Auction Law & Ethics
Every time I pick up a paper or click on the news, someone is calling for transparency in something. Critics and the media demand transparency in this and that. The public wants transparency in everything—except their individual affairs. Transparency shows up time and again in discussions of government, the political process, campaign finance, corporate management, executive compensation, economic development, contract bidding, all aspects of business, etc. While the concept is certainly well intentioned, and while much progress has been made in bringing light to many corners once hidden in darkness, a mere call for transparency is no panacea.
Those who prefer to work in the shadows because it furthers their interests are not prone to voluntarily opening the curtains that they prefer. So while efforts to be transparent are steps in the right direction, they are usually far from being the end of the journey that is needed. Indeed, changes in transparency are usually a matter of degree and not a complete fix. They are only a partial correction in what has been done as opposed to an absolute remedy that rights all wrongs and cures all ills.
Despite progress in making many fields and activities transparent, one area that has seen little to no progress is auctions, where murky remains the usual order of business. Auctions are events where tricks and ruses are sometimes played to benefit some at the expense of others. Quite a few auctions use smoke and mirrors to keep the old secrets as close as magicians’ tricks, while the crooked practices of the past continue to be the conduct of the present. This is largely attributable to the different agendas and interests of the different parties involved in an auction, and their desire to keep those agendas concealed. The one common denominator is the individual quest for financial gain, which pits certain parties against others. For a buyer to win big, it is necessary for a seller to lose big, and vice versa. Consequently, none of these parties are anxious to share their respective views, secrets, and objectives with others for fear of losing a competitive advantage.
Furthermore, little about the auction process lends itself to transparency. This is due to several factors, including: (a) the fast pace at which most auctions are conducted; (b) the large number of persons present and the distractions that they cause; (c) the impossibility of monitoring the activity of all those present (i.e., in person, by telephone, via the Internet, or by absentee bid); and, (d) the inability to know the thinking behind what people do and do not do during an auction.
In a transparent situation, the operative facts are on display to view, digest, and use to make calculations, form opinions, and reach conclusions. In shrouded matters, interested parties gaze into the dark for material facts that cannot be seen. As a result they are left to speculate far more than they are able to calculate. Prospective bidders and buyers need to know there are hidden and significant risk factors in auctions and conduct themselves accordingly. This column is slanted to the perspective of these bidders and buyers. Here are the key groups within an auction that pose a threat.
I want to emphasize that many auctioneers and auction firms run honest and ethical businesses and no criticism or condemnation is aimed at these practitioners and firms whatsoever. Nevertheless, we will see that the honest and ethical practices of auctioneers alone cannot provide a transparent setting to protect against wrongful practices that could harm bidders and buyers. Consequently, bidders and buyers must exercise a high degree of caution and care in auctions to safeguard their interests. The reasons for this will become clear.
Likewise, many bidders, buyers, and sellers are honest and ethical people. No criticism or condemnation is leveled toward any of these folks either.
Although many auctioneers are honest, hard-working professionals, other auctioneers can be the originators of the wrongful sleight-of-hand activities that exist in auctions that are devoid of transparency and honesty. The pace, distractions, and auctioneer’s chant can combine to create near-perfect camouflage for these unlawful and unethical activities. Wrongs can pass through the auction process as easily as rights, because they are perpetrated in ways intended to escape detection by others. When an auctioneer crosses the line, the most common target is bidders and buyers.
Several unethical practices predominate. Most auctioneers have no interest in talking about these things, let alone revealing information that would bring transparency and recognition to these abuses.
Some auctioneers are inclined to misrepresent certain lots by falsely puffing up the descriptions, quality, and provenances. The object is to fool bidders into bidding more than the lots are worth. The culmination of the ruse occurs when the auctioneer sells both the fiction and the lot to a bidder who then pays too much for too little. Misrepresentation is the antithesis of transparency.
Phantom bidding occurs when an auctioneer calls bids that no bidder has made. The auctioneer pretends that one or more bidders are vying for the lot in an effort to create the appearance of bidding competition that does not exist. The object of this scam is to lure a legitimate bidder into biting the auctioneer’s “hook” and bidding real money against the phantom bidder. This is the same goal for every form of misrepresentation in auctions—to induce buyers to overpay for what is being offered for sale.
Shill bidding is the same as phantom bidding, except some person in the crowd plays the role of a legitimate bidder and actually makes bids to the auctioneer. Nevertheless, the shill is merely a straw bidder working in tandem with the auctioneer, and no real money is bid. The shill makes hollow bids to encourage legitimate bidders to jump in and bid real money against him. Once again the buyer of such a lot is the sheep who gets fleeced out of his money by the tag team of the auctioneer and shill.
No one would ever assume bidders as a group are an open book and aboveboard. Instead, the opposite can be true, and bidders often are a secretive lot who engage in certain practices under the table in an effort to do one another in. Here are several techniques commonly practiced to dampen competition from other bidders that are hidden from view.
First, some bidders will bad-mouth certain lots to reduce or terminate interest in the lots. Frequently this criticism is rooted not in fact but in self-interest. If the effort works, demand for the lots will be decreased, which will reduce bidding and result in lower selling prices that would favor the negative-speaking bidders if they became the buyers of these lots.
Second, bidders have been known to physically alter lots to make them less attractive to others. This might involve removing parts to make an item appear to be incomplete or, in extreme cases, purposefully damaging it. Another ploy is to hide items so other bidders cannot bid for these pieces. Bidders sometimes will move items to change their order of appearance in an auction in hope of preventing others from bidding for the pieces.
Third, some bidders can be extremely petty. Any slight or offense by another bidder, either real or perceived, can trigger a sharp retaliation. This might come in the form of the angered bidder outcompeting the other bidder for the lots the latter wanted or running the bids up on that bidder—even when the party running the bids has no interest in purchasing the lots.
There is nothing transparent about the identity of bidders. Who are the people that registered to bid in the auction? Is every person who flashes a bid sign a legitimate bidder acting in good faith and with a bona fide intention to purchase the property for the amount bid? Are those pieces of paper the auctioneer refers to as “absentee bids” from real bidders? I once heard an auctioneer at a conference boast about his “absentee bidders”—the ones he revealed were his creation that he used as “paper shills.” Are those telephone bidders legitimate or just shills? Are there real persons on the other end of those phone lines?
Auctioneers love the numbering system they commonly use to identify bidders who become buyers in auctions. There is nothing transparent about “bidder 117.” Who is this person? Is he a legitimate bidder who has become a buyer, or is he an agent who was bidding at the behest of the auctioneer to drive the bid price up for real bidders to compete against (and who will never pay for the lot if he ends up with the highest bid)? If he is not an agent of the auctioneer, is he an ally of the seller? Is number 117 a person or just a “house number” that the auctioneer uses to “buy in” lots that do not reach their reserve amounts while giving the appearance that everything that crosses the auctioneer’s block is selling for strong prices?
What are we to make of sellers? Transparency has not chased back the dark of night that cloaks them. Sellers can be straight arrows or crooked snakes. Bidders and buyers often do not know the truth.
The warning to sellers at the outset of this column to stay alert and cautious, even when an auctioneer is lily white, is because, unbeknownst to that auctioneer, the seller might be the opposite and running any number of concealed tricks in the auction.
Consider the following questions. Are the descriptions and provenances that the seller gave to the auctioneer for the goods truthful and accurate, or are they contrived and fraudulent, with the intent of cheating bidders and buyers? Is the seller trying, either directly or indirectly, to affect the bidding by making undisclosed bids for his own goods or enlisting others to bid in the auction as shills for him? Is it the seller’s intention to refuse to close some sales because of unsatisfactory prices even though that would violate the terms of the auction?
A lack of transparency keeps us from knowing these answers at the outset of an auction. In fact, we may never know the truth.
Auctions can be great buying venues, but they can include hidden traps for the unwary. Transparency has not come to auctions, and there is no means by which bidders and buyers can easily see where hidden traps might lie and how they would work. This means bidders and buyers are left to wonder about these things and search for these risks on their own. Next time we will consider several rules that can help protect you from the risk of harm and loss that lurks within the auction process. That is it until the May 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 April 2013 issue of Maine Antique Digest. © 2013 Maine Antique Digest