Legal Definitions - knock-out auction

A knock-out auction refers to an illegal agreement among potential bidders at a public auction. Instead of competing fairly and driving up prices through open bidding, these bidders conspire to suppress the price of an item. They agree that only one of them will bid, or that they will bid in a way that ensures the item sells for a low price, often significantly below its true market value.

After the item is purchased at the public auction, the conspirators then hold a private, secondary auction among themselves for the item. The profit made from the difference between the low public auction price and the higher private auction price is then shared among the participants in the scheme. This practice is illegal because it defrauds the seller by preventing the item from achieving its true market value through open competition.

• Example 1: Art Dealers at a Gallery Auction

  A group of prominent art dealers attends a public auction featuring a rare painting by a famous artist. Before the auction begins, they secretly agree that only one designated dealer will place bids on the painting, and the others will refrain from bidding. This allows the designated dealer to acquire the painting for a price significantly lower than its estimated market value due to the lack of competition. Immediately after the public auction, the dealers hold a private, secondary auction among themselves for the painting, where it sells for a much higher price. The substantial profit margin between the public and private sale prices is then distributed among all the dealers who participated in the initial agreement.

  How it illustrates the term: This scenario demonstrates a knock-out auction because the art dealers colluded to artificially suppress the bidding at the public auction, preventing the painting from reaching its fair market value. They then privately profited from the item's true worth, defrauding the original seller.

• Example 2: Real Estate Investors at a Foreclosure Sale

  Several real estate investors attend a foreclosure auction for a highly desirable commercial property. They form an agreement not to bid against each other, allowing one investor to purchase the property at a very low price, perhaps just above the minimum bid required by the bank. Once the public sale is complete, they conduct a private bidding process among themselves, where the property sells for a much higher, more realistic market value. The difference in price, representing a significant profit, is then divided among the investors who participated in the initial agreement to suppress bids.

  How it illustrates the term: This is a knock-out auction because the investors conspired to eliminate competition at the public foreclosure auction, ensuring a low sale price for the property. Their subsequent private auction and profit-sharing scheme directly illustrate the illegal nature of this practice, as it denied the foreclosing entity a fair market price.