The Art of the Steal

I’ve just finished reading “The Art of the Steal”, Christopher Mason’s account of the Christie’s-Sotheby’s price-fixing scandal that resulted in jail terms and multi-million dollar fines. Underneath its fascinating story of greed and machinations at the top of the art and antiques market lurks a subplot that I, at least, had not picked up in reading the press accounts of the trials. Behind the collusion lay an explicit and strategic attempt to squeeze dealers out of the top of the market. The Christoby’s collusion was, in part at least, an alliance of auctioneers against dealers.

The plot goes all the way back to 1973, the year that saw the first (unproven) act of collusion. In that year Christie’s shocked the art and antique world by introducing a 10% buyers’ premium. Three days later Sotheby’s did the same. Coincidence? The Society of London Art Dealers and the British Antique Dealers Association did not think so. They mounted a challenge to the legality of the premium on the grounds that auction houses were the agents of the seller, and thus could legitimately charge a seller’s commission, but they had no right to charge buyers as well. They discovered that the premium itself was not illegal, but that any collusion to introduce it was. Sadly, this all took place in London where the anti-trust laws are limp dish-towels compared to those in the U.S. If found guilty, Christoby’s would have faced a maximum fine of $3,000 – roughly the premium on the first couple of lots in the new system! Not even a slap on the wrist.

Despite the paltry penalty SLAD and BADA pressed their suit, and eventually reached a settlement of $110,000, which didn’t even cover their legal costs. But Christoby’s must have been up to something if they were willing to pay $110,000 in order to avoid a fine of $3,000. What they were doing, as SLAD and BADA saw clearly, was launching an assault on dealers. Dealers were the main buyers in the auction market, and the 10% premium was expected to come out of their mark-ups: it was a deliberate move to transfer a hefty chunk of dealer profits to the auction houses.

The clock now leaps forward to 1983, the year in which Alfred Taubman bought Sotheby’s with the money he had made from developing shopping malls. At that time, 60% of lots were still sold to dealers, and Taubman decided he could only make the sort of money he wanted to by changing Sotheby’s from wholesalers into retailers. The difference between the dollars received by all the private sellers of antiques in any one year and the dollars paid by the private customers who eventually bought them is the gross margin available to the business as a whole, and Taubman didn’t want dealers to have any of it.

Two simple techniques had made Taubman his shopping-mall millions – making the experience of shopping as significant as the purchase, and overcoming “threshold resistance”, his term for the reluctance of shoppers to enter a store that appeared unfamiliar or intimidating. In his first speech to the assembled staff of his newly-acquired company, Taubman upbraided them for allowing their expertise to make customers feel ignorant (he had himself been a victim of their snootiness when selling an art work at Sotheby’s.)

He also launched Sotheby’s onto the international social scene. All major sales were accompanied by major parties that he packed with celebrities – anyone from dusty European aristocrats to toothy models with matchstick legs. Sotheby’s gave those who had made new money, and lots of it, in the booming markets of the 1980s access to high society as well as to high art. The experience meant as much as the purchase.

Auction-room drama was another vital part of the experience, and Taubman did all that he could to intensify it. He reasoned, correctly as it turned out, that if a buyer would spend $100,000 on a high boy in the calm atmosphere of a dealer’s shop, he would spend more in the excitement of a public auction. High drama meant high prices, and high drama was achievable only in the auction room.

Taubman encouraged his auctioneers to play the whole repertoire of theatrical techniques, all of them well tried and tested. They bounced bids off the chandeliers to create the impression of hot interest in a lot when, in fact, no-one was bidding at all. They pretended that all the lots were selling, even when many were not. Such playacting, of course, requires the existence of a secret reserve that is known by the auctioneer, but not by the bidder.

These theatrics had already come under legal scrutiny. In 1985, Lord Bathurst, the then Chairman of Christie’s International, had had to surrender his license to conduct auctions in New York for two years because he had claimed that two paintings had sold (for $2.1 million and $1.3 million, incidentally) when in fact they had not sold at all. The incident almost allowed Angelo Aponte, the New York Commissioner for Consumer Affairs, to close down Christie’s New York operation entirely. A settlement was reached, however, that allowed Christie’s to continue doing business in the city while sending, in Aponte’s words, “a very clear signal to the art world that they are going to have to clean up their act.”

There is very fine line between declaring falsely that a lot has been sold and making it impossible for bidders to distinguish between lots that have sold and those that have not. Aponte investigated this deliberately engineered confusion but had to conclude, reluctantly, that the inadequacy of the law prevented him from declaring it illegal. He also concluded that the legality of the secret reserve was equally uncertain.

The New York Department of Consumer Affairs clearly considered that the lack of transparency in the auction room was against the public interest and lay on the margins of legality. Aponte considered requiring auctioneers to declare reserves, to cease chandelier bids, and to announce unsold lots – proposals that the auctioneers opposed vehemently and vigorously. Consumer obfuscation was the key to their theatricality: there is no suspense and no drama if everything is known. Taubman was adamant in his belief that robbing the auction process of its mystery would spell disaster.

Theatricality worked. Auction prices sky-rocketed, soaring above estimates and far above dealer prices. Taubman had found his pot of gold at the end of the rainbow – a booming retail business with no inventory, an entertainment business that could gross $32 million in a single hour (as Sotheby’s did when they sold the Gould collection of Impressionist paintings in 1984), a money machine that ran on other peoples’ money.

The only problem facing Christie’s and Sotheby’s in those heady days was their mutual competition for sellers. This led them to reduce their seller’s commission to zero, to guarantee prices, and to offer advances against reserves. All of this was fine when the market was booming and they could make millions from the buyer’s premium, which by now they had increased to 20%. The slowing down of the market in the later 1990s, however, meant that the buyer’s premium was no longer the cash cow it had once been. Competing over seller’s commissions was costing them money that they desperately needed, so they agreed to stop competing and to raise their commissions in parallel. Stupidly, they did this in New York, where the strict Sherman anti-trust law applied. And they paid the price – nearly $600 million in fines (excluding the class action suits that were to follow), and a year in jail for Alfred Taubman.

As a result of all this, sellers at the Christoby’s duopoly are now being treated fairly, but the smoke-and-mirror techniques in the saleroom continue unabated. As a dealer, it makes me wonder if I’m shooting myself in the foot by putting everything I know about a piece, including its price, on the tag. Maybe I should watch a couple of David Copperfield specials to see if I can’t learn better sales techniques from him!