The Fine Art of Fraud

    Thursday, 15 August 2019
    Russian billionaire and President of French football club AS Monaco Dmitry Rybolovlev poses in Paris on September 24, 2015 in front of two allegedly stolen paintings by Pablo Picasso, which he purchased from a Swiss art dealer who tried to defraud him. Credit: AFP

    Last Friday, 17 Goldman Sachs bankers were hit with fresh criminal charges in the titanic 1MDB scandal, through which billions of dollars were allegedly embezzled from a Malaysian state development fund.

    The latest bankers indicted comprised some of Goldman’s highest-profile European employees—including its most senior London-based executive—striking a blow to Goldman’s argument that any wrongdoing was the work of a single rogue employee who had hoodwinked the rest of the firm. This defence was already on shaky ground: investigations have outlined how Goldman staff—from internal auditors to senior executives—repeatedly dismissed red flags about the 1MDB contract.

    Under everyone’s nose

    Some former members of Goldman’s management, in fact, are nearly incredulous at how apparent wrongdoing on such a massive scale went unnoticed for so long. As ex-partner Dennis Suskind mused, “It doesn’t smell right […] the thing about the firm is that they should have been monitoring it closer”.

    This fits a common pattern, however, of fraudulent schemes—particularly at firms with long-standing reputations—slipping just under the radar for years. Only in June 2012, for example, was centuries-old British bank Barclays was finally forced to admit that it had been unlawfully manipulating LIBOR—a benchmark interest rate underpinning trillions of dollars of global transactions. By then, as industry insiders explained, such market manipulation had been going on for decades.

    Sluggish regulation still better than no regulation

    In cases like Barclays’ tinkering with LIBOR, there’s little doubt that regulators failed to do their part in swiftly stamping out the deceit. Documents released at the behest of a U.S. Congressional Committee showed that as early as 2008, a Barclays employee had admitted to the New York Federal Reserve that “we know that we’re not posting […] an honest LIBOR”. The Fed passed concerns to European regulators, but little action was taken until 2012.

    Slow reaction notwithstanding, the banking sector enjoys a significant amount of oversight—particularly after the 2008 financial crisis—ensuring that the majority of fraudulent schemes will eventually come to light. The lucrative art market, by contrast, remains opaque and largely unregulated—a state of affairs which has let art dealers and auction houses operate essentially unchecked and given rise to any number of illicit rackets.

    Yves Bouvier’s $1 billion mark-up

    Given the lack of regulatory oversight, the only way many of these swindles come to light is through individual lawsuits brought by their victims. One such case, dubbed“the largest art fraud in history”, is currently playing out in courts on both sides of the Atlantic. According to the plaintiff, billionaire art collector Dmitry Rybolovlev, Swiss art dealer Yves Bouvier defrauded him out of more than $1 billion. In addition to litigation against Bouvier in jurisdictions including Switzerland and Monaco, Rybolovlev is suing Sotheby’s for $380 million for its purported role in the fraud.

    Bouvier allegedly employed a simple recipe to pad his profit margin so substantially on the 38 paintings he sold to Rybolovlev between 2003 and 2015. Bouvier apparently purchased works himself, often from Sotheby’s, and days later would sell them to Rybolovlev for up to 70% more than he had just paid—all while concealing both the paintings’ provenance and their true value from his billionaire client.

    A veneer of respectability

    Such a fraudulent scheme would necessarily require a certain amount of coordination to ensure plausibility. Just as emails released by authorities following the LIBOR scandal illustrated how traders casually swapped insider information and agreed on rates to submit, newly-public correspondence between Yves Bouvier and Sotheby’s executive Samuel Valette reveals how the pair collaborated behind-the-scenes to develop appraisals which would benefit Bouvier.

    Sotheby’s had long fought to block the emails from becoming public, but they were recently ordered released by a U.S. judge. According to the correspondence, Bouvier and Valette followed a familiar pattern over a period of years: On Bouvier’s request, Valette would send him an official, Sotheby’s-endorsed appraisal to be transferred to Rybolovlev. The Swiss dealer would later purchase a painting—through Sotheby’s—for less than the amount indicated in the appraisal, before finally reselling the painting to Rybolovlev, often for a price even higher than that in Valette’s valuation.

    Rybolovlev’s lawyers claim that the appraisals drawn up by Bouvier and Valette were designed to convince their client, who believed Bouvier was working solely for a 2% commission, “to pay inflated and fraudulent prices”—and that the cachet of the Sotheby’s name had lent a “veneer of legitimacy and expertise” to the valuations.

    Sotheby’s has argued that it was unaware that Rybolovlev was Yves Bouvier’s final client. Even so, the recently-released emails suggest that the auction house was at least cognizant of the scale of Bouvier’s mark-up. As an example, Valette reportedly provided Bouvier with a valuation for the Modigliani sculpture Tête for “between 80 million and 100 million euros”—while also sending the Swiss dealer a contract of sale for €31.5 million. To make matters worse, court documents suggest that the transaction histories Sotheby’s provided for some works omit their sale to Bouvier—despite Valette’s personally having brokered many of these sales.

    Sotheby’s sold Gustav Klimt’s Wasserschlangen II, for example, to Yves Bouvier in 2012 for $126 million. After the media reported the approximate price for this transaction, Bouvier asked Valette for a formal valuation of the work. The appraisal Sotheby’s provided in October 2014, signed by Valette, valued the work at $180 million and omitted the 2012 sale to Bouvier from the painting’s transaction history.

    Untold similar stories

    The high-end art world suffers from such a lack of transparency that it’s difficult to estimate how many similar cases remain under the radar—Rybolovlev was apparently only tipped off that something was amiss after he read a newspaper article reporting the real value of one of his paintings.

    Just weeks ago, British art dealer Timothy Sammons was sentenced to between 4 and 12 years in prison for misleading his clients around the world—to the tune of $30 million— about the sums he had actually sold their artworks for. Trusted art gallery Knoedler & Co., founded in 1846, shuttered its doors in disgrace in 2011 after it came out that it had been selling forgeries for top dollar.

    Though Sammons and Knoedler’s conduct was so egregious that the justice system weighed in, the shades of grey the art world is painted in mean that there’s far greater tolerance for behaviours like insider trading than would be accepted in any other industry. As one former investment banker turned art collector commented, “the way [the auction houses and the big galleries] hide the reality is fantastic”.

    The steady stream of scandals coming from the likes of Goldman Sachs and Barclays has bolstered calls for strengthened regulatory oversight of the financial sector. Beneficial though this might be, the importance of cracking down on fraud in the art world—“the largest unregulated industry in the world, besides guns and drugs”—is even greater.