How Much Damage Does Shill Bidding Really Cause?

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There's something scarier in the Bill Mastro case than alleged fraud. It's more dreaded than the trimmed T-206 Honus Wagner. And it's freakier than the fake Elvis hair.

It's math. The type that haunts me at 2AM while I'm dreaming about college finals. Even though I'm 39-years old and have been practicing law for 14 years, for some reason, in these dreams I think that if I don't get the right answers that I won't graduate.

And it doesn't look good for me, because, frankly, I haven't done any real math in almost 20 years, haven't gone to class all semester, and the numbers on the test keep changing.

Anyone else have these dreams?

Well, now I can thank the Mastro case for bringing that type of math to the waking world.

For a quick recap, the court requested that the government file a brief and explain how the heck it came up with a 30-month maximum sentence for Mastro. The court's biggest concern was that "unlike other agreements" this one "did not contain a cooperation agreement."

Legal translation: Hey guys, as I see it, this guy is giving us nothing and you're cutting him a break. What gives?

The court also asked the government to identify the benefits it received in exchange for reducing the maximum sentence to 30 months.

Legal translation: I, the judge, as a representative of the people, feel like we the people are getting ripped off by this deal. So you better explain to me why this is a good deal.

Now, the government filed a response to the judge's questions, and it does not go into specific detail about how Mastro helped the prosecution. It does, however, provide this vague statement:

"The defendant agreed to be interviewed by the government, and pursuant to a proffer agreement, provided valuable information concerning the nature and extent of his conduct. While not rising to the level of substantial assistance in the prosecution of another, the defendant's proffer provided a benefit to the government…"

Legal translation: Hey judge, he told us some really great stories. They don't substantially help us but they kinda help us.

Well, the judge blew up the 30-month maximum sentence, which is a nightmare for Mastro.

And I don't mean to minimize the agony I'm sure that caused Mastro, but we try to keep things light in Law of Cards.

So we'll address the bad dreams the government's brief caused for me -- math problems.

In the brief, there are a half dozen or so word problems that we can all play along with at home to quantify how much legitimate bidders were victimized by shell bidding.

Let's try a couple of them. See if you can figure out how much everyone was ripped off.

Question No. 1: The "Straightforward" Shill Bid.

Legitimate Bidder #1 sees an item he likes, and bids $100.

Shill Bidder #1 follows up with a bid of $125.

Legitimate Bidder #1 then bids $150.

Shill Bidder #1 then bids $175.

Legitimate Bidder #1 really, really wants the item, so he bids $200.

Shill Bidder #1 sensing he's got one more bid out of his prey, raises it to $225

Legitimate Bidder #1 then checks his kids college fund, figures out that his wife won' t notice an additional $25 missing, so he bids $250.

And wins.

How much did Legitimate Bidder #1 get hurt?

Answer: If you answered you don't care, that is correct. If you answered $150, the difference between the winning bid and the first legitimate bid that should have won, you and the government see eye to eye.

I won't explain why until later, but here I think it gets the answer right.

OK, let's make it harder.

Question No. 2: Multiple Suckers, and Multiples Suckees (Legal translation: people who suck are suckees, right?)

Legitimate Bidder #1 bids $100 for an item.

Shill Bidder #1 then raises the bid to $125.

Legitimate Bidder #2 also wants it, so he bids $150.

Enter Shill Bidder #2 who is working with Shill Bidder #1. He raises it to $175.

Seeing all the activity, Legitimate Bidder #3 now surfaces, and bids $200.

Shill Bidder #3 then comes along, and raises it to $225.

Then, Legitimate Bidder #4, seeing all the action on something he thought should have ended at $175 throws out a $250 bid and wins.

So, how much did the Shill Bidders hurt the Legitimate Bidders?

Answer: According to the government, just $75.

Here, the government looked at the alleged specific intent of each bidder, and determines each Shill Bidder really just wanted the Legitimate Bidders to bid more. In Question No. 2, each Shill Bidder raised the price $25, which in turn got a different Legitimate Bidder to bid another $25. For this question, the government believes that the "rip off" was only the $75 that Shill Bidders inflated the price.

I disagree with this calculation. The group of Shill Bidders should get nailed for $150.

Why? Shill Bidders likely aren't bidding when they think Legitimate Bidders are going to bid. Shill Bidders only bid when bidding has stalled and there's a chance that the bid before the shill bid will be the final bid. Shill Bidders don't want that. Their intent is to make sure the stalled bid is not the final bid. Their intent is to keep the bidding going, especially since they are concerned the bidding may stop.

So, given that "intent," here's the proposed Law of Cards Shill Bid Formula:

Winning Bid – Last Legitimate Bid = Loss Amount

Legal translation: Mr. or Mrs. Evil Shill Bidder, you are responsible for everything after your Shill Bid.

Now, a formula only works if can be used in other scenarios. If we plug in the numbers from Question No. 1 into the Law of Cards formula, we actually get the same answer as the government. So, the Law of Cards Formula might just work.

I don't think this formula is that much of a stretch at trial either. A jury could easily infer from the evidence that a Shill Bidder thought the bidding stalled, and there was a risk that the stalled bid would be the final bid. So, the Shill Bidder acted to ensure it would not be the final bid.

Leave it up to the Shill Bidder to provide evidence to the contrary.

Question No. 3: Nothing To See Here. There's Allegedly No Victim.

This one is of my own creation. Take the facts of Question No. 2, but then say that a Shill Bidder threw out a final bid of $275, and accidentally won. What's the loss amount?

Answer: According to the government, there is no victim. Seriously:

"Despite the number of years of fraud and the number of fictitious bids placed, it was frequently the case that a shill bidder was the highest bidder on an item and "won" the lot. In such cases, the sale of the lot was cancelled and the item was returned to Mastro Auctions' inventory, defendant, or the consignor of the item. Under the guidelines, there was no victim in these instances."

What?! It's myopic to think that shill bidding hurts only those involved in the bidding. Contrary to pricing guides, I'm a firm believer an item is worth what someone will actually pay for it. In the scenario for Question No. 3, the market thinks the item is worth $275 because it believes someone actually paid that amount for the item. It's not. No one actually spent $275 on that item.

That fraudulent $275 is problematic to the market. For example, others see that price, think it's legitimate, and may decide to spend that much (or more) on a similar item later. Or others may overprice their goods and not receive bids. Those people then could be out listing and auction fees.

We also don't know that the last legitimate bid of Question No. 3 (the $250 bid) would have occurred if it weren't for the sheer number of bids before it. In auctions, it's not just the price that people look at…it's also the number of bidders (the number of interested parties). That goes into others' thought processes: if lots of people want it now, there's a good volume of people desiring this item. Maybe then, one of those many losing bidders will want a similar item and would pay the same (or more) later.

Applying the Law of Cards Formula, the Shill Bidders should be on the hook for $175 here. I think this a lot more realistic than the government saying there was "no loss amount."

Question No. 4: The Government's Formula!

Legitimate Bidder #1 $100

Shill Bid #1 $200

Legitimate Bidder #2 $300

Shill Bid #2 $400

Legitimate Bidder #3 $500

Shill Bid #3 $600

Legitimate Bidder #1 $700

Shill Bid #4 $800

Legitimate Bidder #1 $900

Shill Bid #5 $1000

Legitimate Bidder #1 $1100 (winning bid)

What's the loss? According to the government, it's $700. See if you can figure out how they did it on your own.

I couldn't.

Thankfully, the government provided a handy-dandy formula:

+ + + = Loss Amount

So, the math looks like: [200-100] + [400-300] + [600-500] + [1100-700] = $700

Since it's a formula, let's see if it works in other scenarios. Unless I completely forgot how to do math, it doesn't. If you plug in the numbers Question 2, you don't get $75 again. You get $125. It also doesn't work for Question 1. Instead of $150, it gives an answer of $125.

Guess the Government's Formula doesn't work in every scenario.

Now, I'm not trying to pick on the government, this is complex stuff, especially for lawyers (most of whom decided to be lawyers because they didn't like math or science). But I think the government is making this more complex than they need to. If you just use the Law of Cards Formula, the loss amount is $1000. And again, I think a jury could easily infer that because the shill bidding began after a legitimate bid of $100, the Shill Bidders were concerned that $100 could be the final price.

OK, enough word problems. Anyone else's head hurt?

Maybe that's something the court thought of when he blew up the 30 month maximum sentence.

He made us do math. We're all victims because of that!

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