Three real estate investors accused of rigging bids in Palm Beach County won 1,363 properties, but walked away from 109 of the deals, forfeiting $427,000 in deposits—a move industry leaders said should have raised red flags on the auction circuit.

Auction records obtained by the Daily Business Review show defendants Avi Stern, Christopher Graeve and Stuart Hankin invested nearly $139.88 million from 2012 to 2015 to purchase foreclosed properties at judicial sales in Palm Beach County. Graeve and Hankin also participated in the auctions through their company, Prodigy Capital Inc. The process required participants to bid in good faith.

Federal prosecutors from the U.S. Justice Department’s Antitrust Division provide no details on what sparked their pursuit of the three investors, who they accused of conspiring offline to cheat the online marketplace. They suggest the men were sophisticated investors who gamed the system as millions of properties went into foreclosure across the nation during the last housing market collapse. On Nov. 2, a federal grand jury charged the men with conspiracy to restrain trade, making them the first indictments on bid-rigging in foreclosure auctions filed in Florida.

Stern was affiliated with Florida’s Best Realty Services in Boca Raton, but no longer works for the company. Graeve and Hankin co-founded Prodigy Capital Inc. in Palm Beach Gardens in 2010. Graeve is chairman and Hankin is CEO, according to the company website. Their attorneys said the allegations are a stretch.

“The banks caused the problem, and this case is another example of the government trying to bail them out,” said Stern’s lawyer, Jeffrey Neiman of Marcus, Neiman & Rashbaum in Miami and Fort Lauderdale.

But real estate experts say the number of abandoned deals hint of at least a disregard for the spirit of the auction system, designed to prevent participants from failing to complete purchases after beating out other bidders.

Jeffrey Gilbert.

“That is outrageous and unheard-of conduct and practice,” said Cozen O’Connor Miami partner  Jeffrey Gilbert, who for more than 30 years has represented developers, real estate lenders, financial institutions, special servicers and receivers in construction, property and commercial financial disputes. ”That’s something that the online (auction) policies and procedures are designed to prevent.”

‘Conspiracy Behind the Keys’

Palm Beach County judicial auction rules require participants to submit deposits of 5 percent of their highest intended bid and agree to forfeit these deposits if they fail to follow through.

Auction records show Stern won 461 properties between 2012 and 2015, submitting bids totaling more than $53 million. Graeve won 755 properties with bids totaling nearly $74.7 million. His company with Hankin won 147 bids during that period, totaling nearly $21.6 million.

The data also suggest the men forfeited nearly $427,000 by abandoning 109 properties for which they had submitted winning bids in that three-year span—a pattern lender attorneys say would have stood out if Florida courts weren’t drowning in foreclosure dockets.

Palm Beach County auction records show Graeve forfeited 68 times on bids totaling $5.3 million, which suggests he abandoned $266,410 in deposits. Stern forfeited 27 times on offers totaling $2 million, which would have required $102,210 in deposits. Prodigy Capital forfeited 14 times on nearly $1.2 million in bids, leaving $58,160 on the table.

“The reason this wasn’t a red flag to the auction site is because there’s nothing wrong with it. It’s a simple cost of doing business issue. There are lots of legitimate reasons for not going forward with a closing,” Hankin’s attorney, David Oscar Markus of Markus/Moss in Miami, said in a statement without elaboration. “Sorry, but there are no flags here—red, yellow or otherwise. These are fake flags.”

If prosecutors succeed, real estate attorneys following the case say potential litigation by borrowers who lost property traded in judicial sales could threaten a still-recovering real estate sector.

Daniel Stermer.

“The government is alleging a conspiracy behind the keys. That’s going to be an interesting issue, because there’s no way to see what’s going on,” said Development Specialists Inc. Miami Managing Director Daniel J. Stermer, a former special assistant U.S. attorney. “What we don’t know online is what’s happening outside of the keystroke.”

Observers say the government will likely produce text messages, phone records and similar evidence to support claims the investors conspired to rig bids. But they say defense lawyers will likely argue that even if the men did communicate during the bidding window, that behavior would have little effect on a process open to users across the world.

“An auction could go in less than 10 seconds,” Gilbert said. “Once it gets to the high bid … a sale could be done in a minute or two.”

Real estate attorneys also say the scrutiny could mean new uncertainty and revived litigation if creditors and former property owners claim collusion deprived them of surplus funds and lien payments.

Jason Vanslette.

“That’s the real problem,” said foreclosure litigator Jason Vanslette of Kelley Kronenberg. “A borrower or second-mortgage defendant could come in and object to the sale and try to vacate it.”

But Neiman refuted that idea.

“The notion that homeowners or HOAs were somehow defrauded by a handful of investors sending text messages to each other during an open online auction is absurd,” he said. “The banks overextended themselves to allow homeowners to get loans based on inflated property prices. … Investors came in and saved the day by paying a fair market price.”