, since his agency views online auctions in much the same way as classified and other advertisements in traditional media, the venue would not run afoul of federal law even if problems were found with a given ad or transaction.

Pursglove says that eBay has arrangements with more than 100 software companies to help police software transactions and stop the sale of counterfeit programs. He reiterated the company's position that eBay has no legal liability because it is in the same position as traditional media wthat accept advertising. Andy Rebele, founder and CEO of CityAuction, agreed -- but cautions that "the reach of the Internet is such that a bad apple can reach a lot more people a lot faster than a classified ad in traditional media, and that means sites need to act quickly to police themselves."

Legal and other experts say that online auction sites need to police their systems for any questionable activity, if only to protect the site's reputation in the minds of consumers.

"The fact that the products are less controlled than the products sold by other businesses probably means a bit higher risk," says Goldman Sachs analyst Rakesh Sood. (Goldman Sachs was an underwriter of the eBay IPO.) "But every business has risks and what matters is how the risk is managed. They're addressing these issues and cooperating closely with authorities. At the end of the day, people's enthusiasm for the site and its stock will depend most on its franchise value and branding, and those rest on trust and safety issues."

Sood says he thinks that banning firearms and alcohol sales are more important from this standpoint than from a legal one.

A survey of other online auctions, including CityAuction, Yahoo! ( YHOO) and Excite ( XCIT) indicate that eBay is -- so far -- the only online aution site being examined by federal authorities. Despite that, Pursglove says, "We don't really feel singled out. I think they have contacted us because we've been proactive in addressing these concerns, because they know we're cooperative and because we're the industry leader."

In other words, because they are the biggest target.

Lewis Perdue helped launch three technology companies in roles ranging from marketing to chairman/CEO. He has written widely on technology for InfoWorld, PCWorld, Interactive Week, Forbes ASAP and many others. Perdue is also editor and publisher of Wine Investment News. He does not hold any positions in the stocks discussed in this column.

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