Auction Angst: The Anti-Trust Investigations Are Looking At Fee-Fixing, But What About Reserves, Estimates, Guarantees And Post-Auction Sales?
By Carter B. Horsley
The Spring 2000 auctions are upon us and for Sotheby’s and Christie’s they are fraught with anxiety in the wake of the April stock market declines and the anti-trust investigations that rocked the auction world over the winter and led to the resignations of Alfred Taubman and Diana Brooks, the chairman and president, respectively, of Sotheby’s. Christie’s is also involved in the investigations but received some immunity for coming forward first with information pertinent to the investigations.
These auction houses are being charged with conspiring to fix fees to consignors and buyers.
Historically, the houses have closely paralleled each other’s fees although one might announce a change shortly after the other. The fees have been steadily climbing in recent years.
The merits of the investigation, however, are rather strange for it would be virtual suicide for one of them to have substantially higher such fees given that together they dominate the fine art auction business in the United States and compete fiercely for consignments.
The auction houses traditionally have coordinated their schedules so that their auctions do not overlap and so that the art market can coordinate other activities and exhibitions with them.
Of far more importance than the issue of fee-fixing are the issue of the houses’ financial interest in some items they sell, the practice of conducting post-auction sales, the setting of reserves and the actual bidding process in the auction room itself, but it is not known that the Federal officials are investigating these practices.
The auction houses now indicate in their catalogues with a symbol, explained in the back of the catalogues, if they have a "financial interest" in, or own, specific lots as well as whether the lots have a "reserve." Often the "financial interest" takes the form of guarantee that the auction house has given the consignor that provides the consignor with a minimum amount regardless of whether the lot sells for more, or even does not sell.
In negotiating to get major consignments, the auction houses have been known to reduce or even waive their normal sellers’ fees, which are not insubstantial and run currently to about 10 percent for lots that sell for more than $50,000 and higher for lesser amounts. This does not establish a level playing field for all sellers, but has not stirred up a great deal of controversy.
The question of "reserves" is thorny.
"Reserves" are the selling price below which the consignor will not allow the work to be sold. Ideally, one would think they would have to be below the low estimate, but in recent years they are often much higher. If they are higher than it is completely misleading to indicate a lower figure in the printed "estimates" in the catalogue. This problem, however, is complicated by the fact that the catalogues are printed in advance and usually available a few weeks before the auction and its exhibition to permit potential buyers time to study the items being offered. The art market is not static and very frequently auction house specialists will quote one set of estimates to a consignor to obtain the lot for auction and then sometimes call later to revise the estimates because of perceived current market conditions.
Art is not terribly liquid and works of art that are offered at public auction suffer from two important market considerations.
First, they are being sold on a specific day, which might be rainy and prevent an interested party from getting to the auction in time, or whatever, or the potential buyer may have just overspent his budget earlier in the auction, or decided that earlier low prices in the same auction do not justify what he planned to spend, or whatever. For a work of art to really "soar" in value at an auction requires that there be at least two active, determined, competing and well-heeled bidders.
Second, once a work of art has been at public auction it has been regarded as "burnt" in the art market, especially if it failed to sell. Such a fate can linger for several years, depressing its value even in an "up" market. The art markets, in fact, fluctuate considerably and while they tend over the very long haul to climb, their dips can be severe. Indeed, unlike securities or real estate or other important assets that can usually find a buyer at some distressed price in "down" markets, art can become very illiquid and seen its value not only plummet but in essence evaporate as it is a specialized market with relatively few buyers scouring over a seemingly infinite variety of alternative "untainted" material. In one instance, an important and very good painting that had been exhibited at several museums was given an initial consignment estimate in the early 1990s of $120,000 to $150,000, only to have its estimate verbally reduced twice on the telephone prior to the auction to $70,000 to $90,000. It failed to sell at the auction, but was offered again, at another auction house, several years later with a lower estimate of $50,000 to $70,000 and again failed to sell. Finally, a distress auction sale to meet taxes, back at the first auction house, took place a couple of years later with an estimate of $20,000 to $30,000. The painting once again failed to sell. The market, which was in sharp decline during this period, turned around significantly and presumably if the painting were being offered for the first time now might fetch more than its original high estimate, instead of being in limbo.
For decades, the auction houses have provided "estimates" for each offered lot that provide a range of monetary values within which they anticipate the lot will probably sell. In recent years, the auction houses have tended to print estimates that have been on the low side, which has, the argument goes, led to fewer "buy-ins," or "passes," or "no sale," while also making sales often appear to be more successful that might really be justified by the market. "Low" estimates, some auction professionals also argue, can entice some more potential buyers who might otherwise be put off by a higher estimate, especially since one a potential purchaser gets the pyschological "fever" for a particular lot he might bid more than he planned.
The downside to such arguments, on the other hand, is that the published estimates are highly influential, especially given the unpredictability of the marketplace and the difficulties of predicting values for works of art that are quite rare. As a result, some sellers may not consign works that are given too low an "estimate," especially since in recent years the major auction houses have been raising the lowest values of what they will accept for auction.
The estimates are made by the specialists in each department, which has extensive records on most artists, and they occasionally consult with outside "experts" who are known as specialists on certain artists. In any event, estimates are more of an art than a science as few experts have seen every work of art and some have even been known to revise their "opinions," or have been wrong.
(It should be noted with proper respect, of course, that many auction house specialists have had great exposure in handling works of art, as opposed to looking at less than perfect photographs or reproductions, and are very knowledgeable and have great resources at hand.)
Auctioneers are the great performers of the art world and some like John L. Marion, the honorary chairman of Sotheby’s, have had a great sense of humor and a remarkable ability to coax more bids from the auction room. Great auctioneering skill is akin to tightrope-walking: it is very exposed and titillating and fraught with danger. Momentum may not be everything but it can make a significant difference. Similarly, pacing is important and long, agonizing stretches between bids can often be interpreted by some observers as an indication that the "reserve" has not yet been met. Similarly, the failure of some works to sell early in an auction can affect the value of other works later in the auction, but not necessarily. Of course, the process has been greatly delayed and discombobulated by the explosion of "telephone" bidding and last season the actual presence of real bidders in the room almost brought cheers, or tears, from some old auction-goers after a couple of seasons when most bids seemed to have been made on the phone at some of the major auctions. The telephone bidding system has gone almost too far as sometimes the bidders on the phones were actually sitting and calling from one of the auction house’s "sky-boxes" and then the situation worsened when some of the attendees in the auction room were conducting their own bidding on their portable phones.
Telephone bidding was introduced to accommodate some potential bidders who were unable to attend the auction in person and were not comfortable leaving an "absentee" bid in advance because of uncertainties over market conditions and the valuation of specific lots. At one recent major auction at Christie’s, there were about 40 auction house staffers manning a bank of phones along one long wall in its impressive new Rockefeller Center digs and Christopher Burge, the auctioneer, would recognize them by their first names, which adding a rather charming personal touch, but which was also a little distracting for those desperately concentrating on whether to bid.
In the old days, if you wanted to buy a Rembrandt you cared enough to go to the auction in person and try to stare down your competition, or at least enjoy the action and try to figure out from where the bids were coming. The auctioneer’s have a lot of discretion as to what level they start the bidding and at what increments they will take bids. Historically, they would raise the bidding according to specific printed guidelines that kicked in at certain levels. At $10,000, the next bid will be $1,000 more; at $50,000, the next bid would be $5,000 more; at $100,000, the next bid would be $10,000 more; at $1 million, the next bid would be $100,000 more. That system, however, has broken down a lot over the past couple of seasons and the auctioneers would become nice guys and take much smaller increments, which probably helped eke out a few more dollars from the bidders but also made bidding a bit more uncertain. At the end of bidding, there would be little doubt from where the bids were coming, but at the beginning and often well through much of the action, the bids would sometimes seem to come proverbially "out of thin air," a practice that is disconcerting, misleading and subject to some scrutiny. It is all part of the theater of the auction room, which has become one of the more dramatic in town, but manipulation is manipulation.
In the best of all worlds, the reserves would be the starting bid and no telephone bidding would be permitted and no estimates printed. This would be a lot more exciting and a lot fairer to the poor consumer out to buy a Rubens. It would probably result in fewer sales and less mystery, but no less drama as the pause after the opening "reserve" bid would be most disquieting. It would require more courage by both consignor and the auction house because they would have to set the reserve/starting price considerably in advance of the auction.
For many years, the auction houses have conducted discrete "private sales" of some lots that failed to sell at auction. Presumably these came from people who were interested in the lots, perhaps underbidders, but at a lower price. When approached after the sale by such people, the auction house would relay the proposed price to the consignor who might accept or reject it. The advantage to the consignor was that he was able to make a sell without having to pay a no-sale penalty fee to the auction house and or additional storage and insurance costs should he opt to let the auction house keep it for another sale, and the advantage for the auction house was that it got both the seller’s and the buyer’s commissions, albeit at the lower price.
The problem with such post-auction sales was that some sophisticated buyers once aware that this was possible intentionally refrained from bidding in the hopes that the work in question would be passed, or bought in, that is, not sell, and then come forward with some "low-ball" proposal. This is an unregulated sector of the auction market and one that is troublesome, especially as it hurts the sellers and harkens back to the bad old days of dealer cabals in which groups of dealers would decide not to bid at the auction and agree to let one member of the group buy it at a low price and then conduct their own "secondary" private auction.
"When the law sanctions a breach of form but leaves the door open to deception and manipulation, something must be wrong with the system. That would appear to be the case with the art auction market and the rules that govern its regulations," wrote Souren Melikian in a superb article on "The Scandal" in the March 15,2000 issue of Art & Auction magazine.
Mr. Melikian, the magazine’s international editor and one of the most knowledgeable observers of the auction scene for many seasons, noted that "the phenomenal brouhaha caused by revelations that the world’s two leading auction houses may have conspired to charge buyers and sellers at the same rate would be hilarious were the potential consequences not so serious."
He was critical of negotiated fees for some sellers, arguing that "in doing so they favor those who are wealthiest, thus breaking the principle of equal access for all citizens, which should prevail in what is effectively a public service."
Melikian called attention to the issue of reserves, stating that "The reaction that…[the auction houses’] petty alleged crimes has elicited contrasts curiously with the bland, or better said, blind acceptance of some of the practices of the auction houses, acknowledged by them in their salecatalogues." "Did the censors who take the auction houses to task over commissions ever read thhe paragraphs dealing with the ‘reserve,’" he asked. Melikian noted that the estimates printed in the catalogues are "frequently the outcome of a negotiation with a vendor often convinced that a high estimate leads to a higher price."
"This may be the case when the auction house department is approached prior to the sale by prospective buyers new to the market. The ‘estimate’ will be quoted to them as it were an objective fact of life. Inquirers will be informed that if they wan the item, it would be safer to leave a commission bid (placed prior to the auction) within the state price bracket, or better, in excess of the higher limit. As the next interested party approaches the department, he or she is informed that ‘it would be safer,’ et cetera. Thus begins an exercise that dangerously resembles price manipulation, based on an ‘estimate’ that hardly qualifies as the considered expert opinion that auction houses suggest it is. If that is not commercial deception, one wonders what is. Yet this is innocent stuff compared with the way in which an auctioneer is allowed to conduct the bidding….Often, the works are consigned by dealers, or, more subtly, by individuals who buy and sell as a matter of speculation….In that case, the auctioneer helps a dealer or a speculator disguise his commercial activity, introducing yet another element of deception. This is not he only circumstance in which the borders between auctioneering and dealing are blurred," Melikian continued, adding that "Many old auction-room hands find it hard to believe that the dealers who thus struck an alliance with the auction house do not enjoy privileged access to information concerning reserves, for example, and thus an obvious advantage over their competitors."
"The practice of the reserve-cum-estimate looks uncomfortably close to a speculative scam. It would be easy to stop the fiddle by forbidding auctioneers and auction house employees to place bids on behalf of a seller. Artificially speculative reserves would then promptly go down because auction houses would not want to risk massive failures to sell, which translate into unprofitable handling of goods and generate bad publicity. More damnable practices should be swiftly ruled out by law. Auction houses are there to auction, not to deal. Therefore, giving sellers ‘guarantees’ must stop," Melikian argued.
While many of his observations are correct, obviously not all auction house transactions aresuspect, or tainted. Sotheby’s and Christie’s have aggressively been expanded their business and in so doing have transformed the one rather private art world into public extravaganzas, oiled by brilliant marketing and public relations savvy. Given the staggering volume of works they now offer, it is remarkable that there have not been more problems.
"The problem so far," Melikian concluded, "has been that the art auction arena has been governed by rules conceived for the wholesale production or distribution of commercial goods with quantifiable cost elements. These are conspicuously lacking the art market. There, each work of art presents characteristics that make it unique, by virtue of aesthetic creation, state of preservation or glamorous provenance, or all three together."
The coordination of auction schedules and similar rate schedules makes sense in the real world.
Reserves and estimates are necessary evils and are virtually impossible to regulate for the very "unique" characteristics mentioned by Melikian as well as a consignor’s threshold of pain. By and large, the auction houses’ estimates have a pretty good and consistent batting average. A broad ballpark guess might indicate that half of the lots at the major auctions sell within the printed estimates, a quarter fall below the low estimate and or do not sell, and a quarter sell for more than the high estimate. While some auctions have had all their lots sell and many at high prices, in good times most have 10 to 15 percent that do not sell and in bad times have 20 to 35 percent that do not sell. Melikian describes the auction business as "delicate." It is also nerve-wracking, fascinating, and full of surprises even when it functions perfectly. The art business, however, is far from perfect.
Improvements, however, can and should be made.
The auction houses should not be in the business of art dealing and should not have special relationships with some and not all dealers and should not offer financial guarantees to sellers. They also should not bid on behalf of the seller. Often auctioneers start bidding at half or two-thirds of the published low-estimates rather than at the reserve. When someone in the auction house bids, the auctioneer often will follow up with another bid that he, or she, makes on behalf of the seller as the bid price moves up toward the reserve. The low bids sometimes entice bidders who might not otherwise have considered the specific work and once someone starts bidding they are susceptible to auction fever and find it hard to "uncommit." The bidders, however, do not know the reserve, although in recent auctions some of the auctioneers have begun to remark, "I’m out," which possibly indicates that either the reserve has been exceeded or that pre-sale "commission," or "ordered," bids have been surpassed.
The practice of arranging post-auction sales should be stopped. The high hopes of a seller might be dashed by the failure to sell at the auction and they occasionally will reconsider and accept a lower offer which on the surface seems a relatively happy solution for all parties. If the practice were stopped, however, the buyers would not be able to hold back in the hopes of a distressed post-auction arranged sale and would have to commit and that activity would result in higher prices. Not everyone knows that the auction houses indulge in such activities on behalf of the sellers and such sales are not publicly reported by the auction houses, which further obfuscates the market.
In September, 2000, press reports indicated that Sotheby's and Christie's would pay $256 million each into a pool to satisfy claims of customers and shareholders who brought suit against them for price-fixing. The civil settlement does not affect the criminal investigation by the Justice Department against Alfred Taubman, the former chairman of Sotheby's, and Diana Brooks, its former president and Chief Executive Officer. Mr. Taubman was reported to have agreed to pay about three-quarters of Sotheby's civil assessment. (9/26/00)
Mr. Taubman was found guilty and sentenced to serve one year and one day in prison, which he started in April 2002. Ms. Brooks cooperated with the prosecution and did not have to serve jail time. In February, 2003, Mr. Taubman decided to stop trying to sell Sotheby's. (2/24/03)