Courthouse Step Dwellers: Violating Sherman’s Trust or Assisting Sallie Mae?

What are those people doing on the steps of the Wakefield Taylor courthouse in Martinez?

What most of them are doing is bidding on bank-owned properties that homeowners have had the misfortune to lose through foreclosure to assist Sallie Mae or Large Bank USA recoup some of their losses. What some of them may be doing is engaging in “bid rigging,” which is considered an illegal restraint on trade and competition in violation of the Sherman Antitrust Act of 1890.

Amanda Bevins

For years, as I have climbed the rust-colored brick steps of the Wakefield Taylor courthouse, going to or coming from juvenile court (usually with a heavy heart because of the nature of representing the very young accused of very serious crimes), I have seen men and women assembled on the steps, cell phones and laptops at the ready. As they call out unintelligible addresses and prices, communicating in a language of gestures and glances, I’ve often wondered what they were doing. When a girlfriend of mine got notice that the house she was renting was being foreclosed upon and would be sold at public auction at the courthouse, I finally put it together: These people on the courthouse steps were participating in a public foreclosure auction.

As a criminal defense attorney, I deal with most substantive issues in an actual courtroom. It seemed odd to me that these auctions would take place without supervision on the courthouse steps. Wouldn’t these extrajudicial auctions be susceptible to some unfair practices? Might it not be difficult for someone like my friend, who was naive to the auction lingo, to actually bid on a property? As it turns out, and as this article will discuss, the Government does believe that there has been some unfair practices and collusion in these extrajudicial public auctions. After the property bust and the foreclosure crisis caused in large part by financial institutions offering home buyers sub-prime mortgages on properties they couldn’t possibly afford, the Government, looking for a scapegoat more easily prosecuted then Sallie Mae or Large Bank USA, has put the spotlight on the mostly small-time real estate professionals who participate in these public auctions. In the wake of the economic meltdown, many of those “courthouse steps” participants are now being investigated by the Government for “bid rigging.” A caveat: I’m a criminal defense lawyer, not a real estate specialist. This article is not intended to be a primer on foreclosures, but will focus on the prosecution and defense of bid rigging and the associated criminal penalties.

So what is bid rigging? As you real estate mavens know, a foreclosure is the process by which a bank or other secured creditor sells or repossess real property after the owner has failed to comply with terms of the mortgage by defaulting on the promissory note secured by a lien on the property. The foreclosed property then goes to public auction. In theory, the property is auctioned off by the bank’s trustee at a price set by the bank to a consumer who may be the owner, a real estate broker or investor, or any Dick or Jane looking for a good deal. Typically, the property must be purchased at auction at a price no lower than the minimum bid set by the bank, by a cashiers check and sold as is. The trustee then recovers some of the debt owed to the bank and someone acquires below- market-value property to live in, refurbish, invest in or sell and we all go off to the seashore. This is how it’s supposed to work.

Bid rigging, by contrast, involves a situation where bidders at the public auction agree not to compete against each other at the auction, usually in return for some consideration. The designated person then bids on the property, and if that person is the successful bidder, sometimes that person and those who had agreed not to bid hold a second round auction. At this auction, the property goes to the highest bidder. The difference between the purchase price at the trustee auction and the second auction is then paid by the ultimate winning bidder to the other persons in the group as a premium for agreeing not to bid on the property at the first auction.

Does it seem odd that the Government is concentrating on prosecuting these people who, for the most part, may have simply devised a way to breathe new life into the scores of properties that have been lost to foreclosure rather than the banks that put them there? Ironically, these banks that caused the foreclosures by offering “fairytale” mortgages recover part of their losses from these auctions, regardless of whether the bid comes at a first or second- round auction. So what is the government’s motivation in targeting the small guy instead of the money-hungry lenders? The concern does not appear to be to avenge the homeowners or the mom-and-pop real estate brokers and investors, who were shut out of the private second round auction. In fact, the prosecution may have nothing to do with protecting victims because at law it is irrelevant whether anyone is harmed or victimized by the bid rigging. This is because the alleged bid rigging practice is being prosecuted as a per se violation of the Sherman Antitrust Act (15 USC §1.). Therefore, the Government can prosecute these “bid riggers” without showing any harm to anyone and reap large fines and penalties.

When the first of these “bid rigging” cases came our way, my intellectual dander was up when I learned they were being prosecuted pursuant to the Sherman Antitrust Act.

When the first of these “bid rigging” cases came our way, my intellectual dander was up when I learned they were being prosecuted pursuant to the Sherman Antitrust Act. The Sherman Antitrust Act was enacted in 1890 to protect against unfair competition. As the Supreme Court said in Spectrum Sports v. McQuillan: ‘The purpose of the [Sherman] Act is not to protect businesses from the working of the market; it is to protect the public from the failure of the market. The law directs itself not against conduct which is competitive, even severely so, but against conduct which unfairly tends to destroy competition itself.”

This was the law used by President Taft to break up the American Tobacco Company and unjustly used by President Cleveland to stop the Pullman Strike led by Eugene Debs. It’s not often that I get to defend against such a stately and dignified law. It certainly has a more rarified origin than Three Strikes or Megan’s Law. So, the crux of the criminal violation is that the “bid rigging,” regardless of whether anyone is harmed, is a per se violation of the Sherman Antitrust Act in that it suppresses and restrains competition and creates an unreasonable restraint on interstate trade. These cases are being investigated by the FBI and prosecuted jointly by the United States Attorney and the Antitrust Division of the U.S. Department of Justice. If convicted of a single violation of the Sherman Act, one faces up to 10 years in federal prison and a $1 million fine. Violators are also subject to the federal alternative fines provision, which authorizes fines up to twice the gross financial loss or gain from the violation. Under these alternative fines provisions, individuals have been fined more than $10 million. In addition to Sherman Act violations, bid riggers have been prosecuted for violations of mail and wire fraud and making false statements to a government agency, leading to decades of additional time in federal prison and increased fines. These cases are complicated to defend. All the Government needs to prove is that there was an agreement to not bid on a particular property regardless of whether the foreclosing bank received less than it would have had there not been such an agreement, and regardless of whether secondary profit was made from this agreement. This is particularly troublesome, as it is a common practice of “courthouse steps” dwellers to refrain from bidding on a property in a certain area that he or she knows has caught the interest of another bidder. Is that “bid rigging” or professional courtesy?

Moreover, since it may be difficult to tell from the auction results themselves whether anything untoward occurred, the Government relies upon cooperation from those involved to turn on others and provide information. Of course, this method of evidence gathering is rife with problems since those trying to defer scrutiny from themselves are more likely to exaggerate or embellish the dealings of others. And often, overzealous prosecutors will catch a dolphin or two in the tuna net and investigate a person who, for example, had no knowledge of the bid rigging activities of fellow investors or may have had no idea that a second round of bidding was illegal.

So the answer to the question, “What are those guys doing on the courthouse steps?” is complicated and depends on who is asking the question. They may be legitimately participating in a non-judicial foreclosure auction to purchase cheap, as-is investment or personal real estate. They might be trying desperately to buy back their own home. Or, as the Government believes, they could be conspiring together and participating in secret second auctions to violate the rarified and dignified Sherman Antitrust Act of 1890.

– Amanda Bevins is a shareholder at Gagen, McCoy, McMahon, Koss, Markowitz & Raines in Danville. She has been practicing criminal defense and juvenile defense law for the past 18 years in Contra Costa, Alameda, Solano and Napa Counties and is on the board of directors of the Contra Costa County Bar Association and on the Napa County Juvenile Justice Commission. Amanda is also a member of California Attorneys for Criminal Justice; Women Defenders, and the National Association of Criminal Defense Attorneys.

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