Auction Law & Ethics
Auctioneers get excited when they have a chance to put “blood in the water” for an auction. This auctioneering expression refers to alerting prospective bidders that a seller is in trouble and must sell. The message has considerable drawing power, so it is important for bidders and buyers to understand it. We’re going to delve into it now.
When there is blood in water in nature, nearby predators sense the opportunity to attack the injured creature and turn it into an easy meal. Think of a hurt sea creature surrounded by ravenous sharks. The animal’s blood is a ringing dinner bell for these predators that jolts them into a frenzy, as they look to rush in and devour the hapless victim.
Now consider an auction setting. A financially sinking seller can spew desperation like a harpooned whale gushes blood. As the auction waters turn crimson, the receptors of prospective bidders detect a prime buying opportunity. This is because a desperate seller is often in no position to hold back assets while waiting for a premium offer. Instead, dire circumstances frequently require sellers to quickly sell property for whatever it might bring them—and that spells “bargain-basement” time for buyers.
When an auctioneer spreads a seller’s “blood in the water,” the lure of cheap prices has a magnetic appeal that will excite the market for the property and ensure keen bidder interest. The result will be sales made and selling commissions earned, and these are the two foremost goals of every auctioneer.
So what signals an auction market that there is “blood” pooling around a seller? Phrases such as “rare buying opportunity,” “once in a lifetime chance,” “unparalleled value,” and “auction of the century” are mere puffery—i.e., a typical salesperson’s exaggeration, which any reasonable buyer should see through and discount.
Spreading a seller’s “blood” for an auction is much more. Phrases such as “seller forced to sell,” “bank-ordered sale,” “bank requires liquidation,” “creditors say, sell,’” “seller going out of business,” and “seller closing the doors” are “blood” phrases. These lines communicate a far more extreme message about the circumstances underlying an auction than puffery does. The clear signal is that the seller is in financial trouble and must sell the assets for whatever bidders will give, no matter how little that might be, because the seller has no choice.
Oftentimes, sellers take valuable assets to auction because they are struggling with financial or other problems that are forcing them to sell quickly for whatever they can get. These sellers are prime candidates for a “blood” marketing campaign. As much as auctioneers love to run these campaigns, there is a significant constraint that prevents it in many instances. The great majority of sellers don’t want their plight revealed. Unless they are down to their last gasp, these sellers prefer to keep their struggles private and try to hide their desperation and vulnerability from others. They don’t want to become a guppy in a tank full of piranha.
The agency relationship that defines the pairing of sellers and auctioneers takes on a central role in this issue. An agency carries a bagful of duties that the agent must fulfill for the benefit of the principal. The requirements that the law imposes upon auctioneers determine what they can and cannot do. Three of these duties make this clear.
First, there are two parties to an agency—a principal and an agent. One has a higher status than the other. Just as the principal was in charge of your school, a principal in an agency is the boss within that relationship. The agent is the subordinate and owes a duty of obedience to the principal. Principals give direction to agents and exercise control over what they do. Principals make decisions, and agents follow instructions. That’s the way it is in all agencies, and this rule applies equally to sellers (principals) and their auctioneers (agents).
Second, fidelity is another duty carried by agents. An agent must be loyal to the principal.
Third, an agent also owes a duty to strictly uphold the confidentiality of the principal’s business and other affairs, unless the principal specifically authorizes the agent to disclose such information. A seller’s financial struggles are confidential, unless made public in some other manner, and an auctioneer has no right to unilaterally divulge this information to anyone, let alone to a marketplace of prospective bidders.
When a seller decides that something won’t be done, an auctioneer has no authority to do otherwise. This includes spreading “blood in the water” for an auction against the seller’s wishes.
Notwithstanding the prohibitions mentioned, the concept of spreading “blood” for an auction is a popular technique that auctioneers like to use, and it is permissible in several circumstances. Let’s look at three scenarios.
First, auctioneers know that the more qualified bidders they have at an auction, the stronger the bidding competition will be for the lots, and the higher the sale prices will go. Considering the boost for an auction that “blood in the water” can sometimes yield, some auctioneers try to sell the value of this technique to sellers. Where a seller agrees that the advertising can include “blood,” an auctioneer is authorized to proceed with that angle.
(Practice pointer—an auctioneer who obtains authorization from a seller to run a “blood in the water” marketing campaign should always have that authority reduced to a clear and complete written agreement with the seller. The best practice is to include the exact wording that the auctioneer proposes to publish. This serves to block a subsequently dissatisfied seller from turning on the auctioneer and claiming that no authority had been given for the type of advertising and marketing that were done.)
Second, some owners of valuable assets would not be auction sellers without a lot of encouragement from their creditors. Where a creditor is pushing a seller toward an auction, or insisting upon it, bringing that creditor into the discussions (always with the seller’s prior approval) can sometimes gain an auctioneer the approval to use a “blood” campaign to hype the assets and auction. A creditor with a financial interest secured against a seller’s assets has a lot of leverage and can be very persuasive in steering the seller to what the creditor wants.
Third, sometimes a creditor has exercised its legal rights under a security interest and reclaimed assets from a debtor/owner prior to an auction. In the case of a repossession (personal property or commercial goods) or foreclosure (real estate), the creditor becomes the rightful owner of the assets and is entitled to do with them as it chooses. A creditor motivated to achieve a quick liquidation often can be sold on the concept of using “blood” to jack up interest in the auction. You’ve seen auction and other sale ads that blare “Bank Ordered Sale” or something comparable. That message will spread the “blood” needed to draw the hungry fish the auctioneer wants in the auction crowd.
Does a “blood in the water” campaign always achieve higher sale prices? Sometimes it does, and sometimes it doesn’t.
The concept of “blood in the water” triggers many people to think of the image laid out at the beginning—a wounded creature about to be attacked by those who would prey upon it. In an auction setting, they see a desperate seller about to be picked clean by penny-pinching bargain hunters. There’s an opposite slant we have yet to consider.
Fishermen put “blood in the water” to attract hungry fish, so they can catch them. The bait they use is called “chum,” and it turns the natural instinct of these fish to feed into a weakness that can lead to their being caught and eaten by others. The same dynamic can occur in auctions. This happens when “blood” is spread to attract the voracious bargain chasers that it will draw, but illegal means are employed by auctioneers and/or sellers to take advantage of these bidders and deny them the deals they expect to snare. Two primary tricks are used to fool and “catch” these bidders—phantom bidding and shill bidding.
Phantom bidding occurs when an auctioneer calls bids that no other bidder has made and a legitimate bidder unknowingly competes against the “phantom” (auctioneer) in an effort to buy the lot. The effect is to artificially drive bid prices higher and make the legitimate bidder pay more than honest, competitive bidding would require. The practice is fraudulent and illegal.
Shill bidding achieves the same result as phantom bidding (artificial escalation of the bid price) but in a different manner. With shill bidding, the shill bidder works in tandem with the auctioneer and/or seller. The shill actually bids for the lot to create the illusion of competition with a legitimate bidder, but the shill is a “straw man” and not a legitimate bidder. The shill will pay for nothing and bids solely to drive a legitimate bidder to bid more for a lot than honest, competitive bidding would require. Shilling is also fraudulent and illegal.
A major corporation hired me to consult with it relative to an auction of valuable commercial goods for which it had contracted with an auctioneer. The auction was held without reserve protection, so the subject equipment and goods were sold to the highest respective bidders, regardless of the amounts of those bids. This was what the auction advertising had promised. While this was not a classic “blood” situation, prospective bidders clearly had expected a chance to snap up some nifty bargains, and the auctioneer had feared as much.
The company came to me in response to an employee who had been involved with auction preparations. This fellow had subsequently gotten into a dispute with the company and was threatening to become a whistleblower relative to the auction. He alleged that the auctioneer had privately enlisted him to act as a shill for the company and make straw bids for the more valuable lots to push selling prices higher. The employee executed these bids but later claimed he did not know this was illegal when he did it. The corporation wanted an investigation done on the auction and several questions answered, including whether the employee’s bidding was unlawful.
I reviewed the information provided to me, conducted the investigation, and wrote a comprehensive report on my findings. Answering the question about the employee’s bidding was the easiest part of the assignment. Of course what he did was illegal bidding. The employee had been deployed by the auctioneer to act as a shill in the purest meaning of the term. His bids were made solely to drive other bidders higher and not to try to genuinely buy anything. What he did was assist the auctioneer in a plan to commit fraud, which is what was accomplished.
The buyers who thought they had bagged some sharp bargains were, instead, bagged themselves by an even sharper plan designed to trick and catch them. So whose “blood” was shed in that auction? It wasn’t the seller’s, but I was told the seller was going to contact the buyers of the subject lots to make amends.
“Blood in the water” is an auctioneering technique used in certain circumstances to serve as a strong draw for prospective bidders. Prospective sellers and bidders should understand the concept and how and when it is used. Potential threats can be hidden within this practice, and these also need to be known and understood.
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., 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 September 2013 issue of Maine Antique Digest. © 2013 Maine Antique Digest