In brief, it is an illegal agreement involving bid rigging and price suppression, in violation of law inclusive of the Sherman Antitrust Act.
We have previously wrote about the Sherman Antitrust Act and related topics here:
- What is collusion at auction?
- Bid suppression at auction
- Price fixing at auction
To describe how a “Secret second auction” works, we’ll illustrate with an example:
- Three men decide to commit bid rigging and price suppression. They decide rather than bidding against each other at a public auction, they will “allow” one of them to bid (and buy) and then they will later hold a second (secret) auction amongst themselves to then profit accordingly.
- Allen, Bob & Cory essentially form a business entity (We’ll call it “ABC Company.”) ABC picks a property all members believe is worth somewhere between $100,000 and $110,000 to them individually.
- Then, only Allen, Bob or Cory bid (let’s say Cory is designated.) Cory wins the property for $60,000 due to the lack of bidding of the other bidders — Allen and Bob.
- Following this public auction, Allen, Bob and Cory meet secretly to conduct a secret second auction with the only bidders being Allen, Bob and Cory. In this auction, Allen wins this same property for $105,000 and the below distributions are made:
- Allen pays Bob $15,000.
- Allen pays Cory $75,000.
- Bob nets a profit of $15,000.
- Cory nets a profit of $15,000.
- Allen saves $15,000 on his purchase.
As a result:
Generally, if we say that there are X number of conspirators, the first auction sales price is Y and the secret second auction sales price is Y+Z, we have this formula for our conspirators of any number:
- The winning bidder in the secret second auction saves Z/X dollars.
- All the other conspirators make Z/X dollars.
- Allen pays Cory $67,500 (Y + Z/X)*
- Allen pays Bob $7,500 (Z/X)
- Allen pays Dale $7,500 (Z/X)
- Allen pays Ernie $7,500 (Z/X)
- Allen pays Frank $7,500 (Z/X)
- Cory pays Allen $7,500 (Z/X)
- Cory pays Bob $7,500 (Z/X)
- Cory pays Dale $7,500 (Z/X)
- Cory pays Ernie $7,500 (Z/X)
- Cory pays Frank $7,500 (Z/X)
In more detail, there are two scenarios which require conspirators to calculate two different methods of distributions.
In this example:
- We have six conspirators (Allen, Bob, Cory, Dale, Ernie and Frank); the first auction results in a sale price of $60,000 and the secret second auction results in a sale price of $105,000. Therefore X = 6, Y = $60,000 and Z = $45,000.
Situation A: The high bidder at the first auction IS NOT the high bidder at the secret second auction.
Situation B: The high bidder at the first auction IS the high bidder at the secret second auction.
- Situation A: Cory buys at first auction for $60,000. Allen buys at secret second auction for $105,000.
- * Essentially, in this case, Allen must “buy” Cory’s interest at $60,000 + $7,500 in profit.
- Situation B: Cory buys at the first auction for $60,000 and buys at the secret second auction for $105,000.
We present these calculations to shed some light on the mathematics involved in these illegal schemes — and not to suggest these calculations be used to commit these crimes.
I’ve been asked before, “How does this work?” and “What benefit do these conspirators receive …?” and hopefully this analysis will help answer such valid questions.
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.