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Agents, at it again

Agents provide services in markets where transactors may be poorly informed. This fact provides agents an opportunity to serve potential customers, but also a chance to take advantage of a customer's ignorance.

In his research with Chad Syverson, and with Stephen Dubner in Freakonomics, Steve Levitt has presented evidence that real estate agents, in the aggregate, profit not just from serving customers, but by taking advantage of them. One might hope that market forces would curtail this behavior, but customer ignorance coupled with infrequent transacting are factors which limit the market's effectiveness at policing.

Joe Drape's story in the New York Times about a lawsuit in horse racing shines the spotlight on agents in the sport of kings. Shady agents are part of the woodwork in racing, but this time, the accused apparently took advantage of a newcomer with enough cash, passion, and experience to fight back. That would be Jess Jackson, multi-billionaire developer of Kendall-Jackson Vineyards, and part-owner of last year's Triple Crown star, Afleet Alex.

In court filings in California, Jackson says his advisers overcharged him for the purchases of 30 horses and took undisclosed payments from sellers at thoroughbred auction sales.

...At 76, Jackson is a relative newcomer to the industry. But many old-line breeders agree with him. Although he has been involved in the sport since just 2003, he has successfully lobbied for legislation in this state that prohibits a practice known as dual agency, in which an agent receives money from the buyer and the seller in a horse trade.

...Long before Jackson founded his winery in 1982, he worked as a police officer while in law school at the University of California, Berkeley. He was also an investigator and eventually a lawyer for the California attorney general's office. Those skills and sense of justice, he said, were piqued in the spring of 2005, when a member of his organization ran into John Silvertand, the breeder of last year's Preakness and Belmont Stakes winner, Afleet Alex.

Jackson had bought Afleet Alex's mother, Maggy Hawk, from Silvertand for $750,000. At least, that was the price that [agents] de Seroux and Narvick told Jackson that they had paid on his behalf, according to the lawsuit. Silvertand, however, told Jackson's associate that he had sold Maggy Hawk for $600,000.

Jackson terminated his relationship with de Seroux and, concerned about the discrepancy in prices, traveled to Argentina and Chile to meet with other sellers of horses that he had purchased through de Seroux. He found similar discrepancies in the prices for those horses, according to his lawsuit.

Part of what makes the story compelling are quotes from famous breeders who back the allegations, and believe that these practices keep potential owners from investing in the sport.

Several [breeders] acknowledged that agents of buyers had approached them, seeking to inflate prices on their horses.

"We don't do that and have lost business because of it," said Arthur Hancock Jr., whose Stone Farm has produced three Derby winners. "When you tell them no, you understand that they are never coming back to buy one of your horses. Honest sellers can't compete with those who cheat. I'm a fourth-generation horseman, and I'm ashamed that a winemaker has to clean up our sport."

Hancock's take is quite different from that of former Governor Brereton Jones, also a breeder, who is involved in the case. Jones defended the agents' behavior and said he'd pay them again: "That is the beauty of the free-enterprise system, that you have the right to reward people who do business with you." I'd wager the Governor did business the same way when he was in office, but that doesn't make it right!