People click through search results really fast. "XYZ alternative" would be much more acceptable if it came after the real name, but putting "XYZ" as the very first word is guaranteed to cause confusion.
The result can be split two ways. Either the advertiser wasted money on a click because the consumer will seek out the true XYZ. Or the consumer will be satisfied with what they've clicked and choose to buy it.
Hopefully the metrics show that the latter is mostly happening.
It's only fraud if the advertiser counterfeits XYZ's brand on their website.
Generally, yes. But if a large fraction of people are getting confused in a specific context, then you can say "don't word it that way", even if the wording is true when you consider it in a vacuum.
If putting the other brand name first causes consumer confusion in certain places, that's a problem, even if they're not lying or even doing it on purpose.
Hopefully the metrics show that the latter is mostly happening.
It's only fraud if the advertiser counterfeits XYZ's brand on their website.