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R Lalique Auctions Law and Ethics: Call It What It Is

by Steve Proffitt

In the June issue I began a multi-part series on bid rigging. Bid rigging is a crime that does tremendous harm in auctions of every type, in every region of the country, and to every sort of auction participant.

Last month we looked at several examples of bid rigging. We learned that the motivation for this illegal conduct is old-fashioned greed. We touched on the history of market manipulation in the late 19th century and saw how the government launched antitrust laws to attack and roll back giant corporations' efforts to monopolize important industries.

This month we're going to review the susceptibility of the auction markets to bid rigging and see the forms this crime takes. Along the way, I'm going to share what will be three surprises for many of you. I'll also tender an apology that I owe for an error I made last month-more about that in a bit.

-The Problem

An auction is a marketplace where sellers expose valuable assets to competitive bidding by prospective buyers. The goal is to achieve sales based upon the amounts of the highest bids made for the lots. An auction connotes an open, fair, and competitive market operated in accordance with law as a legitimate selling venue. Unfortunately, in too many auctions, the concepts of "fair" and "legitimate" are lofty aspirations undercut by fraud and other forms of illegal conduct, including bid rigging, all of which are rooted in the lust for money.

Bid rigging is a lot more common than you might think. I liken it to driving. Go out on most roads and there are folks around you playing fast and loose with the rules. This is what you find in many auctions. Bid rigging, like traffic violations, runs the gamut from incidental to egregious.

From my years of experience with auctions, I have long concluded many auctions involve some incidence of rigging by some parties on some lots. The nature of the auction process makes auctions fertile ground for wrongdoers to practice their tricks. Auctions are often conducted before large crowds, at a fast tempo, with no record of bids made or called, and frequently with some participants who are willing to ignore law and ethics. These factors and others make auctions an easy venue for wrongdoers to practice and conceal their sins. When someone tilts the bidding in his or her favor, the auction is polluted by the wrong, but the tilting party may reap an ill-gotten yet substantial gain-and one party's gain is another party's loss.

This problem has significant and far-reaching impact on auctions. The Antitrust Division of the U.S. Department of Justice publishes An Antitrust Primer for Federal Law Enforcement Personnel. The publication explains the antitrust laws and encourages law-enforcement personnel to look for and report violations. The paper warns: "Price fixing, bid rigging, and market allocation are economic crimes with potentially devastating effects on the U.S. economy. Such crimes rob purchasers, contribute to inflation, destroy public confidence in the economy, and undermine our system of free enterprise."

The pamphlet goes on to urge: "To protect the U.S. economy by successfully detecting, investigating, and prosecuting these crimes, the Antitrust Division believes that it must engage the assistance and support of other federal law enforcement personnel. We hope this Primer will help you to understand, detect, and report antitrust violations."

-Participants

One of the most pernicious characteristics of bid rigging is that it is commonly practiced by "good" people who see no wrong in what they do. These folks don't see themselves as criminals, and they would not ordinarily be thought of as lawbreakers. Yet that is what they are, and it is what they do when they rig bids. They don't see the criminality in their conduct because of the powerful and blinding effect of financial interest on personal judgment. These are the same folks who would quickly yelp about an offense they perceived committed against them. Sadly, their keen sense of right takes a holiday when they stand to gain by traveling the highway of wrong. The pot of gold at the end of the rainbow justifies their rigging that rainbow.

While bid rigging is commonly thought of as bidders attempting to "fix" auction results, this view is only partially true. There is another aspect to the crime that will surprise a number of you (Surprise No. 1)-bid rigging occurs on both sides of the auction equation. It is perpetrated by bidders and buyers for sure but probably no more than it is by sellers and auctioneers. If that news surprises you, it is because you envisioned bid rigging as working in only one direction when, in truth, it is a bidirectional activity that can involve agreements to artificially manipulate sale prices either down or up. Let's see how it is commonly done.

-Buying Side

On the buying side, two or more would-be bidders make a plan to work in concert to dampen market demand and thereby depress selling prices for what they want. These lawbreakers on the buying side of an auction are often referred to as "poolers." This term stems from the actors joining a "pool" of likeminded participants who agree to: (a) not bid against one another in favor of a pool member who is allowed to bid for himself, or (b) join in making a unified bid for the entire pool on each auction lot desired, thereby eliminating some, if not all, of the competitive bidding pressure that would otherwise exist to drive prices higher in a legitimate auction. Simply stated, fewer bids equals less demand, and less demand equals lower selling prices.

-Selling Side

The opposite is true on the selling side. Here, two or more persons plan to set the auction table so they can artificially inflate selling prices. This might be done by a seller and an auctioneer who plan to work together, or by a seller and another ally, or by an auctioneer and one or more shills. The plan is to inject "straw" bids into the auction, as necessary, to compete against legitimate bidders in an effort to induce these bidders to bid higher than real market demand would require.

-Methods

Imaginative bid riggers can employ many techniques to manipulate auctions, but four schemes predominate. As noted, the goal of each is financial gain for the perpetrators.

First, the practice of "cover bidding" is done by would-be competitors in the same industry. The practice is used to camouflage the ruse. It occurs on the buying side of the sale equation and usually in sealed-bid auctions. Each of the bid riggers bids to create an illusion of competition between them for what is being offered, but none of them has any intention of winning the bid. Instead, their purpose in bidding is only to "cover" their underlying plan. By example, several contractors might intentionally bid too high to gain a contract. The trick they intend turns on a fellow contractor's submission of a lower bid that will win the contract for less money than the compatriot's bid, and less money than genuine, competitive bidding would have required.

Second, "bid rotation" is a collusive agreement amongst would-be bidders that is also done on the buying side. The participants take turns on some agreed basis to win the bid in different auctions, or on different lots within the same auction.

Third, "bid suppression" is the buying-side technique used by poolers. As we've seen, participants agree not to bid against one another on a lot so that competition will be lessened in hope that the selling price will be depressed. Various techniques are used within these groups to compensate their members for their cooperation.

Fourth, "price fixing" in an auction is the opposite of bid suppression. This is "bid inflation." It occurs on the selling side when a seller and cohort (auctioneer or other ally) conspire to act in an effort to artificially raise prices that buyers will have to pay for goods or services.

Bid rigging is not a strategy in legitimate business. It is a crime of theft committed by criminals.

-Agreement

As we've seen, bid rigging is the result of a conspiracy between two or more participants entered into for the purpose of artificially affecting auction prices. The parties' agreement to the scheme is the necessary keystone to establish a violation of the Sherman Antitrust Act. Here are two important points about bid rigging that are not commonly known.

First (Surprise No. 2), a violation of the Sherman Act does not occur when a rigged bid is executed in an auction. The law is broken at the moment the conspiracy was formed by the co-conspirators. The Sherman Act outlaws a conspiracy made "in restraint of trade or commerce." The statute is triggered upon the parties' making an agreement to do what is impermissible, and it does not require execution of the plan.

Second (Surprise No. 3), it is not necessary for the conspiracy to succeed for the Sherman Act to be violated. Again, the violation occurs immediately upon the parties making an agreement that is prohibited by law. If two or more would-be bidders conspire to depress bidding in an auction, they have violated the act even if their plan fails. Likewise, if an auctioneer and a shill, or a seller and an accomplice, conspire to artificially boost prices in an auction, a violation of the Sherman Antitrust Act has occurred regardless of whether they gain a higher selling price.

-Penalties

As we saw last month, a violation of the Sherman Act is a federal felony. But it is more than I stated.

I began working on this column by reading last month's installment. When I did, something caught my eye. I realized I had errantly used a copy of the Sherman Act from an antitrust seminar I had presented several years ago. The version of the statute I quoted included penalties that have since been increased. Shame on me!

In June's column, I noted that upon conviction, the statute provides for a "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…." The government has upped the ante to a "fine not exceeding $100,000,000 [that's one hundred million!] if a corporation, or, if any other person, $1,000,000, or by imprisonment not exceeding 10 years, or by both …." I apologize for my error, but I'm pleased my mistake involved only quoting the statute and not violating it.

Why does the Sherman Act include such harsh penalties? It is because the federal government wants to protect sellers and buyers alike from those who would use wrongful means to affect trade and commerce. Open, legitimate, and fair markets are good for the nation's economy and benefit consumers and the government. Rigged markets are the opposite.

-Conclusion

Bid rigging is a serious threat to auctions of all types in all regions of the country. When practiced on the buying side, it can result in the sale of assets for a small fraction of their real value. When done on the selling side, it can cost buyers just as dearly. The practice is stealing, plain and simple, and it should be addressed sternly wherever it is found. This is what the Sherman Act and other laws against bid rigging stand to do.

Next month we'll consider what auctioneers should do to protect themselves and their sellers from those who would conspire to damage the auction markets and the selling prices they produce.

That's it until the August 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 <sproffitt@jpking.com>.

All articles in this series on Auction Law and Ethics are 2008 Copyright Maine Antique Digest and are reprinted with the assistance of the Maine Antique Digest and the generous permission of the author, Steve Proffitt.

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