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Can buyers at auction be subject to fraud? Can sellers? What is fraud?

In talking with other auctioneers about fraud, as well as others including auction buyers and sellers, there are considerable differences in opinion in regard to what fraud is, and if it occurs in the auction business.

Fraud has six (6) tenets which almost all courts use to decide if fraud has (or has not) been committed:

    1. The party makes a representation of fact
    2. The representation is false
    3. The representation relates to a material fact
    4. The representation is made knowingly, recklessly, or without belief in its truth
    5. The other party acts reasonably in relying on the misrepresentation
    6. The other party is actually damaged by the misrepresentation

Given these six (6) tenets, here’s an example of potential auction fraud committed against a customer (buyer):

    Jerry is an auctioneer who specializes in antique swords. Besides having his own collection, he has sold antique swords for over 20 years, and worked for 14 years as chief curator for a sword museum. His upcoming auction has an antique British Infantry sword with a 1845 pattern.
    Roger, a prospective buyer, contacts Jerry about this sword, and inquires about the condition. Despite the sword being in only fair condition, Jerry describes the sword as being in excellent condition thinking that this bidder (Roger) may bid more given a better condition report.
    Roger leaves an absentee bid of $2,500 for this sword, noting that in his years of seeking out British Infantry swords, this one is the first he has found to be in excellent condition.
    The auction takes place, and Roger is the high bidder on this sword for $2,150, with another absentee bidder being the runner-up bidder. Jerry sends the sword to Roger as Roger is some distance away, and shipping is more economical than him driving to Jerry’s auction location.
    Upon Roger receiving the sword, he notes immediately that the sword is only in fair condition — and certainly not in excellent condition as Jerry has described. Roger values the sword that Jerry sent to him as one for which he would pay no more than $1,000.

Does this story meet the six (6) tenets of fraud? Let’s see …

  • The party makes a representation of fact
      Roger said the sword was in excellent condition
  • The representation is false
      The sword was actually not in excellent condition
  • The representation relates to a material fact
      The condition of these swords are material to buyers — Roger inquired specifically
  • The representation is made knowingly, recklessly, or without belief in its truth
      It’s reasonable given Jerry’s collection and experience, he knew this sword wasn’t in excellent condition
  • The other party acts reasonably in relying on the misrepresentation
      Roger bid up to $2,500 because this sword was reportedly in excellent condition
  • The other party is actually damaged by the misrepresentation
      It appears the actual damage may be approximately $1,000

It appears this auctioneer has committed fraud against this buyer.

Given these six (6) tenets, here’s an example of potential auction fraud committed against a client (seller):

    Mary is a fairly new auctioneer, trying to compete against more seasoned auctioneers in her market. Mary has held a few auctions thus far in her career; however, they have largely been unsuccessful including a live auction attracting only 15 bidders, and an online auction with over 60% of the items not selling.
    Jane calls Mary to ask about selling her grandmother’s estate at auction, including an extensive collection of jewelry, antique furniture, two automobiles, and some farm equipment. Mary tells Jane that she has vast experience in such items, and the marketing and promotion knowledge to maximize Mary’s grandmother’s Estate. Jane tells Mary that such experience and knowledge are important to her.
    Jane and Mary contract for the auction. When the auction day arrives, Jane is at the auction and talks with Mary, noting that very little advertising was placed, signs are not up around or near the property location, the farm equipment has not been cleaned — and overall she is disappointed. Nevertheless, the auction takes place.
    A fairly small crowd shows up, and prices for the automobiles and farm equipment are soft by all accounts. Following the auction, neighbors and friends of Jane tell her that they think she hired the wrong auctioneer. They inform Jane that Mary has only started in the auction business, and there were other, better, choices of auctioneers in the area.
    Jane investigates further, and sees via auction results on various area auctioneers’ websites that the automobiles sold for $3,000 – $4,000 less than comparable vehicles. Also, it appears the farm equipment sold for nearly $10,000 less than market.

Does this story meet the six (6) tenets of fraud? Let’s see …

  • The party makes a representation of fact
      Mary told Jane she had vast experience in such items, and the marketing and promotion knowledge …
  • The representation is false
      Mary had only very limited experience
  • The representation relates to a material fact
      Given Jane’s choices of auctioneers, and the dissimilar results, this appears material
  • The representation is made knowingly, recklessly, or without belief in its truth
      Mary knew she didn’t have vast experience …
  • The other party acts reasonably in relying on the misrepresentation
      Jane told Mary that Mary’s experience and knowledge was important to her
  • The other party is actually damaged by the misrepresentation
      It appears the actual damage may be approximately $15,000

It appears this auctioneer has committed fraud against this seller.

It is important to note that fraud cases are difficult to prove, as it is all six (6) tenets that must be proven for fraud claims to prevail; with even one tenet dis-proven, the fraud claim will be unsuccessful.

Is auctioneer fraud common? When comparing to 50 years ago, it is very uncommon. With the Internet as a tool for buyers and sellers to research and investigate claims made by auctioneers, fraud is actually hard to consummate these days.

Yet, such resources don’t prevent a small percentage of auctioneers from attempting fraudulent acts — so buyer and seller beware nonetheless. Penalties for fraud can include orders for restitution, fines, and/or imprisonment.

Mike Brandly, Auctioneer, CAI, AARE has been an auctioneer and certified appraiser for over 30 years. His company’s auctions are located at: Mike Brandly, Auctioneer, Keller Williams Auctions and Goodwill Columbus Car Auction. His Facebook page is: www.facebook.com/mbauctioneer. He serves as Adjunct Faculty at Columbus State Community College and is Executive Director of The Ohio Auction School.