Prepared statement of Christopher Painter.
Re: Internet auction fraud.
Date: February 14, 2000.
Source: The page was created by scanning and converting into HTML a paper copy obtained from the FTC.

The events of the last week have demonstrated how important the Internet has become to our every day lives and how important it is for law enforcement to investigate and prosecute Internet crimes. Over the last 9 years as a federal prosecutor in Los Angeles, I have witnessed the tremendous growth and promise of the Internet. I have also seen, from the front lines, the dark side of this new technology as cyber criminals use the Internet to trap victims in a web of fraud. I have investigated and prosecuted Internet investment scams, hackers such as Kevin Mitnick, Internet stock manipulation schemes and online auction fraud. I have seen almost every type of traditional fraud migrate over to the new medium of the Internet, so called old wine in new bottles, and have also seen novel frauds made possible by this new technology.

One new type of crime is Internet auction fraud. Prior to the Internet, auction fraud was simply not a problem. In traditional auctions you could meet the buyer and seller and inspect the merchandise. At the very least you could make sure the merchandise actually existed. In online auctions however, you don't know who the seller is, where he is, or whether the offered items even exist.

My office, along with a task force made up of the FBI, Postal Inspection Service and the local Orange County California Sheriffs Department, prosecuted one of the first Internet auction fraud cases in the nation. In that case, the defendant, Robert Guest, offered a number of different items for sale over the Internet auction site eBay including digital cameras, laptop computers and gemstones. He cleverly gained the trust of his victims by engaging in a couple of legitimate sales to create a positive seller history on the service. He offered his wares in what is called a Dutch auction, allowing several bidders to "win" because several of each item was being sold. The auctions proceeded like any on eBay; bidders bid, the high bids were notified by email and they made arrangements to send their money. Guest told the "winners" that, if they sent money orders or cashiers' checks they would get their merchandise faster. What he didn't tell his victims was that they were not winners at all, but that he meant to make them losers, since he never owned and never intended to deliver the merchandise he sold to them It was a rip-off operation pure and simple, one that caused almost $40,000 dollars of losses to dozens of victims across the country.

We used both traditional and cyber investigative methods to investigate and charge Guest, following the money and following his digital footprints. He pled guilty to mail fraud, received a sentence of 14 months in prison and was ordered to pay nearly $100,000 in restitution to his victims - one of the first and the longest sentence meted out for this new crime.

Although Guest is one of the few criminal prosecutions to date, his scheme is not atypical. As you have heard this morning, online auction fraud is the fastest growing type of fraud around exploding at a pace that mirrors the expansion of the Internet. Most often, the schemes, Eke the one perpetrated by Guest, are not very complicated, though they cause real harm to many real victims. This harm is not limited to the loss of money but includes a loss of consumer confidence and trust in emerging Internet commerce. it is up to law enforcement, both state and federal to maintain consumer confidence by aggressively prosecuting fraud on the Internet, including online auction fraud.

Although we applaud the efforts of many of the online auction houses to protect their customers with escrow services, insurance and other methods of fraud prevention, that alone is not enough.

Law enforcement must shine a bright spotlight on the dark side of the web to expose those who would victimize our new cyber citizens. Prosecution of Internet fraud is a priority of the Department of Justice. I am happy to say that the United States Attorney's Office in Los Angeles, along with the Postal Inspection Service and FBI, are investigating several auction fraud cases. I also know of other cases being investigated by both federal and state authorities around the country, and that more cases are being referred by the FTC There is no stronger deterrent than criminal prosecution. If state and federal authorities work together to combat online fraud, the power of the Internet will spread that message far and wide and make would-be cyber criminals think twice before committing their online schemes.