Most had used a third-party payment company named PayPal, which advertises itself as the safe and secure way to make payments in online auctions. So the victims were shocked to learn that PayPal -- the largest auction payments system, with 2.6 million users -- offered them none of the built-in consumer protection familiar to credit card users.
The trouble started in late June, when a Yahoo! (yhoo) user identifying himself as "harddrives4sale" began auctioning off four drives every day for about two weeks. He urged auction winners to use the PayPal service, saying he would get his money faster and thus could deliver the hard drivers faster.
At least 50 sent the money via PayPal; none received the hard drives. Since there is no mechanism to stop payment or contest charges against their PayPal accounts, the victims have no prospects for getting back their money.
"This guy found a weakness in the system and exploited it," said Sam Johnson, who was cheated out of $418. Johnson has set up a Web page where victims of the scam artist have collected their complaints and discussed strategy.
A big part of their discussion: Why isn't PayPal offering victims some kind of relief? When asked for help, victims got this reply: "PayPal is not an escrow service, and cannot protect buyers from sellers with illegal or unsavory business practices."
PayPal, which began facilitating payments between auction buyers and sellers in November, has enjoyed stellar success, and was acquired by online banking firm X.com in March. Not only has the company signed up 2.6 million users, but it's even become the most popular payment service used on eBay Inc. (ebay), dwarfing the auction site's own rival service, Billpoint.
PayPal works like this: Users open an account and fund it with credit card deposits, personal checks, or by receiving payments from others. Then, account holders can pay auction sellers instantly with PayPal funds. That's a big advantage -- the most frustrating part of the online auction business for sellers is waiting for payments to arrive via snail mail and then waiting for personal checks to clear. What's more, the service is free, so merchants can accepts credit card payments without paying a transaction fee.
But while sellers love the speed of the service and the security of knowing a check won't bounce, buyers don't have the built-in safety net offered by credit cards. The company makes clear in its terms of service that it's not a bank or escrow service and has no legal obligation to help users who are cheated out of money.
In fact, the company's terms of service even predicts the possibility: "(PayPal) does not ensure the quality, safety, or legality of the merchandise received, nor that the seller will even ship the merchandise."
Vince Sollitto, a spokesman forPayPal, said his firm has shut down the scam artist's account already and is investigating the incident.
Sollitto said PayPal changed its company policy on Friday to allow victims who filled their accounts with credit card funds to pursue refunds through their credit card companies -- though he said the policy change had nothing to do with this Internet scam. But users who fund transfers purely with cash balances in their accounts will still have no recourse.
"Well, they sent that person money," he said. "Our terms of use are quite clear. You asked us to send money to another person. We encourage you to know to whom you are sending money and why."
And since there's noway to stop payment orcontest charges againsttheir accounts, the PayPalsystem is ripe for fraud, according to Ken Owens of Twentyninepalms, Calif. He lost $191 in the scam.
"I'm sure (the scam artist) was hoping everybody sent money through PayPal," Owens said. "I'm sure he read the user agreement too."
Victims who paid via a personal check sent through regular mail discovered the scam artist was using a fake address, and their checks were returned by the U.S. Postal Service.
As for the scam artist, he used the name "Richard Nelson" in e-mails to the victims to announce they had won their various auctions. The headers of those e-mails, as supplied to MSNBC.com by victims, suggest the e-mails originated at "AlwaysPC.com,"which is registered to a"Jay Nelson" in NewHampshire. The phone number attached to thatregistration has been disconnected.
An alleged scam artist named Jay Nelson was charged Feb. 14 by the Illinois Attorney General's office with failing to deliver auction merchandise to buyers and with selling pirated software. Lori Corral, spokesperson for the attorney general's office, said there was no evidence to suggest that the harddrives4sale case and the Illinois case are related, but she confirmed that three consumers had recently filed complaints with her office suggesting a link between the two.
The story raises interesting questions about online payment firms like PayPal, which may act like a bank, and hold money in accounts like a bank, but are not subject to federal banking regulations.
Doug Johnson, senior policy analyst for the American Banker's Association, said he thinks federal regulators will eventually treat Internet-based payment systems like banks.
"I wouldn't be surprised if the FTC or another agency does try to make sense out of this in the near future. But from a consumer standpoint, this is problematic at this juncture," he said.
Dolores Gardner, an attorney in the Bureau of Consumer Protection at the Federal Trade Commission, said many consumers are surprised they have no protection when using services like PayPal.
"We've received a number of complaints about various companies acting as third-party facilitators of credit card transactions between buyers and sellers," she said. Despite detailed terms of service agreements, she said, some companies haven't done an adequate job of explaining to consumers what their rights are.
"It's not the kind of thing a consumer should have to ask about," she said.
But any future changes won't help Richard Nelson's victims, who are collectively out nearly $10,000 according to a tote board of victims that has been compiled.
"Just when you thought you could trust the Net something like this happens," said Tom Wight, of Agawam, Mass. "I know this is not the first time someone has been scammed over the Net, but I guess it doesn't hit home until it happens to you."
