On November 9, the U.S. Department of Justice announced that a third real estate investor, Avi Stern, had pleaded guilty to bid-rigging charges in connection with an ongoing investigation by the Department’s Antitrust Division and the FBI into bid-rigging in online public foreclosure auctions in Florida. On November 2, 2017, a federal grand jury in the Southern District of Florida had indicted Stern and two other real estate investors for conspiring to rig bids during online auctions in Palm Beach County, Florida, from at least January 2012 until June 2015, to obtain foreclosed properties at suppressed prices. Stern was the last of the three investors to plead guilty in the case.
The Department stated that the primary purpose of the bid-rigging conspiracy
was to suppress and restrain competition in order to obtain selected real estate offered at online foreclosure auctions at non-competitive prices. When real estate properties are sold at these auctions, the proceeds are used to pay off the mortgage and other debt attached to the property, with any remaining proceeds available to the homeowner. According to court documents, the conspiracy artificially lowered the price paid at auction for such homes.
The Department also reported that over the past several years, the Antitrust Division and its law enforcement partners had obtained convictions of more than 100 individuals for rigging public mortgage foreclosure auctions in six different states, including Florida.
What made this case noteworthy — according to November 15 public remarks by Assistant Attorney General for the Antitrust Division Makan Delrahim — is that “[t]his case is unlike the Division’s prior foreclosure auction prosecutions because the auction occurred online rather than in-person, and the collusion occurred primarily by text message rather than in-person.” Assistant Attorney General Delrahim also provided a number of details regarding the case that were not included in the Department’s release concerning Stern:
- Timing: The conspiracy “took place in the aftermath of the financial crisis, which affected the housing market nationwide and the Florida real estate market in particular.”
- Methods: “Co-conspirators texted each other to coordinate their bidding and facilitate the conspiracy to obtain foreclosed homes at suppressed prices. Most commonly, bidders would agree to stop bidding or to refrain from bidding at their co-conspirators’ request. In some instances, they lowered bids for each other’s benefit. After learning of the investigation, one of the defendants used and encouraged other co-conspirators to use a text messaging application to continue colluding. He believed that law enforcement would be unable to read or trace any messages sent through the application.”
- Initiation of Investigation: The Antitrust Division “began an investigation into possible collusion in online foreclosure auctions in Palm Beach County, Florida after receiving an anonymous citizen complaint that included a link to a YouTube video detailing the collusion.”
Note: This third plea appears to conclude the Antitrust Division’s prosecution of this individual case, and the Antitrust Division appears to have successfully resolved most of the bid-rigging cases it has charged to date for other foreclosure auctions.
Assistant Attorney General Delrahim’s comment about the defendants’ use of text messaging to continue their collusion in this case provides an interesting counterpoint to the Department’s Corporate Enforcement Policy. In listing various criteria for an effective corporate compliance program, that Policy specifically included “prohibiting the improper destruction or deletion of business records, including prohibiting employees from using software that generates but does not appropriately retain business records or communications.”
That requirement — which was based on the Department’s concern that criminals could use certain ephemeral messaging applications to coordinate their actions and count on the messages’ disappearance before law enforcement could access those messages — prompted extensive criticism in the legal community. Assistant Attorney General Delrahim’s comment indicates that in the Palm Beach County bid-rigging case, federal authorities were somehow able to obtain one or more text messages that were apparently probative of the defendants’ collusion. That fact lends ammunition to both sides in the debate over the Corporate Enforcement Policy: law enforcement can point to this case as proof that corporate criminals will seek to use ephemeral messaging, while defense attorneys will take note of the fact that the authorities were able to obtain such messaging. Neither position will resolve the larger debate in any event.