Real Estate Auction Bid-Rigging Rings Busted

February 14, 2011

If you listen to enough news these days, you may hear that the United States real estate market has finally hit bottom - perhaps you even heard the thud? 

In theory, we're supposedly sorting things out by re-pricing the unsold housing inventory, which seems like a fairly innocuous process until you realize that the house you bought for $1 million in 2006 is now sitting next to an identical home on an identical lot that went into foreclosure and just sold at auction for $200,000.


Of course, hey, wattayagonnado, right? It's the free market cleansing itself of excess supply.  Some naive homebuyers paid too much and now we have to re-jigger things.  First the bargain basement sales.  After that, interested buyers may begin to percolate back up into the market.  You know, that whole supply and demand thing. 

All of which leads us to those ugly public auctions.  No one likes the foreclosure process but it's considered a necessary evil that begins the painful process of healing.  If nothing else, the winning auction bids put floors underneath the battered real estate market.  Fire sale prices or not, it's still the bottom of the well.  And the bottom is the bottom is the bottom  - maybe it's uphill from here? 

That's a nice thought.  Unfortunately, it may be based upon a lot of assumptions - and more than a sprinkle of illegality. 

Let's be honest: wherever there is a free market there is corruption - much like the remoras that feed off sharks.  And wouldn't you just know it ? - but those real estate auctions aren't necessarily all that meets the eye.  Seems that a lot of paddles remain unraised in a lot of laps, which would be fine if it weren't all part of a criminal conspiracy. 

You see, there's the auction for the public and then there is a second auction for the crooks.

Designated Bidder

By prior agreement, a group of bidders selects one of their group as a so-called "Designated Bidder," who is the only one of them that will actually raise a paddle and bid.  In some auctions, the Designated Bidder may be the only bidder. If you watch closely, you might catch the winks, the quick nods, the smirky smiles.  The fix is in. We got that property for a lousy buck over the lender's bid.  Boy, are we gonna make a bundle on this.

Afterwards, when the public auction ends, there's a special crooks' auction.  At this honor-among-thieves event, the Designated Bidder puts all the goodies that he won on the table and whoever is high bidder for a given property wins.  In fact, virtually every member of this conspiracy comes away a winner because the profits at the second auction (that is, the difference between the price paid at second auction minus the price paid by the Designated Bidder at the public auction) is frequently divided among the conspirators.

In some depressed real estate markets, it is rumored that this second-auction scheme has become a cottage industry where folks earn a living by simply joining bid-rigging groups, which they often reference as partnerships or clubs.  If you talk to enough real estate professionals (assuming they would even want to talk about this), you may be surprised to learn that not ony are such illegal bid-rigging conspiracies well known in the industry, but they've been in existence for decades.  Not exactly a well kept secret. 

Before the Great Recession, when the airwaves were filled with those infomercials about how to buy a home with no money down and flip it for millions, these partnerships were all the rage. Those who attended real estate auctions in those halcyon days of the 1980s, 1990s, and the early 2000s could frequently direct you to one of several second-auctions rings - you simply went to Joe's Diner, the parking lot behind the courthouse, or the benches next to the schoolyard. If you ask me, I'd go to the parking lot this afternoon, they're serving a nice spread.

What's the harm if the property sold at a public auction gets banged out for an artificially lower price as a result of the manueverings of some savvy business persons? For starters, the seller at the public auction was cheated out of the hidden profit realized in the second auction. Yeah, I know, the seller is often a bank and who the hell cares about them these days.  However, sometimes it's the homeowner whose finances are depending upon a legitimate sale. Other times your neighborhood is praying for a fair comparable from the auction.  

Then there is a more basic issue.  There's just something about such dirty deals that rubs Americans the wrong way.  You either believe in transparency and free markets or you don't.  Fact is, we got this Sherman Antitrust Act that says we care about such things.  We even have an entire Antitrust Division that's part of the United States Department of Justice. 

According to government prosecutors, during 2008 and 2009, a number of conspirators suppressed and restrained competition by rigging bids to obtain selected real estate offered at San Joaquin County, California public real estate auctions.  Regardless of whether they knew it, the conspirators were violating the Sherman Antitrust Act, the federal law that seeks to protect free and vibrant competition in the United States.

A Federal Case

As subsequently charged by federal prosecutors, the conspirators entered in a continuing agreement, understanding, and concert of action:

  • to suppress competition by agreeing to refrain from full competitive bidding against each other to obtain selected real estate offered at San Joaquin County, California public real estate auctions;
  • to make payoffs to one another in return for suppressing competition for the selected real estate offered at the public real estate auctions; and
  • to obtain title to real estate sold at noncompetitive, rigged prices.

In order to accomplish their bid rigging, those charged:

  • agreed, during meetings, conversations, and communications, to rig bids to obtain selected real estate offered at San Joaquin County, California public real estate auctions;
  • designated, in various ways, which conspirator would bid for the selected real estate at the public real estate auctions for the group of conspirators;
  • bid at noncompetitive amounts or refraining from bidding for the selected real estate at the public real estate auctions;
  • often held private auctions, open only to members of the conspiracy, to rebid for the selected real estate obtained at the public real estate auctions;
  • awarded properties to the conspirators who submitted the highest bids at the private auctions; and
  • distributed the proceeds of the private auctions as payoffs, based upon a predetermined formula agreed upon by the members of the conspiracy.

Banging Down the Gavel (of justice)

On April 16, 2010, Anthony B. Ghio pleaded guilty to participating in a conspiracy to rig bids at public foreclosure 

On June 24, 2010, John R. Vanzetti pleaded guilty in Sacramento to participating in the conspiracy.

Plea and Cooperation Agreement (June 24, 2010)

Criminal Information (June 24, 2010)

On June 24, 2010, Theodore B. Hutz pleaded guilty in Sacramento to participating in the conspiracy also

Plea and Cooperation Agreement (June 24, 2010)

Criminal Information (June 24, 2010)  

On February 4, 2011, real estate executive Richard W. Northcutt pleaded guilty in U.S. District Court in Sacramento, California, to conspiring from September 2008 until October 2009 with a group of real estate speculators who agreed not to bid against each other at certain public real estate foreclosure auctions in San Joaquin County.  Northcutt's bid rigging count carries a maximum penalty of 10 years in prison and a $1 million fine.  The maximum fine may be increased to twice the gain derived from the crime or twice the loss suffered by the victims of the crime, if either of those amounts is greater than the statutory maximum fine. Northcutt also pleaded guilty to conspiracy to commit mail fraud, which carries a maximum sentence of 30 years in prison and a $1 million fine.