this also happened to a friend of mine who used paypal on ebay. somebody was using his account to sell non existant goods and then transferring the money out to a seperate barclays account in england (we live in northern ireland). the first he knew about it was a letter from paypal threatening legal action for the lost sum of over £3000. did the same as above but thet are not interested even though there is a police investigation and the barclays account in england has been discovered and have now issued a court order. again they are not interested in his explanations but only in recovering the money they have had to repay to these people who bought the non existant goods.
a salutary lesson to us all! i have also now cancelled my paypal account.