Taubman and Sotheby's
As inches are to length, and pounds are the weight, money is to success. It is not uncommon to measure an individual’s success not only by how much money one has, but also by how quickly they made it. Someone who has earned a lot of money quickly can arguably be described as more successful than one who has doesn’t have much money, or worked laboriously for their fortune. In some instances however, fortunes made can be at the expense of others, or, in some cases, entirely against the law. Examples of this are all too prominent today in America’s already sickened economy. From WorldCom’s accounting 101 fraudulent practices to Enron’s earning cover-ups to home-maker idol Martha Stewart’s insider trading. Are our Rockefellers, Fords and Carnegies gone forever? Have the days of being able to earn an honest buck disappeared - possibly. To add to the list of corporate crooks, consider the case of Sotheby’s largest stockholder Albert Taubman. Born into a middle class family in Michigan during the depression, Taubman bought 22% of the auction house Sotheby’s in 1983 from fortunes made in shopping mall construction in Michigan (at least he can claim to have earned some honest money), making him the company’s primary class B share holder. Regarded as on the of the world’s finest auction houses, its only real competitor of rare-second hand valuables is Christie’s auction house. Both over 200 years old, their domination of controlling 90% of the market for art created a duopoly. Up until 1995, art prices had been at an all time high, and the houses decided to take advantage of it. Both Sotheby’s and Christie’s (allegedly at the request of Taubman) created a sliding-scale commission which basically said that the more a painting sold for, the more commission the house would receive. Although both houses came out with this policy at the same time, it was labeled as a coincidence and not many took notice – except for the US Justice Department. This policy was the corner stone of the price fixing scandal. With a way to boost their profits in place, both companies shared information with each other that included lists of current clients and their salaries. This way no one bidder would be perused too much. Equipped this kind of insider information, the companies were able to set the prices of their paintings higher, raise their revenues and earn more money for the shareholders than ever before. As paintings started to sell at record prices, would there be an end to the fruits of such a scam? Oh yes. In 1999, documents containing incriminating information, such as the source of the colluding in prices and the plan behind it, were brought to the attention of Christie’s Auction Houses’ lawyers. The law firm turned the information over the US Department of Justice, and the scam between the two houses began the crumble. With undisputable evidence and a mound of civil suites brought on, both Sotheby’s and Christie’s paid 256 million dollars in damages to people who claimed to have been ripped off (a small price to pay considering paintings from artists such as van Gogh were selling for over 70 million each, at the time). Taubman, 79, claimed his innocence and ignorance in the matter. He did have to pay half of Sotheby’s 256 million dollar fine and, being the primary share holder, lost quite a bit of money when the company’s stock tumbled from 40 dollars a share to 16 dollars a share after the news of the scandal broke. His personal profits from the price setting scandal were quoted at around 43 million dollars, although that number is not concrete. On April 22, 2002, he was conviced of price fixing and sentenced to a year in jail and another 7.5 million dollars in fines. In reality, one year in jail is a small price to pay when you figure that if Taubman had just robbed a bank and stolen 40 million dollars, he’d probably get life in prison. Why, then, do white collar criminals face such a lesser sentence? Is there something wrong with the justice system that they get off more easily than their blue collard counterparts? Many people, including myself, think so. Penalties for white collar fraud cases such as this one should be increased substantially. Thankfully, it is in the process of happening right now thanks to the current publicity over such crocked CEO’s and company owners such as Taubman.
In February 2000, the chairman of Sotheby's auction house, Alfred Taubman, and its president and CEO Diana "Dede" Brooks resigned their positions following the outcome of various antitrust investigations and civil class action complaints accusing the auction house of fixing sales commissions with it's main rival, Christie's. Together, Sotheby's and Christie's share 90% of all world art auctions.
Diana D. Brooks pleaded guilty in November 2000 to fixing hundreds of millions of dollars in commission fees with Christie's between 1993 and 1999. Customers were thereby unable to negotiate prices. The two would agree on which should raise their fees first and who would follow. The government charged that such arrangements meant that individuals who contracted with those auction houses had to pay more than they would otherwise.
It began in 1997 when the Antitrust division of the United States department of Justice launched an investigation into possible collusion between the two auction houses. By January 2000 the case made headlines when Christie's CEO (who resigned shortly before) Christopher Davidge, revealed information that accused Sotheby's and Christie's of a price-fixing scheme. These disclosures left Sotheby's exposed to criminal prosecution for violating the antitrust laws against price fixing. Christie's was granted amnesty by the government for its cooperation. Brooks, Sotheby's CEO, pleaded guilty to one count of price fixing. She said she acted under Alfred Taubman's, Sotheby's chairman, direction and agreed to testify against him in expectation of a lighter sentence for her cooperation. Taubman was convicted by a Manhattan jury last December. What encouraged these prestigious auction houses to act this way?
In the 1970's, after a period of rapid growth, both Christie's and Sotheby's went public. The value of Sotheby's stock doubled in just 18 months. Then in 1983, business man Alfred Taubman along with a small group of investors, bought the company. The 1980's were a wild time in the international art market. Fortunes were made and lost hundred times over. Prices for both old masters and individual works by more recent artists such as Monet, van Gough, Picasso and others skyrocketed to millions of dollars. The art auction business was cut throat. The two biggies competed head to head with discount fees, special deals, and costly services. The late 1980's saw a strong economic downturn which made people less inclined to buy expensive art work. It was approximately at this time that the heads of Sotheby's and Christie's got together in London and decided to put an end to the price wars between the two companies. They agreed to eliminate discounts and negotiable commissions and to charge identical rates for all sales. As a result, during the next six years the two companies earned an additional half a billion dollars in commissions.
This case shows that antitrust legislations differ in Europe and in the States. Sotheby's chairman Taubman was convicted in New York expecting up to 3 years in jail. His anti-competitive actions violated the 1890 Sherman Antitrust Act (which declares illegal every contract or conspiracy in restraint of trade) as well as the 1914 Clayton Act. Sir Anthony Tennant, however, Taubman's alleged conspirator the then chairman of Christie's was so far able to avoid sanctions. He refused to travel to the US to face charges and cannot be extradited because operating an illegal cartel in Europe is not a criminal, but civil, offense and executives are not sent to jail.
Price-fixing defies the principles of a free market economy. Price-fixing threatens to reduce the amount of a prouct available for purchase and to increase its price, thereby distorting the functioning of the marketplace by causing resources to be switched from productions of the affected product to other, less valued uses. The social benefits from price fixing are thought to be small or nonexistent. However, there are arguments that disagree with this point of view. It can be argued that although price fixing agreements may intend to restrict productions and increase group profits, they are generally unable to do so. First of all, the higher prices will attract new firms to enter the industry and prices will be driven back to their competitive level. Second, each member of the conspiracy has an incentive to cheat on the agreement by secretly lowering its price and substantially expanding its share of the market, thus increasing its profits at the expense of the other cartel members. This means that such conspiracies are inherently unstable and unlikely to be effective in maintaining artificially high prices; the social cost of price fixing thus seems to be overstated. This opinion is debatable.
An interesting point which relates to some of the issues covered in EC 341 is that fact that Sotheby's is a public company. It was not only sued by its costumers, but also by its shareholders for having failed to disclose the existence of the collusive arrangement with Chrisitie's, and for having breached their fiduciary duties owed to their shareholders. In fact, it appears as though the fact that Sotheby's was public may have been a strong incentive for the price-fixing activities. Due to the fact that the shareholders require returns and Alfred Taubman owned a large part of the shares, Sotheby's was probably very motivated to increase share value. However, growth within the auction house is not possible as in other companies, without hurting the exclusive image of the auction house. Hence, in my opinion Sotheby's decided to take the easy way out in order to increase profits thereby also their market value.