Swimming With Sharks; With more people buying goods on online auction sites, crooks are getting even more aggressive.

Byline: Benjamin Sutherland

Last November, Chinese banker Jacky Chung searched the online auction Web site eBay for a model 5035 Patek Philippe watch. He found one offered by a woman in New York City. Her eBay account showed that she had sold numerous Swiss watches, and all her customers had posted positive feedback after their transactions.

Chung bid on the watch, won the auction, and wired $10,600 to her bank in New York. The woman e-mailed the tracking number of a package shipped, curiously, via Canada Postes in Quebec City. Six days later the envelope arrived at Chung's home in Hong Kong. It contained a car catalog, ripped up for good measure. "I think she just wanted to humiliate me," says Chung, who e-mailed eBay repeatedly, seeking redress. Five days later the San Jose, California-based company responded, inviting Chung to contact the authorities instead. The FBI suggested Chung talk to the police in Hong Kong. A police officer in Hong Kong told Chung to forget about it--such fraud is widespread.

The scam, increasingly common, highlights the growing vulnerability of online auction houses. Chung had unwittingly sent money to a fraudster who had hijacked the eBay account of a legitimate seller. Hijackers typically obtain passwords to accounts by "phishing," which entails spamming thousands of e-mail addresses with official-looking, but bogus, messages that solicit passwords to auction accounts. Once hijackers gain access to an account, they impersonate the legitimate owner, benefiting from that person's positive feedback (which previous customers post after each transaction). The feedback system is crucial to online auction firms and their users because it builds trust that lubricates deal-making. But scammers are getting better at gaming the system by stealing the reputations of others.

One reason fraud is on the rise is that more and more auctions sites have been popping up, thanks to inexpensive do-it-yourself programs. And eBay--the leader with 181 million people trading more than $40 billion a year worth of merchandise--signs up 110,000 people each day, providing crooks with a huge pool of neophytes to swindle.

Because eBay and others don't like to talk about fraud, hard numbers are scarce. According to the FBI, cyberscams in the United States increased by about 20 percent last year--of which three in five involved ...