What is Price Collusion?

As this issue went to press, another explosion in the wide-reaching Department of Justice probe of the art market detonated on February 21, with the twin resignations of Sotheby’s longtime corporate leaders, chairman and majority shareholder A. Alfred Taubman and president and CFO Diana D. (“Dede”) Brooks. “My decision is a very difficult one, but I have taken it in the best interests of the company and of my colleagues,” said Brooks in a press statement. Breaking its stony silence, the company also commented on the 22-month-old antitrust investigation: “Sotheby’s has recently met with the Department of Justice in order to discuss a prompt and appropriate resolution of this investigation, which will allow the company to put this difficult matter behind it.” It also confirmed that the investigation and subsequent spate of related lawsuits “could well have a material impact on Sotheby’s financial condition and/or results of operations.” Sotheby’s noted that it has secured a $300 million credit line through Chase Manhattan Bank to meet those ‘future business needs.” Sotheby’s named former Columbia University president (and Clinton legal defense fund trustee) Michael I. Sovern as chairman. Sotheby’s veteran William E Ruprecht takes over Brooks’s position. Both Taubman, who controls 63 percent of the voting power, and Brooks remain on Sotheby’s board, however.

The timing and impact of the resignations could not haw been worse for the company as it entered the critical last two weeks of nailing down multi-million-dollar consignments for the important May sales. Already at a competitive disadvantage from Christie’s recent lowering of seller commissions (see page 63), the firm is being hit where it hurts most, its vaunted bottom line. Wall Street reacted to the latest news with thumbs-down velocity, sending Sotheby’s stock skittering south to a near-record low it closed at 150 on February 22—and also fueling rumors that the company was ripe for a takeover, given the grim scenario. Speculation centers on online giants amazon.com and eBay and the luxury-goods empire LVMH.

The front-page bombshell in London’s Financial Times hit the art market on Saturday, January 29. “CHRISTIE’S ADMITS TO FIXING ART COMMISSIONS—AUCTION HOUSE TELLS JUSTICE DEPARTMENT THAT IT COLLUDED WITH SOTHEBY’S,” screamed the headline, heralding a surprise turn in the nearly three-year-old U.S. Department of Justice investigation into alleged antitrust violations by Christie’s and Sotheby’s.
Since an initial flurry of newspaper articles in spring and summer 1997, that investigation, which was also said to be looking into the possibility of bid-rigging by dealers, had seemingly become dormant. “I never heard another word,” said one dealer involved in the probe, “and then—BAM!—the Financial Times article appears.” A wake-up call to the art world, the article, which reported that Christie’s had turned over to the Department of Justice evidence relating to “a deal between Christie’s and Sotheby’s…to limit competition,” also broadcast to collectors and financial markets worldwide that, in exchange for its cooperation with the investigation, Christie’s had been granted “conditional amnesty.” Although Christie’s and its current employees appear, as a result, to be insulated from criminal charges, Sotheby’s is not and neither are dealers. At press time, however, there have been no indictments.

The Financial Times revelations followed Christie’s discreet release the previous day of a brief statement issued by its New York headquarters: “Christie’s new owner [Francois Pinault, the Frenchman who acquired the firm in May 1981 and our new senior management recently became aware of information relevant to the antitrust investigation being conducted by the Department of Justice. The information concerns possible conduct prior to the tenure of our new management,” the announcement noted. “We immediately disclosed that information to the government. We can confirm that we have been granted conditional amnesty by the Department of Justice.”

Instantly, the abrupt Christmas Eve resignation of Christie’s longtime CEO Christopher M. Davidge first interpreted as the act of a corporate lame thick deciding to open his golden parachute after 34 years of loyal service (see Art Auction, February 2000)—was put in a brand-new light. Some market observers began to suspect Davidge of having divulged to the authorities information that severely compromised Christie’s—perhaps as some Parthian shot?

There were other questions, too. “If there was collusion, who at both houses participated in the arrangement?” asked one Manhattan attorney. “Who could have done it at Sotheby’s? There aren’t too many candidates that have the ability, the power to execute that.”

To some, the revelations carried the imprimatur of Pinault’s proactive corporate style: doing what he considers best for his new company’s interests—in this instance, cooperating with authorities and getting amnesty—without regard for the reputation of longtime employees like Davidge, who reap the blame for past mistakes. “Christie’s is hanging out the old team to dry big-time,” says one former employee of the firm. “The whole Davidge thing just smacks of convenience.” (Davidge did not respond to messages left at his Manhattan residence seeking comment for this article. He has not been seen in New York for months and his absence was widely noted during the November sales at Christie’s.)

But if such scenarios trafficked in the as yet unknowable, the revelations had at least one undeniable effect: to put Christie’s competition, Sotheby’s, in an extremely awkward position. To some, the ET story was a brilliant samurai stroke, marking a quantum escalation in the long-standing rivalry. On Monday, January 31, following the news, frenzied trading on Sotheby’s stock—known as BID on the New York Stock Exchange—dropped three points to close at $20. Three top-ranking stock-analyst companies—Dain Rauscher Wessels, Janney Montgomery Scott and Morgan Stanley Dean Witter—downgraded their ratings on BID to more neutral positions. (Ironically. Diana D. Brooks, Sotheby’s hard-charging CEO. serves on the board of Morgan Stanley Dean Witter.) At one point during the day, BID was down a whopping 6 points (or 27.1 percent) to $17, its lowest level in 52 weeks. In May 1999, news that giant e-commerce
player Amazon.com had invested $45 million in Sotheby’s Internet future brought trading on BID to a buoyant $47.

At press time in mid-February, BID was languishing between $17 and $20 a share and, says George Sutton, a research analyst at the Minneapolis-based Dain Rauscher Wessels, which tracks Sotheby’s stock, “There’s this concern out there that you don’t know what can happen in this antitrust matter. That makes it fairly difficult to predict stock performance.” Taking a distinctly opposite view, Baron Asset Fund, Sotheby’s largest institutional shareholder, headed by CEO and founder Ron Baron, addresses the inquiry in its latest quarterly newsletter, published in late February: “We were surprised, puzzled and disappointed by the article in the Financial Times…. Although we can obviously not be certain if an individual or individuals at Sotheby’s have violated antitrust regulations, if they have, we do not believe the 225-year-old business will incur liabilities that are significant relative to either its current or potential value.”

Despite the Wall Street drubbing and persistent press probing launched by the Financial Times story, however, Sotheby’s continues to maintain a stony silence. “No comment” has been its only comment, a wise if perhaps costly defense. As Diana Phillips. Sotheby’s spokesperson. puts it, “This investigation has been ongoing for three years. We haven’t commented during that time and it’s not appropriate to comment now as it’s still ongoing.”

Such evasiveness had seemed to serve both auction houses well ever since the New York Times, in June 1997, broke the news that the New York Field Office of the Department of Justice’s Antitrust Division had launched an investigation into the art market. Christie’s and Sotheby’s were subpoenaed to produce extensive documents relating to the manner in which both firms had come to set similar buyers’ premiums and sellers’ commissions, in 1992 and 1995, respectively, within weeks of each other. Antitrust law forbids competitors from acting together to set rates in order to lessen or quash competition. (Nothing prevents one competitor from following the actions of another, however, as often happens in matters of commerce.) As reported last month in the Wall Street Journal, the Department of Justice subpoenaed Sotheby’s in 1997 to provide the names of officials who “had direct or indirect responsibility, including management oversight responsibility, for setting. recommending or negotiating consignors’ commissions and/or buyers’ premiums.” Justice also requested documents relating to any meetings or discussions concerning fees between Sotheby’s and other auctioneers.

At the same time, as part. reportedly, of an investigation into dealers’ rings, the records, files and correspondence of some two dozen dealers, for the most part active in the Old Master trade—but also including blue-chip modern and contemporary dealers—were reported to have been subpoenaed.

According to Department of Justice guidelines, convictions for violating antitrust laws can result in penalties of up to S10 million for corporations, a sum that may be increased to twice the gain derived from the crime, or twice the loss suffered by its victims, if either of those amounts is greater than the $10 million statutory maximum. In addition, individuals can be fined up to $350,000, with a maximum three years’ imprisonment. Amnesty only applies to current employees of a corporation. However. the Department of Justice also has an individual leniency policy. Last month, the London livening Standard reported that “Davidge is understood to be negotiating a personal amnesty in exchange for recent and future cooperation.”

The day that Christie’s revelations hit Wall Street was also the day that the first class-action suit charging illegal price-fixing by both Sotheby’s and Christie’s came to light. The suit had been filed on Sunday, January 30, in Manhattan U.S. District Court for the Southern District, by a major auction player. Canadian metals trader Herbert Black, representing an unidentified class of claimants. Black is president of the Montreal-based American Iron & Metal Company Inc., once described by Forbes magazine as the largest scrap metal recycling business in Canada. (Recently, Sotheby’s reimbursed Black in full for a pair of Georgian armchairs that he bought for £837,5001$1.3 million] at Sotheby’s London in 1996, which turned out to be fake. A collector of English furniture, Impressionist pictures, animation art and wine, Black did not return calls for comment on his suit.)

Suddenly, following Black’s lead, more than 40 similar lawsuits were launched, claiming that the two auction houses had engaged in price-fixing. In addition, at least two more class-action suits—the direct consequence of the antitrust investigation—have been brought on behalf of investors who purchased Sotheby’s common stock, alleging that the auction house’s reported revenues were inflated as
a result of the illegal conduct.

“If the auction houses have Herbert Black and his lawyers against them, it will be like having a pack of dogs at their throats.” said one well-informed art world source upon hearing of the Black suit. And indeed. Lovell & Stewart, the Manhattan law firm representing Black, and Milberg, Weiss. Bershad, Specthrie & Lerach, another top Manhattan firm representing another similar class-action suit, are practiced hands at this game. They both litigated and negotiated the record 01.027 billion price-fixing settlement involving 24 major securities firms in 1998. The settlement was the result of a Department of Justice investigation into the securities firms for fixing transaction costs for investors buying on NASDAQ, “It was a bit like the alleged price-fixing by the au, tints houses and it involved the same section of the same law, Section One of the Sherman Antitrust Act,” says attorney Christopher Lovell of Lovell & Stewart, comparing that class action to the one his firm has now lodged against Christie’s and Sotheby’s on Black’s and other claimants’ behalf.

As sketched out in the Lovell & Stewart complaint, the plaintiffs allege that, “beginning at least as early as on or about January 1, 1992, defendants agreed to cease competing with one another on the basis of price.” The allegation is referring to the fact that, on November 2, 1992, Sotheby’s announced an increase in buyers’ premiums, which Christie’s followed on December 22, a move that helped stabilize the bottom lines of both companies. For his part, David Bershad of Milberg, Weiss, which filed a similar suit, explains: “We will be arguing not just that the new, higher rates were something they got together to do, but that, if there had been real competition, the rates might have been lower than the flat 10 percent they used to get before.”

The 1995 change in the seller’s commission also comes under fire in the Lovell & Stewart-led suit. According to the complaint, Christie’s and Sotheby’s effected “an identical change in commissions between March and September 1995 from flat fees to a sliding fee,” and “defendants have colluded to preserve and maintain their fixed prices.” The statement is a reference to the fact that, after Christie’s and Sotheby’s fierce competition in the lean, mean early 1990s—when both firms sacrificed several percentage points (or more) on sellers’ commissions for property over S5 million in order to secure the pricey consignments—Christie’s announced on March 9, 1995, that it was eliminating “special terms” for high-end consignments, a move that Sotheby’s followed on April 13.

Adds Bershad, “We’re basically saying that people who dealt with them were subject to a non-competitive pricing situation, whether you were on a buying or selling side, and that they effectively agreed amongst themselves the levels at which they would charge.” The net effect of this alleged activity, the Lovell & Stewart court papers charge, “caused plaintiffs and other members of the Class in interstate commerce to pay more for the services of defendants than would have been paid in a free and competitive market untainted by defendants’ illegal price fixing agreement.” Without naming a dollar figure, the complaint calls for the court to order Christie’s and Sotheby’s to “disgorge their ill-gotten and unlawful gains.”

Since the suits focus on the auction houses’ alleged collusion in both the sellers’ commissions and buyers’ premiums, legal sources consider it logical to assume that the Department of Justice’s investigation is also looking at both buyers’ and sellers’ fees. Involving buyers means a much larger class than the more exclusive club of sellers at auction, art market and legal sources point out, thus opening the floodgates for vastly bigger claims. “You’ll get huge damages here if the buyers are included.” speculates one art world attorney. “It could easily hit $100 million in civil claims.”

But, says Bershad, “I haven’t really looked into the numbers hard enough and I think it’s premature to try to assess where it might end up.” Asked about the suit’s next step, Bershad says, “We will engage in a formal, factual discovery seeking documents, taking depositions and establishing our evidence. We will be looking for individuals who we think could substantiate the allegations that this was purposeful conduct between the two auction houses.” The attorney predicts that all class-action suits will ultimately be consolidated into a single proceeding. “We’re actually drafting a motion to consolidate right now,” he says.

According to several attorneys contacted for this article, however, the spate of similar actions—which could elicit treble damages if successful—are months away from any sort of action by the courts. Part of the outcome depends on how soon Christie’s and Sotheby’s formally respond to these cornplaints and whether the courts grant the plaintiffs the class-action status they seek.

Despite Christie’s public acknowledgment that it has been granted amnesty, the Department of Justice won’t confirm or deny that the firm has benefited from its popular corporate leniency policy, in which, according to the department’s guidelines, a corporation has to confess its role in the alleged illegal activities, fully cooperate with the antitrust division and meet other specified conditions—such as taking “a prompt and effective action to terminate its part in the activity.”

That being said, it was hardly surprising that, on February 7, Christie’s announced new sellers’ commissions and buyers’ premiums for its clients worldwide, characterizing these changes as being “accelerated by the recent events.”

Commenting on the nature of Christie’s position in the class-action suits given its conditional amnesty, Bryan Dunlap, an attorney specializing in antitrust law for the New York firm Winthrop, Stimson, Putnam & Roberts, notes that, “When Christie’s lays its soul bare to the antitrust enforcement, what it does, of course, is leave itself wide open to automatic civil liability, because it has already admitted that it did something wrong.” Although Dunlap points out that the information that the government has gathered from the criminal investigation is not usually made available in toto to the class-action plaintiffs, they can request all of it, he says.

“If tad,’ incriminating documents are produced, it’s not really worth fighting too much,” Dunlap continues. “It’s really just a matter of how much the corporation has to pay to get it behind them, because they’ve already admitted to having done wrong things. If Christie’s wants to go on trial in a civil action, the first thing the plaintiffs would do is wave this plea agreement from Justice and say, You signed this, right?’ So they’re not going to have a good time of it.”

No one at either auction house is uttering a peep about the long-incubating, high-stakes investigation. All requests for information on the investigation or the class-action suits are politely denied. An eerie curtain of silence, in fact, has descended over both houses—with all employees under what amounts to a gag order—even as the rest of the art world buzzes about who will be indicted, when, and what the impact on the firms’ business and reputations will be. Despite such unanswered questions, several things are already clear. The continuing investigation and class-action suits will cost both auction houses a bundle of money. If the Department of Justice seeks and obtains an indictment—and most legal observers believe that to be a certainty (“As I see it. Sotheby’s is indictable,” says one prominent attorney)—it is sure to spill over to the rest of the market. Calls for greater regulation may prove irresistible. “I really think it’s going to be bad for everyone,” says one art world attorney. The public’s response to a highly publicized indictment, he continues, can only be: “They’re all a bunch of crooks.”

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