Here is a good article about Phantom and Shill bidding....very informative as far as AUCTIONS go; however, it looks as though it might be against the law to have a Phantom bid in an Offer's Thread, if the winning bidder relied on that misrepresentation and hit the Reserve Price when he/she otherwise would NOT have (I am treating this as an intellectual exercise as well and am not recommending the policing of Offer's threads here.... and the Auction Threads are pretty quiet anyways).
Auction Law and Ethics
Phantom Bidding
by Steve Proffitt
Here's a letter from a reader that Sam Pennington forwarded to me for reply:
While looking for auctioneering information, I came across the articles on your website. I spent over two hours reading through your archives, which are all great. From the perspective of a person thinking about a career in auctioneering, your site is the best I've found as far as information goes. The reason I'm writing is in regard to phantom bidding. Currently I'm a self-employed used-car dealer. I always thought phantom bidding was just part of the program. I've been to auctions (all across the country) and have watched ring men, as well as auctioneers, bounce bids off the wall like crazy.
My question is: Is phantom bidding against the law? Don't get me wrong. I can see phantom bidding as being unethical in many cases, but what do you think about it if the seller sets the reserve at five grand and the only money the auctioneer can find at four grand is one lonely bidder? Would you still say it is unethical if the auctioneer bumps that guy up to five grand and rings the bell? I mean, the bidder was obviously willing to pay the five grand and the seller would refuse a sale for less money, so wouldn't the auctioneer be in the right in this situation?
If I were to become an auctioneer, I'm wondering if auctioneering practices differ from industry to industry. It seems to me phantom bids and shill bids are the norm in the car biz. However, at estate auctions I've yet to catch a phantom bid. I feel like I'd always be a dollar short if I were auctioneering at a car auction and not bouncing bids off a wall. I'm somewhat confused, especially over the legalities of this phantom bidding. Please shed some light on my questions, but do not publish my name.
Thank you for the nice compliment on the M.A.D. Web site and the archive of my columns. You're right&
#8212;M.A.D. does have a top-drawer site, and I'm delighted you found it interesting and informative. I found your letter to Mr. Pennington interesting but not informative. That's because I've heard this old tune way too many times and never have liked it.
Phantom Bids
It's clear that the letter writer knows what a phantom bid is. Nevertheless, I'll briefly identify that snake for readers who are unfamiliar with it. Phantom bidding occurs when an auctioneer calls a bid that no bidder has made. It's a ruse used to trick bidders into believing there is bidding competition for a lot where none exists. Auctioneers use phantom bids to fool bidders into paying more for goods than genuine competitive bidding would require.
Sellers bidding on their own consignments, and auctioneers placing those bids for them, are not phantom bids, as long as it is clearly disclosed beforehand. That practice is addressed in the Uniform Commercial Code, <185>2-328: "If the auctioneer knowingly receives a bid on the seller's behalf or the seller makes or procures such a bid, and notice has not been given that liberty for such bidding is reserved, the buyer may at his option avoid the sale or take the goods at the price of the last good faith bid prior to the completion of the sale."
The Administrative Code of the City of New York also has provisions for auctioneers placing bids on behalf of consignors, as long as it is properly disclosed: "Before bidding on any lot has reached its reserve price no auctioneer may make or place consecutive or successive bids, or place bids in response to bids from others, on behalf of the consignor, unless the fact that the auctioneer will or may bid in such a manner is clearly and conspicuously disclosed in any catalogue and any other printed material published or distributed in connection with the sale. For the purposes of this regulation advertisements in newspapers or other periodicals shall not constitute printed material. This disclosure must also be made on signs prominently displayed in the auction room and at the entrance thereto, and must be announced by the auctioneer immediately prior to the commencement of any auction.
"The sign required by this regulation must be at least 12 inches by 18 inches in dimension with letters at least one inch high, and must read as follows, or convey a substantially similar disclosure: `The auctioneer may open bidding on any lot by placing a bid on behalf of the seller. The auctioneer may further bid on behalf of the seller, up to the amount of the reserve, by placing successive or consecutive bids for a lot, or by placing bids in response to other bidders.'
"After bidding has reached the reserve price of a lot: a. the auctioneer may not bid on behalf of the consignor or the auction house; and b. the auctioneer may only accept bids from persons other than the consignor or the auction house except absentee telephone, order or other agent's bids."
An auctioneer calling phantom bids is like a fisherman. The bid is the lure, the bidder is the fish, and the hook is set when a "live money" bid is received from a legitimate bidder. Even after a bidder is hooked, the auctioneer may continue to call phantom bids to "play" that bidder and further raise the purchase price.
Let's consider an example. An auctioneer opens the bidding on an item by starting it with a phantom bid of $1000. Legitimate bidders then take the bidding up to $2000, but no one will outbid the $2000 bidder. The auctioneer could throw in another phantom bid at $2250 with the hope that it would trick the $2000 bidder into going to $2300 or $2500.
Unlike shill bidding that requires a co-conspirator, phantom bidding is a solo act done by the auctioneer. Skilled bid-callers can roll through phantom bids so easily that most bidders never know a con game is underway. Auction-goers familiar with this dirty practice refer to it as bidding against "the chandelier," "an empty chair," "the ceiling," "a fence post," etc. Auctioneers who use phantom bids refer to it as "running bids," "bouncing bids," "picking pockets," and "carrying the bidder."
Misrepresentation
Phantom bidding is fraud because it's the misrepresentation of a material fact. The bid price is the material fact. The auctioneer calls a bid and thereby tells the audience how much the highest bidder has declared he is willing to pay to own the lot.
Next, the auctioneer calls a false bid in an effort to lure the previous high bidder into bidding even more for the lot. The false bid is the misrepresentation. The auctioneer calls this phony bid to fool the previous high bidder into believing that another bidder has bid more for the lot.
"The Program"
The letter writer said he "always thought phantom bidding was just part of the program." He is right if he is referring to dishonest auctions. Phantom bidding is about as common in those sales as blue is in the sky. That's because it's easy for auctioneers to run this con, and it's hard for bidders to detect. The fast pace and frenetic activity that surround many auctions create nearly perfect camouflage for different types of fraud, especially for phantom bidding.
He mentioned that he has never detected a phantom bid in an estate auction. He has either had the good fortune to attend honest auctions, or he just failed to realize what was taking place. Estate auctions and phantom bids go together like ham and eggs when dishonest auctioneers conduct these sales.
An Example
The writer of the letter gave an example of an auctioneer opening the bidding on a lot with a $5000 reserve. The only bidder bid $4000, and no one would bid more. He asked, "Would you still say it is unethical if the auctioneer bumps that guy up to five grand and rings the bell?" It's not only unethical, it's illegal.
He tried to excuse the auctioneer's conduct by noting that "the bidder was obviously willing to pay the five grand and the seller would refuse a sale for less money, so wouldn't the auctioneer be in the right in this situation?"
In response, here are several questions:
(1) If you went to a store willing to pay $2 for a loaf of bread and found the bread was priced at $1, how much do you think you should have to pay for it?
(2) If you took the bread to the checkout expecting to pay $1, but the store's owner quietly picked an extra dollar out of your pocket, would that be OK since you had been willing to pay $2 for the bread?
You would call anyone who took a dollar out of your pocket a thief, but many auctioneers "bump" bidders with phantom bids for hundreds and even thousands of dollars and just call it "auctioneering."
Industry Practices
The letter writer asked if auctioneering practices vary across different industries. Yes, sometimes they do. What he's really asking is if phantom bidding is permissible in auctions where it's customarily done. It is not.
The law of fraud doesn't change like a chameleon according to its backdrop. The law applies equally to auctions and auctioneers, just as it does to wholesalers, liquidators, and retailers. When I address auctioneers or auctioneering students on the subject of fraud, I emphasize that nowhere in the law is there any exception for auctions, auctioneers, or any particular type of asset. Phantom bids are fraudulent in every auction where they are called.
"That's Auctioneering"
Do you know what really grates on me? It's auctioneers who pretend to be good guys while they play scams to cheat people out of money. These practitioners delude themselves into believing that a microphone and an auction chant equals a license to do whatever they want under the banner of auctioneering.
This month's letter writer asked to remain anonymous. Every article I write and every talk I give, however, has my name on it. You would think that advocating legal compliance and ethical conduct would be an agenda everyone would support. It is not. I have many detractors in auctioneering, because I advocate legal and ethical practices.
Here are several examples of what I mean:
A well-known auctioneer asked me where I would draw the line about the auctioneering tricks I reveal. I won't. Why shouldn't the public know what to watch for and avoid?
I taught a seminar on fraud to a national audience once, and an auctioneer afterward said, "Steve, that was a nice talk, but you just don't understand auctioneering." My reply was that I understand it just fine&
#8212;just like I do the law of fraud.
At the conclusion of another seminar an auctioneer said, "I was taught you can't be honest and be an auctioneer too." I replied, "I feel sorry for you and hope you're wrong. If you're not, this is no place for me."
Then there are the occasional letters I receive urging me to refocus my work on the positive aspects of auctioneering. My work is focused. I decry illegal and unethical practices and boost honest auctioneers at every opportunity.
Recently I was about to address over 300 auctioneers. A fellow I have long considered a friend came to me backstage with a message from some unnamed auctioneers. These folks were "troubled" by my outspokenness on wrongdoing, and their critiques of my work weren't positive.
"We don't want our dirty laundry aired in public, Steve," my "friend" told me. I replied that I didn't care what they wanted. They could find a publisher and write columns supporting their illegal tricks, and the public could critique that. As for their dirty laundry, they never have tried to wash it.
Conclusion
Phantom bidding is a scourge in auctions. Never let anyone convince you otherwise. Bidders can protect themselves from this and other illegal practices when they patronize honest auctioneers. If everyone would refuse to do business with the crooks, we could be rid of them and that would be good riddance.
That's it for now, but I'll see you again in the October issue of M.A.D.. Until then, good bidding!
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Steve Proffitt is a Virginia attorney-at-law, auctioneer, and an instructor at the Reppert School of Auctioneering in Auburn, Indiana, and at the Mendenhall School of Auctioneering in High Point, North Carolina. He welcomes questions from readers about all aspects of auctions and auctioneering. Mr. Proffitt will answer selected questions in this column, but he cannot provide personal answers. The answers given do not represent legal advice or the formation of an attorney-client relationship. Readers should seek the advice of their own attorneys in their respective states on all legal issues. Please submit questions to PO Box 1013, Dept. M, Staunton, VA 24401, or email
[email protected].
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#169; 2004 by Maine Antique Digest
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