Cartel busted

8 real estate investors have pled guilty to rigging bids at foreclosure auctions.

According to the court documents, the real estate investors conspired with others not to bid against one another at public real estate foreclosure auctions in Northern California, participating in a conspiracy in various lengths of time between May 2008 and January 2011.  After the conspirators’ designated bidder bought a property, the conspirators would hold a secret, private auction at which each participant would bid the amount above the public auction price he was willing to pay.  The department said that the secret, private auctions took place at or near the courthouse steps where the public auctions were held.  The highest bidder at the private auction won the property.  According to the court documents, the difference between the public auction price and that at the second auction was the group’s illicit profit, and it was divided among the conspirators, often in cash. 

The purpose of the second private auction, sometimes known as a knockout auction is to allocate the item to the highest-value bidder, and to compute cartel profits so that the gains from collusion can be distributed.

For example, suppose that of five bidders, three are cartel members. Imagine that they have values of {$500K, $400K, $300K, $200K, $100K} for a foreclosed property. Also imagine that the cartel members are the ones with values {$500K, $400K, $200K}.

In the first auction, the designated bidder will win and pay a price of just over $300K, the value of the highest non-cartel member.

In the second or knockout auction, the cartel members will bid among themselves for the property. The $500K bidder will win the knockout, and pay a price just over $400K, the value of the second highest bidder.

The profit to the cartel is the the winning bid is $100K=$400K-$300K, the difference between the prices in the knockout and the first auction.