Monday, June 3, 2013

Financial Powerhouses Flood Online Tax Lien Auctions With Bids From Tens & Hundreds Of Thousands Of Shell Companies, Driving Away Bona Fide Bidders; Anti-Competitive Practice? Will Somebody Please Call The Antitrust Feds???

In Fort Lauderdale, Florida, the South Florida Sun Sentinel reports:

  • Tax lien auctions are a little-known but juicy Florida financial market worth up to $1 billion a year. And, the Sun Sentinel has found, banks, hedge funds and other financial powerhouses have hit upon a way to game the system, squeeze out the little guy and gobble up most of the good deals.

    "I don't think it's fair; it's rigged," said Linda Kliston, of Plantation, a small-scale investor who, like many others in South Florida, finds she can no longer realistically compete.(1)

    Big banks are widely blamed for sending America's real estate market and economy into a tailspin beginning in 2007, and then receiving billions of dollars in government bailout loans. Now, some of these same financial heavyweights have found another way to turn the system, and Floridians who can't pay their taxes in time, into a profit center.
  • A bank CD might pay 0.26% interest a year these days. Florida tax liens guarantee a return nearly 20 times higher, and can generate annual returns of as much as 18%.

    For decades, these liens were part of some families' or individuals' investment portfolios, with the proceeds used to help fund retirements, vacations, kids' college tuition and other personal expenses.

    Then events coincided to rewrite the script. Uncertainly bred by the Great Recession made the financial returns on liens look extremely attractive to institutional investors, including banks that provide millions of dollars in credit to hedge funds seeking to buy liens. About the same time, tax collectors in Florida started selling the liens online.

    Those online auctions have come to be dominated by large financial institutions, which have dramatically increased their odds of winning by forming thousands, even hundreds of thousands, of proxy or shell companies to flood the auction, giving them a huge edge in tie bids where the winner is chosen by lottery.

    The gambit is legal under Florida law, but some question whether it's fair. The silly or preposterous names often given the dummy companies — "Yay for Tax Liens," "Pork Chop Sandwiches" and "Spiderman Corp." among them — strongly suggest their creators know there's something absurd about the whole process.

    "The majority of the smaller bidders are getting squeezed out or dropping out because they cannot effectively compete," complained Miami real estate agent Murry Diamond, 60, a longtime participant in South Florida tax auctions.

    "I'm one of the people they're driving out," Diamond said.
  • First, under Florida law, all liens are guaranteed to yield at least a 5 percent return to the buyer over the lifetime of the loan. That's even if the bidder won the lien by agreeing to accept only a quarter of 1 percent, the minimum bid allowed under state rules.

    Second, in online auctions, tie bids are broken by a random number generator, a computerized equivalent of how winning numbers are picked in the Florida Lottery.

    The result: big investors now all agree to accept the theoretical minimum return, and swamp the system with simultaneous bids to increase their chances at being picked.

    At first, firms created thousands of shell companies by applying for and receiving taxpayer ID numbers from the Internal Revenue Service. Then tens of thousands.

    Then came what Miami-Dade Tax Collector Fernando Casamayor calls the "nuclear arms race of bidder numbers."

    In Broward County the total of bidders went from 20,351 in 2010 to more than 1.1 million the following year.

    In Palm Beach County, the count zoomed from 64,877 to 2 million.

    In last year's property lien auction, Broward topped 2 million bidders. Five investment funds alone accounted for more than 1.4 million of them.

    Since the winning bid is now usually chosen at random, the process is akin to tossing the bouquet at a wedding with one bridesmaid having hundreds of thousands of proxies on hand to help her grab it.
  • In implementing their strategy for dominating Florida's tax lien market, institutional investors had an unwitting accomplice: the Internal Revenue Service.

    In the online bidding process, Florida counties require that each participant furnish a taxpayer identification number, which is considered adequate proof by local tax collectors that a business exists.

    The IRS issues those numbers at no cost. It's a closely guarded secret as to how certain firms were able to apply for and obtain tens and hundreds of thousands of ID numbers.

    Some in the industry devised an automated method to deluge the IRS with requests.

    "They identified a process that streamlined a common industry practice," said New York tax lien broker Tom McOsker, president of BloxTrade.

    Asked how his company created more than 200,000 sub bidders, each with its own IRS number, LienBase partner Joshua Schrager said: "We just work hard and work long hours."

    Shocked by the sheer volume of companies registering, Summerford said the Florida Tax Collectors Association questioned IRS officials about the firms' legitimacy, but got no response.

    "They were more concerned about simply running out of the numbers," he said.(2)

    The IRS's South Florida office declined to answer questions submitted by the Sun Sentinel about the process. On its web site, however, the government agency warns that taxpayer ID numbers "are issued for the purpose of tax administration and are not intended for participation in any other activities (e.g., tax lien auction or sales, lotteries, etc.)."
  • Last year, Miami-Dade County began requiring $5,000 refundable deposits from all individual bidders before the public sale began. At prior auctions, a deposit was demanded only from the parent company.

    Now, a firm with 450,000 dummy subsidiaries would have to plunk down $2.2 billion.

    Not surprisingly, Miami-Dade experienced a dramatic reduction in the number of bidders participating: from 1.7 million to about 64,400.

    "Is it fair? I don't know. If you have more money, you have more opportunities to register more bidders," said Casamayor, the county tax collector. "But it's as fair as we could have done it."

    Because of the change in IRS policy, even tax ID numbers have become a commodity to be bought and sold. According to Palm Beach County Tax Collector Anne Gannon, companies with a lot of the numbers are known to rent them to other would-be bidders.
For the story, see Sun Sentinel Investigation: Tax lien sharks use shell companies to squeeze out locals.

For a story follow-up, see Broward leaders order review of tax lien auction rules (Action follows Sun Sentinel's finding that system is stacked in favor of banks, hedge funds).

(1) According to the story, Kliston's husband and fellow investor, attorney Todd Kliston, feels that the local tax lien auctions have become unfair playing fields where a single bidder now can raise 200,000 paddles at once. In 2011, the Florida Tax Collectors Association has reportedly urged its members to take action to restore "integrity and fairness" to the system.

The Klistons are reportedly unsure if they will be participating. Over two decades, they reportedly invested in tax liens to save extra funds, helping to put their daughter through college. But now the odds have become very long, perhaps impossibly so, the story states.

"As far as we're concerned, it's illegitimate. It's not an auction anymore," Linda Kliston reportedly said.

(2) It may be that the Florida Tax Collectors Association (or any other interested party, for that matter) should contact the Antitrust Division of the U.S. Department of Justice and file a complaint. The practices described in the story sure sound like a pattern of collusive schemes among a few, big-money tax lien investors that appears to be eliminating bona fide competition at tax lien auctions.

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