Panties were missing.
Many pairs of panties. Lacy panties, colorful panties, plain cotton panties, thongsand not clearance ones, either. They were being stolen by the armful from Victoria's Secret stores in the Boston area, with losses in the thousands of dollars.
Simultaneously, an unusually large number of new Victoria's Secret panties were appearing in eBay auctions. In volume.
The company knew this because Paul Jones, CSO of Victoria's Secret parent company Limited Brands, has a small team of investigators who monitor online auctions. In any given day, they crawl through tens of thousands of listings for merchandise from Victoria's Secret, Limited and Express stores. One investigator, Joe Hajdu, had a hunch that the upswell in eBay panty auctions was no coincidence.
Posing as "Joyce," owner of a small store, Hajdu bid on and won 65 pairs of panties offered by a seller who called herself Inesteva. The picture of her merchandise had caught his eye. "They were almost displayed like we have them displayed in the stores," Hajdu says. "It was like someone had taken their arm and just swiped a whole table right into a bag."
When the package arrived, Hajdu was not surprised to find a return address in Andover, Mass., not far from where the panty thefts had occurred. Using his alias, Hajdu won a couple more of Inesteva's auctions. Soon, she asked him what else he wanted. It was the lead he needed. He requested a particular kind of Victoria's Secret panty from the company's "Pink" collection, featuring an embroidered dog on the front.
That was when the investigation swung into high gear. A regional loss prevention manager marked hundreds of pairs of dog-embroidered panties with ultraviolet ink, writing the store code on each price tag. The very night that 180 pairs of panties were stolen from a store in Marlboro, Mass., Inesteva e-mailed "Joyce." "I have 185 pairs of panties," Hajdu recalls Inesteva writing. She attached a picture of the panties, some of which were embroidered with dogs, and asked, "Would you like to buy them?"
Cue the Dragnet theme song. The Andover, Mass., police department put the eBay seller, a 30-year-old named Jennifer Stevanovich, under surveillance. Police officers then watched the mother of three, who was technically unemployed, unload boxes from her new Mercedes-Benz SUV and carry them into the post office. This time, when Hajdu opened a box of panties postmarked from Andover, more than 20 pairs had ultraviolet ink markings from the Marlboro store, evidence enough to arrest Stevanovich for receiving stolen goods.
The sting seemed like a moment of glory for the good guys. When police searched Stevanovich's apartment, they seized $28,000 worth of new apparel from Victoria's Secret, Express, Gap, Abercrombie & Fitch and other retailers, along with $15,000 in cash and a device that removes product security tags. (At press time, Stevanovich was out on $15,000 bail and faced, if convicted, up to five years in prison for receiving stolen property, according to Hashem. Stevanovich pled innocent.)
But for Limited Brands, the panty raid was a mixed victory. Only one person was arrested in what investigators believe must have been a much larger criminal operation. And the company had dismaying new evidence that the resources it devotes every week to searching online auction sites for stolen and counterfeit goods are not optional. They have become a permanent cost of doing business.
"Criminals are just like water," says King Rogers, former vice president for asset protection at Target and now CEO of an eponyous loss prevention consultancy. "They seek the path of least resistance." Right now, say Rogers and other loss prevention experts, online auctions sites such as eBaylargely unregulated, wildly popular and next to impossible to controlare providing that path.
EBay, for its part, insists that it is not a retailer but a marketplace"the world's online marketplace"and as such is not responsible for the products offered on its site. So far, the courts have agreed. That puts companies like Limited Brands in the awkward and expensive position of serving as the world's online cops. If they don't, right now, no one else will.
A New Kind of Marketplace
Today, eBay markets itself as a vast and utopian community, where buyers meet sellers, and the laws of supply and demand rule. The strategy has worked. According to Nielsen/NetRatings, eBay has 49 million unique visitors per month, 50 times as many as its largest competitor, uBid. In the first quarter of 2005, eBay's members traded $10.6 billion of merchandise.
The vast majority of eBay sellers are law-abiding citizens. But eBay's success has also attracted a customer base that the San Jose, Calif.-based company does not as readily acknowledge: criminals. Many are the online equivalent of pickpockets, who describe products inaccurately, drive up prices with illegal shill bidding or fail to deliver merchandise. Far more dangerous to corporate America, however, are criminal sellers whose products do arrive as promised. These are the sellers who rely on good customer feedbackeBay's primary mechanism for protecting both buyers and sellers from fraudto grease the wheels of illegal activity.
A constant dribble of news reports illustrates how. Wiley Publishing sues a college student for selling copyrighted material. A Maryland woman finds an iPod on eBay with the same inscription as one that was just stolen from her home. Officials in Florida bust an orchid thief who's been auctioning off flowers he allegedly stole from state parks. Two Americans are arrested for selling pirated DVDs in China.
The problem gets worse. Experts see alarming evidence that these sellers are often organized retail crime rings, unloading huge quantities of counterfeit, stolen and gray-market goods. Oftentimes, the activities on auction sites serve as the public-facing portion of a much larger operation.
Shoplifting only begins to describe what these crime rings do. Loss prevention experts say that groups of three to six professional "boosters" can rob a store of $5,000 worth of apparel in one fell swoop. They'll pile merchandise into bags with special foil lining that thwarts store alarms, or one of them will "accidentally" set off the alarms to distract security, while the others walk brazenly out the doors with bags of merchandise. The boosters then pass the stolen goods on to the fence. The fence lists the items at sites such as eBay and Yahoo Auctions, posting large lots of similar goods, all labeled "NWT," for "new with tags." Once the seller finds a willing buyeroften a wholesaler or small-business ownerhe typically offers to sell goods outside of the auction space, as Stevanovich allegedly did.
"We're careful about not encouraging people to go out and steal" when they're under investigation, says John Talamo, Limited Brands' vice president of loss prevention, who directs the company's organized retail crime division. "But once our investigator starts to buy things, the person will contact us and say, Hey, I can get a lot more of this,' or I can get you what you want.'
"The Internet kind of transforms shoplifting from a petty theft into a lucrative business," Talamo says.
Uncertain Legal Terrain
Fake Coach handbags for sale on Canal Street in New York; fake Coach handbags for sale on eBay. Are online auctions really any different from criminal activity that has been happening all along? Yes and no.
Much of the criminal activity that used to take place at flea markets has simply moved online. The difference is that flea markets and another typical fencing operationpawn shopsare regulated by a patchwork of state laws. In those venues, sellers might be required to show receipts for merchandise, or to register and fill out paperwork before selling certain goods. Online, the same rules don't apply.
"The auction sites, in my opinion, are a marketing ploy for the organized retail crime organizations, just like the flea market booths were before the Internet took over," Rogers says. "It's simply a situation of criminal displacement."
EBay and others contend that they merely provide a trading platform for buyers and sellers, and are not responsible for any illegal transactions that may occur. "We never take possession of goods," says Hani Durzy, a spokesman for eBay. "We never touch them; we never see them. Therefore, of the 50 million listings on eBay [on an average day], we cannot confirm the origin of anything."
So far, the argument has worked. The online auction companies have managed to avoid regulation either of themselves or of the growing number of third-party brokers who specialize in selling items on their platform.
Three cases in particular stand out. In 2000, a judge in San Francisco dismissed a lawsuit filed by an attorney named Randall Stoner over bootlegged music sold on the site. The judge ruled that eBay was shielded by the Communications Decency Act, which protects Internet service providers from liability for potentially illegal conduct by their customers. Then, in 2001, a documentary film producer named Robert Hendrickson sued eBay for pirated DVDs being sold on the site. This time, a California judge ruled that eBay was covered by a safe harbor clause in the Digital Millenium Copyright Act. (The safe harbor protects online service providers from copyright liability, provided they block access to infringing material when they receive proper notification from the copyright holder.) Finally, in 2002, yet another judge in California threw out a case filed by five eBay users who had purchased phony autographed sports memorabilia. The judge ruled that eBay was not a "dealer" that needed to follow California's Autographed Sports Memorabilia statute.
Right now, the auction company faces the attorneys for two more formidable opponents. In Germany, high-end wristwatch manufacturer Rolex sued eBay for copyright infringement. The case was originally decided in favor of eBay, but an attorney for Rolex says that an appeals court recently reversed the trial court's decision and sent the case back for further proceedings. In the United States, the upscale jeweler Tiffany & Co. has filed a lawsuit charging that eBay is facilitating and participating in the sales of products that violate Tiffany's federally registered trademarks. (Tiffany declined to comment for this story, citing the active lawsuit.)
In a complaint filed in the U.S. District Court in New York, Tiffany's attorneys offer a rare glimpse into the scope of the eBay problem. During one five-month period, two Tiffany employees devoted "substantial portions of their time" to getting eBay to shut down 19,000 auctions of counterfeit Tiffany merchandise. That's 126 auctions a day. In another effort, the company randomly purchased 186 pieces of "Tiffany" jewelry for sale at eBay and found that only 5 percent of the items "advertised and sold as being genuine Tiffany jewelry were, in fact, genuine."
EBay declined to comment on the specifics of the case. Durzy says only that the claims are without merit and that the company is "disappointed to see that Tiffany felt that it had to resort to this."
"Their theory is that they're not like a seller, they're like a classified ad," says Brian Brokate, a partner with Gibney, Anthony & Flaherty, a New York City law firm that serves as Rolex's general counsel. "But they take a percentage of the sales price, so that to me says they are participating in the sale."
Brokate doesn't seem terribly optimistic that the courts will agree with him, though. "Everybody is watching the Tiffany case to see what happens," he says. "We're hoping for a good result, obviously. My primary concern is that no bad law comes out of itthat some court doesn't say, this is what eBay is, and this is what eBay's responsibilities are, and one of them is not to monitor for counterfeits.
Working with the System
Limited Brands and a coalition of other large retailers have taken a different tack. About a year and a half ago, under the auspices of the Retail Industry Leaders Association, companies including Limited, The Home Depot, Lowe's, Wal-Mart, Gap and Target approached eBay to open talks about reducing illegal activity on the site.
"They're pretty good at dealing with law enforcement, but that doesn't help if you're a retailer," says Limited Brands' Jones (whose full title is CSO and senior vice president of loss prevention and global security). He recalls the first meeting with eBay: "We said, Look, if you start working with us, and you start coming to the table with solutions," then retailers won't be forced to take legal action. "But right now," the retailers told eBay, "you're part of the problem."
The most pressing issue at the time was gift cards. Organized retail crime rings were returning stolen merchandise for store credit, and then selling the credit online. For criminals, selling store credit provides much higher profit margins than selling the merchandise itself. Hajdu, the Limited investigator, paid 25 cents on the dollar for the allegedly stolen panties that he purchased from Stevanovich. Recently, an eBay buyer paid $375.99 for a $449.99 Victoria's Secret gift card84 cents on the dollar.