5
Buying Art Wisely
The art world is a wonderful, exciting place with many delightful things to look at and buy, from a $2,000 print to a $20 million painting by Picasso. The purpose of this chapter is to share practical wisdom about buying art effectively from galleries and at auction. This is followed by a section on the relationship between gallery and auction prices, an incendiary topic inside the commercial art world. Where money goes, scoundrels follow. The history of collecting is littered with incidents of buyers being duped. As the price of art soars, the schemes and shenanigans of those who prey on collectors have grown bolder and more nefarious. I share recent cases of bad behavior in the last section, titled “Avoiding the Scoundrel’s Corner (Part 1).”
BUYING FROM GALLERIES
Buying from galleries can be a fun and rewarding experience, but one that has become more complicated over time. With so many galleries now in business, often with opaque practices, many people need a road map to building relationships with galleries. I spent time with fifteen seasoned collectors to learn about their gallery-buying experiences and combined them with my own experiences. I interviewed five marketplace collectors, four masterpiece collectors, and six connoisseur collectors (using the definitions introduced in Chapter 3). All the collectors were active buyers over the past five years in a wide range of categories including prints by Jasper Johns, Contemporary art by emerging artists, art from Latin America, paintings and sculpture by artists associated with American Modernism, and blue-chip Postwar and Contemporary art. Even though their collecting interests and financial resources for collecting varied widely, there were more similarities in their approaches than differences. Here are some key takeaways.
Focus on a Small Number of Galleries
Choose galleries based on the quality of their exhibition programs and whether you like and trust the gallery directors. One collector couple, for example, focused on four galleries that handled work in their particular collecting category. The couple also wanted to have relationships with a few galleries known for spotting younger talent, so they spent time cultivating relationships with three additional galleries.
Building relationships is not complicated, if you are a regular customer. Visit the galleries frequently and pay promptly when you buy something. Because galleries are passionate about the artists they represent, they prefer engaging with collectors who want to learn and talk about the art in addition to making purchases. For infrequent buyers, getting gallery attention is easier if you have real passion for and interest in the gallery artists and avoid talking about the investment potential associated with buying work.
Good Relationships Pay Dividends
Like any business, important clients get special treatment. By focusing their attentions on a handful of galleries, buyers are more likely to get on waiting lists for artwork, be invited to special gallery dinners and events, have the gallery source things for them in the secondary market, and receive extended payment terms and “store credits.”1
Waiting lists are a constant source of intrigue and derision in the art world. When galleries have a “hot artist,” they have to ration supply in some way, because there is a limit to the amount of work the artist can create. But where a buyer shows up on a waiting list is fluid. Generally speaking, the list hierarchy goes something as follows: museums; clients willing to buy the work and make it a promised museum gift; clients who are already spending a lot at the gallery who are unlikely to flip things at auction; important collectors new to the gallery but with the potential to buy a lot of work from gallery artists; everyone else. Museums are at the top of the list because being in a museum collection helps validate the importance of the artist. For the gallery, sharing news of a museum acquisition can stimulate more collector demand and higher prices. Because of this, galleries routinely offer museums substantial discounts. Collectors who are willing to make a promised museum gift of the work may enjoy similar benefits. One collector shared how he was able to buy a piece by a thirtysomething artist who was in very high demand. Earlier work by the artist was already being flipped at auction for around $150,000. The artist and his gallery wanted to reduce the supply of work in the secondary market and get it placed in important museums. After the collector committed to make a promised gift, the gallery sold him a large painting for $50,000. But a promised gift is a declaration of intent, not a formal museum gift. The collector plans to hang the painting in his home for many years to come.
Vet Potential Purchases with Those in the Know, But Keep the Feedback Confidential
Before purchasing something, get into the discipline of asking curators and other knowledgeable parties for feedback. Most of the people interviewed for this road map support museums, but they are not necessarily big check-writing trustees. Many have joined groups that donate at a lower contribution level. These groups meet three to five times a year for events the museum organizes around a lecture, an artist studio tour, or collection visits. Through these interactions, these collectors have built relationships with museum curators to whom they can turn from time to time for input. Museum curators are usually willing to provide feedback about a potential purchase. Curators typically have keen insight into the relative importance of artists and, for a specific artist, how to distinguish between good, great, and outstanding work. Listen to what they have to say, but also be sure to let them know you will keep their views confidential. They do not want to get on the bad side of a gallery looking to make a sale.
Specialists at auction houses may also be willing to share their perspective on a potential purchase, if they already know the collector. Because they see so much work, they are likely to have an interesting point of view on the quality of the work and its current fair market value. Just because they work at an auction house does not mean they will try to talk the collector out of buying the work. Similarly, when a collector is thinking about buying at auction, she should consider getting input and feedback from art gallery staff she has gotten to know. Because the art market is so opaque, it is essential to get as much information as possible from different sources before making a purchase.
Be Mindful of Condition, Authenticity, and Title Issues
Galleries, like auction houses, sell work “as is,” so ask questions about condition. They are not obligated to unwind a sale because a buyer claims after the fact that there were condition issues. For especially valuable work, consider retaining a third party to inspect it and prepare a condition report.
Talk with the gallery about how the artist’s work is authenticated. For living artists, the control point is generally the artist’s studio and inventory numbers associated with each work. For deceased artists, there may be an authentication committee and/or a catalogue raisonné the collector can look to for verification. Ask a lot of questions, because standards vary considerably by artist. For example, the Keith Haring Foundation decided in September 2012 to stop authenticating his work. This complicates matters, because sellers now use their own standards to decide whether a Haring is authentic. Haring was a prolific artist, even making hundreds of drawings on blank poster boards in New York subway stations in the early 1980s. Now referred to as his Subway Drawings, they frequently come up for sale but are very difficult to authenticate. Some selling venues have very lax standards and ask few questions about the work they are selling, while others will only sell Subway drawings with a photograph of the artist standing next to it. Buyer beware.
Title issues rarely arise when buying art, but there are some important special situations, including Nazi-looted art and artworks deemed cultural property. For Nazi-looted art, the original owner and his or her heirs still have some rights to the work, even if it has changed hands multiple times since being looted. Current owners may have to settle restitution claims before they can sell or donate the work.
The definition of cultural property has expanded greatly in many countries over the past few years and can now include work by Andy Warhol. Cultural property is generally subject to export restrictions that, if violated, can create title issues for unsuspecting buyers. I talk about cultural property in more detail in Chapter 7.
Negotiate in Good Faith, Leveraging Public and Private Information
Galleries are generally willing to discuss how they set the price for an artwork and how it compares to auction pricing, where relevant. (See Exhibit 5.1 to learn about online services collectors can use to obtain detailed auction sale records.) It is important for buyers to learn the technique of pricing conversations, so they can ask for discounts and buy with more confidence. For primary market work, galleries may be willing to extend a discount. It is not uncommon for buyers, even those who are new to a gallery, to be able to negotiate a 10 percent discount off the asking price. The more frequently a collector buys from the gallery, the higher the likelihood she may be able to obtain larger discounts over time.
A collector’s ability to get a discount is also influenced by whether he is buying at the gallery or at an art fair. Art fairs are a convenient way for collectors to see a lot of work and to comparison shop. But at the same time, they have less negotiating leverage because so many people are on the prowl. Many of the collectors I spoke with enjoy going to art fairs but prefer buying during gallery visits, so they can avoid art fair buying pressures.
If Using an Art Advisor, Remain the Primary Point of Contact with the Gallery
For time-starved collectors, it is easy to “outsource” building and developing relationships with galleries to an advisor. But this practice should be avoided because a collection should reflect the taste of the collector. An advisor can be an invaluable partner when helping collectors build a collection, but galleries need to have a direct relationship with collectors to really support them.
AUCTION HOUSES—MORE SIMILARITIES THAN DIFFERENCES
Buying at auction is easy, because anyone who passes a basic credit check can bid. If a buyer wants an object, then she can have it as long as she is willing to be the highest bidder. No lists, no relationships to build and foster, no feelings or egos to manage. For some buyers, it is their preferred way to collect.
The buying experience at the large auction houses (e.g., Sotheby’s, Christie’s, Phillips, Bonhams) and important regional firms (e.g., Leslie Hindman and Freemans) share many similarities but few differences. All of them charge the successful bidder a buyer’s premium on the hammer price of each lot the buyer purchases.2 Most firms charge similar buyer’s premiums, so the all-in cost of buying is similar across the companies. Specialists at all these firms write up condition reports for most items included in their sales and make them available for free to potential buyers before the sale. Specialists also vet these works for authenticity and title. Additionally, all of these companies provide buyers with some form of limited warranties against buying fakes or objects with title issues.3 The major difference between the auction houses is the number of specialists on staff and their areas of specialization. Because the buying experience is so similar, buyers generally have little preference for one auction house over another. Buyers are drawn to objects, not the selling platform.
Auction houses provide five ways to bid, each one involving different levels of convenience and disclosure.
1. Bidding in the Auction Room. Once registered for an auction, bidders get a numbered paddle upon checking in. No one from the auction house will know ahead of time which lot(s) bidders intend to bid on, unless they have elected to disclose it to a specialist.
2. Bidding on the Phone. Bidding in the room is inconvenient for most people, so auction houses offer a service where an employee will call the bidder approximately five minutes before a lot the bidder registered for comes up for sale. The client tells the employee when to bid, which is then communicated to the auctioneer. Like bidding in the auction room, clients are under no obligation to bid when they are on the phone. Because it is so easy and convenient, many collectors use phone bidding as a way to be in the game but only act if they can land something for a good price. Because clients have to register for phone bids, the auction house has prior knowledge of each bidder’s potential interest in a specific lot.
3. Bidding Online. Online platforms enable bidders to register online, watch the auction-room action from their computer, and jump in when they want. Unlike phone bidding, bidders do not disclose ahead of time the specific lots on which they intend to bid. Additionally, because they are not in the auction room, no one knows who is bidding. It is the ultimate form of bidding anonymity.
4. Bidding by Absentee Bid. Sometimes clients are not available at the time of the auction, or they do not want to live bid because they may get carried away by emotion and overpay. To encourage people to participate, auction houses accept absentee bids. This gives the auction house permission to bid on behalf of a client up to a specific hammer price limit. Placing an absentee bid is convenient, but it discloses to the auction house the most information about the bidder’s willingness to pay.
5. Bidding via an Agent. A variant of absentee bidding is for clients to appoint someone to bid on their behalf with an agreement on the maximum hammer price to which the agent is permitted to go. The agent can execute the client’s bid via phone, online, or live bidding in the auction room.
With all these ways to bid, do bidders pay the same buyer’s premium? Yes. Whether a first-time bidder or a seasoned auction buyer, regardless of the method by which the bids are placed, the buyer’s premium calculation is the same. It is a level playing field.4
With auction mechanics behind us, any advice from the seasoned collectors I interviewed?
Seek Input from Auction Specialists
While auction house specialists are agents for the seller, most are happy to discuss in detail what they know about the condition of the object, its importance and rarity, and the depth of potential buyer interest in the lot. Take advantage of their willingness to share information. Remember too that over the course of the preview period, as they interact with more prospective bidders and learn more about market demand, what the specialists have to say about an object and the market interest in it can change. Some seasoned bidders stay in phone contact with specialists right up until the sale begins.
But Minimize Disclosure
As agents for the seller, specialists help sellers set the confidential reserve price based on all available information the specialists have learned during the preview period. So if specialists know that interest is strong, perhaps because there are multiple phone bidders and some absentee bidders, they are more likely to recommend the seller set a higher reserve price for the object than would be the case if there was little buyer interest. Because of this, some seasoned bidders have a strict policy of waiting until the very last moment before letting an auction house know they intend to bid. In one case, a collector who bids regularly in evening auctions only registers to phone bid a few hours before the auction. By doing so, he feels he is preventing the auction house from setting a higher reserve price based on his potential bidding activity than would otherwise be the case. He wants the reserve price as low as possible so that it increases the odds he may get the object for a lower price. He will also register for multiple lots, even if he is only interested in one specific lot, to make it difficult for the auction house to predict what he may do.
Use Technology to Get Sale Alerts
With so many auctions taking place, it is difficult for collectors interested in specific artists to know when work is coming up for sale. Luckily, most of the auction-pricing services discussed in Exhibit 5.1 provide alert services. Subscribers specify the names of the artists and the type of work (e.g., paintings, drawings, prints) they are interested in following. They will get emails whenever a work satisfying these criteria is offered in an upcoming auction. Many collectors find these alert systems an invaluable way to remain informed about artists on their wish lists.
Consider Buying Lots That Did Not Sell
All the lots in an auction rarely sell. While it varies from category to category, a good rule of thumb is that 75 to 85 percent of the lots will find buyers. The objects that do not sell, or in auction parlance, objects that are “bought in,” can sometimes be an interesting post-sale buying opportunity. Because of the small number of bidders in most auctions, there is a bit of serendipity in whether something sells. Maybe the bidders interested in a lot were unable to participate because something as mundane as traffic or sickness prevented them from getting there. Or they bought a lot earlier in the sale and decided to pass on something later in the auction. For these and other reasons, many perfectly legitimate artworks in good condition just do not sell. After the auction, all of the bought-in lots are still available for purchase. Specialists are happy to get post-sale phone calls from potential buyers with offers that are at or below the low estimate. Serendipitous events sometimes create opportunities for the educated buyer.
Auction Houses Sell Things Privately Too
In addition to running auctions, many of the large auction houses have an active secondary-market business selling artwork privately. For example, the owner of a major Picasso painting may not want to risk selling it at auction but instead have the auction house offer it privately to a handful of potential buyers. Most of what auction houses have for private sale is very expensive “blue chip” art. For collectors with the means and desire to swim in that pond, it is worth exploring with auction specialists what may be available for sale.
THE CURIOUS RELATIONSHIP BETWEEN GALLERY AND AUCTION PRICES
A recurring question is whether galleries or auction houses offer buyers a better deal. For those in the art trade, this is an incendiary question. Unfortunately, there is no authoritative database combining auction and private sale prices that can be used to arrive at a definitive answer. Based on my own experiences and those of other collectors, there is no single, monolithic answer. It depends on context and the type of work being sold.
To provide buyers with some guidance, I share the following general guidelines about the relationship between the sale prices of works at galleries and at auction.
When an artist’s career is in a slump, gallery prices are likely to be significantly higher than auction prices. As an artist’s career develops, galleries raise prices to reflect not only higher demand but also to signal to buyers that the artist is on an upswing. The latter occurs because many buyers find it hard to evaluate an artist’s importance and sometimes use price increases as confirmation the artist is doing well. But if demand slumps for their work, galleries hate lowering prices. Many feel that if they do so, it will not stimulate enough new collectors to consider the work and will simply publicize to existing collectors that the artist’s career has paused, or worse. But when work by the artist comes up at auction, it sells for its fair market value, which is far below the artificially high price galleries continue to ask for it.
If an artist trades infrequently at auction, then his auction prices are likely to be lower than gallery prices. Galleries spend considerable time and money building and cultivating a buyer base for their artists. Because artists create unique objects and collector tastes for the same artist can vary widely, finding a buyer for each work takes time. Ask three people at a gallery opening to point out their favorite artwork, and you will likely get three different answers. Because most artists have a small buyer base, it is hard to know whether a buyer who is both aware of the artist and interested in the specific work for sale will emerge on the day of the auction. If it sells, then it will most likely go for less than what the gallery gets for similar work.
Galleries rationing work by “hot artists” tend to price it too low, leading to price spikes in the auction market. Galleries experience both pleasure and pain managing the sales of work by “hot artists.” To get it placed with the “right” collectors, they may offer discounts relative to what other “less desirable” collectors may be willing to pay for it. Galleries may also be reluctant to jack up prices too quickly because they are concerned about problems down the road if the artist’s career pauses. But when work by the artist leaks into the auction channel, those who could not get access to it through the gallery drive up the price. Speculators may also jump into the game, helping to push auction prices above gallery prices.
Masterpiece collectors are often willing to pay more for something at auction than privately. Masterpiece collectors know that the pool of potential buyers with the means and desire to spend millions for a work of art is very small. So it is difficult for them to know with confidence the likely fair market value of an object. Think back to the Kurt Schwitters case from Chapter 3. Nothing like it had been on the market for years. What was it really worth? If offered privately, collectors may balk at paying a big price for it because the price has not been validated in the marketplace. But this resistance can drop away during an auction when they see other bidders going after the work. Auction house specialists are full of stories of fruitlessly trying to sell a masterwork privately for a big price. But when the work is then offered for sale at auction, the same clients bid against each other, sometimes paying more for it than the private sale price.
Only in very liquid markets are auction and gallery prices largely the same, but even then there can be short-term differences that reward the diligent, informed buyer. A very liquid market creates a lot of visibility about the fair market value for work by an artist. This makes it hard for pricing differentials to persist between the two sales channels. But because the number of participants in the market at any point in time is small, and they have different levels of knowledge about current pricing, there can be meaningful short-term pricing differences between galleries and auction houses. The Kusama market, for example, is fairly liquid. But even that market goes through periods where it makes more sense to buy from galleries than auction and vice versa.
AVOIDING THE SCOUNDREL’S CORNER (PART 1)
Where money goes, scoundrels follow. The history of collecting is littered with smart collectors being duped. As the price of art has soared, the schemes and shenanigans of those who prey on collectors have grown bolder and more nefarious. The three situations below are examples of the need for collectors to be cautious about whom they trust and to verify claims made by people offering them work.
The Secret World of Introductory Commissions
Art galleries, just like wealth managers, rely on referrals for new clients. But when a wealth manager compensates someone for introducing a client to him, he is required to disclose it. For example, suppose an accountant introduces a client to a wealth manager. Under current securities law, the wealth manager is required to inform his new client in writing that the accountant is receiving an introductory commission and to get the client’s approval before the payment can be made. Everything is aboveboard, with all three parties to the transaction fully aware of the existence and size of the introductory commission.
In the art world, unfortunately, there are no disclosure requirements around introductory commissions. For example, let’s say an art advisor has an agreement with a client that allows her to bill a 10 percent fee on top of the sale price of any work the client buys based on her recommendations. The advisor may also have an arrangement with a gallery in which she gets a 10 percent commission from the gallery on all sales made to clients of the advisor. The payment from the gallery no doubt influences what the art advisor recommends to her clients. But unlike the wealth management industry, it is up to the gallery and the advisor to decide whether to inform the client of this payment.
Because disclosure is not required, it is hard to pin down the frequency of undisclosed introductory commissions. Based on my interviews, however, they seem to occur with enough frequency that collectors should take steps to protect themselves. For example, they should consider adding language to a purchase agreement that says something like “no payments have or will be made by the gallery to any third party related to my purchase of the artwork.” The collector should also add language to the advisor agreement that says something like “the advisor will not accept any fee from a gallery or other third party, in cash or in kind, related to works of art that I purchase based on their advice.”
How Does a Long-Trusted Art Advisor Try to Defraud a Client?
Hannelore and Rudolph Schulhof were important collectors of American and European Postwar and Contemporary art. Portions of their storied collection are now in the Guggenheim Museum.
In October 2011, the Schulhof family wanted to raise approximately $6 million by selling art from the collection. Based upon court documents, Michael Schulhof, on behalf of his mother Hannelore, turned to Lisa Jacobs for advice.5 Jacobs was an art advisor the family had used for thirteen years to help manage the collection. Jacobs presented a proposal with different selling options involving paintings by Agnes Martin and Jean-Michel Basquiat. Schulhof and Jacobs signed an agreement on October 25, 2011, permitting her to sell one Basquiat painting, titled Future Science versus the Man, for no less than $6 million. She would receive a $50,000 fee upon a final, binding sale of the work. As part of the written agreement, Jacobs agreed not to accept any fee from the purchaser, in cash or in kind. It was a simple and clear document: Jacobs was acting on behalf of the owner and would only be paid by Schulhof for her role in the sale.
On November 7, 2011, Jacobs informed Michael Schulhof that she had a firm deal with a buyer for $5.5 million and that the buyer would pay immediately. In addition:
[Jacobs] informed me in her November 7, 2011, email that the Buyer wished to remain anonymous (which is not uncommon for private collectors of art), and therefore proposed that we structure the contemplated transaction as a two-step process—first, a sale of the Work to [Jacobs], as intermediary, for $5,450,000 (i.e., the $5.5 million purchase price, less [Jacob’s] agreed $50,000 fee), and second, an immediate resale by [Jacobs] to the buyer for $5.5 million.6
Schulhof agreed to these terms, and on November 16, 2011, Hannelore Schulhof received a wire transfer from Jacobs for $5,450,000.
The story would stop there, but for an odd twist of fate involving a housepainter, stolen artworks, and subpoenaed bank records. Early in 2011, before there was any discussion about raising $6 million, the Schulhof home on Long Island suffered flood damage. The family hired painters in March 2011 to get the house back in order. In 2012, an inventory of the Long Island residence revealed that three small works of art worth about $100,000 were missing. The family informed the police, who launched an investigation that included subpoenaing the bank records of people with access to the house.
The investigators soon determined that one of the stolen artworks was sold at auction and tracked a check for sale proceeds to a private mailbox in Bay Ridge, Brooklyn. The mailbox belonged to Joselito Vega, a housepainter who had been in the Long Island home back in March 2011. The check was in the name of Mr. Vega’s sister-in-law. With Vega their prime suspect, the police set up a sting operation. He was hired once again to paint two rooms at the Schulhof house. He was caught on videotape in April 2013 stealing three additional works and was arrested and jailed.7 He subsequently pleaded guilty in November 2014 to a time-served deal.8
How does all this tie back to Lisa Jacobs, who had no role in the theft? In an August 2013 lawsuit, Michael Schulhof details how the bank records that were subpoenaed as part of the theft investigation established that Lisa had actually found a buyer willing to pay $6.5 million for the Basquiat.
Defendant [Jacobs] got away with her chicanery—i.e., her secret pocketing of $1 million of the purchase price paid by the Buyer—for more than a year. And, she probably would have gotten away with it for even longer (possibly forever), were it not for the fact that a theft of certain pieces of art from my mother’s collection resulted in the issuance by the district attorney’s office of a subpoena for defendant’s [Jacobs] bank records … It was then discovered that two days before she paid Mrs. Schulhof the $5,450,000 for the Work, [the] defendant received $6.5 million (not $5.5 million) from the Buyer.9
The Schulhofs are seeking the $1 million, punitive damages of $2 million, repayment of the $50,000 fee, plus legal fees and expenses. After filing their lawsuit, Jacobs filed various motions of her own to dismiss it along with lawsuits against the family for various unrelated claims. Over the past two years, the judge assigned to the case rejected all of Jacobs’ motions to dismiss the case and her counterclaims against the family. In the latest twist to the case, Jacobs’ lawyer resigned in May 2016 because of unpaid legal fees. The Schulhof family filed a motion in August 2016 for the judge to rule in their favor on all claims. As the son of the now-deceased Hannelore said in the most recent filing: “… it is hard to imagine a more egregious case of fraud and breach of fiduciary duty than cheating an 89-year-old woman—for whom the defendant [Jacobs] had worked for 13 years—out of $1 million by making blatantly false and fraudulent misrepresentations of fact, and ignoring the express provisions of the contract defendant [Jacobs] had knowingly and voluntarily signed.”10 The judge has yet to rule on the motion.
This is an especially troubling case for two reasons. First, while I am not a lawyer, based on my reading of hundreds of pages of court documents, the Schulhof family seems to have a strong and compelling case. What is disturbing is the extraordinary amount of time, money, and effort they have expended trying to get their money back. Justice is neither swift nor cheap. Second, if found liable, Jacobs will have to return the $1 million and pay some punitive damages. However, this is a civil suit filed by the Schulhofs, not a criminal complaint filed by the State of New York. As such, if convicted, Jacobs will not serve any jail time for defrauding the Schulhofs. But Joselito Vega, the forty-two-year old painter who stole $100,000 of art, served a year and a half in jail for his crime. Justice and proportionality do not seem aligned.
What can collectors take from this case? Aside from the obvious “be careful who you trust,” be dubious of claims that buyers demand confidentiality for a deal to get done. This sort of claim is tossed around indiscriminately in the art world but is rarely a firm requirement. If pressed on the topic, the collector should put an intermediary, like a trust bank, in the middle of the transaction. By doing so, both sides of the transaction can be verified, while protecting the identities of each party.
Can a Collector Get His or Her Money Back When a Painting Is a Fake?
Since being elected the chairman of the Board of Directors of Sotheby’s in March 2015, Domenico De Sole has been busy with the Sotheby’s turnaround. He has also been occupied with a lawsuit to get his money back from the gallery where he bought a Mark Rothko painting that proved to be fake. Based upon court documents, De Sole and his wife bought the “Rothko” painting in 2004 from Knoedler Gallery in New York, paying $8.3 million for it. At the time of the purchase, Knoedler Gallery had an excellent reputation for sourcing works of art on the secondary market. In connection with the sale of the Rothko, the De Soles received a letter from the gallery summarizing research on the painting’s provenance, the names of experts who had reportedly inspected it, and an important written statement that concluded, “Knoedler warrants the authenticity and good title of the painting.”11
Seven years later, the gallery suddenly closed amid rumors that it was selling fakes by Mark Rothko, Jackson Pollock, Robert Motherwell, and other artists. Two years after that, Glafira Rosales, a Long Island art dealer, admitted in federal court to participating in a scheme to sell more than sixty fake works of art to two New York galleries, one of which was Knoedler Gallery. She received approximately $33.2 million from the galleries for the fakes, which the galleries in turn sold to collectors for more than $80 million.12 She created false backstories that the trove of paintings came from a private collector who acquired the never-before-exhibited-or-known works directly from the artists. Rosales’ co-conspirators included Pei-Shen Qian, a seventy-three-year-old Chinese immigrant who came to the United States in 1981 and attended classes at the Art Students League. Investigators believe all the fakes were painted in Pei-Shen’s home and garage in Woodhaven, Queens. Pei-Shen fled the country and is back in China. Knoedler Gallery claimed it had been duped by Rosales.
The De Soles filed suit against Knoedler Gallery to get their money back plus damages. In court documents, the De Sole lawyers presented evidence that Knoedler paid Rosales $950,000 in 2003 for the “Rothko” and then sold it to De Sole the following year for $8.3 million, a truly spectacular markup. The suit claimed the gallery should have realized that someone cannot buy an undiscovered authentic masterpiece at the price Knoedler paid for it. The gallery repeatedly said it was unaware the work was fake and that it had consulted numerous experts about its authenticity. As part of its defense, the gallery argued that sophisticated collectors like De Sole are responsible for their own due diligence and cannot rely just on statements from the gallery to make their purchase decision.
Expectations were high that De Sole v. Knoedler Gallery would create a court opinion on the responsibilities of collectors to do their own homework when buying a work of art and the responsibilities of galleries to investigate thoroughly the authenticity of works they sell. The jury trial began on January 25, 2016. After two weeks of damaging testimony about the actions of the gallery, the parties settled out of court. The details of the settlement are unknown, but given the vehemence with which the De Soles pursued the case, they probably received not only the $8.3 million purchase price but also some compensation for damages.
What can collectors take from this case?
Beware of newly discovered works of art. It is hard for art forgers to make a living creating duplicates of known work. Instead, forgers tend to create work in the predominant style of the artist and pass it off as newly discovered work. Rather than “masterworks,” they tend to make “solid” examples by the artist. Masterworks draw too much attention, which can undermine the scam. If presented with the opportunity to buy a newly discovered work without a reliable provenance, walk away. Run if it is being presented as an opportunity to buy something for a very good price.
Distinguish between different types of expert opinions. Three bodies of evidence can help determine whether an object is authentic: provenance, scientific evidence, and connoisseurship. Provenance is a record of who owned the work from the time it left the artist’s studio to the current owner. The second is an assessment of the pigment, canvas, and stretchers to see if the materials were commercially available at the time the work was supposedly created. Both of these are largely objective opinions. Connoisseurship, however, is a judgment call that an expert makes based on a visual inspection of how the artist painted the work compared to other work the expert has seen over the years. But experts who render opinions based on connoisseurship are not all created equally. Some have dubious credentials, perhaps as an expert in one artist but not in the work of the artist in question. Moreover, the expert’s judgment may be compromised because he will earn a success fee if the sale goes through. Even if he is a true expert, acting honestly, there is an asymmetry in how many experts express their views. Those who “believe” in the object speak up, while those who do not will either be unwilling to say anything or will only raise doubts in highly elliptical language to avoid risk of being sued by the object’s owner. Because of this, potential buyers tend to only see evidence supporting the attribution.
As a preventative tool, wise buyers seek to embed in purchase agreements a requirement for galleries to represent that they do not know of any information or evidence that would call into question the authenticity of the work. This is a great way to “flush the birds out of the tree.” One case in the public domain relates to a “Jackson Pollack” painting the Knoedler Gallery tried to sell to Nicholas Taubman, the former US ambassador to Romania. As reported by the Art Newspaper, “… Taubman negotiated with Knoedler to purchase a ‘Pollack’ that had been evaluated by the International Foundation for Art Research (IFAR) that could not support the painting’s addition to the artists’ oeuvre. [Knoedler] never showed IFAR’s report to the Taubmans. The deal fell through when Knoedler refused to sign a contract saying that it didn’t know of any facts that called the authenticity of the painting into question.”13 Bravo to Taubman and his lawyer for adding this term into the proposed purchase agreement.
Beware of counterparty risk. Someone can provide a buyer with representations and warranties about authenticity, but will he or she stand behind them? The greater the time lapse between the date of purchase and the date the fraud is detected, the bigger a problem this becomes. For example, a collector who buys something from a sole proprietor takes on the risk that the dealer may not have sufficient resources in the future if the deal goes sour.
One collector I spoke with is working through this problem. This collector bought a very expensive nineteenth-century landscape painting from a small private dealer. A number of years later, he wanted to sell the work, but he was shocked to be told by auction house specialists they could not sell the work because it was not authentic. It took time and effort for the collector to track down the dealer, who retired in the intervening years. The dealer steadfastly denied the work was a fake and refused to return his money. The joy of owning the painting turned into a financial mess the collector is still trying to resolve.
EXHIBIT 5.1
EASY ACCESS TO INFORMATION ON HOW AN ARTIST’S WORK PERFORMS AT AUCTION
There are both subscription and free services to historical sale results from hundreds of auction houses around the world.
Subscription Services
These services enable a subscriber to:
• Determine whether a specific work of art was ever offered for sale at auction and the details around the sale (e.g., presale estimates, whether it sold and for how much, and at which auction house).
• Find similar works by the artist that have sold at auction so the collector can create a comparables database.
• Receive email alerts when work by the artist is included in upcoming auctions.
At least four companies provide subscription packages, from one-day passes that cost around $30 to annual subscriptions that cost around $400 a year, including:
• Artnet
• Artprice
• Askart
• Artvalue
Because these providers rely on the same underlying data, it is probably best for users to select one based on how much they like the user interface.
One note of caution: these services do not include information on the condition of the artworks. So if something did not sell or it sold for a low price, it may have been due to condition issues. But there is no way to determine that from the information provided.
All the subscription services rely on data feeds from auction houses to populate their databases. Most auction houses provide free access to their specific data on their website.