When federal agents recently raided property manager Cortland’s Atlanta headquarters, company officials said their executives were not the “target” of a criminal probe into price fixing in the rental housing market.
But what exactly is a target?
Lawyer Lisa M. Phelan, a former chief of criminal enforcement at the Antitrust Division of the U.S. Department of Justice, said in a federal criminal investigation the government is interested in witnesses, subjects, and targets.
It might go without saying a witness has information the government believes is important to the investigation. A “subject” is someone investigators might suspect. When prosecutors identify a “target,” they believe they have enough evidence to bring charges, according to Phelan.
“In the early stages of an investigation, they’re trying to figure out who is culpable, or who are they going to be able to get enough evidence to charge. Until they get there, most companies they are looking at are what you consider subjects,” Phelan said.
Whatever bucket Cortland officials fall in to, the FBI search of its headquarters in May shows the government is intensifying its antitrust investigation of the multifamily rental industry, and the role of tech company RealPage’s price-setting software.
Headquartered in Atlanta, Cortland has a portfolio of 80,000 units and has offices in Charlotte, Dallas, Denver, Greenwich, Houston, Orlando, and Phoenix, according to its website.
The FBI in Atlanta and the Justice Department’s Antitrust Division declined to comment on the raid or probe. However, FBI Atlanta spokesman Tony Thomas confirmed agents “were at an Atlanta location last month conducting court-authorized activities.”
Former FBI agent and white-collar crime expert Vic Hartman said at the very least, the search warrant means a federal judge agreed there was probable cause of evidence of a crime at Cortland’s offices.
“It can be the case that you have evidence of a crime on your property and you don’t know anything about it,” he said. “That’s rare. It could technically happen.”
The search might have come as a shock to Cortland. But Vanderbilt University law professor Rebecca Haw Allensworth said it was in line with the Biden administration’s approach to antitrust cases against big business and tech companies.
“This is a sign that this administration is getting serious about antitrust enforcement where the victims are relatively lower income and more at-risk populations,” she said. “That doesn’t describe the entire rental market. But it certainly describes a lot of renters.”
The rhetoric from the White House teed up the action, with President Joe Biden taking aim against corporate landlords on the campaign trail and in his State of the Union address in March.
“For millions of renters, we’re cracking down on big landlords who break antitrust laws by price-fixing and driving up rents,” he said during the State of the Union.
Tenants in a nationwide class action complaint, and top prosecutors in D.C. and Arizona have likewise got in on the action in civil court, accusing RealPage and the property management companies of conspiring to inflate the price of rents. Scores of those companies operate in Atlanta’s rental market.
According to complaints filed against the company, RealPage revenue management software compiles pricing and occupancy data that allows landlords to conspire to set rates by relying on an algorithm.
Credit: TNS
Credit: TNS
RealPage has declined to comment on the search of Cortland’s headquarters. But its attorney, Stephen Weissman, of the law firm Gibson Dunn said the company is ready to “cooperate with any regulator that has questions.” He said the company is the victim of an inherent misunderstanding about how its software works.
“All the scrutiny is driven by political noise to try to focus on housing affordability. The real culprit is the supply shortage in the country for multifamily housing,” he said. “To point the blame at some software company that is following the law and has designed its product to be compliant with long-standing rules of antitrust is politically opportunistic.”
There is no evidence that RealPage or property managers conspired to set pricing, the lawyer said. Only a minority of property managers rely on the software to make decisions on rates, he added.
Phelan said she could only speak broadly about antitrust procedures because the former federal prosecutor’s law firm, Morrison Foerster, is working on the civil litigation against RealPage. But she said in criminal antitrust cases, DOJ officials will take their case to a grand jury, which would decide whether there is sufficient evidence to file indictments.
And any criminal trial wouldn’t be a slam dunk.
The burden of proof is higher in criminal than in civil trials, where prosecutors must prove their cases beyond a reasonable doubt. And, Allenworth said, the claims are unusual because they revolve around RealPage’s tech and algorithm rather than “major titans of industry” conspiring to fix prices in a backroom.
“This is individual owners of buildings using one big company to coordinate,” she said of the allegations. “It’s not just a few key players in a highly concentrated market. How these people agreed is through an algorithm.”
She said the reliance on tech could pose a problem for prosecutors because it is unclear whether an agreement through an algorithm is “legally cognizable” under federal antitrust laws.
“You’re going to have to prove the landlords essentially had the mental state of agreeing with the other landlords to keep prices high,” she added. “That’s going to be the toughest hurdle because maybe they thought this product just made it easier for them to compete, rather than not compete.”
Not only that, prosecutors might have to show that the price increases came from the conspiracy when other factors have plagued the multifamily rental market, including a shortage of housing, Allensworth said. Higher rental costs typically come when demand outpaces supply.
According to Hartman, it’s not beyond the realm of possibility that both things are happening at once.
“We could have a short supply of apartments and we also could have a cartel,” he said.
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