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Source link: http://archive.mises.org/12511/foreclosing-on-free-markets/

Foreclosing On Free Markets

April 19, 2010 by

Last Friday the Justice Department announced a plea agreement with Anthony B. Ghio, a California real estate executive. Mr. Ghio agreed to plead guilty to one violation of the Sherman Act, and he faces a maximum penalty of ten years imprisonment and a $1 million fine. He probably won’t get the maximum penalty, but the DOJ did not say what sentence it would recommend to the U.S. district court in San Francisco.

So what exactly did Mr. Ghio do? The DOJ’s criminal information isn’t all that, uh, informative, but the gist of it is that Mr. Ghio and various unnamed associates “engaged in a combination and conspiracy to suppress and restrain competition by rigging bids to obtain selected real estate offered at San Joaquin County, California public real estate auctions.” The DOJ deemed such activities an “unreasonable restraint of interstate trade and commerce.”

Basically, the DOJ claims Mr. Ghio and his unnamed conspirators got together before the auctions and agreed that one of them would bid for a particular property; in some cases, after the auction was completed, the conspirators then held a second auction among themselves. In the DOJ’s mind, this violated the rights of the banks that conducted the original auctions, since the conspirators were able “to obtain title to real estate sold at noncompetitive, rigged prices”:

[A]fter the conspirators’ designated bidder bought a property at a public auction, they would hold a second auction. Then each participating conspirator in turn would bid amounts above the public auction price he or she was willing to pay. The conspirator who bid the highest amount at the end of the rounds won the property. That difference between the price at the public auction and that at the second auction was the group’s illicit profit, and it was divided among the conspirators in payoffs. Ghio participated in the bid-rigging scheme from April 2009 until October 2009.

There’s a lot of rhetoric here — “illicit profit,” “noncompetitive, rigged prices,” — but no substance to the DOJ’s charges. Refusing to bid at a foreclosure auction is not a crime; that is, it does not violate the rights of anyone. Nor should the “secret” second auctions concern anyone who believes in individual rights and free markets. Once someone buys a property, they are free to resell it as he or she sees fit. By the DOJ’s logic, anyone who has ever “flipped” a house or engaged in speculation is a felon.

You might wonder why the Justice Department is prosecuting a man for his bidding practices at a single California county’s foreclosure auctions. The DOJ’s information explains that Mr. Ghio’s actions terribly harmed interstate commerce, because “mortgage holders located in states other than California held mortgages, appointed trustees, and received proceeds from the public auctions that were subject to the bid-rigging agreement.” Ah, so that’s the problem: The DOJ is bailing out poor, beleaguered banks that didn’t recover as much as they wanted to at foreclosure auctions, because they were outsmarted by some local real estate speculators. Those darn kids!

It’s also worth noting that the DOJ touted Mr. Ghio’s plea agreement as the product of a new “Financial Fraud Enforcement Task Force” established by President Barack Obama last year:

President Obama established the interagency Financial Fraud Enforcement Task Force to wage an aggressive, coordinated and proactive effort to investigate and prosecute financial crimes. The task force includes representatives from a broad range of federal agencies, regulatory authorities, inspectors general, and state and local law enforcement who, working together, bring to bear a powerful array of criminal and civil enforcement resources. The task force is working to improve efforts across the federal executive branch, and with state and local partners, to investigate and prosecute significant financial crimes, ensure just and effective punishment for those who perpetrate financial crimes, combat discrimination in the lending and financial markets, and recover proceeds for victims of financial crimes.

If a bunch of speculators agreeing not to bid at a San Joaquin County foreclosure auction constitutes “significant financial crimes,” then the Republic is in truly wretched shape. To think there’s a massive federal apparatus policing local foreclosure auctions — deciding whether the bids submitted were high enough to compensate politically connected lenders for their poor lending decisions — suggests the economic and moral compass of the Obama regime is even more misaligned then even I’d previously thought. These people want to send Anthony Ghio to prison because he wouldn’t submit a “competitive” bid at an auction. Think about that for a moment.

Unfortunately, this prosecution also suggests one of my other fears may come true: Since the passage of the Obama tax bill (aka “health care reform”), I’ve been sounding the alarm about the potential, additional antitrust consequences for physicians and other health care providers. For the past decade, the Federal Trade Commission has cracked down hard against any physician group that tries to “improve its bargaining position” with insurers — yes, the FTC actually outlawed this — by subjecting them to civil “consent orders.” But antitrust makes no distinction between civil and criminal liability; it’s purely a matter of prosecutorial discretion. There’s nothing in current law preventing the DOJ from converting the existing FTC civil cases into criminal cases, subjecting individual physicians to the same ten-year prison sentence and $1 million fine Mr. Ghio now faces.

So what happens when physicians start balking at the next round of government demands to cut rates? My guess is that El Presidente forms a “Health Care Fraud Enforcement Task Force” — assuming one doesn’t exist already — and the DOJ starts rounding up doctors and announcing plea agreements similar to the one signed by Mr. Ghio. If throwing doctors in jail doesn’t lower the costs of medical care, nothing will.


Jeff P. Zacher April 20, 2010 at 3:19 am

Obama bans the boycott…nice.

mundi April 20, 2010 at 4:32 am

Wow… I bad better watch out. This is standard practice at used furniture auctions.

Usually things are sold in groups of 50. But if you have the highest bid, you only have to buy 1, then the other 49 ‘pass in’ and the auction is back next week. So we get together with everyone we think is going to bid and all agree to pool our money and buy all 50 at a really rediculous price. I am guessing this would be illegal under these rules too…

Its utterly stupid because the very idea of an auction leaves you open to collusion between buyers. Infact in MOST auctions there is buyer collusion going on. I am not sure why this guy was targetted. Afterall, they didn’t have to sell him the house at that price, they could have had a reserve price.

Also there argument doesn’t make alot of sense. For example even if I had no real intention of buying, I could get in on this, and get a cut of the profits – reducing the whole point of the system. Would they still have went after him if the profit had to be split 1,000 ways? Or 10,000 ways? Or did they only go after him because it was only split 5 or 10 ways?

S.M. Oliva April 20, 2010 at 6:30 am

mundi -

I don’t know exactly why Mr. Ghio was targeted. The fact that it’s real estate, as opposed to used furniture, is a clue. No doubt the banks that held these foreclosed properties whined and cried to the DOJ; direct lobbying tends to be very effective in antitrust.

The DOJ and FTC have also been expanding their own authority over real estate in general, as witnessed by the FTC’s declaration that multiple-listing services are de facto public utilities.

DayOwl April 20, 2010 at 7:48 am

Regarding government control and prosecution of doctors check out


The mechanisms are already in place.

Mitchell Powell April 20, 2010 at 7:48 am

At first glance this looks like a clear case where governmental intervention is needed–people are cheating the banks! But last I checked, nobody has an automatic right to buyers. If the banks don’t feel they’re being given enough money to compensate them for the houses, they ought to hold on to said houses and not give them away.

The fact that the banks sold the houses is evidence enough that the banks were satisfied. What the buyer does with the house afterward is his own business–that’s the essence of the property concept, no?

And if 5 or 10 guys can warp the price of a house, perhaps the banks need to expand their marketing efforts to involve people who are willing to pay higher prices than these 5 or 10 folks.

Bogart April 20, 2010 at 8:48 am

Simply more Obama patronage.

The banks could have used Ebay and instead of having several or dozens of buyers they could have exposed the bids to several or dozens of thousands of buyers.

mikey April 20, 2010 at 12:34 pm

I’d love to bid at auctions where only I and my friends were bidding. Something fundamentally wrong with the whole process here.

speedyboy April 21, 2010 at 8:15 pm

You can just get out your checkbook and you can go bid too…everyone can

matt nutting July 26, 2010 at 7:24 pm

I’m a real estate attorney and directly involved in this matter. I spent many hours at this particular auction in the past as well. anyone and their momma could bid on any property, any time, for any amount. what was the harm?

Joe Stoutenburg April 20, 2010 at 1:06 pm

Mr. Ghio goes to prison for a non-crime of getting good deals from bank foreclosures that (arguably) add up to, I’m guessing some number in the thousands of dollars — millions at most. Next up, watch Goldman Sachs get a handslapping and no criminal charges levied for actual fraud that surely (again, argument could be made on the exact amount) runs in the billions.We live in a banana republic.

Walt D. April 20, 2010 at 5:18 pm

This seems to be contrived to say the least. What if the “conspirators” in question form a Partnership or Corporation. Are they saying that it is illegal for a Partnership or Corporation to bid at a foreclosure auction? What the DOJ appears to be implying is that the action of the partnership or corporation should be illegal if more than one of the partners or shareholders could individually buy the property. This would certainly be the case with my acquaintances who were “flipping” houses at Foreclosure auctions in 2007.

Bruce N. Stein April 20, 2010 at 6:26 pm

The funny (sad?) part is – had they formed a corporation for the very same purpose, and just bought/sold the houses as group and given each member a proportionate share, it wouldn’t have been “rigging” at all. It would have been sound business practice.

Gerry Flaychy April 20, 2010 at 7:19 pm

“mortgage holders located in states other than California “ The article.

What I don’t understand is why it doesn’t applied to mortgage holders located *in* California. What’s make the difference between the two ?

Gerry Flaychy April 20, 2010 at 7:35 pm

“Ah, so that’s the problem: The DOJ is bailing out poor, beleaguered banks …”
For that to be true, it should applie, firstly, to *all* mortgage holders (not banks), not only to those of outside California.

The problem here is not so clear.

Cindy Mello April 21, 2010 at 2:48 pm

Not only does it make it non-competive for the other purchasers who want to purchase from the auction, the profit that there making between themselves is non-taxable. It is and was unfair for the legitimate bidders at the auction who want to purchase and I really don’t think it has anything to do with the banks. I gather some of the other bidders at the auction got tired of the unfair competiton and turned him in.

Michael A. Clem April 21, 2010 at 3:09 pm

Perhaps I’m not reading the original article correctly, but I fail to see where other purchasers were prevented from bidding in the auction. And what’s wrong with avoiding a tax, the moreso if it’s done legally?

Gerry Flaychy April 21, 2010 at 5:22 pm

If the fairness of the bidding was the problem, it would have incuded also the auctions with mortgage holders located in California, but it is not the case.

Why those it concerns *only* the auctions with mortgage holders located *outside* California ?

Walt D. April 21, 2010 at 11:26 pm

The “out of state mortgage holders” is just a charade to give the DOJ federal jurisdiction over the case using the spurious “Interstate Commerce Clause”. Otherwise, this would be under the jurisdiction of the State of California.

Gerry Flaychy April 22, 2010 at 7:38 pm

But, Walt D., what is the case exactly ?

Is it to refuse to bid at a foreclosure auction as suggested in the article ?

Is it the unfairness of the bidding ?

If so, how come is it a crime *only* when “*out of state* mortgage holders” are implied ?

speedyboy April 21, 2010 at 8:14 pm

There are hundreds of people at these auctions and any one of them can bid if they have the capital to do so. What concern is it of the governments if the banks post an opening bid that is the amount they expect to receive the rest is Gravy and from the amount of kick backs they get from the government the less GRAVY the banks get the better in my opinion. There is no way a handfull of bidders can affect a public auction there are too many people there and let’s face it Stockton is large enough that a few bidders cannot affect the price of a property no one is going to pay more than what they think they can make a profit at. We have to stop this Government takeover Madness!!! Join a cause to protect your right to do business.

Betsy B April 26, 2010 at 11:14 am

If the public auction took place and competive bidding occured, how was the banks defrauded? was not the public auction held? so, the issue is controlling the activites after an auction. So, I guess the small guys can not agree to partner togeather. I can see a problem if there was no other bidders, but when there is open bidding and these guys won the house, who is the government to tell us what we can do with our personl real property. Did not the auction process take place. What happend to free enterprise? o yeah, these are no name individuals, easy targets vs big corporations with politicans in their pockets. The Feds need to spend their time on Wall Street tracking all the BILLIONS made in this MORTGAGE CRISIS. FOLLOW THE BIG MONEY AND YOU WILL SEE WHO REALLY DEFRAUDED THE BANKS. WAS NOT SOME LOCAL REAL ESTATE SPECULATOR!

Gerry Flaychy April 26, 2010 at 6:38 pm

Why is it that there is only Mr. Ghio who is sued and not the other ‘conspirators’ ?

Wile E. Coyote May 4, 2010 at 12:52 pm

Amazing! This only takes place in San Joaquin County CA. The banks, government and mortgage(the 3 stooges) companies screwed up and Mr. Ghio takes the fall. If Mr. Ghio makes poor business decisions no one bails him out. The 3 stooges have helped screw up the economy so badly it makes Ghio look like and ant. There should be a list of thousands that should be suing the 3 stooges and all their poor business decision making. They loaned to individuals whom had no means. Had the business that owned the property not bet on lame horses they would not be auctioning the property. By placing the property up for auction they opened the opportunity to minimize their loss and move forward. The only guilty parties here are the 3 stooges.

whats so funny May 23, 2010 at 11:23 am

The obama task force is at many locations investigating fraud at the court house auctions, all over ca. and other states. They were exposed at the stockton court house by one bidder,so the investigation was cut short, you could be next for the obama linch mob,

Dennis "DennisKnows" Marshall July 24, 2010 at 10:07 pm

As long as Obama doesn’t get rid of the 1031 tax law and pass a bill against real estate wholesaling, I’m good. I flip houses for a living and I love it. When I lost my job, my co-workers were more worried that I wasn’t going to have sufficient health care. LOL. That was the last of my worries. With whats going on with health care behind closed doors, I focus on eating and exercising so I can stay as far away from a hospital as possible. By the way, I use to work in a hospital and I remember the CEO was furious when he found out about the new health care bill Obama was passing.

keny December 19, 2010 at 1:38 am

I am always browsing online for ideas that can assist me. Thanks!

ddff June 30, 2011 at 7:35 pm
Dietmar Georg July 6, 2011 at 2:20 pm

What is next? Will I be prosecuted because I did not bid in the auction? Not bidding at all might be a crime as well….

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