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EBay Unit to Pay Fine Over Bad Transactions

Scam artists are turning increasingly to Internet auction services to sell nonexistent products.

March 09, 2004|From Reuters

Online payment service PayPal has agreed to pay $150,000 to settle charges that it misled customers who expected refunds when purchases went awry, New York Atty. Gen. Eliot Spitzer said Monday.

The payment service also faces inquiries from the U.S. Federal Trade Commission and several states about its practice of freezing customer accounts as it investigates suspicious transactions, parent company EBay Inc. said in its annual report.

An EBay spokesman said the FTC had asked the company a number of questions last year but did not open a formal investigation. Other states are currently asking questions as well, EBay spokesman Chris Donlay said.

Internet fraud has grown in recent years as scam artists use auction services like EBay to sell nonexistent products.

The rate of fraudulent PayPal transactions is less than one-half of 1%, Donlay said. But due to the sheer volume of transactions it handles -- more than $12.2 billion last year, according to EBay's annual report -- the online service frequently is caught in the middle of disputes.

The settlement with Spitzer's office clarifies that the public should not expect the same level of fraud protection that credit card companies provide, a Spitzer aide said.

PayPal is not a credit card company and is not required by law to provide "chargebacks" to customers should a transaction go wrong, a Spitzer aide said, but the company's customer service agreement had led consumers to believe they enjoyed such protection.

PayPal agreed to change its user agreement to more clearly describe consumer rights, and will pay New York $150,000 in penalties and investigation costs, Spitzer's office said.

Complaints have also prompted the FTC and other states to investigate.

"If PayPal's processes are found to violate federal or state law on consumer protection and unfair business practices, it could be subject to an enforcement action or fines," EBay said in its annual report.

An FTC spokeswoman declined to comment.

Disgruntled buyers have said that PayPal does not deal with complaints promptly, while sellers say the payment service is too quick to side with consumers.

Shares of San Jose-based EBay rose 52 cents Monday to $69.83 on Nasdaq.

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