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R Lalique Auctions Law and Ethics: Sleep Well

by Steve Proffitt

Last month I completed a three-part series on bid rigging in auctions. Bid rigging is a topic that generates more mail than most. The letters and e-mails I received ran the gamut from bidders attempting to trivialize the issue and explain how their agreements with other bidders not to compete against one another are not illegal to auctioneers sharing stories of riggers at work. I decided to use this column to share several letters that raise important issues.

-Real Problem

A letter from an auctioneer underscored the severity of the bid rigging problem: "I had an incident recently with some 'bottom fishers,' who were not only in collusion with other investors, but also went around and offered retail bidders $1000 to $2000 not to bid. I told them this must cease and, if it happens again, I intend to institute legal action. I'll use your information to further support any actions I take."

Bid rigging is a serious crime that costs victims a lot of money. The U.S. Department of Justice says so, and this auctioneer's letter proves it. Consider the amount of money these riggers were offering to some bidders solely for their agreement not to bid in an auction. Now ask: how much could they have been hoping to save on purchase prices if they were willing to invest thousands of dollars upfront to try to diminish competition for what they wanted? The obvious answer is a bundle. And who would pay the cost of their savings? The seller would pay it in reduced prices for his assets, along with the auctioneer who would lose commission dollars.

The techniques used behind the scenes by bid riggers span the spectrum from exchanging favors to trading things of value to bribes and payoffs to intimidation and threats. This auctioneer responded to these riggers by mentioning legal action against them. That is too great a burden and cost for him to undertake. The brazen illegality of this wrongdoing is so great that the auctioneer's best remedy is as simple as A-B-C. Well, actually three different letters: F.B.I. A report to the feds on this activity, supported by credible evidence, would bring investigatory heat that these riggers would never want to experience.

-Both Sides

When bid rigging is mentioned in an auction, a vision forms of colluding bidders working in the shadows to dampen prices. This is only half the story-the buying-side half. Bid rigging is not limited to bidders by either the law that makes the activity a crime or the facts of who rigs auction bids. Bid rigging is practiced on both sides of the auction street-by sellers as well as bidders.

A reader noted this: "Mr. Proffitt, I follow with great interest your monthly legal articles in M.A.D. I have just read your June column about auctions and bid rigging. While I realize it is premature for me to comment without first having access to the full series you are doing, I hope you will touch on shills in the auction audience. This is definitely a problem, and it was revealed some years back in our area at a local auction house."

The reader is right. Shilling is a form of bid rigging, and it is a serious problem that cheats buyers out of a lot of money. I addressed it in my July column.

A shill is a compatriot of a seller or auctioneer who works in tandem with the seller or auctioneer and makes straw (i.e., false) bids. The shill is a decoy used to trick other bidders into bidding an auction lot up to a level higher than legitimate competitive bidding would require. The shill bids against a legitimate bidder to keep that bidder bidding when no other legitimate bidder is participating in the auction.

-A Museum

A lawyer in New York City posed an interesting scenario about museums: "One issue you may wish to address is when a museum that collects the type of objects up for auction decides it would like to bid and publicly announces or privately alerts its circle of supporters and others on its mailing list of its interest. This issue may especially arise with historic house museums trying to reclaim original furnishings. It is logical to assume that a lot of collectors, but not necessarily all, will drop out knowing that the institution wants the item. I have always assumed there is no restraint of trade, price fixing, etc. by a mere expression of interest (even if directly communicated to those whom the museum knows may be potential bidders) even it if is assumed that this may logically result in fewer bidders competing for the piece since there is no agreement. It becomes more problematic, however, if the museum affirmatively asks (or even strongly suggests) that the other potential bidder not bid. And if the museum extracts an agreement from someone not to bid, it probably does fall afoul of the rule…."

I agree with my lawyer-friend on the first scenario. I see no violation of the Sherman Antitrust Act when a museum merely announces its interest in acquiring something in an upcoming auction. There would be no intent to conspire or make an agreement with another to "restrain trade or commerce," as the act prohibits.

The second scenario is more troublesome. If a museum asked someone not to bid against it, the museum's intention to affect bidding would certainly be present. As my lawyer-friend noted, however, the missing component for a Sherman Act violation would be the lack of an agreement with the second party. The Sherman Act is about dancing—couples dancing. It is not about solo acts.

Here is what the act at title 15, section 1 of the United States Code provides in part: "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 $100,000,000 if a corporation, or, if any other person, $1,000,000, or by imprisonment not exceeding 10 years, or by both said punishments, in the discretion of the court."

Consequently, when my lawyer-friend added "if the museum extracts an agreement from someone not to bid, it probably does fall afoul of the rule," he is dead on target. The agreement is the violation of the law.

-Partners

Several readers wrote with questions about "partners" joining to buy something in an auction to resell for a profit. The following encapsulates the gist of these inquiries: "I'm interested in learning the legal distinction, if any, between pools and partnerships among bidders. It seems that pools, where an item is bought by a group and then 'knocked out' (i.e., sold within the group at a private auction such that the proceeds are divided among the participants in one of several ways), are illegal because the knockout proves that some in the group would have paid more for the object at the original auction. I would like to believe that partnerships, however, are not similarly treated under the law. Certainly from the news coverage given to pairs of dealers combining to purchase objects I would take it they are not. My take is that if two or more people combine to purchase an object, and remain partners until that object is sold, the action is legal. My rationale is that without the second knockout auction, there is no admission that one of the parties would have paid more at the first auction, and also that the buying power of the bidders is now increased, which enables them to collectively bid more on an object than either of them could have bid individually. Certainly, the idea that they do not want to bid against one another and raise the price cannot be dismissed. To add a final twist though, if there is a problem with such a partnership, what if they do not succeed in buying the object, or what if they buy it and then ultimately lose money when they resell it?"

Bid rigging is illegal. It doesn't matter who does it or why. In any form it is a per se violation of the Sherman Act. This means there is no defense available for bid riggers, and no explanation or justification will change it from being a federal felony.

Partnerships and joint ventures are legal forms of business entities commonly made by businesspeople for legitimate purposes. The Sherman Act does not address partnerships and joint ventures, and it certainly does not outlaw them. Consequently, the fact that a partnership or joint venture is created is not a per se bid rigging violation under the act.

The key question that leads to the answer to the reader's question is: what is the intention of the parties in forming the partnership or joint venture? This answer determines whether the parties' action is legal or illegal. If the parties' intention is to conduct lawful business in hope of realizing a profit, there is no restraint of trade or commerce and no violation of the act, unless their combination is of such magnitude as to have a monopolistic market effect. It is where the parties come together solely to avoid being competitors in an auction that the law is violated.

The reader's reference to a subsequent knockout auction held by the parties is proof of their malignant intent, but it is not a requisite for a violation of the act. Likewise, whether the parties succeed in buying the targeted lots does not figure into the matter, just as whether they subsequently make money on a resale does not weigh on the legality of their action. Their conspiracy to restrain trade or commerce is all that is needed to establish a violation of the law. The end result of the conspiracy changes nothing.

What matters when considering whether a partnership or joint venture will pass legal muster are the facts surrounding it. What is the true intention of the parties and is there evidence of criminal intent? Is it an upfront and disclosed undertaking or a secretive pact? Do the facts indicate the agreement was made for a bona fide purpose, or do they point to an illegal scheme? Is the arrangement reasonable under the circumstances?

-Conclusion

The reported cases show bid riggers commonly don't exercise much subtlety behind the scenes in expressing their intentions and making their plans. The decisions of the federal courts and the press releases from the Department of Justice establish that bid rigging prosecutions are not built on fuzzy or technical violations that ensnare well-intentioned persons who unknowingly blunder into trouble with the law. Instead, the government's cases are built on solid and substantial facts of egregious wrongdoing.

Those who conduct legitimate business in an open and lawful manner have next to nothing to fear from the authorities who police commerce. The targets of Sherman Act investigations do things that justify the scrutiny they receive and the harsh consequences that sometimes follow.

The bottom line is this: do the right thing, and you will never lose a good night's sleep fearing that a federal indictment is being prepared in your name.

That's it until the October 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>.

© 2008 Maine Antique Digest

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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