Canadian COMPETITION LAW

February 7, 2011

The United States Department of Justice (Antitrust Division) has announced that a California Real Estate Executive has plead guilty to bid-rigging at public foreclosure auctions, which in the U.S. is a violation of the Sherman Act (see: California Real Estate Executive Pleads Guilty to Bid Rigging at Public Foreclosure Auctions).

The offence in the U.S. carries a maximum penalty of 10 years in prison and a $1 million fine (which may be increased to twice the gain derived from the crime or twice the loss suffered by the victims of the crime, if either is greater than the maximum statutory fine).

In making the announcement last Friday, the U.S. Department of Justice said:

“Richard W. Northcutt pleaded guilty to conspiring with a group of real estate speculators who agreed not to bid against each other at certain public real estate foreclosure auctions in San Joaquin County. The primary purpose of the conspiracy was to suppress and restrain competition and to obtain selected real estate offered at San Joaquin County public foreclosure auctions at non-competitive prices, the department said in court papers.

According to the court documents, after the conspirators’ designated bidder bought a property at a public auction, they would hold a second, private auction, at which each participating conspirator would bid the amount above the public auction price he or she was willing to pay. The conspirator who bid the highest amount at the end of the private auction won the property. The 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. According to his plea agreement, Northcutt participated in the scheme from September 2008 until October 2009.

To date, including Northcutt, four individuals have pleaded guilty in U.S. District Court for the Eastern District of California in connection with this investigation. On April 16, 2010, Anthony B. Ghio pleaded guilty to participating in a conspiracy to rig bids at public foreclosure auctions held in San Joaquin County. On June 24, 2010, John R. Vanzetti and Theodore B. Hutz also pleaded guilty in Sacramento to participating in the conspiracy.

‘With our law enforcement partners, we are vigorously pursuing bid rigging conspiracies in real estate foreclosure auctions that allow individuals to gain illegal profits and take advantage of adverse situations,” said Assistant Attorney General Varney. “The Antitrust Division has expanded its investigation into anticompetitive practices in real estate foreclosure auctions beyond the Sacramento area into northern California.’

‘By rigging public auctions of foreclosed properties, the defendants who have pleaded guilty as a result of this investigation illegally manipulated the market for residential real estate,” said U.S. Attorney Wagner. “Improving the transparency and integrity of that market is a principal objective of these prosecutions. The investigation will continue.’

…

These charges arose from an ongoing federal antitrust investigation of fraud and bidding irregularities in certain real estate auctions in San Joaquin County. The investigation is being conducted by the Antitrust Division’s San Francisco Office, the U.S. Attorney’s Office for the Eastern District of California, the FBI’s Sacramento Division and the San Joaquin County District Attorney’s Office. Trial attorneys Barbara Nelson and Tai Milder from the Antitrust Division’s San Francisco Office and Assistant U.S. Attorney Russell L. Carlberg are prosecuting the case.”

Bid-Rigging Law in Canada

In Canada, section 47 of the federal Competition Act (the “Act”) makes it a criminal offence to enter into an agreement, in response to a call or request for bids or tenders, to: (i) not submit a bid or tender, (ii) withdraw a bid or tender already made or (iii) submit bids or tenders that are arrived at by agreement.

Like criminal conspiracy agreements under the Act, bid rigging is a per se criminal offence, in that it is not necessary to establish any adverse market effects (though all elements of the offence must be proven on the criminal burden of proof – i.e., beyond a reasonable doubt).

Common types of bid-rigging include: (i) “cover” or “courtesy” bidding (some bidders submit bids that are too high to be accepted, or with terms that are unacceptable to the buyer, to protect an agreed upon low bidder),  (ii) bid suppression (one or more bidders that would otherwise bid agree to refrain from bidding or agree to withdraw a previously made bid), (iii) bid rotation (all bidders submit bids but take turns being the low bidder according to a systematic or rotating formula), (iv) market division (suppliers agree not to compete in designated geographic areas or for specified customers) and (v) subcontracting (some bidders that agree not to submit a bid or submit a losing bid are awarded subcontracts or supply agreements from the successful low bidder).

Parties contravening the bid-rigging provisions of the Act are liable to a fine in the discretion of the court, imprisonment for up to 14 years, or both.   It is also common for the Bureau to seek prohibition orders in bid-rigging cases to prohibit the continuation of an offence.  Private parties that have suffered loss or damage as a result of a breach of the criminal provisions of the Act, including the bid-rigging offences under section 47 of the Act, may also commence private civil damages actions.

The Bureau has also issued a number of bid-rigging enforcement guidelines and educational tools including its Bid-Rigging pamphlet and an online multi-media tool entitled Bid-Rigging – Awareness and Prevention, intended to “provide public and private organizations engaged in procurement with information to help them detect, prevent and report suspected incidences of bid-rigging.”

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