Real Estate Investor Sentenced to 14 Months in Prison for Rigging Bids at Northern California Public Foreclosure Auctions

Wednesday, October 4, 2017

A real estate investor was sentenced today for his role in a conspiracy to rig bids at public real estate foreclosure auctions in Northern California, the Department of Justice announced.

Brian McKinzie was charged on June 30, 2011, in an indictment returned by a federal grand jury in the Northern District of California. McKinzie pleaded guilty on Oct. 26, 2016, to two counts of bid rigging at real-estate foreclosure auctions in Alameda and Contra Costa County. Today, McKinzie was sentenced to serve 14 months in prison and to serve three years of supervised release. In addition to his term of imprisonment, McKinzie was ordered to pay a criminal fine of $10,000 and $652,824.43 in restitution.

“Today’s sentence reflects the seriousness of offenses that subvert the competitive process,” said Assistant Attorney General Makan Delrahim of the Justice Department’s Antitrust Division.  “The Division remains firm in its resolve to seek prison terms for individuals who commit antitrust crimes.”  

Between November 2008 and January 2011, McKinzie and other bidders at the auctions conspired not to bid against one another for selected properties, instead designating a winning bidder to win the property at the auction. The members of the conspiracy then held second, private auctions, known as “rounds,” to award the properties to members of the conspiracy and determine payoffs for other conspirators who had agreed not to bid against each other at the public auctions. The private auctions often took place at or near the courthouse steps where the public auctions were held.

When real estate properties are sold at public auctions, the proceeds are used to pay off the mortgage and other debt attached to the property, with the remaining proceeds, if any, paid to the homeowner.

The sentence is a result of the division’s ongoing investigation into bid rigging at public real estate foreclosure auctions in California’s San Francisco, San Mateo, Alameda and Contra Costa counties. These investigations are being conducted by the Antitrust Division’s San Francisco Office and the FBI’s San Francisco Office.

Anyone with information concerning bid rigging or fraud related to public real estate foreclosure auctions should contact the Antitrust Division’s San Francisco Office at 415-934-5300 or call the FBI tip line at 415-553-7400.

CCC’s: It Is Time for an Antitrust Whistleblower Statute–Part 3

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This is Part Three of a four-part series of posts by myself and colleague Kimberly Justice on “It Is Time for an Antitrust Whistleblower Statute.”  Parts 1 and 2 can be found here and here.

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Note:   If the Grassley/Leahy Anti-Retaliation Act is passed, that protection would be part of the whistleblower statute. Ms. Justice and I are advocating that an antitrust whistleblower statute should go farther and provide a reward for actionable cartel-busting information.

The SEC whistleblower statute is a very successful model to be followed for a potential antitrust whistleblower statute. There should be differences in some areas (discussed below), but the SEC program has shown to be an effective tool in preserving the integrity of the nations’ securities market while conserving the investigative resources of the SEC.  But, it took a severe financial crisis to overcome the objections to an SEC whistleblower statute.  Many of the stakeholders, such as the Chamber of Commerce that opposed allowing a whistleblower award as part of the Dodd-Frank Act are likely to oppose an antitrust whistleblower statute.  But in November 2016, then SEC chair Mary Jo White said: “The whistleblower program has had a transformative impact on enforcement and that impact will only increase in the coming years.”

The success of the SEC whistleblower statute, at least from an enforcement perspective, is one reason why we think the time has come for a similar antitrust whistleblower statute.  It works.  The SEC, which pays the whistleblower 10-30% of the sanctions collected in successful actions, has rewarded 46 whistleblowers with approximately $158 million for information that has led to successful enforcement actions.

The SEC statute, like the antitrust statute we propose, is different than a typical False Claims Act-type whistleblower claim where the relator (whistleblower) brings an action in the name of the United States alleging the government has been the victim of fraud.  The SEC statute basically provides an informant with a reward (bounty) for coming forward with actionable information where the SEC obtains monetary sanctions.  The SEC, however, is precluded from making monetary awards “to any whistleblower who is convicted of a criminal violation related to the judicial or administrative action for which the whistleblower otherwise could receive an award.”

While the SEC statute provides a model, there are areas where adjustments for the nature of cartel violations may be made in an antitrust whistleblower statute.  The full SEC legislation can be found here, but below are a couple of key provisions and our suggestions about how they might be modified.

Payment of Award

The SEC whistleblower program allows for a reward, “In any covered judicial or administrative action, or related action.” 

The Antitrust Division does not have administrative actions.  An antitrust whistleblower would be eligible for an award, in our view, only based on original information that led to criminal Sherman Act convictions and the imposition of fines based on a conviction.

 Amount of Award

The SEC provides for a whistleblower award only where the penalties exceed $1 million.  In such cases the reward is an aggregate amount [if more than one whistleblower] equal to—

‘‘(A) not less than 10 percent, in total, of what has been collected of the monetary sanctions imposed in the action or related actions; and

‘‘(B) not more than 30 percent, in total, of what has been collected of the monetary sanctions imposed in the action or related actions.

In our view, this may not be an appropriate award schedule for an antitrust whistleblower.  At a minimum, the $1 million threshold should be eliminated. A whistleblower statute may be particularly effective in construction-type contracts where the loss to the victim is acute.  For example, a rigged electrical contract at a local hospital that would have been $750,000 with competitive bidding but has a low fixed bid of $1 million is as worthy of a whistleblower award as an international cartel where each consumer suffers a relatively small loss, but cumulatively the loss will easily exceed $1 million.

Also, the 10 to 30 percent award range may be excessive in a large cartel case.  The impetus behind our proposed legislation is not so much to make a whistleblower a mega-lottery winner, but to provide a way to help the whistleblower pay for what could be substantial attorney fees, and to compensate the whistleblower for what may be a long period of unemployment or underemployment, regardless of anti-retaliation protection. Therefore, we would eliminate the minimum award of 10%, leave the maximum of 30% and perhaps require that in making the award the Antitrust Division consider a) the attorney fees incurred; and b) the likely or actual loss of income over a period of time, as well as the value of the information provided, the level of cooperation and the amount of the recovery.

No Recovery for One Convicted of the Violation

No SEC whistleblower award can be made to ‘‘to any whistleblower who is convicted of a criminal violation related to the judicial or administrative action for which the whistleblower otherwise could receive an award under this section.”

             An antitrust whistleblower statute should certainly retain this provision.  It is our sense that the most likely potential antitrust whistleblowers will be lower-level employees who know about a conspiracy and take some action in furtherance of it—thus creating criminal liability for themselves.  This will give the Antitrust Division much control over who can become a whistleblower.  The Division retains the discretion whether to give non-prosecution protection, a necessary first step before an insider can become a whistleblower.  If the potential whistleblower has a level of culpability such that the Antitrust Division is not comfortable accepting as a whistleblower, the simple answer is to not grant non-prosecution protection.  Another possible scenario is that the Antitrust Division grant non-prosecution protection to a highly culpable individual (making them eligible for an award because no conviction) but write into the cooperation agreement that the cooperator waive the right to a potential “bounty.”

There may be, and hopefully will be, some whistleblowers who do not need non-prosecution protection (customers, administrative staff or others who learn of a cartel but have no role in it).  But, in practice, the Antitrust Division would have significant control over the whistleblower program because it is likely that many potential whistleblowers would have to take as a first step, negotiating non-prosecution agreements.

 Office of the Whistleblower

            A key aspect behind the success of the SEC whistleblower provision is that the SEC actively promotes the program.  The SEC established an Office of the Whistleblower.  This is an excerpt from the office’s home page:

Assistance and information from a whistleblower who knows of possible securities law violations can be among the most powerful weapons in the law enforcement arsenal of the Securities and Exchange Commission. Through their knowledge of the circumstances and individuals involved, whistleblowers can help the Commission identify possible fraud and other violations much earlier than might otherwise have been possible.

The level to which the Antitrust Division promotes a new whistleblower statute will determine its level of success.  When the Division first began the revised leniency program, it rolled it out like a new iPhone.  The Division went to great lengths to advertise the program and make the program successful in practice by working with companies to help them qualify if at all possible.  The flexibility and discretion built in to an SEC style whistleblower statute will give the Antitrust Division the ability to accentuate the features the whistleblower provisions that work best for law enforcement while mitigating any possible downside (such as very culpable people getting awards).

Miscellaneous

We’ve only touched on the most significant feature of the SEC whistleblower program that may be mimicked in an antitrust whistleblower statute.  There would be more “sausage making” into creating actual legislation.  Other features of the SEC program worth noting are the reporting requirements to Congress and the Inspector General review and report on the program.  If an antitrust whistleblower statute is nearly as effective as the SEC statute, law enforcement and consumers will be the winners.  But, if an antitrust whistleblower statute is a bad idea, it can be a short-lived bad idea.  In light of the success of the SEC program, it is prudent to give it a chance.

Thanks for reading

Robert.connolly@geyergorey.com

Kimberly A. Justice, kjustice@ktmc.com

CCC’s: It Is Time For An Antitrust Whistleblower Statute–Part 2

Objections to an Antitrust Whistleblower Statute

The idea of an antitrust whistleblower is not new, but it has never gained much traction in the past.  There have been significant objections, or at least disinterest—particularly from the Department of Justice.  The mood seemed to be “Our cup runneth over with Amnesty applications so let’s not screw this thing up.”  But, perhaps times have changed.  Our analysis is that the objections to a whistleblower statute were either superficial, or when having merit, still not enough to outweigh the benefits of a whistleblower statute.

Before considering some of the possible downside to an antitrust whistleblower statute, a little explanation of what we have in mind may be helpful.  We propose an SEC-style whistleblower statue where an informant can be awarded a level of compensation (bounty) when information of illegality leads to charges and recovery by the SEC. This is different than a False Claims Act qui tam case where a Relator brings a case in the name of the government alleging the government has been defrauded.  In fact, an antitrust whistleblower statute is needed because a qui tam case is not generally available in price-fixing matters since it is the private sector, not the government that has been harmed.

Concerns About an Antitrust Whistleblower statute

 It’s worth noting that the Criminal Antitrust Anti-Retaliation Act has been passed twice unanimously by the Senate in the last two Congresses and is up for vote again on the Senate floor.  It will no doubt pass—most likely again unanimously.  There is agreement that a person who reports criminal antitrust activity should not face retaliation in the workplace. (Despite the consensus, the House has failed to take up this bill the last two times it has passed the Senate).  There is controversy, however, about whether a whistleblower should be eligible for some type of bounty if the information leads to successful cartel prosecution and the imposition of fines.

In 2011, the General Accounting Office Published a report on Criminal Cartel Enforcement that reported stakeholders’ views on a possible antitrust whistleblower statute (here).  This is a summary of the GAO findings:

There was no consensus among key stakeholders GAO interviewed–antitrust plaintiffs’ and defense attorneys, among others–regarding the addition of a whistleblower reward, but they widely supported adding antiretaliatory protection. Nine of 21 key stakeholders stated that adding a whistleblower reward in the form of a bounty could result in greater cartel detection and deterrence, but 11 of 21 noted that such rewards could hinder DOJ’s enforcement program. Currently, whistleblowers who report criminal antitrust violations lack a civil remedy if they experience retaliation, such as being fired, so they may be hesitant to report criminal wrongdoing, and past reported cases suggest retaliation occurs in this type of situation. All 16 key stakeholders who had a position on the issue generally supported the addition of a civil whistleblower protection though senior DOJ Antitrust Division officials stated that they neither support nor oppose the idea.

The GAO report is several years old and it may be that positions have been reevaluated.  For example, I think the Antitrust Division today would support the anti-retaliation measures in whistleblower statute.  But below is an analysis of some of the objections raised to making a bounty available to an antitrust whistleblower.

Whistleblower Credibility

 The Antitrust Division’s principal concern was that jurors may not believe a witness who stands to benefit financially from successful enforcement action against those he implicated.  GAO Report p. 39.  But, a whistleblower is highly unlikely to ever be a principle witness at a trial.  An antitrust crime typically involves many culpable actors.  A whistleblower would generally “get the ball rolling” and provide evidence that will turn other witnesses, and allow subpoenas and search warrants from target companies.  Further, a single whistleblower who might receive a financial reward seems no less credible than witnesses from an amnesty company where everyone—including the highest-ranking culpable executives—will have escaped criminal prosecution.  Also, criminal antitrust trials are relatively rare—almost all cases are resolved by pleas.  Finally, it is not logical to worry about the credibility of a witness you would otherwise not even know about absent a whistleblower statute.

A Whistleblower Reward Could Result in Claims That Do Not Lead to Criminal Prosecution: 

 There was some fear expressed in the GAO report that would-be whistleblowers would fabricate information in order to conjure up a cartel in the hopes of collecting a reward.  GAO Report p. 40.  Anything is possible, but the Antitrust Division folks are pretty savvy and have standards for opening grand jury investigations.  Moreover, the possibility of fabricated charges exists today with a company applying for leniency in the hopes of knee-capping competitors who would have to deal with a criminal cartel investigation.  The reality is a “false accusation” simply wouldn’t be corroborated by anyone else and could land the accuser in jail for making a false statement.

In a similar vane, concern was expressed that a whistleblower statute may result in a deluge of complaints to the Antitrust Division that would take additional resources to sift through.  This seems like a good problem to have.  When Ms. Justice and I were at the Division, we received a fair number of complaints that amounted to no more than oligopoly pricing.  It did not take too much time to ask: “What else ya got?”

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CCC’s: Criminal Antitrust Anti-Retaliation Act of 2017 Voted Out of Committee

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The Grassley/Leahy Criminal Antitrust Anti-Retaliation Act of 2017 was unanimously voted out of the Senate Judiciary Committee this morning and will now go to the Senate floor.  The bill has passed the full Senate unanimously twice before, but has never been taken up in the House.

The bill is an important first step in creating protection for individuals who report criminal antitrust activity.  I have advocated for a stronger whistleblower statute (here) (here) that would provide a possible financial incentive for a whistleblower to help defray what could be the substantial legal bills that may accompany involvement in an antitrust investigation, as well as provide possible reward for actionable information.  But, certainly an anti-retaliation provision should be part of any whistleblower statute.  This legislation will be a good start if the House can be persuaded to join the Senate and pass the bill.

Below is the text of the statute

Criminal Antitrust Anti-Retaliation Act of 2017

This bill amends the Antitrust Criminal Penalty Enhancement and Reform Act of 2004 to prohibit an employer from discharging, demoting, suspending, harassing, or in any other manner discriminating against an employee, contractor, subcontractor, or agent of such employer (covered individual) who: (1) provided information to the federal government or a person with supervisory authority over the covered individual (or such other person working for the employer who has the authority to investigate, discover, or terminate misconduct) concerning a violation of antitrust law or of another criminal law committed in conjunction with a potential violation of antitrust law or in conjunction with an antitrust investigation by the Department of Justice; or (2) filed, testified, participated, or otherwise assisted in an investigation relating to such a violation. This protection does not extend to any covered individual who planned and initiated such a violation or an obstruction to its investigation.

A violation with respect to the antitrust laws shall not be construed to include a civil violation of any law that is not also a criminal violation.

A covered individual who alleges discharge or other discrimination by an employer in violation of such prohibition is authorized to seek relief: (1) by filing a complaint with the Department of Labor; or (2) if Labor has not issued a final decision within 180 days of such filing, by bringing an action at law or equity in the appropriate U.S. district court. A covered individual who prevails in any such action is entitled to all relief necessary to make such individual whole, including reinstatement with the same status, back pay plus interest, and compensation for special damages sustained

Thanks for reading.  robert.connolly@geyergorey.com

CCC’s: A Shout Out From John Hughes

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Yesterday I had the pleasure of having lunch with my old boss, John Hughes.  Also with us were former office mates in the Philadelphia Field Office, Brad GeyerRich Rosenberg, and Wendy Norman.  I thought I’d post the picture because John is one of the most respected and beloved figures in the antitrust world and people often ask me, “How is John doing?”  John  is doing great!

John began his career in the Department of Justice, Antitrust Division, Philadelphia Field Office and immediately began to work on what would become the Great Electrical Conspiracy cases–a watershed event in antitrust history.  He later became Chief of the Philadelphia Field Office where I worked for 34 years.  Everyone that worked for John agreed–he was the greatest boss, mentor and friend that anyone could ever ask for.  When John retired in 1994, he became a trial advisor on a number of Antitrust Division cases so he got to know and help staffs throughout the Division.   It is pretty common for a trial staff not to want someone looking over their shoulder as an “advisor,” but everyone asked for John.  He is equally respected by the defense and plaintiff bar and the judiciary.

So, I just want to let everyone know John and his wife Helen are doing great.  They keep busy with a very large family of children, grandchildren and great grandchildren.  John gives his best to everyone who helped make his career in antitrust so fondly memorable.

E-Commerce Company and Top Executive Agree to Plead Guilty to Price-Fixing Conspiracy for Customized Promotional Products

Monday, August 7, 2017

Conspiracy Was Conducted Through Social Media and Encrypted Messaging Applications

An e-commerce company and its top executive have agreed to plead guilty to conspiring to fix prices for customized promotional products sold online to customers in the United States. Zaappaaz Inc. (d/b/a WB Promotions Inc., Wrist-Band.com and Customlanyard.net) and its president Azim Makanojiya agreed to plead guilty to a one-count criminal violation of the Sherman Act.

Acting Assistant Attorney General Andrew Finch of the Department of Justice’s Antitrust Division, Acting U.S. Attorney Abe Martinez and Special Agent in Charge Perrye K. Turner of the FBI’s Houston Field Division made the announcement.

According to the felony charges filed today in the U.S. District Court for the Southern District of Texas in Houston, the conspirators attended meetings and communicated in person and online. The investigation has revealed that the conspirators used social media platforms and encrypted messaging applications, such as Facebook, Skype and Whatsapp, to reach and implement their illegal agreements. Specifically, the defendants and their co-conspirators agreed, from as early as 2014 until June 2016, to fix the prices of customized promotional products sold online, including wristbands and lanyards. In addition to agreeing to plead guilty, Zaappaaz has agreed to pay a $1.9 million criminal fine.

“As today’s charges show, criminals cannot evade detection by conspiring online and using encrypted messaging,” said Acting Assistant Attorney General Andrew Finch. “In addition, today’s charges are a clear sign of the Division’s commitment to uncovering and prosecuting collusion that affects internet sales. American consumers have the right to a marketplace free of unlawful collusion, whether they are shopping at retail stores or online.”

“Schemes like the defendants’ cause financial harm to consumers who purchase goods and services and to businesses who sell goods and services in compliance with the laws of the United States,” said Acting U.S. Attorney Abe Martinez. “The United States will continue to investigate and prosecute individuals and businesses who seek to gain an illegal advantage.”

“The FBI stands ready to protect consumers from unscrupulous business practices,” said Special Agent in Charge Perrye K. Turner. “Antitrust laws help protect the competitive process for the benefit of all consumers.”

Makanojiya is charged with price fixing in violation of the Sherman Act which carries a maximum sentence of 10 years in federal prison and a maximum fine of $1 million for individuals. The maximum fine for an individual may be increased to twice the gain derived from the crime or twice the loss suffered by the victims of the crime if either of those amounts is greater than the statutory maximum fine.

Both defendants have agreed to cooperate with the Antitrust Division’s ongoing investigation. The plea agreements are subject to court approval.

This prosecution arose from an ongoing federal antitrust investigation into price fixing in the online promotional products industry, which is being conducted by the Antitrust Division’s Washington Criminal I Section with the assistance of the FBI’s Houston Field Office. Anyone with information on price fixing or other anticompetitive conduct in the customized promotional products industry should contact the Antitrust Division’s Citizen Complaint Center at 888-647-3258 or visit www.justice.gov/atr/contact/newcase.html.