The emperor has no clothes: the scams and swindles driving up art prices

The emperor has no clothes: the scams and swindles driving up art prices
David Hockney - Portrait of an Artist (Pool with Two Figures) [1972]. The Hockney painting became the most expensive painting by a living artist ever sold at auction when Christie's sold it for $90.3 million in 2018. Photo by Gandalf's Gallery on Flickr, Creative Commons 2.0
Marketplace

For many, the headline-making stunt Italian artist Maurizio Cattelan pulled at Art Basel Miami this year—Cattelan duct taped a banana to a blank white wall, called it “Comedian”, and sold it for $120,000—crystallized the problems with how art is valued. After Jeff Koons’s Balloon Dog shattered records in 2013 to sell over Christie’s auction block for $58.4 million—then the highest amount ever paid for a work by a living artist—even the auctioneer, Jussi Pylkkanen, was stunned and remarked “We are in a new era of the art market”.

The intervening years seem to have proven Pylkkanen right. How exactly did the art market come to the point where an installation composed of two ordinary lightbulbs strung up on two ordinary extension cords was dubbed “ephemerally beautiful and deeply profound” and sold for more than $500,000, while a white canvas by Robert Ryman fetched an obscene $15 million? A good amount of blame can be laid at the doors of the auction house officials secretly conferring with dealers to set prices, the galleries sending false bidders to drive up a piece’s value, the lack of transparency inherent in systems like third-party-guarantees, and a culture of speculation which sends prices yoyoing, with major ramifications for collectors and artists alike.

An army of ghost bidders and backers

Many common art market practices, though legal, are questionable from an ethical standpoint and have helped distort the market, putting some artists and collectors on the back foot. For one thing, galleries frequently plant fake bidders in auction rooms to bid up the artists they sponsor. What’s more, it’s an open secret—one which legislators have resoundingly failed to tackle—that the major auction houses engage in so-called “chandelier bidding”. In another industry, such behaviour might be considered fraudulent—but in the art world, auctioneers are allowed to call out non-existent bids in order to conceal a work’s undisclosed reserve and create the illusion of competition, thereby inciting genuine bidders to offer more than they would have otherwise.

Nor is chandelier bidding the only way auction houses are pulling the wool over unsuspecting buyers’ eyes: the practice of third-party guarantees has come under especial criticism. Following the 2008 financial crisis—in which Sotheby’s apparently lost $52 million in a single season on works it had guaranteed itself— auction houses have been increasingly wary of taking on the financial risk entailed with big-ticket items.

Guarantees nobody can see

To limit their exposure and to compete with the most desirable lots, auction houses dig up a third-party guarantor. Both the identity of this person and the sum for which they agree to buy a work if it doesn’t sell at auction remain secret. In exchange for their pledge to underwrite the auction, guarantors receive an—equally undisclosed—financing fee.

Adding to this lack of transparency, two of the major auction houses, Christie’s and Phillips allow guarantors to recoup their financing fee as long as the work sells above the agreed-upon price—even if the guarantor themselves ends up purchasing the work! In practice, this amounts to handing the guarantor the artwork at a steep discount—one which is concealed from the general public. As retired New York University professor Michael Moses emphasized, “If the price is not the price because the guarantor has bought it and gotten a discount, there is no longer any transparency in the market”.

Paradoxically, in other cases sellers and auction houses may exploit the very absence of a guarantee to drive prices up. As one concrete example, David Hockney’s 1972 painting Portrait of an Artist (Pool with Two Figures) became the most expensive painting by a living artist ever sold at auction when Christie’s sold it for $90.3 million in 2018. The sale garnered significant interest not only because of its unusually hefty price tag—previous Hockney works had generally sold for less than $10 million—but because the painting’s unnamed owner, believed to be British billionaire and Tottenham Hotspur owner Joe Lewis—offered the work without a guarantee and without a reserve.

The fact that the Hockney sold for exactly the price which Lewis apparently expected only increased suspicions that the entire auction had been staged. Art collector Kenny Schachter raised the possibility that Lewis had secretly bought back the painting himself, orchestrating the high-profile sale to establish an inflated market value for the Hockney in view of a future sale.

Christie’s, Schachter suspected, may have been in on the deal—the auctioneers seemed unusually relaxed at the prospect of selling a painting for nearly $100 million, and the auction house came out ahead—regardless of who bought the artwork—thanks to its commission and the notoriety which came from the widely-reported sale. Christie’s has denied the Hockney sale was anything other than “a matter of the market finding its real level”, emphasized that the seller turned down a number of third-party irrevocable bids, and that “no financial promises of any kind, including non-traditional risk-sharing or risk-mitigating arrangements” were established for the Hockney painting. Rumours nevertheless persist, especially given the fact that, as a privately held company, Christie’s is able to “construct creative financial arrangements” that play in the grey zones of the art world.

The idea of a billionaire and one of the world’s most prestigious auction houses conspiring to stage a sham auction to inflate an artwork’s value—and their own bank accounts—might once have seemed farfetched. Recently released correspondence which appears to show exactly that type of coordination between Swiss art dealer Yves Bouvier and auction house rival Sotheby’s, however, lends credence to Schachter’s theory.

Sotheby’s, Yves Bouvier and Samuel Valette: a case study in apparent price coordination

 By its very nature, the wheeling and dealing which frequently establishes the value of fine art usually remains behind the scenes—but the massive feud termed the Bouvier Affair has offered an unexpected insight into the manoeuvring by which artworks’ prices are set.

Swiss art dealer and freeport magnate Yves Bouvier has faced legal challenges around the world from his former client, Russian billionaire Dmitry Rybolovlev, who alleges that Bouvier overcharged him by $1 billion for 38 paintings. Bouvier consistently denies all charges, arguing that he was an independent seller free to sell Rybolovlev paintings at whatever price the art collector was willing to pay.

Rybolovlev’s attorneys are also taking legal action against Sotheby’s for the auction house’s alleged role in Bouvier’s plot, claiming $380 million in damages. Documents released as part of the case seem to shed a light on just how much of an insider’s game art valuation is. Unsealed email correspondence has revealed how Yves Bouvier and Samuel Valette, the vice president of worldwide private sales at Sotheby’s, apparently coordinated on the appraisals which Bouvier then sent to his client.

Behind the scenes

The first thing that’s apparent about the messages bandied back and forth between Samuel Valette and Yves Bouvier is the secrecy and paranoia pervading the upper echelons of the art world. Denied access to the Matisse painting Nu au Châle Vert by one Sotheby’s representative, Bouvier turned to Valette, asking him to “do what is necessary”. Bouvier flew into a panic when he thought that Valette had informed some of his colleagues about their deals: “I thought no one in Geneva was supposed to know about this operation!!!!!!! I cannot work under these conditions.” Valette reassured the Swiss dealer that “no one else from Sotheby’s [would be present] before, during, or after any of the visits”.

Bouvier’s insistence on secrecy is perhaps not surprising. For the same reason that galleries have stubbornly resisted conspicuously displaying prices, Bouvier and Valette’s private correspondence appears to have allowed them to push up the prices of any number of artworks—naturally, pushing up their own commissions in the process.

Much ado about a Modigliani

Throughout 2012, for example, Valette coordinated with Bouvier regarding the Modigliani sculpture Tête. In July 2012, according to court documents, the work was already in Yves Bouvier’s freeport in Geneva. Samuel Valette nevertheless sent the Swiss dealer a valuation for the work on July 24th, estimating that it could sell for between €70 and 90 million. Inexplicably, one day later this same Sotheby’s representative sent Bouvier a second formal valuation, this time indicating a range between €80 and 100 million.

Not only is it peculiar that Valette gave no explanation for why he hiked the price of the Modigliani by €10 million overnight, the fact that in September 2012, Valette sent Bouvier a contract of sale for Tête for a paltry €31.5 million should further raise eyebrows—and questions about why Valette still works at Sotheby’s, since selling at such a steep discount would appear to violate Sotheby’s Code of Conduct. Valette’s willingness to sell the Modigliani for a scant fraction of what he himself estimated its value at suggests that the valuation was fishy to begin with. As such, Rybolovlev alleges that it was done in order to extract top dollar for the artwork.

That’s exactly what happened, in fact—months after he had already bought the piece, Bouvier apparently pretended to Rybolovlev that he was negotiating with the sculpture’s “sellers”, who wanted €65 million or €37.5 million plus a Degas painting Rybolovlev owned. The Swiss dealer maintains that there is nothing improper about feigning tough negotiations to obtain his desired price: “When so much money is at stake it’s only natural I look for a compelling argument”, he explained. “It is not lying; there is always a part of the story which is true.”

At the time, the saga seemed to have ended well for both Yves Bouvier and Sotheby’s—Rybolovlev accepted to buy the sculpture for €37.5 million plus the Degas, Bouvier kept the Degas for himself, and Sotheby’s sold Tête at auction in November 2014 for over $70 million. Years later, however, the auction house is mired in legal proceedings over its alleged coordination with Bouvier, and has been dealt several judicial blows in recent months.

In June 2019, a US District Court judge gave Rybolovlev the green light to proceed with his lawsuit against Sotheby’s. In November, in the separate case between the businessman and the auction house, the US Second Circuit ruled that Sotheby’s must hand over documents for use in criminal proceedings in Switzerland and Monaco.

Sotheby’s did not immediately respond to a request for comment for this article, but consistently denies that it was aware of either “the prices at which Mr. Bouvier intended to sell works of art he acquired from Sotheby’s, if he indeed decided to sell them at all”; indeed, the profits which Bouvier made by reselling the works to Rybolovlev were often larger than the auction house’s own commissions. Yves Bouvier, meanwhile, claimed in response to an October 2019 Vanity Fair article that “I never sought Sotheby’s out as a shield but in order to reassure myself about the soundness of the transaction and the documentation”.

Putting a pin in emerging artists’ hopes

The apparent collusion between art dealers like Yves Bouvier and members of the auction house establishment, like Samuel Valette, undoubtedly has deleterious effects on art collectors. Collectors, however, are far from the only collateral damage stemming from the art world’s clubby nature. In fact, artists themselves often lose out thanks to the art world’s lack of transparency and the price manipulations carried out by insiders.

Gallerists have argued that the art market’s lack of regulation and transparency “protects” artists, but in reality collectors considering whether to buy an artwork in the primary art market (meaning that it is for sale for the first time)—deprived of any metrics which would help them evaluate whether the amount they are quoted is fair, such as the prices for that artist’s previous works—collectors are skittish about taking a chance on new artists.

In a cruel irony, even those artists whose work is excitedly snatched up by dealers or collectors often suffer from the way the art world is laid out—just look at the case of self-taught artist Purvis Young. Young’s inventive works painted a vivid picture of African-American life in the South and captivated billionaire energy executive William Louis-Dreyfus—the father of actress Julia Louis-Dreyfus and an aficionado of so-called “outsider art”.

Louis-Dreyfus allegedly offered Purvis Young $3 million for 1,500 of his works and offered to fulfil the artist’s lifelong dream of studying art in Paris—but only if Young destroyed a third of his artworks. The idea, apparently, was that the value of his remaining pieces would then increase because the market wasn’t “oversupplied” with Purvis Youngs. Young turned down the bargain Louis-Dreyfus had apparently offered him, and ended up in a morass of legal issues which saw his own manager and gallerist, Martin Siskind, vying for 50% of Young’s inventory and seeking for the artist to be put under a court-ordered guardianship.

The downside of speculation

Other up-and-coming artists, meanwhile, have also been handed the short end of the stick by an art world which embraced their work too enthusiastically—only to drop them just as swiftly. As the market for abstract art from contemporary artists caught fire last decade, a number of emerging artists—young creators such as Lucien Smith or Oscar Murillo—were buoyed to impossible heights on the auction floor.

Reporters and art insiders alike tried to warn that the market was in a bubble, yet prices for popular artists continued to spiral well beyond any objective metrics. By 2016, the inevitable downturn was in full swing. One art dealer, for example, bought an abstract painting by Hugh Scott-Douglas in 2014 for $100,000. Only two years later, he was desperate to offload the work at $20,000. The price of Scott-Douglas’s work, Artprice calculated, fell a staggering 91% between 2014 and 2016.

Playground for money launderers

Above and beyond the effect on collectors and artists, the art world’s lack of transparency and the ease with which prices for artworks can be manipulated has made it a prime vehicle for illicit financial flows. Rogue financiers have increasingly employed high-dollar artworks in their complex money-laundering schemes as regulators have cracked down on more traditional vehicles for shifting cash around surreptitiously—bank accounts in secrecy jurisdictions like Switzerland come to mind, as do offshore tax havens.

Art insiders and regulators alike have become increasingly alarmed—“the art market is an ideal playing ground for money laundering. We have to ask for clear transparency, where you got the money from and where it is going”, urged Thomas Christ, the head of the Basel Institute on Governance, a Swiss non-profit working on the issue. As he explained to Art Critique, the Basel Institute of Governance established suggested guidelines for the art trade years ago which would centre around the notion that “in the art trade the provenance of the objects and the provenance of the funds are of equal importance”, and would see art dealers and galleries subject to the same “know your client” rules as any other financial intermediary.

As concerns over its transparency mount, the art world is slowly becoming regulated. The transposition deadline for the EU’s Fifth Anti-Money Laundering Directive, for example, was last month. As an EU official told Art Critique, the European Commission attaches “utmost importance to the effective application” of the new directive’s rules as part of the institution’s effort “to ensure that our citizens and companies can trust that the EU’s financial system is clean and transparent”. The new legislation, which will require any intermediaries in the art world (from dealers, to auction houses, to freeport operators) to carry out anti-money laundering checks on their customers, promises to ratchet up oversight of the art market. By how much is another question. Thomas Christ emphasized to Art Critique that the new regulations are a step in the right direction and a “valuable instrument to combat money laundering in the art trade”.

Ron Korver, a policy analyst for the European Parliament’s Research Service, explained to Art Critique that “banks have to report suspicious transactions already and advisors or consultants dealing with arts would also fall under the directive. But of course, this does not mean that a clamp down on sales of looted goods is guaranteed as elsewhere in the world there will always be jurisdictions – often financial centres – competing with one another with the high degrees of secrecy they may offer.”

According to Korver, the new directive has put a system in place “that has the potential to genuinely reduce the sales/storage/hiding of looted art. The question now is to what extent it will be implemented. The fines in the EU Member States are not as high as in the US, so the deterrent effect may be limited. In the banking sector, with all its scandals, we have seen that rules only don’t provide a guarantee against money laundering.” Only time will tell whether legislators have gone far enough in bringing clarity to the murky art world.

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