What Sotheby’s Tells Us About the Art Market

Recent revelations pertaining to the interplay between auction houses, galleries and art dealers provide a rare glimpse into an opaque world where almost everything is allowed.
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July 15, 2019 09:44 EDT

Sotheby’s, the world-famous auction house, is feeling the reverberations of its $3.7 billion sale to a French-Israeli investor in mid-June, as organizational changes take shape. The acquisition has caused waves throughout the art world because it is synonymous with the company’s privatization. As a private entity, Sotheby’s can dispense with the public sector’s stringent financial reporting and regulatory compliance requirements — a telling move in an industry already under fire for its opacity and blatant lack of regulation.

The privatization is surely a boon to the company’s profit maximization goals as much as it is setback for the market and genuine lovers of art. The art sector is one of the most manipulated ones in the world. The glitz surrounding the artists, the sellers and buyers of their work, belies the art market’s dark side of greed and murkiness.

The Case of Yves Bouvier

It is little wonder why the sector’s players prefer keeping a low profile. Yet the deliberately quiet art world was recently dragged into the limelight through the global feud between Swiss art dealer Yves Bouvier and his then-client Dmitry Rybolovlev, a Russian billionaire businessman. The feud revolves around Bouvier selling 38 artworks to Rybolovlev at illicit markups worth as much as $1 billion over several years.

Sotheby’s was involved in 14 of these sales, including that of Leonardo da Vinci’s “Salvator Mundi,” where the company provided an appraisal of the painting’s value per Bouvier’s request. Bouvier sold it to the Russian for $127.5 million in 2013, less than 24 hours after having acquired it from art dealers Simon and Parrish for $80 million via Sotheby’s.

Rybolovlev sued Sotheby’s for having “materially assisted” Bouvier in his fraud. Newly declassified correspondence between Bouvier and Sotheby’s senior director and vice-chairman for private sales, Samuel Valette, reveal that the art dealer flipped it to the billionaire for a 54% markup. The other famous artworks sold by Bouvier in a similar way — with Sotheby’s involvement — included Gustave Klimt’s “Water Snakes II” and Amedeo Modigliani’s “Nude on a Blue Cushion,” as well as Picasso’s “Man Sitting at the Glass.”

The court recently ruled that the $380-million lawsuit will continue in New York, despite Sotheby’s objections. Perhaps Sotheby’s was afraid that being exposed on its home turf would put a limelight on the wider connections between auction houses and the local art market infrastructure — the one that contributes to Sotheby’s “aiding and abetting” with dealmakers like Bouvier.

Out of the Authorities’ Reach

While the scale of the fraud puts it among the biggest in art history, the fact that it was even possible demonstrates how far the sector is removed from the oversight of the authorities. In the words of Sharon Cohen Levin, chief of the asset forfeiture unit of the US attorney’s office in Manhattan, “you can have a transaction where the seller is listed as ‘private collection’ and the buyer is listed as ‘private collection.’” Nowhere else would anyone “be able to get away with this.”

Consequently, practices that are illegal in every other economic sector are pervasive — first and foremost price-fixing. It begins with the fact that an artwork’s sales price and the names of any participating parties are usually unknown, to the extent that it is often impossible for the non-initiated to tell if any transactions have taken place at all — an issue only exacerbated by the fact that transaction registers are wholly absent. As a consequence, insider trading is the rule, especially since the art market’s rapid growth has turned art from a form of pleasure to a fully commodified industry.

Unethical Practices

Recall the great price-fixing scandal of 2002, when both Sotheby’s and its rival Christie’s were revealed to have formed a cartel throughout the 1990s. For years, both firms had coordinated their seller’s commission rates, effectively making them identical and non-negotiable. The European Commission fined Sotheby’s $20 million and its former chairman, Alfred Taubman, was jailed after Christie’s obtained a plea-bargain, handing over evidence in the process. Considering that the fine represented a measly 6% of Sotheby’s global turnover at that time, it is right to say the company got away with murder.

Neither did it have any effect on the way the market operates, nor the way prices are set. As it turns out, the big auction houses are merely the tip of the iceberg in terms of determining a painting’s value. Since the monetary value of a painting is subjective — only the paint and canvas can be associated with a hard cost — matters of taste and simple supply-and-demand dynamics determine a price, one that is often arbitrary and influenced by galleries and auction houses. The art industry has developed an intricate signaling process “where the approval of a handful of galleries, collectors and museums, determines what is good and valuable,” writes Allison Schrager.

In other words, galleries manipulate the secondary market, where auctions and owners are selling their artworks, to not only raise the prices at auctions but to keep them high as well. Given that higher prices result in higher commissions, auction houses like Sotheby’s and Christie’s have a vested interest in achieving high prices for the art they sell. Auction houses, in effect, willingly allow themselves to be manipulated into pushing for higher prices at auctions.

A Regulated Art Market?

Needless to say, the current slew of scandals being revealed is only bringing the art market further into notorious disrepute. It is high time for a serious push for regulations, be it to protect the public from fraudulent and illicit activities or even to elevate art as a legitimate asset class. An easy start would be increased transparency of brokerage fees, where any person representing a seller or buyer needs to provide all documentation detailing prices paid and fees received.

Interestingly, the proliferation of auctioning platforms on the internet and other forms of internet commerce has led to an increase in traceable paper trails in art transactions. For secrecy purposes, actors in the art market have traditionally been reluctant to leave too many documents. However, with ever more activity moving online, stricter rules may become unavoidable.

It is in the art world’s own interest to clean up its act. Otherwise, Sotheby’s and others will face an increasingly unsustainable art market.

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.

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