March 8th, 2010 by admin
Presently before the NYS Senate is a bill, passed by the Assembly that is attempting to define how public auctions should operate. This law needs clearer and more direct disclosure of the potentially deceptive and collusive actions presently allowed. Codified with this bill, the new rules will avail auctioneers to continue these abuses.
Below, is a link to the legislation and my comments on specific sections of the bill.
Section 1 (S29) Requirements For Auction state it is the responsibility of the auctioneer for the truth in any statement relating to the auction.
Comment: The auctioneer should also be responsible for disclosing any relevant information that he knows regarding all lots that are not printed in the catalogue, and that information should be announced at the beginning of the bidding on those lots.
Section 2G Discusses the disclosure of extending a loan to a purchaser by the auctioneer as a general announcement.
Comment: By making a general announcement bidders do not know which lots are subject to loans by the auctioneer. Those bidding with the conditional advantage of obtaining the loan from the auctioneer on those lots have an advantage over regular bidders. Auctioneers should not be “bankers’ and loans should be illegal. This process requires inside information and collusion between the auctioneer and loan bidder. Also, the consignor should know that the auctioneer has made, in effect a side agreement on lots without the consignor’s approval.
Section 2H (VII) Discusses sending checks to the consignor along with a settlement statement.
Comment: This legislation should disclose on the consignor’s settlement statement all actual fees collected and specifically show all commissions (both Seller’s and Buyer’s Premium), along with a separate statement on the collection of sales taxes. If sales taxes were not collected, a form of tax exemption (purchaser resale certificate or shipping out of state bill of lading should be noted as to why the taxes were not collected on the sale. Presently, Sotheby’s and Christie’s do not issue their resale certificates to dealers or anyone consigning to an auction. For a dealer/reseller this income has no legal documentation to prove taxes were collected, yet these auctioneers are protecting themselves with the necessary documents they receive from the purchaser at the auction.
Section 2I Discusses the auctioneers disclosure of loans to potential purchasers or consignors as a general posting.
Comment: This section also fails to specify which lots these loans will be applied against. Again, the issue of loans by the auctioneer to a buyer represents a collusive action against other bidders.
Section 2J Discusses insider information as it relates to the bidding process and the disclosure of the status of such bidders in the catalogue or posted signs at the auction
Comment: By making this information generalized and not specific to lots, this inside information is clearly an area for abuse and collusion. Simple disclosure of the fact that a party with inside information is going to bid is not only unfair to the general public but deceptive in its intent.
Section 3B Discusses auctioneer bidding up to the reserve price
Comment: This is the area of greatest potential for the “chandelier bidding” deception practiced by the auctioneer or anyone he may be colluding with to reach the secret reserve price point. It is the single most important reason to start the bidding at the reserve price. Again, the way the legislation is written, a public announcement or conspicuous disclosure of the auctioneer performing consecutive bidding to reach the reserve isn’t specific to lots where this tactic is going to be employed. This is a form of deception and fraudulent bidding perpetrated against the public and should be illegal.
To recap, this legislation while well meaning, has some serious flaws and fails to adequately protect consumers buying at public auctions. Issues like the the consignor’s settlement statement, loans, secret reserves, and insider information are all in need of enhanced disclosure or elimination to properly level the playing field for all participants in the public auction process. It has been crafted to mask these issues and keep the deception methods in place.
One area that the legislation doesn’t discuss is the Irrevocable Bidding process, which actually involves a financial kickback to the individual leaving the Irrevocable Bid, if his bid is superseded in the auction. On many counts, it involves fraud, inside information, deception, and collusive illegal activity. I would refer you to two of my blog commentaries on this matter.