Disasterpiece

Make no mistake: the genteel art world is a full-contact sport where amateurs play peak-fitness athletes with predictable results. Injuries are frequent, often serious and always embarrassing. Consequently, they are rarely discussed publicly. The root cause is always the same: conflict of interest.

The standard weapon against conflict of interest is independent professional due diligence. After all, a trustee would never simply accept the word of a seller or their agent when buying an aircraft, company, real estate or vessel.

A trustee will take a close interest in the asset itself. Who is the owner of the asset? Does the seller have the power to sell it? Does anyone else have a claim on it? What is the condition of the asset? Have all factual claims been checked and warranted?

A trustee will also focus on the roles, responsibilities and financial incentives of all the parties and advisors to the transaction. An estate agent working for a seller has a clear stake in their advice about price, condition or legal issues, and so that advice will be treated very differently from the advice of the independent valuer, surveyor or lawyer.

Due diligence is normal in the real world. Yet, in the art world, due diligence is routinely skipped. As the examples below show, this can lead to major problems, particularly when it transpires that advisors have a conflict.

On the face of it, this is unexpected because the risks associated with art are acute. Sums involved can be significant; however, the art industry is largely unregulated. There are no central asset registers and each work has its own quality, condition and provenance crucial to determining authenticity, title and value. Art is one of the few physical assets a trustee can buy that can turn out to be worthless.

Art industry professionals and savvy collectors know this and are obsessive when researching and understanding every detail of a transaction. When navigating the art world, it is best to assume that everyone has a conflict of interest until proven otherwise. Be polite, trust no one and check everything.

How conflicts of interest thrive

In the examples below, we will see how players such as dealers, brokers, auction houses and art advisors tend to fall at the first hurdle when it comes to conflict of interest.

At the same time, these players are typically immensely gifted salespeople adept at glossing over conflicts and turning counterparties into ‘friends’. Asking legitimate questions or suggesting second opinions becomes awkward; everything is made personal and ‘discreet’.

With this backdrop, friendship, gut feel and instinct simply do not work when making decisions, even for the most successful, sceptical, well-connected global entrepreneur or industrialist. However capable they are, they simply do not have the knowledge and experience to play the art game.

Meanwhile, the trustee carries fiduciary responsibility for any decisions made. Yet all too often, trustees encounter settlors and beneficiaries who remain completely convinced their inherently conflicted art world contact has their best interests at heart, making it a difficult topic to broach.

How do conflicts arise in practice?

When a trustee is confronted with an art transaction, it is worth considering the role of different market participants to understand where conflicts might be coming from.

The art dealer

Art dealers who trade on their own account are like any other trading business: they buy cheap and then sell as expensively as they can. By definition, the likelihood of striking a good bargain when buying from or selling to a dealer is very low. Can they be advisors? Of course not.

Art advisory firms may conduct pre-purchase due diligence on works offered by well-known dealers. Provenance and conditions problems do come up, but the most common issue is simply price. The average mark-up versus likely resale value is usually around 200–300 per cent, and often more.

The art broker

Art brokers offer different challenges and can inhibit transparency. When selling, clients are usually required to entrust the handling of client funds, as well as the physical artwork, to a broker. As the sale process itself will usually be cloaked in secrecy, the seller is now reliant on the honesty and good character of their broker not to take advantage of them.

When buying, it can be difficult to establish the true owner of a work and how many brokers are in a transaction chain (often referred to as a ‘layered transaction’), factors that create significant money laundering and credit risk. Prices are invariably extremely high and rarely justified. A recent case revealed an attempted USD33 million mark-up on a work worth USD4 million. The transaction did not go ahead.

Example (selling)

The risks are best illustrated by the case of Hickox v Dickinson & Anor,1 concerning Timothy Sammons (currently serving up to 12 years in a US prison),2 who sold client artworks and kept the funds or borrowed money against the art, defrauding clients of USD30 million. Despite this and many similar cases, the business practices that made this fraud possible are still the industry norm.

Example (buying)

The case of Accidia Foundation v Simon C Dickinson illustrates the risks of layered transactions.3 In this case, a seller and buyer of a Leonardo da Vinci drawing had no idea that multiple parties defalcated USD2 million in commissions without their knowledge.

The auction house

Auction houses are high fixed-cost sales channels under constant pressure to secure artworks for the next sale. Their standard ‘advice’ tends to be: trust us, sell everything, sell now, do not call anyone else.

The conflict of interest is usually obvious, yet most sellers assume it does not matter because ultimately the public market will decide the value of a work and auction houses are much the same anyway. Unfortunately, this assumption is wrong.

The rarely discussed reality is that 20–45 per cent of works offered at auction fail to sell, causing an average long-term loss in value of 31 per cent. At the same time, performance varies substantially between auction houses depending on market sector, so highlighting the importance of proper due diligence in identifying the strongest team with the best record of accomplishment, sales strategy and commercial terms.

Art advisors and valuers

Buyers or sellers may conclude that taking advice from an independent art advisor is a good idea. The term ‘independent’ is certainly heavily used among art advisors and valuation firms, but in most cases the facts tell a different story.

In addition to brokering sales and proprietary dealing, nearly all art advisors and valuers earn fees via introductory commissions from auction houses trying to win consignments; essentially becoming the extended sales force of the auction house while portraying their advice as ‘free’. It is important to note that introductory commissions are never free, as they are always paid for by the seller through higher commissions. These activities and arrangements are often left uncommunicated or obliquely portrayed, and differing levels of introductory commissions will influence the advice.

What should trustees do about art conflict of interest?

Guidance to trustees could not be simpler: there is no need to treat art differently. Art due diligence should be conducted the same way as with any other asset. Trustees should keep asking rigorous questions until they are absolutely certain that the advice they are getting is world class and conflict-free.

• 1[2020] EWHC 2520 (Ch)
• 2Sammons was indicted in the Supreme Court of the State of New York with grand larceny in the first and second degrees, as well as scheme to defraud in the first degree on 20 October 2017. He was sentenced to four to 12 years on 30 July 2019. See Art Fin. Partners LLC v Sammons 2017 NY Slip Op 31779(U), Sup. Ct. N.Y. Co. (August 22, 2017). (Ch)
• 3[2010] EWHC 3058 (Ch)