eBay, The FBI, Shawn Hogan And Brian Dunning - Business Insider

The knock at the door came at 7:03 a.m.

Shawn Hogan, the CEO of a successful online marketing company called Digital Point Solutions, was sitting on his sofa. He didn't immediately answer the door. Then the key turned in the lock.

Nine FBI agents entered Hogan's upscale condo to serve a search warrant. They obtained access from a maintenance worker, according to a copy of the search report.

The agents took photos of his circular living room, and its wraparound windows looking out onto San Diego. Hogan's white cat appears in several of the pictures, perched unconcerned on a chair, but the real focus of the investigation was his computer equipment. Much of Hogan's apartment was a clutter of screens, hard drives and keyboards — which the FBI confiscated.

As they questioned him, Hogan told the agents he had been expecting them.

eBay paid Hogan a staggering $28 million in affiliate marketing sales commissions over the years, according to court papers.

Affiliate marketers place ads or links for eBay on their own networks, or on other people's sites, and they collect a cut of any sale the online auction company generates from them. eBay has about 26,000 of them, or more, at any one time, feeding traffic to its auctions.

But recently Hogan had fallen out with eBay, and the company had sued him, accusing him of fraud. eBay had also been cooperating with the FBI since June 2006 to root out affiliate marketers whose success was a bit too good to be true. The company had even created a piece of software to monitor Hogan's internet traffic — an online sting operation the company named "Trip Wire."

eBay alleged that what Hogan did to earn the sting operation and the knock at his door by the FBI was to rig eBay's system so that it falsely credited him for sales he did not generate. He did it by seeding unknowing users with hundreds of thousands of bits of tracking code, or "cookies." If any of those people bought something on eBay, the code signaled to eBay that Hogan should get a cut of the sale — even though he had done nothing to promote eBay.

The sting also netted Brian Dunning, eBay's second biggest affiliate marketer. The company had paid Hogan and Dunning a combined $35 million in commissions over the years, court papers say. Both men have since pleaded guilty to wire fraud.

This is the story of how eBay turned against the most successful affiliate marketers it has ever worked with. It is taken from the personal accounts of both men, and from civil and criminal court papers filed in litigation by eBay and the FBI.

Secret dinners and private jets

Hogan was eBay's top affiliate marketer, out of 26,000 members of the program, according to court papers in the case against him. The company had once feted him in Las Vegas, Hogan wrote on a 2010 blog post, with a "secret" dinner at miX, the Alain Ducasse restaurant at the Mandalay Bay hotel. They whispered to him about eBay's "black budget" for fighting Google, he claims, over a menu that today features Caspian Golden Osetra caviar. They offered him credit for private jet flights — which he says he took.

EBay had known for a long time how he generated his sales, Hogan claims, and wanted more of them. After all, Hogan was only taking a 50% cut (or less) of the revenues — the more he made, the more eBay made.

But a year before that, eBay executives began talking to the FBI about how, exactly, Hogan earned his sales, and whether they were generated honestly.

Hogan wasn't the only affiliate eBay was after. On the same day, at the same time, another group of FBI agents executed another search warrant, 70 miles away in Laguna Niguel, Calif., at the home of its second biggest affiliate marketer, Brian Dunning.

Dunning had earned $7 million in commissions from eBay over time, the court papers say. When the FBI agents questioned him, "The interview took place at the dining room table in Mr. Dunning's spacious, expensive home," as the FBI later described it.

Both Hogan and Dunning reacted the same way to the agents' questions: They both cooperated, and both indicated to the FBI that eBay knew what they were doing. Neither, however, produced any evidence — beyond their oral accusations — that any eBay employee did anything wrong.

Ultimately, three people were indicted* based on eBay's internal probe of its affiliate marketers. The company sued them all for its money back, too. Hogan and Dunning recently pleaded guilty to a single charge of wire fraud each. They have not yet been sentenced, but they both potentially face up to 20 years in prison.

Hogan told Business Insider, "The only one responsible for my actions is myself." He added that he hasn't given much thought to whether he'll go to prison or not.

Dunning declined to comment for this article.

EBay, in a statement, told Business Insider, "eBay has zero tolerance for criminal activity on its platforms; and, we are pleased that justice has been served in this matter."

Striking a deal over "World of Warcraft"

Hogan, 37, first became an affiliate marketer for eBay in 1999. Dunning joined in 2000.

Hogan is the more outspoken of the two. He has a blog called "Shawn Hogan Fan Club." His Wikipedia page shows him with a shaved head and dark glasses, wearing all black like sci fi villain. He was once hailed as a "hero" by Wired magazine for standing up to the movie industry when it sued him for piracy after he allegedly downloaded the movie "Meet The Fockers" via BitTorrent, even though he owned the DVD.

Dunning, 48, is the more "normal" of the pair, at least in real life. He has a wife and two kids. When the feds burst into his home, the search papers say, one of his main concerns was who was going to drive his Aunt Joy to the airport.

Online, however, Dunning has carved a path as a podcast personality, "The Skeptoid." Each week, Dunning examines a New Age, non-scientific, superstitious issue in his audio download. He claims 177,000 listeners weekly, on average. He has tackled UFOs, "The Aquatic Ape Theory," and the Loch Ness Monster in recent episodes.

The two men got to know each other around 2003 because they moved in similar circles. They were essentially competitors. But few people can write their own code and speak the arcana of affiliate marketing, and they ended up exchanging emails and phone calls frequently. They once discussed going into business jointly, as they played World of Warcraft together, but nothing came of it. They have only met face to face about seven times, the FBI believes.