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|R Lalique Auctions Law and Ethics - 1st in a Series|
R Lalique Auctions Law and Ethics: Goliath Meets King Kong
by Steve Proffitt
This is the opening installment in a multi-part series I'm going to do about a serious auction scourge: bid rigging. Bid rigging is a problem that adversely affects auctions of every type in every area of the country. We're going to examine some of the key aspects of this practice to gain an understanding of what bid rigging is, what motivates it, the primary law that applies to it, methods of rigging bids, and the steps to be taken to address it. Let's get started.
We'll begin by considering three examples of bid rigging by would-be bidders and buyers in auctions.
First, at a consignment auction, a woman is interested in a Chippendale table. It's a good piece, and she thinks it might fetch $25,000. She sees a dealer she knows eyeing the table and approaches him. In the conversation she gingerly inquires about the man's interest in the piece. During a brief discussion, she learns the dealer is interested in acquiring the piece. He tells her, however, that he equally likes another table in the auction. The woman tells him she had intended to bid on that other table, but if the dealer will agree not to bid on this Chippendale piece, she will promise not to bid against him on the other table he likes. This way, both of them have an increased likelihood of getting a better buy on the items they want. The two seal the deal and thus commit an illegal act of bid rigging.
Second, a residential house is scheduled to be sold at a foreclosure auction. A man sees someone that he has observed at similar auctions and concludes this second fellow will most likely be his stiffest competition for the property. He offers the other man $1000 cash on the spot if the fellow will agree not to bid on the property. The second man accepts the offer and the cash. This deal violates the law by rigging bids in this auction.
Third, at a heavy-equipment auction, two contractors and two equipment dealers are interested in the same bulldozers, graders, pans, and excavators. These fellows are acquainted through their work in the construction industry. They agree that they won't bid against one another, as this would only drive the prices up on the pieces they each want to purchase. The four decide that just one of them will bid on the pieces the group wants in an effort to buy for the lowest prices. They further agree that after the sale they will privately re-auction the pieces they purchase among themselves in such a manner that they will each benefit from participating in this scheme. The four men have violated the law against bid rigging.
We need look no further than the original "seven deadly sins" in early Christian teaching to find the root cause of bid rigging. It is a vice as old as mankind and one that has continued unabated over the millennia. It is greed.
People who rig bids in auctions are driven by selfishness so great that it causes them to break the law in hope of realizing extreme gains for themselves, without concern for the corresponding loss that their conduct will inflict upon others. This is raw and ugly greed.
In the late 19th century, large concentrations of capital held by a small minority of businessmen led to the formation of powerful monopolies that gained a stranglehold on major segments of American commerce. To further these gains and protect the commercial giants that they created, these businessmen forged anticompetitive agreements with would-be competitors. These agreements were known as trusts. Under the terms of a trust agreement, the participants would agree to work in tandem to dominate a market instead of competing head-to-head against one another. The goal was to extinguish serious competition and ensure that the companies involved would enjoy market dominance and the prosperity that came with it.
The trusts began to utilize various means to drive competitors out of business. It was a cutthroat time when Goliaths ruled the landscape of business. The impact on commerce in general and on consumers specifically was substantial and negative. The impetus and incentives for innovation and efficiency were reduced, and consumers had fewer buying choices, which led to higher prices for the goods and services they bought. This made the major corporations big winners, while consumers were relegated to being huge losers.
Government leaders became increasingly alarmed by the concentration of economic power among a small number of trusts and monopolies. Strong corrective action was needed, and Congress responded by creating and unleashing an 800-pound gorilla.
Senator John Sherman of Ohio introduced the first federal antitrust legislation. The public's outcry for reform of the oppressive economic activity of the day was so strong that the legislation passed in the House of Representatives 242-0 and in the Senate 51-1. The act was named the "Sherman Antitrust Act" (herein "Act" or "Sherman Act") for its author and was signed into law in 1890 by President Benjamin Harrison. The new law boldly outlawed the trusts and monopolies that had used their unequaled power to squash competitors and diminish competition.
Interstate commerce was the foundation upon which the Sherman Act was based. The government's initial efforts to use the Act against the trusts that it targeted were thwarted by adverse rulings from the Supreme Court. As a result, by 1899 John D. Rockefeller's gargantuan Standard Oil Company had 70 subsidiary companies and 23 refineries that controlled 84% of the crude oil refined in this country.
When Theodore Roosevelt became president, he became known as the "trust buster" for his efforts to use the Sherman Act to take down the trusts. During his two terms in office, Roosevelt oversaw the end of 44 trusts. His successor, William Howard Taft, followed suit with even greater success. During his one term in office, Taft's administration dissolved an additional 90 trusts.
Perhaps the biggest target of all was Standard Oil. In 1911 the Supreme Court ruled that the behemoth must be dissolved. The company was ultimately split into 34 independent companies, which included the operating units that would become Esso (now Exxon), American Oil, Socony (later Mobil), and Chevron.
The government's enforcement of the Sherman Act served to reopen markets and reestablish meaningful competition so that U.S. economic growth was spurred and widened. This benefits businesses that would be damaged or crushed by more powerful competitors using coercive means to gain market dominance. The Act benefits consumers by providing for free and open markets so there are more vendors competing to increase efficiency and offer increased choices of goods and services at reduced prices.
In 1914 the Clayton Antitrust Act was enacted during the administration of Woodrow Wilson. The Clayton Act supplemented the Sherman Act and corrected several deficiencies in it. The same year the Federal Trade Commission was organized to further rein in and control the excesses that unfettered business was prone to commit.
The Sherman Act is an extremely important law in American commerce. It prohibits efforts to artificially influence what should be free and competitive markets. While the Act is extremely general in its language, the courts have aggressively interpreted the statutes that constitute the Act to hold illegal all sorts of pricing and other anticompetitive schemes designed to tilt the playing field to the unfair advantage of one or a few players and against the public interest.
Title 15, Section 1 of the United States Code addresses the restraints of trade and commerce that are deemed to be illegal. It provides:
"Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal. Every person who shall make any contract or engage in any combination or conspiracy hereby declared to be illegal shall be deemed guilty of a felony, and, on conviction thereof, shall be punished by fine not exceeding $10,000,000 if a corporation, or, if any other person, $350,000, or by imprisonment not exceeding three years, or by both said punishments, in the discretion of the court."
Title 15, Section 2 speaks to efforts to monopolizing trade or commerce. It states: "Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony, and, on conviction thereof, shall be punished by fine not exceeding $10,000,000 if a corporation, or, if any other person, $350,000, or by imprisonment not exceeding three years, or by both said punishments, in the discretion of the court."
These two statutes constitute the heart of the Sherman Act, and they apply to far more than huge corporations trying to fix prices and monopolize commerce. While it's true many of "the big boys" have been prosecuted under the government's antitrust laws, it's also true that quite a few much smaller players have had the same unpleasant experience.
Unless there's a specific exemption (i.e., labor unions, agricultural cooperatives, and professional baseball), the Sherman Act applies to just about every effort to manipulate prices or monopolize trade or commerce. Bid rigging is not a crime that's limited exclusively to bidders and buyers. In auctions, it is important to note that bid rigging occurs on both sides of the selling block-i.e., it is committed by sellers and auctioneers, just as it is perpetrated by bidders and buyers. Either way is a violation of the Act. We'll look further into this point in a future column.
Bid rigging in auctions is a federal felony. The Sherman Antitrust Act is the hammer that nails the crime.
Bid rigging, price fixing, and market allocation have each been determined to be per se violations of the Act. This point is of great legal significance. It means that a defendant cannot offer an explanation that might be accepted to offset or mitigate the damaging effect of the wrongful conduct. Those who would rig bids should know this, just as they should know that a violation of the Act is a federal felony that carries a fine of up to $350,000 for an individual and $10 million for a corporation, plus a prison sentence of up to three years for each violation. Furthermore, those convicted under the Act can also be ordered to make financial restitution to their victims. These victims additionally have a private right to sue wrongdoers pursuant to the Clayton Act and, in doing so, can seek treble the amount of the damages that they can prove.
Next time we're going to delve further into bid rigging in auctions to see how this problem affects everyone interested in fair and competitive markets.
That's it until the July issue of M.A.D. Until then, good bidding.
Steve Proffitt is general counsel of J. P. King Auction Company, Inc. in Gadsden, Alabama. He is also an auctioneer and instructor at the Reppert School of Auctioneering in Auburn, Indiana, and at the Mendenhall School of Auctioneering in High Point, North Carolina. The information in this column does not represent legal advice or the formation of an attorney-client relationship. Readers should seek the advice of their own attorneys on all legal issues. Mr. Proffitt may be contacted by e-mail at <sprof firstname.lastname@example.org>
All articles in this series on Auction Law and Ethics are 2008 Copyright Maine Antique Digest and are reprinted with the assistance of of the Maine Antique Digest and the generous permission of the author, Steve Proffitt.
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