'The art trade is the last major unregulated market'

For the past few years, the media have trumpeted contemporary art as the hottest new investment. At fairs, auction houses and galleries, an influx of new buyers—many of them from the world of finance—have streamed in. Lifted by this tidal wave of new money, the number of thriving artists, galleries and consultants has rocketed upwards. Yet amid all this transformative change, one element has held stable: the art market’s murky modus operandi.

“In my experience, people coming from the finance world into the art market tend to be shocked by the level of opacity and murkiness”, says collector Greg Allen, a former financier who co-chairs MoMA’s Junior Associates board. “Of course, there’s a lot of hubris—these people made fortunes cracking the market’s code, so they tend to think the opacity is someone else’s problems. But the mechanisms are not in place to eliminate ethical lapses or price-gouging and the new breed of collectors are definitely more likely to pursue legal options. And once things go to court a lot of the opacity gets shaken out.”

Last November, Manhattan collector Andrew Klink sued legendary Toronto photography dealer Jane Corkin over an Andre Kertesz print. According to his suit, she cited it as coming from the Paris period most prized by photography collectors and he bought it for $275,000; but the Kertesz foundation later issued an authenticity letter that placed the particular print with more likelihood in the later New York period of the artist’s oeuvre. The case has been settled, and neither party can now comment publicly

“The art trade is the last major unregulated market”, points out Manhattan attorney Peter R. Stern, whose work frequently involves art-market cases. “And while it always involved large sums of money, there was never the level of trading and investing that we have now. I’m increasingly approached by collectors who have encountered problems.” Stern represented collector Jean-Pierre Lehmann in his winning case against the Project gallery (The Art Newspaper, April 2005, p.53), which captivated the art world by revealing precisely what prices and discounts Project chief Christian Haye had offered various collectors and galleries on paintings by Julie Mehretu—information normally concealed by an art world omerta.

While the Project case was exceptionally complex, Stern undertook five more straightforward breach-of-contract cases in the last six months, all involving problems arising after collectors consigned work to a gallery for secondary-market sale. Stern declines to cite the dealers involved, since the suits are either pending or were settled out of court, but in one case, the consignor only discovered a work had been sold after her sister saw it hanging on a museum wall; the gallery had never notified, much less paid, her. In another, the consignor spotted the work at a cocktail party, asked the host its sale price and heard a significantly higher sum than that upon which the gallery had paid commission on. A third case was triggered when a gallery assistant prepared invoices with two different prices and then switched them by mistake while mailing them off, revealing the true selling price to the consignor.

While lawsuits are less of an issue in England, politicians may soon start seriously investigating art-market affairs. This March, Parliament’s select Media, Culture and Sport Committee held hearings on the art trade. Most of the hearing focused on the ramifications of the droit de suite regulations which come into effect in January 2006. But abstract painter Rebecca Salter—whose work is in the permanent collections of the Tate, the British Museum and the San Francisco Museum of Modern Art—weighed in with descriptions of dealer practices that stunned the less art world-savvy MPs present; the predominant absence of written contracts was noted with particular amazement.

Since testifying, Salter says, she has become a magnet for disgruntled artists—in the worst case, a work had been sold in 1963 and the artist was never paid; once the gallery admitted it, they summarily sent a check for £200, making no adjustment for inflation or interest. For contemporary artists with strong markets, the sums can rapidly spiral much higher—two relatively new arrivals to a major New York gallery, for example, had a million-plus dollars each in back payments owed to them from their previous dealer.

“I don’t want to lay all the blame at the door of dealers”, cautions Salter. “Artists with galleries can also behave quite badly, inviting people around to the studio and selling work at half price.” Nor are collectors choirboys when it comes to ethics, commonly reneging on deals, withholding payments for years, and misrepresenting their intentions. A classic example: German collector Hans Grothe, who amassed a huge photography collection at discount prices by promising to build a monumental museum, then auctioned his prime pieces at the height of the German-photo boom—including Andreas Gursky’s Paris, Montparnasse, which was sold at Christie’s for £432,750 in 2001, setting the world auction record for contemporary photography.

Labour party MP Chris Bryant, who invited Salter to testify, sounds cautiously optimistic that one of the committee’s recommendations, a voluntary code of conduct defining ethical art world practices, could become a reality. “For the most part, the art market’s workings don’t come into view”, Bryant says. “But we will have to put droit de suite into place by the end of the year, which will bring those workings into public discussion. At that time there will be a lot of political pressure to also put in place a code of conduct, which of course the national institutions would abide by.” In theory that might mean that any dealer refusing to subscribe by the code of conduct could have trouble selling to publicly funded institutions such as the Tate.

Speaking of museums, the selection of artists for mid-career retrospectives functions as one of more heavily traded-upon pieces of market information. Short of sudden leap in auction prices, there is almost nothing that will turbo-charge an artist’s market faster than a retrospective at major institutions such as the Tate, MoMA, or Whitney. Yet such shows are rarely announced immediately after they have been decided upon. And during the period between when the show is green-lighted and its official announcement, the people best positioned to act upon it are major collectors.

“There’s so much insider trading around these retrospectives”, says London-based dealer Kenny Schachter. “Galleries call their top two or three collectors as soon as they find out and let them in on the deal. In commodities trading, where I used to work, that’s called ‘front-running’ and it’s illegal. I remember when I first stumbled into the art world, I was shocked that it could be run in such an archaic manner.” By the time the retrospective is officially announced, little primary-market work is available, so the second-tier collectors end up either buying the artist at auction or paying the newly raised prices justified by the retrospective. “The issue of how people use and spread this kind of information has not really been looked at in depth, but it actually deserves some attention”, says Susan May, formerly a Tate curator and now Head of the Arts Council Collection. “We always have to know where the line gets too close for comfort, because the last thing we want is to be scrutinised for insider trading. But the art world is such an intensely sociable environment, and it’s not as though we ever make people sign confidentiality agreements.”

Is that really “insider trading”? “The art market is unregulated, so there’s no rule defining what ‘insider trading’ means”, argues major Manhattan collector Adam Lindemann. “Also, it’s good to know about these shows ahead of time and people definitely buy based on that ‘privileged information’. But it’s no guarantee—unless it’s a hit, the artist’s market can often go flat afterwards.” Still, it hardly seems a level playing field when those collectors closest to a museum can profit from advance knowledge of where it will place its imprimatur. Yet museums rarely proscribe such activities. Quite the reverse, in fact. “Generally curators are encouraging people on the board to buy pieces by artists that a museum is planning to show or acquire, hoping that the work will be donated later on”, says one museum-world insider. “It’s seen as mutually beneficial. Information about a big solo show never stays secret. But it stays secret just long enough.”

Among dealers, there’s widespread disagreement about what should happen next. “There’s a lot more money in this business than there used to be, and yet we’re less regulated than used car dealers”, says one major American dealer who is taking part in ArtBasel this month. “And if we don’t start cleaning up the business, we might end being forced to do it from outside. Frankly, I’m surprised [New York State Attorney General] Eliot Spitzer stopped after those tax evasion cases—maybe he didn’t realise how much money is involved here.” But another top American dealer, likewise coming to Basel, says, “If you make the business transparent it would collapse overnight. I have to have the option to lie to collectors about what’s available or quote them prices 10 times what other people paid. Entire careers are built upon fabrications, like about which shows sold out and at what prices”.

Yet it’s precisely such uncertainties that can threaten the growth of the art market, points out Ian Charles Stewart, a London venture capitalist and art collector who also sits on boards at both the ICA and the Arts University London. “For anything to truly be called ‘investment grade’, you need to be able to track its prices over times, both at auction and in private sales”, he says. “A registry of all sales, auditable by the buyers and sellers, to show the price history of a piece would help a lot. The passage of art-market information now is so inconsistent that it’s like tech stocks from 1994 to 1999—the market is flush with cash, but it’s the insiders making the most money and the newbies often tend to learn hard lessons.”

• In 2005, Marc Spiegler was a journalist and regular contributor to The Art Newspaper; he was made global director of Art Basel in 2012

Update: a 2020 Vision

Remarkably, in the 15 years since this article was written, little has changed with regards to regulation in the art market—it could almost have been penned yesterday, although the artist Rebecca Salter has since become the first female president of the Royal Academy in London. As The Art Newspaper’s editor-at-large Georgina Adam wrote here ten years later, the art trade has been resistant to increased regulation. However, art market professionals in the UK are currently grappling with how to comply with the EU’s stringent new Fifth Anti-Money Laundering Directive, which has ramped up due diligence demands on any “art market participant” making transactions (either single or linked) of over €10,000. Another significant change for many in the antiques trade has been the tough crackdown on trading in ivory in numerous countries.

--Anna Brady, art market editor