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The men allegedly created more than 40 different user names on EBay with false registration information, then used those aliases to inflate bids on paintings they were auctioning – an illegal process known as shill bidding. The scheme garnered bids totalling $450,000 in hundreds of auctions from November 1998 to June 2000, said federal prosecutors. Shill bidding is forbidden by San Jose-based EBay Inc. and is generally illegal in traditional auctions. EBay’s deputy general counsel, Rob Chesnut, said he believed this was the first criminal case to result from shill bidding online.

Kenneth A. Walton, 33, a lawyer in Sacramento, Kenneth Fetterman, 33, of Placerville, California, and Scott Beach, 31, of Lakewood, Colorado, were charged with 16 counts of wire and mail fraud, which carry penalties of up to five years in prison, a $250,000 fine and possible restitution to victims. Fetterman is also charged with money laundering, which carries a penalty of up to 20 years and a $500,000 fine. Walton is co-operating with the investigation, said his attorney, Harold Rosenthal: “He feels bad about all of this and is going to do whatever he can to make it right.”

According to the federal indictment, Walton put the initials RD 52 in the bottom righthand corner of an unsigned orange and green abstract painting that he and Fetterman picked up at an antique store. Prosecutors said that Walton then listed the painting on EBay – with photos showing the signature – and wrongly said he had bought it in Berkeley, where Diebenkorn worked in the early 1950s.

The three men allegedly made more than 50 phony bids on the painting, driving its price up from 30 cents to $135,505, before a Dutch man stepped in and bought it for $135,805. Diebenkorn’s real paintings have sold for millions.

Investigators for EBay later dissolved the sale and barred Walton from the site after discovering he had placed a $4500 bid on the painting himself. Walton said he made the bid for a friend.

The indictment said the three men also drove up bids together on another work purportedly by Diebenkorn and artists such as Alberto Giacometti, Clyfford Still and Maurice Utrillo. Fetterman and Walton allegedly came up with fake user names with Giacometti and Still in them to make it look as if the painters’ family members were bidding.

In one case, prosecutors said, the men created a phony e-mail account for a supposed expert on Still and congratulated the buyer for recognising an “excellent example” of the abstract expressionist’s work.

EBay rules prohibit shill bidding and even legitimate bids on behalf of friends and family of sellers. Chesnut said EBay was constantly monitoring for violations of the policy, but advised that buyers checked the bid histories of their fellow auction participants for irregularities.