Government Probes Transactions on eBay

Could the government put an end to all the euphoria surrounding eBay’s stock?

eBay (Nasdaq: EBAY) announced late Friday that it is cooperating fully with a federal investigation into possible illegal transactions on the auction site. The inquiry will include an examination of eBay’s roles in the transactions.

eBay released a one-paragraph statement about the investigation and did not go into specifics, saying that, “in order to protect the investigations, the Court has ordered that no further public disclosures be made with respect to the matter at this time.”

What makes the timing of the announcement interesting is that eBay stock is splitting 3-for-1 after the market closes today, and shares of eBay have seen a dramatic run-up in the last two trading sessions leading up to the split.

Security a Big Concern

Also on Friday, Microsoft (Nasdaq: MSFT) announced that it has determined that much of the Microsoft software being sold on eBay is counterfeit. eBay maintains that the government investigation and the announcement from Microsoft are not related.

With only the vaguest of details given, it’s anybody’s guess how serious of a problem eBay is facing. But the company seems to be doing all it can to shore up security on its Web site.

A week earlier, eBay announced that it would ban firearm sales. In January, the company said it would give buyers free insurance for products sold on the site and also start a user identification program to improve security. The firearm ban and the free insurance are expected to begin this month, but it’s becoming increasingly clear that policing a site with more than two million registered users — and growing — is no small task.

Frenzy Surrounds Stock

In anticipation of the split, eBay stock was up a whopping 34-1/2 to 334 on Friday. What makes this even more impressive is that shares of eBay were up 13-1/2 to 299-1/2 on Thursday. That’s 48 points in just two days of trading.

What’s also notable is that the stock closed Friday more than 100 points higher than it did on February 16, before reports of a deal with America Online (NYSE: AOL) began to circulate.

eBay should be a very active stock today as traders attempt to figure out whether the bad news now outweighs the good.

The stock was down 19 points in early trading, but quickly recovered, and was actually in positive territory around 1 p.m. ET.