Orange tackles ‘rigged’ online tax-lien auctions

April 21--As Billy Ray Cyrus' "Achy Breaky Heart" blared, 76-year-old Tax Collector Earl K. Wood opened his 1993 tax-certificate sale with a dance to lighten things up, then rapidly auctioned off millions of dollars worth of unpaid property taxes to a hall full of investors.

The annual events lured local and out-of-town speculators, many of them in attention-grabbing garb as a way to catch Wood's eye and a winning bid.

But the carnival-like bidding auctions overseen by Wood are a thing of the past. Today, they've been replaced by online auctions that allow big, outside financial outfits to overrun these digital venues from sometimes thousands of shell companies and proxies.

That leaves virtually no room for the little guy, say critics, among them Orange County Tax Collector Scott Randolph.

Last year, Orange's online auction witnessed 350 million bids.

"It's effectively rigged," Randolph said. This year, Orange is going to join Palm Beach and Sarasota as some of the larger counties to adopt a new system that curbs the bid flooding practice.

This little-known but lucrative market of tax-certificate sales exists because every year property owners forget or can't afford to pay their taxes. Yet governments need that delinquent revenue to pay for police, parks or paving.

At next month's annual auction, more than $35 million in Orange County tax certificates will be sold. That's nearly what the county chipped in for its annual Lynx transit system contribution.

So Florida tax collectors hold auctions where investors bid to pay off those unpaid tax bills. And in return, they earn interest that's four times what a bank now pays on long-term certificates of deposits. Annual returns can reach 18 percent.

In the past, auctions were held on courthouse steps, in offices or halls. Investors held hand-scrawled or printed placards with bid numbers, some extra tall or festooned to draw the eye. Bidders ranged from investment-minded snowbirds to well-heeled insurance, bank or investment houses that were rumored to recruit attractive or peppy college kids as stand-ins.

But these auctions had their critics, too. In 2002, Wood reformed the process after the Florida Department of Law Enforcement investigated whether tax certificates were going to his campaign donors. Wood was cleared, and said he didn't play favorites.

Over time, county auctions moved online. Harvey Lerman witnessed both worlds, and recalls Wood's song-and-dance routines, and the manic, rapid-fire auctions.

"He was going too fast sometimes to tell who won them," Lerman said. "It was all so random."

But the 76-year-old Maitland retiree says the new online auctions are flawed, too. When Lerman competed in last year's online sale, he had one account to make bids.

One of his competitors had 241,121 separate entities to make bids for his company, PFS Financial 1, LLC. Another company in the auction, TLGFY LLC, had nearly 600,000 proxies to make bids.

"If you're an individual, you have no shot," said Lloyd McClendon, CEO of Realauction.com, a company that conducts annual tax lien sales, and is helping Orange adopt its new system.

"The local investor once had a one in 40 shot. Now it's one out of 2.2 million."

In Orange last year, that meant PFS Financial had more than 240,000 pingpong balls in that random lottery. Lerman had one.

"It's getting out of hand," said the retired computer consultant. "I don't even know why that's legal."

But it is. And an official linked to PFS Financial, Matt Cosgrave, defended the system Orange used last year.

Financial institutions have been able to acquire thousands of tax-identification numbers from the Internal Revenue Service that they turn around and use to set up shell companies or proxies that make bids in the local tax certificate sales.

But the IRS cracked has down on this practice, limiting the amount of tax ID numbers that can be obtained. Larger companies, however, can still marshal the people to accumulate lots of accounts, and some financial powerhouses have thousands already.

Cosgrave, who is vice president of acquisitions for Propel Financial Services, said that individual investors also can acquire multiple tax ID numbers and set up similar bidding proxies.

"It's a little bit slower than it was before. But you can still do it," Cosgrave said. "And just because it's harder to do it, doesn't mean it's [the auctions] not competitive or it's unfair."

Cosgrave argued that the move to limit the number of bidding entities -- which Orange, Palm Beach, Sarasota and other counties have embraced -- is more bureaucratic work for local officials.

"This shouldn't be a system that burdens local government," Cosgrave said.

Like Palm Beach did last year, Orange's online auction will require that "each bidding entity shall register only once" and "shall not have a financial, legal or contractual relationship with any other bidder or bidding entity."

According to a report by Realauction.com LLC, that change in qualifying resulted in Palm Beach County seeing 148 bidders taking part in last year's tax certificate sale, producing a total 445,000 bids overall. By contrast, the report found, Orange County had 2.4 million registered bidders last year who generated 350 million bids.

"They figured out how to milk the system," said Palm Beach Tax Collector Anne Gannon, who said the new system worked so well last year that she plans to use it this summer. She challenged the notion that it was more work.

Gannon and Randolph say that more counties would switch to the single-bidder system she's adopted, but they fear the financial heavyweights who benefit from the more wide open process might sue them. Randolph understands the threat, but is moving forward anyway.

"Their attempt at intimidation has really affected the number of counties who are going to go to this ... and that's their intention," Gannon said. "Palm Beach [County] has a lot of resources and we're committed to making this a fair auction for everyone."

[email protected] or 407-420-5311 or Twitter @dadamron

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