A Perfect World

Like war, an unregulated business continuously poses the same vexing question to the people inside it: How far is too far? The answers usually seem obvious from a distance. But when the job itself leaves behind the rest of the world's rules, in the moment it can be much harder to distinguish between doing it well and doing it dirty.

I've been thinking about this while reading recaps and takeaways from the recently settled Knoedler Gallery forgery trial. For those who haven't followed the saga––which has now stretched over multiple cases, with more to come––at issue are the gallery's resales of alleged postwar masterpieces acquired from dealer Glafira Rosales, who was in fact sourcing her inventory from a forger working out of a garage on Long Island. The specific suit settled last week alleged that Knoedler and its former director, Ann Freedman, knowingly sold one of Rosale's fake paintings (a supposed Mark Rothko) to collectors Domenico and Eleanore de Sole for $8.3 million. And the absurd-seeming details laid bare in the trial led the de Soles' attorneys––and now, many industry analysts––to argue that Knoedler and Freedman simply HAD to know Rosales and her works were frauds. 

However, as obvious as that conclusion seems today, I think an important point is getting lost in the uproar: The Knoedler sales only dealt in a difference of degree, not kind, from the wholly legitimate day-to-day business of the secondary market. And in that sense, the circumstances surrounding the de Soles' "Rothko" aren't quite the extreme outliers they're being made out to be.

I touched on this same idea a few weeks ago in Market Monday. But with the trial still causing so much forehead-slapping around the industry more than a week later, I think it's worth revisiting in depth. And for my launch point, I'll turn to Eileen Kinsella and Sarah Cascone's "Top 9 Takeaways from Knoedler Forgery Trial."

Specifically, let's look at the following tidbit from item number five, headlined "It is extremely important to follow standard industry practices, aka, 'Don't ignore dozens of red flags'":

Expert witness Martha Parrish, who helped establish a code of ethics for the Art Dealers Association of America, testified that Knoedler's decision to sell Rosales's so-called "Secret Santa" collection was not in line with the industry's professional standards. If a reputable and responsible dealer was presented with a large collection of unknown works without a provenance, being sold below market price by a buyer asking for a cash payment (as in the case of the Rosales paintings), they "would run like hell," she insisted.

Now, not to get all Bill "It depends on what the meaning of the word 'is' is" Clinton here, but I think one word in Parrish's quote detours her testimony from reality somewhat. Had she said that a reputable dealer SHOULD run like hell from an available collection like the one Rosales pitched to Knoedler, I would agree. The total number of unknowns there tip the scales into dubious territory.

Yet scant details, too-good-to-be-true pricing, and cash payments are all time-tested girders in the art market's construction. Any dealer who automatically turns away offers with some or all of these question marks attached may save herself a lot of anxiety... yet she may also cost herself a lot of otherwise above-board money in the process. 

First, it's magical thinking to believe that every, or even most, pieces on the postwar secondary market come with complete provenance information. Even if all actual dealers' record-keeping has been impeccable for the past 70+ years––and I assure you, it hasn't––getting over this bar would also demand thorough record-keeping from every individual collector who owned, traded, or resold the piece along the way. Considering how many, shall we say, 'free-wheeling personalities' fill out this cohort, flawless provenance is just not a realistic ask in most cases. 

As for the "below-market price" aspect, the entire premise is dubious. as I've written before, fine art valuation is like baseball card valuation: The inventory is worth whatever a buyer can be convinced to pay. If "market prices" were well-established, then in my gallery days I would never have been on a conference call with a highly reputable dealer in which he casually mentioned that he never buys secondary-market work unless he knows he can double his money.

But that happened. And even if 200-percent returns aren't the standard in the secondary market, dealers wouldn't be buying resale inventory if they couldn't source it for less than what others in the market will bear . 

Finally, cash payments are basically an institution of their own within the industry. That's not to say that they're dominant. But they are not terribly uncommon. No one likes paying taxes, after all, especially in an unregulated market rich with opportunities to avoid it.

And even if the motivation isn't to barrrel-roll around the IRS, cash payments can often be provoked by another trio of letters. The Three D's––Death, Debt, and Divorce––drive a significant chunk of business in the art market. Those familiar scenarios frequently motivate sellers to close deals at distressed (see: "below-market") prices, as well as to request the quickest liquidity possible: cash. Reputable dealers can refuse to play ball on this point if they want, but why would they? It usually saves them money.

With all that in mind, I still agree with a variant of Parrish's statement to the court: In a perfect art world, dealers would run like hell from offers dragging too many of these types of balls-and-chains behind them. But we don't live in a perfect art world, particularly in the secondary market. That makes it much more difficult for collectors and dealers alike to judge how far is too far. And as much as I wish it weren't the case, it's either naive or dishonest to pretend their distance vision can always be 20/20.