Auction Law & Ethics
In recent years, the public has clamored for increased accountability from our industries, institutions, and arms of government. Progress has been made, but much remains to be done. Last month, I wrote about the lack of transparency that plagues auctions. There’s nothing clear about the auction process—not even close. My comments were not a condemnation of auctioneers but rather a caution for bidders that these markets harbor risks that bidders should know about and remain vigilant to avoid. Some of these risks are matters that are simply unclear and misunderstood. Others are active wrongdoing by sellers and auctioneers (e.g., phantom bids, shill bids, unannounced seller bidding, deception, and misrepresentation) or bad acts by bidders (e.g., malevolently running other bidders up, rigging bids, and even damaging or concealing auction lots to dampen bidding).
The auction process is not going to be suddenly clear like a cloudless sky at noon, so bidders must be proactive to help themselves see through the murkiness and understand what is going on inside. This month we’re going to consider several means for accomplishing this. We’ll look at the issues that bidders should focus on in four areas to guard against damage and loss.
If you’re going to be a bidder at auction, you need to understand the auction process. While this seems obvious, every auction-goer has witnessed others trying to bid when it was apparent these people lacked an understanding of what was transpiring and how to participate properly. Anyone can flash a bid, but before doing that a would-be bidder should become knowledgeable of fundamental auction terms such as “buyer’s premium,” “auction with reserve,” and “auction without reserve”; types of offerings (e.g., “two-way,” “times the money,” “high-bidder’s choice,” and “seller confirmation”); types of warranties; and the effects of disclaimers and disclosures. It is also important to understand the auctioneer’s chant, a singsong patter that weaves “bid” and “ask” amounts through an array of filler words designed to generate rhythm and spike bidder interest.
I couldn’t tell you how many bidders have complained to me over the years about auction issues that simply revealed their lack of understanding of the process. I watched one at an auction where six prints were offered by high-bidder’s choice. The auctioneer gave a clear description of the offering, and the bidder bid $65 to gain control of the lot. She then tried to exercise her “choice” by taking all six prints for $65. When the auctioneer explained that she could have all six for $390, she reeled with outrage. Misconceptions are problematic when bidders don’t understand what could easily be understood by anyone who invests the time and effort to learn.
Part of a bidder’s knowledge about the auction process should be identifying and understanding competitors. While bidders want to buy for bargain prices, sellers and auctioneers have an opposite interest and want to sell for maximum amounts. These opposed views (savings versus increased sales revenue) drive auctions and motivate the participants to act as they do. Bidders also square off with each other when pursuing the same lot.
If you liken an auction to a walk down a dark street, would you rather take that trek with someone you trust in a safe area, or with a stranger in a neighborhood known for muggings? A rational person would choose the former. Bidders should seek the same level of security by limiting their business to honest auctioneers. A trustworthy auctioneer who complies with legal requirements and ethical tenets will eliminate a large measure of the murkiness that shrouds what goes on within auctions.
A bidder finds such an auctioneer by conducting due diligence and learning what reasonably can be gained about a certain practitioner. The information sought should encompass the auctioneer’s procedures, practices, style, tendencies, and the big one—integrity.
The bidder wants to also know what the auctioneer’s reputation and character are. In law school, Professor Salzburg taught that us that reputation refers to the type of person others believe you are, while character is who you really are. Where a gap exists between the two with an auctioneer, the bidder needs to know it. This is why the bidder needs to gather information on more than just reputation to be able to make an informed decision on the auctioneer’s real character. If the bidder finds credible information that the auctioneer is less than honest, the bidder should take his business elsewhere. Crooked auctioneers don’t announce that they’re calling phantom bids or using shills. They just do these things and take the ill-gotten money. Such acts are hidden so that bidders seldom learn they were defrauded.
Here’s a story about an honest auctioneer and a dishonest auctioneer—at the same auction.
An auctioneer and his wife run an auction house that holds weekly sales. Oftentimes, they hire another auctioneer to assist them. They engaged such a fellow for an auction. After the owner had sold for a couple of hours, the backup took the microphone and began selling. The owner’s wife was seated beside the auctioneer and serving as the clerk. During a brief lull, while a large item was moved, the fellow turned to her and said, “You can make more money with that pencil than I can with this mic.”
“What do you mean?” she asked.
“When I sell something for twenty dollars, just mark the ticket twenty-five. If I sell it for fifty, mark it fifty-five or sixty. They forget what they bid, so they don’t know the difference. It works like a charm, and the worst that can happen is that we have to say, ‘Sorry, we made a mistake,’ and then adjust the price.”
There is certainly no transparency in this practice. At the next break, the wife reported to her husband the conversation with the dishonest auctioneer. The owner fired the guy on the spot, proving that he is an honest auctioneer. So there you have it—two auctioneers, one honest and one not, in the same auction. How many buyers do you suppose the other guy has hurt over the years?
The focal point of an auction is what’s for sale. Bidders need to learn all they can about the property that interests them. This starts with the bidder’s knowledge of the items and is supplemented by a careful inspection to determine the authenticity, condition, desirability, and likely value of the goods. Most auctions sell on an “as is” basis. Beyond the legal meaning of this disclaimer is this brass-tacks definition: “Be careful. Be very careful.” Think of “as is” as another translation for “caveat emptor.” The diligent bidder should focus on ferreting out fakes, cheap reproductions, misidentified and incorrectly described pieces, and items with damage.
Here’s an example of how not to bid for valuable property. Our company was conducting in another state a portfolio auction that included a number of fine residential properties. I was at the rear of a packed hotel ballroom observing the offerings and bidding. A house came to the block, and bidding opened at $1 million. Several clicks later, the bid stood at $1.3 million, with the auctioneer seeking a $50,000 raise. A middle-aged couple was standing beside me, and they had already bid twice. They were discussing whether to bid again, and they decided to do so. The husband raised their bid paddle once more.
At that moment, the wife unexpectedly said, “Maybe we should have looked at this house before we started bidding to buy it.”
You think? All I could think was “Wow!” By the way, I hope they like their new home.
Another possible condition that is never discussed in auctions is whether an item might have been stolen from its rightful owner. A lot of stolen property winds through auctions, and it is nearly impossible for bidders to identify. This is another clouded risk for bidders, and it further emphasizes the importance of dealing solely with honest auctioneers. That will lessen, but not extinguish, the threat of a bidder’s buying what he cannot lawfully own—stolen goods. This can become an expensive proposition if the police ever visit and relieve the buyer of his purchases. I have had that case, and it was no fun for the buyer who was left without his purchase or purchase money.
The bidding process is about as clear as tomato soup. When a bidder bids to an auctioneer, he acknowledges a voluntary desire to jump into this darkened fray and compete to buy the subject lot. Certain obligations attach to the bidder, such as the requirement to bid on the correct lot and for the correct amount. Probably every auction-goer has seen bidders make mistakes on these fundamental points. In addition, there are two other points that every bidder should grasp.
First, to the extent that it can be discerned, the bidder should try to identify and evaluate the bidding competition. A dealer in like goods is going to provide one level of competition, while a “retail” end user might push the bid to a much higher level. This and like information will help a bidder see through some of the fog that shrouds the bidding process.
Second, bidders should be prepared and thoughtful, but they should not be fraidy cats. While it is important to understand the cloaked risk that phantom, shill, and unannounced seller bidding can pose, there is no way to be certain that the threat is not present. The best a bidder can do is patronize an honest auctioneer (still no guarantee that others aren’t doing wrong), be knowledgeable about the lot, and remain watchful for questionable activity. An additional safeguard for the bidder is to establish and not exceed a bidding range; this helps the bidder avoid the slippery slope of “auction fever” and the emotional inducement to bid freely against unknown competition. Even if the competition is illegitimate, a range will prevent the bidder from being lured into a severe loss by bidding far more than a lot is worth.
Auctions can be great buying venues offering significant opportunities for desirable and valuable acquisitions. They also hold risks and can camouflage traps for the unwary. The auction process is far from transparent, and bidders should seek to minimize these threats and protect themselves by performing due diligence and preparing for informed and prudent auction participation. Although a bidder cannot always get a bargain, he never wants to be tricked into overpaying for what he buys. Auction transparency does not exist, so a bidder’s best insurance is self insurance.
Over the years, I have formed friendships with several M.A.D. readers, including Lewis Baer, the managing principal of Newel in New York City (for a fascinating peek into his world, go to www.newel.com). Baer wrote me about last month’s column addressing the lack of transparency in auctions. He emphasized that more transparency is sorely needed and shared a point from his long experience in the trade: “Transparency should define anything that is of a ‘public’ nature, (including an auction). That term requires ‘trust.’ If you think ‘private’ trust works, try being a dealer!”
That’s it until the June issue of M.A.D. Until then, good bidding.
Steve Proffitt is general counsel of J.P. King Auction Company, Inc., Gadsden, Alabama. He is 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. Proffitt may be contacted by e-mail at <email@example.com>.
Originally published in the May 2013 issue of Maine Antique Digest. © 2013 Maine Antique Digest