March 9, 2001
3 Men Are Charged With Fraud in 1,100 Art Auctions on EBay
By JOHN SCHWARTZ and JUDITH H. DOBRZYNSKI
Three men accused of trying to sell an abstract painting for $135,805 on the eBay auction Web site last year were indicted yesterday on charges of taking part in a bidding ring that cost hundreds of art buyers a total of $450,000.
The 35-page indictment charges the men with 16 counts of wire fraud and mail fraud. It accuses them of placing "shill" bids in 1,100 auctions between October 1998 and May 2000, including an auction involving the abstract painting, which seemed to be the work of the artist Richard Diebenkorn.
Speculation that this painting might be a 1952 work by Richard Diebenkorn pushed up the price it fetched on eBay last year. The auction company later nullified the sale.
Using more than 40 online user ID's, or screen names, like thrift- storebob and big-fat-mamba-jambas, the indictment says, the bidders buoyed prices and intended to trick other bidders into believing that the sellers were respected users of eBay.
Shill bidding, or bidding on one's own auction, is forbidden by eBay rules and is generally illegal in the traditional auction world. Each count of mail fraud and wire fraud could, if proved in court, lead to a maximum penalty of up to five years in prison and $1 million in fines.
Two of the men, Kenneth A. Walton of Sacramento, Calif., and Scott Beach of Lakewood, Colo., have been contacted by investigators but have not been arrested. The third, Kenneth Fetterman of Placerville, Calif., has not been located, said Nick Rossi, an F.B.I. spokesman in Sacramento, where the indictment was issued. Mr. Fetterman also faces six counts of money laundering.
The F.B.I. has said that it opened its investigation after reading an article that appeared in The New York Times on June 2, 2000. That article outlined how Mr. Walton, a Sacramento lawyer, almost sold the "Diebenkorn" for $135,805 after putting it up for sale for 25 cents. Mr. Walton paid a fee to eBay to have the painting listed as a "Featured Auction" in the art category on the Web site.
According to the indictment, the description of the work in a May 2000 listing said that Mr. Walton had bought the painting at a garage sale in Berkeley, Calif., before he was married, "and that his child had punctured a hole in it with a Big Wheel." A picture of the hole showed the initials "R.D."
The indictment says that "these statements were misrepresentations designed to deceive potential bidders." It added that Mr. Walton "had never been married, and had never had a child," and that he bought the picture at a secondhand shop in Littlerock, Calif.
The price of the painting skyrocketed on speculation that it might have been created by Richard Diebenkorn. The three defendants made more than 50 bids on the painting, the indictment says, and a man in the Netherlands placed the winning bid. The auction company later nullified the sale and suspended Mr. Walton for bidding on his own painting under at least five Internet names.
According to the indictment, the bidding ring had eclectic tastes in art, selling and bidding on hundreds of paintings that seemed to have been created by artists like Edward Hopper, Alberto Giacometti and Clyfford Still. The indictment states that Mr. Fetterman and Mr. Walton went so far as to create user ID's that included the names "Giacometti" and "Still" to give the impression that "a family member of the famous artists was bidding in the auctions of those paintings."
The two men also created an e- mail account for Gerald Stone, a fictitious expert on the art of Still, according to the indictment, and "Stone" sent an e-mail message to the winning bidder of the sham Still painting, congratulating the buyer for recognizing an "excellent example" of the artist's work.
Online auctions remain one of the few raging successes of the faltering Internet economy, and eBay is by far the largest of the companies offering auctions online. In the fourth quarter of 2000, eBay had 22.5 million registered users, more than double the number it had in December 1999; some six million auctions are taking place at any time, adding up to more than 200 million auctions a year.
The site's visitors spend more than $5 billion a year on items that include baseball cards and cars. Current auctions include the $5 million Florida castle of the sculptor Howard Solomon, and 41,686 separate auctions of items pertaining to the late Dale Earnhardt, the Nascar driver who died last month in a crash at the Daytona 500.
Because auction sites like eBay are open to all — eBay allows anyone to list an item for a fee of 25 cents to $2 — the sites have been used to commit a wide range of swindles. Most of those turn on sellers receiving payment for goods they never ship, or for products that are damaged or less valuable than described. The number of auction fraud complaints to the Federal Trade Commission has leaped to nearly 11,000 in 2000, from 107 in 1997. Last year, "they accounted for 8 percent of all consumer complaints to the F.T.C.," said an agency spokeswoman, Claudia Bourne Farrell.
EBay's critics have long contended that the site could do far more to combat fraud. But eBay insists that it has taken forceful action to reduce fraud. It has sporadically used Shill Hunter, software developed by the company to spot questionable bidding, before the "Diebenkorn" case arose, said Robert C. Chesnut, deputy general counsel for the company. But in the months since the case was publicized, the company has improved the software, Mr. Chesnut said, and has added another software tool to help identify shill bids as they happen.
Those tools cannot scan every auction, Mr. Chesnut said, but he compared the software to police with radar guns on the highway: "It sends a message," he said.
The company, he said, was pleased to hear of the indictments. "It helps send a message, and educate our user base that this isn't proper," Mr. Chesnut said. "If you do it, there can be serious consequences."
The United States attorney's office in Sacramento said eBay "provided substantial assistance" in the investigation.
David J. Carlson, a California art dealer who employs three "e-pickers" to search for authentic paintings on eBay that he might buy for resale, said that he had seen a recent drop-off in obviously fraudulent activity on the site. "Ring bidding is practically nil," he said. "It's as clean as I've ever seen it."
One bidder in the auction for the "R.D." painting, Mark Hudnall, said that he had bid $125,000 on the painting and, after being outbid, consulted Mr. Carlson about the painting. "I was ready to go to $350,000," said Mr. Hudnall, who lives in the San Francisco Bay area. Mr. Carlson raised doubts about the painting, and Mr. Hudnall did not raise his bid. "I learned a great big lesson," Mr. Hudnall said.
Mr. Fetterman's lawyer, Mary French of the federal public defender's office in Sacramento, said that she could not comment on the case. Mr. Beach could not be reached for comment.
A lawyer for Mr. Walton, Harold Rosenthal, said yesterday that his client cooperated fully with the investigation. "He's a good guy, and this is a dumb, juvenile thing that got out of hand," Mr. Rosenthal said. "It makes me want to hit him over the head."
Copyright 2001 The New York Times Company