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|R Lalique Auctions Law and Ethics - 3rd in a Series|
R Lalique Auctions Law and Ethics: The Five W's for Stopping Bid Rigging
by Steve Proffitt
We've reached the third installment in this series on bid rigging. In July we considered the susceptibility of the auction markets to rigging and saw several forms this crime takes. This month we'll look at what auctioneers should do to protect themselves and their sellers from those who would conspire on the buying side to damage auctions.
Bid rigging is a serious threat to sellers and auctioneers alike. Here are three initial points auctioneers should know.
First, the risk of bid rigging is in direct proportion with the value of the assets being offered. The more valuable the assets, the more likely collusion will occur. This is because rigging has one goal-money!
Second, certain types of assets particularly attract bid riggers. These include real estate, commercial goods, heavy equipment, motor vehicles, upscale antiques and collectibles, and livestock.
Third, considering the spectrum of bid rigging from small-time efforts to carefully orchestrated rings, many auctions experience some form and degree of collusion.
Although no one knows how much financial damage bid riggers inflict upon auctions, the prosecution of cases and other indicators suggest that much money is involved. Here is an example I have presented to numerous auctioneers in seminars.
Consider that an equipment auction may include hundreds to even several thousand lots. If a track loader that should bring $100,000 is offered but realizes only $60,000 because a cartel of riggers depresses the bids, a $40,000 loss is incurred. If the auctioneer is due a commission of 10% on gross sales, the seller suffers a net loss of $36,000, and the auctioneer gets hit for $4000. This is a significant loss for both. If the riggers succeed similarly on five machines in the auction, the losses suffered by the seller and the auctioneer become $180,000 and $20,000 respectively. Although this is a hypothetical example, you need only think of all the auctions conducted and lots sold to see that sellers and auctioneers have a lot of money at stake.
Unfortunately, in the face of this clear and present threat, the typical response by auctioneers to bidder collusion is to do nothing. It makes no sense, but it is true. Most auctioneers have no policy on bid rigging and take no steps to avoid or defeat it. Some years ago when I began writing and speaking on the topic I formulated what I call "the five W's" for auctioneers to use against this scourge. Here they are.
Thinking auctioneers worry about bid rigging. They realize collusion is a real, substantial, and constant threat to their business. I believe that rigging occurs in some form in many auctions. For auctioneers to ignore it is to whistle past the graveyard. By "worry" I do not mean to sit helplessly and wring one's hands in anguish while doing nothing about the problem. I mean that auctioneers should make worrying about this dangerous issue a stimulus to recognize the threat for what it is, remain mindful of it, and constantly address it.
Have you been confronted in a store by a sign that reads "Premises under video surveillance" or "Warning-Shoplifting is a crime and violators will be prosecuted to the maximum extent of the law"? We've all seen signs like these. They are posted to warn potential thieves and to dissuade them from committing crimes. Auctioneers should take a clue from their retail cousins to thwart those who would rig bids to steal from auctions. Signs like the following ought to be posted conspicuously around an auction site:
"Title 15, Section 1 of the U.S. Code makes Bid Rigging a Federal Felony with a Fine of up to $100,000,000 for a corporation and $1,000,000 for an individual, plus Imprisonment for up to 10 Years. Any agreement amongst potential bidders not to bid against one another, or to otherwise dampen bidding, is illegal and will be reported to the FBI for investigation and prosecution."
Auctioneers should also consider posting the telephone numbers and e-mail addresses for the FBI and Department of Justice (DOJ). These would be strong indicators that the auction company takes bid rigging seriously and will vigorously address violations. It would also invite auction-goers to report known or suspected violations. The more likely riggers feel that they might be detected and apprehended, the less likely they will be to commit their crime at this auction.
Here is a suggested provision for auctioneers to add to their terms of auction:
"Bid Rigging is a Federal Felony. Auctioneer will report illegal activity by any person to the FBI for investigation and prosecution. Title 15, Section 1 of the U.S. Code makes any agreement amongst potential bidders not to bid against one another, or to otherwise dampen bidding, illegal. The law provides for fines of up to $100,000,000 for a corporate offender and $1,000,000 for an individual, plus imprisonment of up to 10 years. Don't Take The Chance!"
Before an auction begins and when the auctioneer reviews the terms of the auction, it should be announced that bid rigging is illegal and that any suspected violation will be reported to the FBI. To underscore the seriousness of the matter, the auctioneer might also announce that the auction and crowd will be videotaped.
This is the principle that stores and other public attractions use when they have uniformed security officers patrolling their premises. The deterrent is obvious to potential wrongdoers.
Auctioneers should school their staff members on the problem of bid rigging just as they do for all other important aspects of their business. If bid rigging is to be detected and defeated, it has to become a top priority with those on the front line and most likely to encounter it.
When circumstances indicate the need, bidders should be watched as closely as is reasonable. Auctioneers should look for unusual conduct and other atypical interaction amongst bidders (i.e., fewer bidders than expected for a certain lot, bidders who were expected to bid not bidding, competitors grouped together, etc.). Although these signs are not conclusive evidence of bid rigging, they might be indicators that would justify inquiry.
There is nothing wrong with having an auctioneer or member of the auction staff politely approach a bidder and calmly ask questions about certain conduct or points that might indicate collusion. Anyone who does this should watch the person carefully and listen closely to the response. Some people give startling answers when questioned like this, and an auctioneer or staff member might learn something useful.
Also remember that when an auction has ended, the talk about it has not. Auctioneers and staff members should keep their ears open for post-auction "news" that might indicate bid rigging occurred. Credible rumors and suspicions should be documented and any evidence of wrongdoing collected and retained. Even if the information is insufficient to justify an immediate report to the government, it may be valuable in the future.
To defeat bid rigging, auctioneers must work at it steadily. Effective policing against collusion requires a full-time commitment. Auctioneers labor hard for their money, and sellers deserve the full value of their liquidated assets. Riggers seek to steal the value that rightfully belongs to auctioneers and their sellers. Auctioneers will either work to stop these criminals, or they will eventually lose to them.
When an auctioneer suspects bid rigging, she should do all she reasonably can to break the ring and stamp out the collusion. If necessary, she might have to pause in conducting an auction to make a stern announcement that bid rigging will not be tolerated. If the problem persists, she may have to end the auction early to save the seller from the financial loss that thievery through rigged bids can cause. No matter how strongly an auctioneer feels the evidence of wrongdoing is, however, she should never accuse anyone of bid rigging in front of someone else, and especially not from the auction block and over a public address system. This could take the auctioneer off the Sherman Act offensive and place her on the defensive end of a lawsuit for defamation.
If an auctioneer gains credible evidence of collusion, she should promptly report it to the FBI and DOJ and then cooperate fully with any investigation. Even if the auctioneer's report does not result in an investigation, the information will go into a government file that can be referenced in the future. Each time the auctioneer makes a report she adds to this file. Eventually the government may feel there is sufficient information to open an investigation.
The FBI and DOJ can be contacted by mail, telephone, or e-mail. These government offices can be reached at local field offices or at their national headquarters:
Federal Bureau of Investigation, J. Edgar Hoover Building, 935 Pennsylvania Avenue, NW, Washington, D.C. 20535-0001; (202) 324-3000; Web site (www.fbi.gov).
Department of Justice, 950 Pennsylvania Avenue, NW, Washington, DC 20530-0001; (202) 514-2000; Web site (www.usdoj.gov).
The Department of Justice maintains a Web site for reporting antitrust concerns: (www.usdoj.gov/atr/contact/newcase.htm). Auctioneers may e-mail complaints about suspected antitrust violations to DOJ's antitrust division at <email@example.com> or call toll-free 1-888-647-3258.
If an auctioneer takes information to the feds and it is not acted upon, that doesn't have to end the matter. States also have laws against bid rigging. If the feds aren't ready to pursue a case, an auctioneer shouldn't hesitate to raise the matter with the state attorney general or a local prosecutor. State officials may be more responsive than the feds, because the auctioneer will have a closer connection to them.
The goal of auctioneers should be to beat bid riggers. To do so requires planning, preparation, diligence, and perseverance. Auctioneers must fight this threat to avoid being victimized by it. When auctioneers are able to convince would-be riggers that their illegal schemes will be found out and their names and activity will be reported to the FBI, these lawbreakers will go where they can mine for ill-gotten gains without fear of detection and apprehension. It is then that auctioneers will have beaten the riggers in the auctions from which they fled.
Auctioneers trade on their reputations with sellers. Those that can generate the best selling prices can expect to attract the best assets to sell. To realize top results, auctioneers must achieve full value for what they sell. This requires that they abandon their tendency to do nothing about bid riggers and become proactive, creative, and energetic campaigners against this crime.
The steps outlined can help reduce the threat of collusive activity in auctions, but bid rigging remains tough to detect and even tougher to defeat. The problem is compounded since the conspiracies are often hatched outside of the auctions they target so that only a single conspirator will be present for the bidding. Nevertheless, a comprehensive policy consistently published and applied can yield positive results.
Finally, auctioneers must understand that every victory won against bid riggers is the same as a dam's holding back water—it's never final.
That's it until the September 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 <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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