BUFFALO, N.Y. (WIVB) — ACV Auctions, considered in some circles as the darlings of Buffalo’s nascent start-up industry, has reported rapid growth after it won the 43North competition’s $1 million prize.
Since the 2015 victory, the company has taken the industry by storm as the nation’s fastest-growing dealer-to-dealer online wholesale auction marketplace for vehicles.
But ACV’s success is now under scrutiny in a federal lawsuit filed by two local car dealerships, which accuse the Buffalo company of allowing, and participating in, what is called “shill bidding,” to increase interest in, and boost sales of, vehicles on its platform.
At the center of the allegations are what the lawsuit describes as screenshots of ACV’s internal online auction platform that show one person (also a defendant) had bid on dozens of vehicles without ever committing to a sale. The lawsuit alleges the man in total bid on more than 900 vehicles, with less than 1% resulting in sales, and that he had business ties to the seller, also a defendant.
In addition, two former employees filed affidavits that accuse the company of fostering a toxic, hostile work environment where the “open secret” was to do whatever it took to increase sales, including shill bidding.
One former employee, who agreed to an interview with News 4 Investigates on the condition of anonymity, said he witnessed one employee shill bidding on a vehicle to boost interest without the intention of buying it.
“There’s a few different reasons why they would do that,” the former ACV employee said.
“If it’s a new dealer that is putting cars on [ACV’s] marketplace, they would want them to sell for as high as possible. That way, the dealer would give them more cars. So, that was the main reason for doing this.”
Corey Hogan, one of the attorneys for the plaintiffs, Jerry Gradl Motors and Lifetime Motor Cars, said he has been told that ACV allegedly used shill bidding tactics on as many as half of its vehicle auctions from 2016 to 2020.
“The clients would like to be reimbursed for the money that they spent over and above what they should have actually paid,” said Hogan, of HoganWillig.
ACV denied the allegations.
In a motion to dismiss, attorneys for ACV and the two other defendants, Sun Auto Group, which is a used car dealership near Syracuse, and Brian Malchak, of Cortland, argue that the lawsuit is a repackaging of a state civil lawsuit filed by a former employee in 2019, which a judge eventually dismissed.
“ACV takes the integrity of its platform very seriously,” the company said in a statement.
“For that reason, it requires users to expressly agree to ‘not attempt to manipulate bids, intentionally bid up the price of the vehicle, or otherwise fraudulently bid on any vehicle.’”
Attorneys for Malchak and Sun Auto did not respond to inquiries.
ACV representatives told News 4 Investigates that the lawsuit is meritless, and they are confident they will prevail in court. The company’s financial filings describe the lawsuit as a “conspiracy.”
“ACV has not entered into any agreements with dealers regarding shill bidding,” ACV said in a statement.
“ACV neither promotes nor facilitates improper bidding by dealers on its platform.”
ACV shines in its early years
Joe Nieman, a former local car salesman, founded the company in 2015. He once said that from the dealers’ perspective, the auction world is a broken, antiquated industry that wastes a lot of their time.
“It’s a lot of work to go to these auctions, source cars, and it’s hard for the sellers to bring all of their cars there, go babysit them,” Nieman said during a 2019 interview posted on YouTube.
“Our business is just meant to streamline the operation.”
The difference is their online auction platform, which is not open to the public, removes the “hassle and expense” of traveling to in-person vehicle auctions by allowing dealers to buy and sell at their fingertips, from a smartphone or a computer. The vehicles stay at the dealership until they are sold, and ACV can help transport the vehicle to the new owners.
ACV bills its platform as: “Transparent & Trustworthy – The way wholesale should be.”
Each auction runs only 20 minutes, unlike days or weeks on platforms such as eBay. As a result, some have described ACV’s platform as an exciting, fast-paced experience. The free phone app allows bidders to filter the auction to their specifications to find years and models of vehicles they want within a reasonable distance from their dealerships.
ACV sells more than 25,000 vehicles a month, with the average price of $7,500, according to its website. More than 16,000 dealers use their digital marketplace.
The company employs more than 340 people in Buffalo – 10-times the number of employees it had in 2016 – and roughly 1,300 employees total across the nation.
ACV almost doubled its revenue year over year in 2020 and its market value has fluctuated between $3.2 billion and more than $5 billion over the past few years.
As a result of the incredible growth, the company went public in March, when CEO George Chamoun rang the Nasdaq opening bell.
“It’s incredible to think that ACV was imagined by Joe Nieman, a dealer only six years ago in Buffalo, New York,” Chamoun said on the Nasdaq stage.
“Today, we have the leading digital marketplace in wholesale, while continuing to innovate, and will transform the entire wholesale vehicle industry.”
Despite the rapid growth, the company has never turned a profit. ACV reported net losses of $118 million in 2019 and 2020 combined. The company still has not reported a profit in the first two quarters of 2021.
The federal lawsuit is not the first time the shill-bidding accusations were made public.
In 2019, a former ACV employee filed an age-discrimination lawsuit in Erie County Supreme Court, in which he accused the company of participating in, and allowing, shill bidding. HoganWillig also handled that civil lawsuit, which a judge dismissed within six months.
The 2019 allegations
Hogan, one of the plaintiffs’ attorneys, told News 4 Investigates that a former ACV employee approached his firm with allegations that he had been subjected to inappropriate behavior and witnessed employees and others connected to the company shill bidding on vehicles being sold on ACV’s platform.
“And when he would go to his superiors and talk about the fact that these sales weren’t going through because individuals were out there bidding and the same people were winning these bids, but the sales were never completed, that was affecting the performance of the sales team,” Hogan said.
The former employee accused the company of firing him because of his age, retaliating, and having knowledge of the shill bidding, but doing nothing to stop it. The lawsuit states that when the employee disclosed the shill-bidding concerns to a superior, he was told to “leave the issue alone.”
What is shill bidding?
Mike Brandly, president of Brandly and Associates, has almost 40 years of experience in the auction industry, and has been hired as an expert witness in more than a dozen court cases. He said shill bidding is “bidding without the genuine intent to purchase.”
“I’m bidding to help the price get up there and I’m trying to encourage you to bid against me,” Brandly said.
“I actually shill to show you that I’m interested. So, maybe you’ll be interested. I don’t want to win it; I want to help someone else pay more.”
Brandly said shill bidding has posed problems in the industry for years, especially since auction sales have gone online, where bidders and sellers are often anonymous to others, unlike in live, in-person auctions where the bidders can often see who is bidding against them.
The anonymity of online auctions makes it easier for seedy sellers to create fake accounts or have someone they know shill bid on their items to trick other bidders into thinking there is legitimate interest and competition.
Eventually, Hogan said the 2019 lawsuit opened a can of worms, as attorneys continued to investigate ACV, which ultimately led them to filing the federal lawsuit earlier this year.
Federal lawsuit against ACV
Hogan said that until they had filed the 2019 lawsuit, they had little understanding of shill bidding.
After attorneys interviewed other former ACV employees, who helped provide necessary context, the picture of how they believed the company operated became clearer.
“We know that ACV is the darling of Western New York,” Hogan said.
“I’m a lifelong Western New Yorker. We were certainly reluctant to bring an action that would have any damage to our community. I love Buffalo. But when we talked to these witnesses, it became apparent that (ACV’s) way of growth was significantly based upon this shill bidding and perhaps some of this other stuff that we’re looking into.”
Malchak, one of the defendants, is a used car dealer in the Cortland area. The lawsuit alleges that he has a business relationship with Sun Auto, another defendant, and one of ACV’s top customers.
The lawsuit accuses Malchak of using his business relationship with Sun Auto to obtain the reserve price of the vehicles, also called the floor price, prior to the auction, and then shill bidding on those vehicles on ACV’s platform. The lawsuit does not disclose who or whom allegedly told Malchak the reserve prices.
Only the seller is supposed to know the reserve price. If a bidder does not reach the reserve price, the vehicle does not sell. The seller still has the option of selling the vehicle to the highest bidder, even if the reserve price was not met, or the vehicles goes back on the auction marketplace, ACV said.
In total, the lawsuit alleges that Malchak was the highest bidder on 963 auctions, but only paid for 57 vehicles.
Put another way, Malchak paid for less than 1% of the vehicles he ended up being the highest bidder on, the lawsuit states.
The lawsuit alleges that ACV had “data which gave ACV reason to believe Malchak’s account was being used to engage in bidding irregularities,” and that the internal screenshots are proof of this.
ACV told News 4 Investigates that the internal screenshots filed as exhibits in the federal lawsuit do not show that Malchak won any of those auctions for which he did not pay. Rather, ACV said Malchak never reached the reserve price on those vehicles and therefore a sale was not finalized.
ACV also said it does not have any knowledge of a business relationship between Malchak and the seller, Sun Auto. Nor did the company have any knowledge that Malchak allegedly knew the reserve prices prior to the auctions. The company declined to answer if Malchak still has an active account.
“Despite no knowledge of that relationship, ACV can confirm that Mr. Malchak has purchased hundreds of vehicles through ACV’s platform from Sun Auto and other dealerships,” ACV said in a statement.
The company argues that the “conspiracy” makes no economic sense because customers “would have no reason to buy Sun Auto cars with artificially inflated prices when they could bypass those offerings in favor of more competitively priced vehicles from the other sellers on ACV’s platform for which there are no allegations of shill bidding.”
But the lawsuit states ACV’s response is flawed because legitimate bidders do not know the reserve price of the Sun Auto vehicles on ACV’s platform, and “do not know that another purported bidder – Malchak – does know the Sun Auto floor price.”
“Put another way, when legitimate bidders are bidding on a Sun Auto car on the ACV platform, they have no reason to know that the bidding is infected with the concealed shill bidding described in the Complaint,” the lawsuit states.
At least two former employees filed affidavits that confirmed they witnessed shill bidding on the ACV platform.
One affidavit states that sales representatives often complained about the large number of shill bids, which impacted their sales and performance. But the former employee was told to “drop it,” according to his affidavit.
“This is not the first time plantiffs’ attorneys have peddled these baseless claims,” ACV attorneys stated in a motion to dismiss the lawsuit.
A second affidavit from a former ACV employee stated that the chief goal at ACV was to generate the highest sale price for each vehicle on its platform.
“The goal and the pressure created by the environment to reach it led to the widespread use of unethical methods (regardless of legal concerns), including shill bidding at the floor price,” the former employee stated in the affidavit.