Fake bids drive up prices on popular site Auction Nation, Republic finds
For two days, Tyler Hudgins watched an online auction for a 14-karat, white-gold engagement ring. In the waning minutes, he made his move.
Sitting in his Gilbert office, he was logged onto the website of Auction Nation, an Arizona-based online auctioneer. Bids for the piece of jewelry hovered around $1,200, far below what he believed he'd pay at Zales. T-minus 5 minutes until auction close, and Hudgins was all in.
But before he submitted his bid, the price jumped.
He started typing another bid and again the price rose.
With 4 minutes remaining, he got in a bid: $1,450.
Seconds later, a competing bidder identified as No. 46176 bested Hudgins' offer by $25.
Hudgins responded, but was topped by yet another bidder, No. 13039.
Hudgins paused and prayed, wondering if it was meant to be. In retrospect, Hudgins said, something seemed off about the auction because the bidding escalated dramatically in the hours before the auction closed.
When the flurry began, the top bid was just $390, thanks to a bid submitted by customer No. 13039.
But there was something unusual about 13039 as well. Hudgins didn't know it at the time, but the email address associated with that account (jameshw@yahooo.com) doesn't exist.
The account of another bidder pushing up the price in the waning moments of the auction, No. 46176, also was associated with a fake email address (serenewwwww@yahoooo.com). And two other bidders in the auction had email addresses with similar misspellings of yahoo.com.
As it turns out, Auction Nation uses house bidders associated with fictitious email addresses to drive up prices on its own items.
In the jewelry auction, Hudgins was caught in the middle of a bidding war with competitors who likely had no interest in actually buying the ring.
Sixty-eight of the final 82 bids were submitted by four accounts tied to fake email addresses, according to an Arizona Republic analysis of the site's auctions over two months.
"It's disheartening," Hudgins said. "I'm just a guy who's in love with my girlfriend, and I just wanted to get engaged. That's all my motive was."
House bids legal under Arizona law
"Shill bidding" — using individuals aligned with a seller during an auction to push up the sale price — undermines bidders' confidence in the process.
But it's legal under Arizona law provided they inform their customers.
Auction Nation conducts auctions for commercial clients and estates, and sells merchandise from a warehouse in north Phoenix. The company also provides a platform for other companies to run online auctions.
Auction Nation's website, like at least a handful of others examined by The Republic, disguises house bidding. Consumers are not told the minimum acceptable sale price, known as the reserve price. And that amount can change even after bidding is underway.
The company does disclose in its user agreement: "…that in the event of a reserve, Auction Nation or its affiliates may implement such reserve by bidding on behalf of the seller…"
Auction Nation's president and owner, Gabriel Prado, acknowledged that customers may not notice that language or understand what it means.
Prado said customers are warned multiple times that the company engages in this practice. And he said the reserve amount protects sellers who want to maximize the price of their merchandise.
Prado stressed that the use of house bidders is common practice in the industry, and provided text from consumer advisories issued by about 50 companies — auctioneers of art, vehicles, real estate, wines and other products — with terms and conditions similar to those advertised by Auction Nation.
In eight years, Prado said, his business has grown into one of the largest auction companies in the country, grossing $20 million a year.
"I set out to be the most transparent auction company in the industry," he said. "There's nothing for us to hide in how we do business because how we do business is not only by the book but how it should be done."
Thousands of likely fake bids
Auction Nation does not reveal which bidders are working on its behalf. But its website allows online users a glimpse behind the scenes, if they know where to look.
The Arizona Republic analyzed auctions during a 60-day period, from mid-February to April, and identified an unusual pattern of bidding by 40 accounts linked to nonworking email addresses.
Those accounts collectively raised the prices of 1,470 items by $139,000—roughly 14% of the total sale price of that merchandise.
This group of accounts tended to target high-value items such as cars and jewelry. They used pseudonyms and misspelled versions of common email providers: "gmailll.com," “aolll.com,” "yahooo.com." They bid more frequently than other accounts overall. And their bidding intensified as auctions drew to a close.
The email addresses tracked by The Republic were either visible in the Auction Nation website's source code or provided by an anonymous tipster. The Republic confirmed information provided by the tipster, including 17 accounts associated with fake email addresses.
Prado, who describes himself on LinkedIn as a "serial entrepreneur," broadly confirmed the findings but declined a request for a follow-up interview to discuss details of the analysis.
Expert advice: 'Consumer beware'
Online auctions hosted by eBay, Amazon and hundreds of other companies account for more than $500 billion in U.S. sales annually.
But the law under which they operate is murky.
About half the states issue auctioneer licenses with detailed requirements, according to Mike Brandly, an Ohio auctioneer and instructor.
Most other states, including Arizona, adopted what experts agree is a convoluted standard in the Uniform Commercial Code. It says: "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…"
Experts say that means auction houses are free to use shills to jack up the bidding.
The key word is "reserved." In auctions, the term refers to a minimum acceptable price. Unless an auctioneer has declared otherwise, all sales are conducted with a reserve price that typically is not disclosed. At the same time, carefully timed house bids can generate competition, pushing the purchase price higher.
Experts disagree on whether the use of shill bidders is common, or appropriate.
At the National Auctioneers Association, Hannes Combest, chief executive officer, said, "I don't know that that is a general practice, nor do I know that it's legal. …There's also a difference between legal and ethical."
PROTECT YOURSELF: How to deal with house bidders in online auctions
Joe Nolan, a Florida attorney who has specialized in auction law for more than three decades, said house bidding is lawful as long as consumers are advised that the auction contains a "reserve." However, he acknowledged many buyers don't know what "reserve" means, and don't realize they're competing with insider bids.
Brandly, who has testified as an expert in numerous court cases, said the practice of disguising house bidders is widespread and deceptive.
"It's everywhere. All 50 states. Every minute of every day," he said. "It's wrong. It's unethical."
Brandly said he doesn't think the laws should be changed. Instead, the public needs to realize what's going on and shy away from reserve auctions, he said.
"It's consumer beware," he added.
'F' from Better Business Bureau
An FBI advisory on avoiding auction scams urges consumers to check the Better Business Bureau.
Auction Nation received an "F" grade from the BBB of Phoenix, which shows 16 consumer complaints.
Some reviews on the bureau's Web page lauded the company for friendly, attentive and honest service. "I have never had a negative experience," wrote one customer. "Their platform is very easy to use, their terms and conditions are always straightforward... I have yet to be disappointed in a purchase."
Other reviewers were disgruntled. One, identified as Bernard K, wrote: "Auto Auction says lowest bidder wins with no minimum. I bid on over 30 cars and they have shill bidders who beat bids by $100 … Dishonest."
Another reviewer, Matt G, wrote: "I was bidding on a high priced item that was appearing to sell to(o) cheap so they removed the item from the auction…What a waste of my, and everyone else's time."
Other dissatisfied consumers posted on scamion.com, an Internet site for business reviews. In addition to allegations of "shill bidding," they complained that products they purchased were not the items shown in pictures or described in text on the website.
Auction Nation's user agreement advises that the company is "not responsible for inaccurate photos, descriptions or information" about products it offers online. Moreover, it says, "By bidding, you agree that Auction Nation gets the final say in any disputes that may arise."
A burgeoning business
The 40 house accounts whose activities were monitored by The Republic bid 5,300 times, generating just over 1% of the nearly 500,000 bids submitted during the period examined.
Although their bid-footprint was relatively small, their impact on auction outcomes was significant. More than 78% of their bids were placed on the last day of an auction, compared with 44% for other bidders in those auctions.
Those accounts' bids won 293 of 1,470 auctions they participated in, higher than their share of bids in those auctions.
Prado said when a house account wins an auction, the company may sell the item to the next-highest bidder.
Prado acknowledged the number of house bids is likely higher than tallied by The Republic. He estimated that 5% of his items, usually the most expensive ones, have reserves. Employees bid on those items using pseudonyms, he explained, so the auction can meet a sellers' reserve amount.
But those minimum prices are not set in stone. Depending on how other items in an auction are doing, Prado said, Auction Nation and the seller may lower or raise the reserve while bidding is underway.
Prado said his company doesn't manipulate auctions to extract the highest possible price, but rather to meet the seller's minimum sales price.
Prado said he abides by the law, but has been targeted by a rival who, in an attempt to undermine his business, has provided internal records identifying the online names of some of the house bidders to the media.
Similar pattern at
a Mesa auto auction
Other auction companies contract with Auction Nation to use its software and platform. These include a Mesa auto sales company, Auction Yard LLC.
Auction Yard's week-long online auctions close on Thursday evenings with an outdoor event, where live bidders compete with unseen customers bidding via the website.
Will Russell, the owner of Auction Yard, served as master of ceremonies on a recent Thursday, peering out of a trailer window at 20 prospective buyers and using a loudspeaker to deliver his muffled version of an auctioneer's patter.
"I currently have it at $100. Otherwise, it's going to the scrap heap," he said to open bidding on a Cadillac Seville.
He notes that auctions are on reserve. And he urges customers to inspect and even drive vehicles before bidding.
When an older Jaguar came up, he said, "The back seat is missing and it smells like low tide."
Among nearly 40,000 bids placed on 602 Auction Yard vehicles during the period analyzed by The Republic, more than 1,400 appear to have been made by house accounts. Some of those accounts placed more than half the bids on a car or truck.
Russell wouldn't confirm whether the accounts identified by The Republic were house accounts, but he said the company has used fake email addresses for undisclosed house bidders.
Bids from the apparent house accounts won the Mesa vehicle auctions at much higher rates than other accounts. Russell said in those cases, he does not offer the vehicle to the highest "real" bidder; instead, the car or truck is simply not sold.
Chris Pantajes, 34, of Chandler, left the auction without a car. He said he read that the auction had a reserve but didn't really understand it.
"I had no idea," he said, when told of the use of house bidders. "It's like a casino."
Larry Carrillo, 37, of Gilbert, had a similar misunderstanding. "It's kind of like the stock market," he said of the auction. "You're gambling either way."
Russell said without house bidders the company would go out of business. Customers are advised of house bidding on the website and at the outdoor auctions, he added.
"We disclaim exactly what we're doing. We're not hiding anything," Russell said. "This is something that's yelled."
Customers say they
didn't know
Despite claims of transparency by Prado and Russell, Auction Nation customers interviewed by The Republic said they didn't feel the company's practices were properly disclosed.
Phoenix resident Adam Jones, 34, described himself as an experienced bidder — much of his apartment is furnished with Auction Nation items — but wasn't sure house bidders were being used.
"If they are doing it, they are doing it under the rug or without any definite 'Hey, by the way, there's going to be a ghost bidder in there,'" Jones said. "Us bidders, we just assume there's thousands of bidders out there and they all want the same stuff."
Jones said, however, he understands why house bidding is done, especially in the Mesa auto auction. "How are they going to make any money if they are selling cars for $100?" he said.
Mesa resident John Graham, 36, said while he suspected house bidders participated in the auctions, he thought the practice was dishonest and poorly disclosed.
He said as a result he would take extra caution to avoid a bidding war.
"If they want to establish a reserve it should just be written out as a reserve price on each item," Graham said. "There's no reason to have a hidden reserve if that's how they are doing it."
Prado said telling customers about the minimum price, or advertising that a specific item has a reserve, would undermine the psychology that makes auctions profitable. Customers become competitive as bidding escalates, he said, and if they see others upping the price they are likely to reassess the value of a product.
In the end, he added, they decide how much they're willing to pay, and the seller gets the highest market value.
"For all parties, it just seems way more fair for everybody just to do it how we do it," Prado said. "It's a learning process for everybody that comes on board."
A ring, a fiancee and
'a great deal'
Hudgins said he still recalls how competitive juices flowed in the final moments of bidding on the engagement ring.
As the price escalated, he upped his bid. And then the price rose again. "It kind of took me back because I was just so shocked about how fast this was happening," he said.
Hudgins got his ring.
A month later later he proposed. His bride-to-be told him it was a better ring than she would have picked out.
"I do feel like I got a great deal," he said. "Still, at the end of the day there's something wrong about this practice."
