Letting the Shill “Win”

Dear “Legal Files”: Have you written about or looked into “shill” bidding on Bring a Trailer? I’m not sure how common it is or if it even exists, but I recently had an experience that got me thinking.

I was bidding on a nice restored Datsun 240Z. (By the way, I’m a Porsche guy, but I owned a 240Z back in college and just wanted to get one for old time’s sake.) I decided I didn’t want to go beyond $60k. Toward the end of the auction, when I was the leading bidder, a new bidder jumped in and outbid me. Every time I bid, he would raise his bid. I’d go to $56k, he’d go to $58k and so on. I went to $66k, and he went to $68k. I stopped and he won the car.

A couple of days later, the seller emailed me and told me the high bidder decided he didn’t want the car, and that I could have it for my $66k final bid. I didn’t buy the car, but the offer made me suspicious. I wondered if the other bidder was a shill bidder who might have been working with the seller to get the price higher.

Your thoughts? Seems like it would be hard to prove, but I still feel like the whole thing was a bit fishy. — Greg J.

Who’s really bidding?

Let’s start with some definitions and legal foundations. This description of “shill bidding” is actually one of three distinct but closely related types of bidding:

• “Chandelier bidding” is when the auctioneer makes up bids, generally by looking or pointing into the crowd and “accepting” a bid that no one made. The lingo comes from the observation that it must have been the chandelier in the room that made the bid. It is also called “advancing the bid.”

• “Seller bidding” is where the seller bids on his own car.

• “Shill bidding” is when the seller has an associate bid to better disguise the situation.

All three are much the same — phony bids that are meant to fool real bidders into bidding larger sums. Most readers will realize that this is despicable and fraudulent conduct that should not exist. Unfortunately, it can be a relatively common occurrence, so you need to understand it and learn to recognize it when it happens.

Is it illegal?

Most readers may be surprised to learn that shill bidding in all three forms is not entirely illegal. It actually depends on the situation, with the rules applying equally to live and online auctions.

In a reserve auction, all three types of shill bidding are perfectly legal as long as the bid is below the reserve. The logic is that no sale is going to occur when the bid is below the reserve, so the real bidders are not being hurt by losing a deal. But once the reserve has been met, a sale is actually going to occur, and shill bidding becomes illegal.

The same logic applies in a no-reserve auction, meaning that since even a $1 opening bid will win, shill bidding is always illegal.

But there is a huge exception to all of this. All three types of shill bidding are perfectly legal if the auction company discloses to the bidders that shill bidding is allowed. How conspicuous does the disclosure need to be? Shouting it out on the block will do it, but a statement to that effect in the bidder’s agreement that every bidder signs may also be enough of a disclosure.

BaT speaks

We contacted Randy Nonnenberg, founder and CEO of Bring a Trailer, and presented Greg’s situation to him. “Our system prevents sellers from bidding on their own car directly,” he stated.

That sure helps, but the tougher challenge is the possibility that the seller could have a real or fictitious friend bid on the car. Nonnenberg agrees this is possible, but adds, “We have a number of custom tools that we use to constantly monitor auctions in the background, and we are on the lookout for suspicious activity. When we see it, we step in and inquire further.”

Nonnenberg understandably didn’t want to go into any specifics about BaT’s techniques, and we can’t blame him. Anything he discloses could give the unscrupulous among us ideas about new ways to cheat or help them find workarounds.

When asked how big a deal he thinks this can be, Nonnenberg is emphatic: “We don’t like or condone shill bidding. We think it is bad for our business, and we also think it is bad for the seller. The seller doesn’t sell the car, tarnishes the car’s reputation, and doesn’t really learn what the real value of the car might be.”

Was it or wasn’t it?

It’s hard to say if Greg has detected a case of shill bidding. If it was, it was poorly executed, as the shill won the auction. This is why you usually see shill bidding early in the auction, to get the bidding up to a higher level, rather than late in the auction, as in this situation. Nonnenberg agrees, saying, “Playing games with bidding really backfires if the shill wins the auction.”

That may be true, but we may well have seen cases of this in these pages. Recall an auction lot that ends in a no-sale, and our auction analyst reports that the bid should have easily been enough for the seller to let the car go. Astute observers may well ask, “Was there any real money on the car?”

Then, a few months later, the same car is another no-sale at another auction, although at a lower bid than the first auction. Our auction analyst reports that the car was a no-sale at a higher bid at the previous auction, and again a no-sale at a bid that should have been enough. Now, astute observers are asking, “Is there something wrong with this car?”

A few more months later, the car finally sells at another auction, at an even lower bid. The pattern is easily detected: Bidders learn to recognize these auction frequent flyers (often with the help of the SCM Platinum Auction Database), and the resulting doubts about the car cause the bids to trend downward.

A depressing situation

In spite of the risks of depressing the value of the car, sellers do sometimes resort to this form of market manipulation. Sometimes, they know the only hope they have of moving a poor car is to catch someone unaware who gets caught up in the moment and overbids.

So maybe Greg did bid against a shill. The quick offer from the seller does seem suspicious. Should we believe that, in the space of just a couple of days, the buyer failed to pay for the car, the seller pursued payment, the bidder communicated his change of heart to the seller, the seller accepted it, and the seller went to the second bidder with a comeback offer? Usually it would take at least a few days just to realize a bidder isn’t going to pay.

To test this analysis, we asked Nonnenberg what happens when a bidder fails to pay for the car. “We always contact the bidder and the seller to ask what the problem was,” he said. “Over the years, we’ve gotten all sorts of ‘dog ate my homework’ stories, everything from ‘My kid bid on the car without my permission’ to ‘I told my wife about winning the car and she almost killed me!’ No matter how funny or sympathetic the story might be, we always disinvite them from ever bidding on BaT again.”

That’s encouraging, and it’s really about the most that you can expect BaT to do in such circumstances. But the fact remains, being blacklisted isn’t much of a penalty if you’re a fake persona to begin with.

Should you buy the car anyway?

So what should we advise Greg to do? He wants a 240Z and he came close to buying this one. Should he just pay the $66,000 and get it done?

The liberal view on this is to take a closer look at the bid history. If he thinks he was bid up by a shill, then his offer should go back to where the shill first showed up. That looks like somewhere in the low-$50k range. No one else bid after that, so he should go back to this last “real” bid and offer that amount at the most.

The conservative view is to take a step back and consider the big picture. If Greg believes that this was a case of shill bidding, then what does that tell him about the seller’s integrity? Does he really want to buy a 45-year-old used car from this guy?

It may be that the best thing about this car is that Greg didn’t buy it. ♦

John Draneas is an attorney in Oregon. He can be reached through www.draneaslaw.com. His comments are general in nature and are not intended to substitute for consultation with an attorney.