An article published in 2007 (see Auction House Buying Considerations, Part II: Chandelier Bid (“Sham Bidding”) Legislation) discussed proposed legislation related to “sham” or “chandelier” bids, described by a New York legislator as “chicanery perpetrated by auction houses,” with auction house Sotheby’s opposed to the legislation.
I have found conflicting information as to the precise definitions of certain terms related to: 1) bids placed by auction houses and/or 2) placed by or on behalf of consignors, sellers, and 3) anyone who might benefit from a high price realized or 4) bids placed not with an intention to win the auction but to advance the bid amount. Following are my best approximations of definitions of those terms:
A “chandelier” or “sham” bid (also referred to as “consecutive bidding”) is made by the auction house to bid up the price on an item with “phantom” (non-existent) bids to meet the seller/consignor’s reserve price.
A “shill” bid is a bid made at auction by the seller/consignor (or someone acting for the benefit of the seller/consignor) for purpose of driving the price up beyond the reserve on an item offered at public auction, with no desire to actually win the item with the highest bid.
In addition to the deceptive nature of these activities, the issue of the mandatory disclosure of “chandelier” and “sham” bidding activities (currently legal) appears to be a primary concern for lawmakers in New York.
A Maine Antique Digest article quoted Assemblyman co-sponsor Richard Brodsky (D-Westchester) as stating:
Acceptance of a sham bid by an auctioneer on behalf of an auction house is essentially a deceptive practice. There is no justifiable reason to permit the taking of fake bids without disclosure of this practice to the public. The theatrical benefits created by this practice are far outweighed by the public’s right to be informed of the acceptance of such bids during the auction process. The marketplace has no need for such fraudulent and deceptive practices.
The latest version of the legislation can be found at assembly.state.ny.us:
A01730 Summary:
BILL NO A01730
SAME AS No same as
SPONSOR Brodsky
COSPNSR
MLTSPNSR
Add S29, Gen Bus L
Specifies auction requirements; holds the auctioneer responsible for truth of statements in catalogues, announcements, etc.
A01730 Actions:
BILL NO A01730
01/09/2009 referred to tourism, arts and sports development
02/25/2009 reported referred to codesA01730 Votes:
A01730 Memo:
BILL NUMBER:A1730 REVISED 3/12/09
TITLE OF BILL: An act to amend the general business law, in relation to auction requirements
PURPOSE OR GENERAL IDEA OF BILL: It is to prohibit acceptance of “sham” or “chandelier” bids by auctioneers without disclosure.
SUMMARY OF SPECIFIC PROVISIONS:
* The Auctioneer will be held responsible for the truth of statements contained in any catalogue etc.
* The consignor must show that he or she has complete and lawful right, title, and interest in property being auctioned
* It must be disclosed if an auctioneer or auction house has any interest in an article being auctioned
* It must be disclosed if a consignor is to receive a rebate commission or when he or she will be allowed to bid upon and buy back their own article
* If there is a “reserve price” it must be disclosed that the item/lot is being sold subject to reserve
* If there is no reserve price there shall not be any indication given that the item/lot is being sold at reserve
* It must be disclosed if an auctioneer extends a loan to a purchaser
* Detailed information must be provided about any jewelry being sold
* The auctioneer shall issue an invoice to each purchaser with specific information
* Each auction sale must be advertised at least once in the seven days preceding the auction
* Prospective purchasers must be allowed to inspect articles for sale
* Checks must be sent to anyone entitled to proceeds of a sale within 14 days
* Except to implement the reserve price no auctioneer, consignor etc. shall make a bid unless their status as someone with inside information has been disclosed
* Whenever an estimated value of an item is posted a description of such estimate must also be provided
* Any advertisement indicating an auction for a business’ liquidation must state the name of that business
* If the reserve price is not bid, the auctioneer may withdraw a lot from sale
* The auctioneer may open bidding on any lot by placing a bid on behalf of the seller
* After the reserve price has been reached an auctioneer may not bid on behalf of the consignor
* The reserve price shall not exceed the minimum estimated value of the lot
* An auctioneer may not offer more than one article for sale at any time unless combining of articles/lots is indicated prior to the initial bid
* An auctioneer may not represent a manufacturer’s or owner’s guarantee unless such guarantee accompanies the article
* An auctioneer may not offer an article contained in a carton or package unless it is announced that the bidder can reject the item upon opening such package.
EFFECTS OF PRESENT LAW WHICH THIS BILL WOULD ALTER: The present law does not regulate the use of sham bids by auction houses.
JUSTIFICATION: This legislation grew out of an 18-month investigation into art market practices. The Committee on Oversight, Analysis and Investigation initially met with art market participants and then identified key issues, which were developed into a draft memorandum and study bills. These bills were the basis for a public hearing in New York City on January 30, 1991 held by the Assembly Tourism, Arts and Sports Development Committee. The hearing was followed by subsequent meetings with art market participants.
A sham or chandelier bid is any bid for which there is no bona fide offer or bidder.
At the hearing, the Committees received testimony that sham or chandelier bids are used by the auction houses as a means of obtaining bids that meet and/or exceed the reserve price. The Committees received testimony that raised serious concerns over this practice. Witnesses testified that sham bidding undermines confidence in the art market, and that such bids are deceptive and should be prohibited. Sham bids create a false atmosphere of interest in offered work that may not actually exist and deprives the public of any real knowledge of the true level of interest for the work.
Testimony was received that a sham or chandelier bid is not an ethical bid, but is simply an inventive bid. Acceptance of a sham bid by an auctioneer on behalf of an auction house is essentially a deceptive practice. There is no justifiable reason to permit the taking of fake bids without disclosure of this practice to the public. The theatrical benefits created by this practice are far outweighed by the public’s right to be informed of the acceptance of such bids during the auction process. This theatrical game playing is akin to pulling the wool over the consumer’s eyes. Identification of the acceptance of such bids with the phrase “for the consignor” would put an end to the chicanery being perpetrated by the auction houses. The marketplace has no need for such a fraudulent and deceptive practice.
PRIOR LEGISLATIVE HISTORY: A.1249 (1993-94), A284 (1995-96), A536 (1997-98), A3847 (1999-2000), Al317 (2001-02), A1254 of (2003-04), A3514 (2005-06). A2442, Passed Assembly; (2007-2008)
FISCAL IMPLICATIONS FOR STATE AND LOCAL GOVERNMENTS: None.
EFFECTIVE DATE: This bill will take effect on the sixtieth day after it becomes a law.
While the original Maine Antique Digest article stated that the legislation proposed at that time would prohibit “sham” or “chandelier” bids from auctioneers “unless the bids are identified with the phrase ‘for the consignor’“, as the current bill reads, it would seem that auctioneers would not require specific bids be identities but merely a disclosure of the practice being employed in a specific auction.
In that this legislation is proposed by the New York State Assembly, if passed, it would only affect auctions held in the State of New York.
However, in researching existing law in California (home of auction house Profiles in History), the following is currently in effect per the Uniform Commercial Code (see legalinfo.ca.gov):
2328.
(1) In a sale by auction if goods are put up in lots each lot is the subject of a separate sale.
(2) A sale by auction is complete when the auctioneer so announces by the fall of the hammer or in other customary manner. Where a bid is made while the hammer is falling in acceptance of a prior bid the auctioneer may in his discretion reopen the bidding or declare the goods sold under the bid on which the hammer was falling.
(3) Such a sale is with reserve unless the goods are in explicit terms put up without reserve. In an auction with reserve the auctioneer may withdraw the goods at any time until he announces completion of the sale. In an auction without reserve, after the auctioneer calls for bids on an article or lot, that article or lot cannot be withdrawn unless no bid is made within a reasonable time. In either case a bidder may retract his bid until the auctioneer’s announcement of completion of the sale, but a bidder’s retraction does not revive any previous bid.
(4) If the auctioneer knowingly receives a bid on the seller’s behalf or the seller makes or procures such a bid, and notice has not been given that liberty for such bidding is reserved, the buyer may at his option avoid the sale or take the goods at the price of the last good faith bid prior to the completion of the sale. This subdivision shall not apply to any bid at a forced sale.
The word “notice” in bold above is fairly vague, so one would assume such notice could be made in the small print of the related auction catalog (as opposed to an auctioneer specifically identifying each and every “sham” bid as they occur).
Taking Profiles in History as an example (since they are the largest auctioneer for the original prop collecting hobby and are based in California), they disclose such practices in their auction catalogs (text below from the “CONDITIONS OF SALE – AGREEMENT BETWEEN PROFILES IN HISTORY AND BIDDER” from the last event catalog, “Hollywood Auction 34”):
4. Auctioneer’s Discretion. Profiles shall determine opening bids and bidding increments. The auctioneer has the right in its absolute discretion to reject any bid in the event of dispute between bidders or if the auctioneer has doubt as to the validity of any bid, to advance the bidding at its absolute discretion and to determine the successful bidder in the event of a dispute between bidders, to continue the bidding or to reoffer and resell the lot in question. In the event of a dispute after the sale, Profiles’ record of final sale shall be conclusive. The auctioneer also may reject any bid and withdraw the lot from sale if the auctioneer decides either that any opening bid is below the reserve (see paragraph 5 below) of the lot or article or that an advance is insufficient. Unless otherwise announced by the auctioneer at the time of sale, no lots may be divided for the purpose of sale.
5. Reserves. Lots may be subject to a reserve which is the confidential minimum price below which the lot will not be sold. Although the auctioneer may open the bidding on any lot below the reserve by placing a bid on behalf of the seller, Profiles reserves the right to protect the reserve by bidding through the auctioneer and continuing to bid on behalf of the seller up to the reserve amount either through consecutive bids or by placing bids in response to other bidders. Consignors may not bid on their own lots or property. If the consignor is indebted to or has a monetary guarantee from Profiles in certain circumstances, Profiles may have an interest in an offered lot and the proceeds therefrom apart from Profiles’ commissions, and Profiles may bid thereon to protect such interest. In such instance, Profiles is entitled to its standard commission rate when a lot is “boughtin” to protect its interest.
So in California, it would appear that merely giving blanket notice as to the mere possibility of “sham” bids is all that is required to be compliant with the law.
In my opinion, a better practice to employ would be making the opening bid on each lot in an auction the reserve amount, and allowing no “sham” bidding whatsoever (disclosed or otherwise) so that the process is transparent and there is no appearance of impropriety or uncertainty as to whether a participant is bidding against another collector or “phantom” bids placed by the house for theatrics and to advance the bidding to the confidential reserve amount. More, if the reserve is unstated, and specific “sham” bids undeclared, there is absolutely no method by which to evaluate the activity to ensure that it is indeed compliant with the applicable laws. As written, the law would appear to be inherently flawed as it cannot be enforced.
Getting back to the New York legislation, it would appear, as written and if implemented, auction houses in the State of New York would merely be required to disclose the overall practice of “sham” bidding, but would still be allowed to place such “phantom” bids up to the (potentially undisclosed) reserve amount, as is currently the case in California. As noted, in my opinion this is still inherently flawed and not in the best interests of consumers, and does not appear to be enforceable. The primary substantive changes would be merely a blanket disclosure of the practice and a prohibition of “sham” bids on behalf of the consignor beyond the (confidential) reserve amount.
In addition to the proposed prohibition of “sham” or “chandelier” bidding without disclosure, there are a number of other provisions of interest in the bill. Given the legislative history, dating back to 1993, it appears that passing any such laws has proved to be a significant challenge.
Jason De Bord
Jason DeBord, Original Prop Blog