Re BID: Now that the weak shorts have been squeezed on the seemingl good news,
the peak in auction activity and the grind on margins helped by regulators and the internet,
BID looks like easy slow short money:
"Files of Ex-Christie's Chief Fuel Inquiry Into Art Auction
By DOUGLAS FRANTZ
This article was reported by Douglas
Frantz , Carol Vogel and Ralph
Blumenthal. It was written by Mr. Frantz.
Last December, Christie's, the London-based
auction house, was forcing out its chief
executive, Christopher M. Davidge, who had
fallen from favor with the company's new
owner. Christie's executives and lawyers
played tough and negotiations turned bitter as
Christmas approached.
Mr. Davidge, a third-generation Christie's
employee attuned to slights in an upper-class society where he never felt
comfortable, was angered over what he regarded as a paltry severance
package, two friends said.
After all, he had driven Christie's from perennial second place to the
equal of its longtime rival, Sotheby's. But the friends said he was more
worried that he was being set up to take the blame if a dormant antitrust
investigation by the United States Justice Department in New York ever
came to life.
So when Christie's demanded all of his business records, Mr. Davidge
turned the tables and produced a bonanza. He dug out private files of his
handwritten notes to Christie's one-time chairman, Sir Anthony Tennant,
and gave them to his lawyer, who, by late December, had dumped them
in the laps of the company's criminal lawyers in New York. The impact
still reverberates through the $4 billion-a-year auction world, which will
never be the same.
Those files described years of price fixing and collusion between Mr.
Davidge and his counterpart at Sotheby's, Diana D. Brooks. They
recounted secret conversations and meetings in apartments, restaurants
and limousines to discuss fixing the commissions paid by thousands of
customers, dividing up superrich clients and a host of other steps to stifle
competition and pump up profits.
The nearly 500 pages, filled with incriminating detail, were a road map to
what A. Douglas Melamed, a senior Justice Department official,
described last week as "classic cartel behavior — price fixing, pure and
simple."
The impact of the records was immediate at Christie's. Before January
was out, the auction house threw itself at the mercy of the government,
offering to cooperate in exchange for amnesty from prosecution.
Interviews in recent months with lawyers, auction house employees and
other people involved in the criminal and civil cases stemming from the
arrangement between the auction houses provided new information about
how the scandal unfolded and where it might be headed. Because the
investigation is continuing and the civil settlement has not been approved
by the judge, most of those interviewed spoke on the condition that their
names not be used.
Through his lawyer, Mr. Davidge turned away all requests for interviews.
Ms. Brooks declined to be interviewed while the case is pending.
But coupled with court records and other documents, the interviews
provide a stark account of how a nearly defunct antitrust investigation
grew into a supercharged inquiry that is exacting hundreds of millions of
dollars in penalties and has changed the world of auctions.
The material shows that the two dominant auction houses, which offer
substantially the same services to the sellers and buyers of fine art and
antiques, conspired for at least six years to eliminate the only bargaining
tool available to their clients — the ability to negotiate on the basis of
fees.
In hindsight, Christie's refusal to be generous with its departing chief
executive might be one of history's clearest lessons in being penny-wise
and pound-foolish.
Resignations and Pleas
Throughout the year, the scandal has unfolded amid the drama of
resignations by Ms. Brooks, 50, and her boss, A. Alfred Taubman, 75,
the chairman of Sotheby's, as well as a $512 million settlement of civil
suits against the auction houses and, most recently, guilty pleas to criminal
charges by Ms. Brooks and Sotheby's.
Mr. Taubman, who owns a controlling interest in the Manhattan-based
Sotheby's, was forced to resign as chairman in February. He has been
named by the government as a focus of its investigation. Mr. Taubman
and Sir Anthony, both of whom have been identified by Mr. Davidge as
the instigators of the collusion, have denied any wrongdoing. Mr.
Taubman and Sir Anthony declined requests for interviews.
At the heart of the inquiry is Mr. Davidge, 55, the former chief executive
who never really fit in at the stuffy pinnacle of the British upper class,
where bloodlines and old-school ties are prized.
Mr. Davidge was the third generation of his family employed by Christie's
and by far the most successful. But he never forgot the fate of the first
family member to work there, his grandfather. He was a clerk at
Christie's when he died at 44.
Not long ago, Mr. Davidge described to a friend what the family said had
followed his grandfather's death. Two Christie's representatives paid a
call on his grandmother and explained that she would get a pension of
seven pounds a month, a miserly amount even at the time. As part of the
deal, they suggested she send her young son, Roy, to work at the auction
house.
Roy Davidge rose to company secretary, an administrative post, but he
never earned enough to move his family out of public housing. Still, he
persuaded his son Christopher, who was 20, to join the firm as an
apprentice printer in 1965.
It is a wonder young Davidge took the job. In an interview several years
ago with The Sunday Telegraph of London, he said he grew up disliking
Christie's because of its treatment of his father, who died at 54. "The
chap next door who worked as a butcher's assistant earned more than
my father," he said.
Despite his resentment, or perhaps because of it, Mr. Davidge excelled.
Within a decade, he was running the printing operation. By 1985, he was
managing director in charge of the British operation. By 1993 he took
over everything as chief executive.
Mr. Davidge's business acumen and heavy promotional spending to woo
customers increased sales and finally propelled Christie's over Sotheby's
to No. 1 in sales revenue in 1997, ending 43 years in second place. But
the ascension came at a price as he drew the wrath of the old guard by
unceremoniously replacing deadwood with aggressive younger
employees.
For all his success, Mr. Davidge, with his blow-dried hair, gold jewelry
and custom- made suits with pink linings, never fit into the clubby
atmosphere. He once told The Financial Times that the place was "like
the Conservative Party, full of pomposity, arrogance, filled with people
from a narrow social circle, who were not commercially aware."
"They recognized that the place needed a manager," he said, "but wanted
to limit my involvement to below stairs."
In 1992, faced with a possible hostile takeover and a declining market,
Christie's board had turned directly to the business world for a new
chairman — Sir Anthony, who was the chairman of Guinness, the large
beverage company. Unlike Mr. Davidge, his social pedigree was
impeccable, from his education at Eton and Cambridge to knighthood.
Sir Anthony, 70, had taken the helm of Guinness in 1987 when it was
recovering from a stock-trading scandal. By the time he left, he was
credited with turning it into one of the world's most profitable beverage
companies.
The secret to his success, he told The Financial Times in 1991, was
forming marketing and distribution alliances with competitors. By the time
he left Guinness it had joint venture agreements with 30 competitors,
which effectively divided the European market for premium drinks among
the companies. While the tactics did not raise eyebrows in Europe, they
would likely have come under scrutiny in the stringent antitrust
atmosphere in the United States.
Accord Dated to 1993
The conspiracy between the two houses started at least as early as April
1993, according to admissions by Ms. Brooks and Sotheby's in Federal
District Court in Manhattan last week. That would have been within
months of Sir Anthony's arrival at Christie's in January 1993.
In statements to federal antitrust prosecutors, Mr. Davidge said Sir
Anthony told him he had met with Mr. Taubman, the Sotheby's chairman,
and that the two men had agreed to make their businesses more
profitable by coordinating various matters.
Mr. Davidge said that Sir Anthony then instructed him to meet with Ms.
Brooks, who was running Sotheby's American operation, to work out
the details, said several people involved in the investigation.
One document turned over by Mr. Davidge was a memorandum to him
from Sir Anthony that could be interpreted as authorizing the scheme
after a meeting with Mr. Taubman, people who have seen it said.
In another memorandum after Mr. Davidge expressed anxiety about laws
in the United States, Sir Anthony wrote that Mr. Davidge should not
worry about regulators, these people said.
Most of the voluminous Davidge records, however, are his handwritten
reports to Sir Anthony about meetings with Ms. Brooks, covering the
subjects they discussed and outlining the agreements they reached.
It is unclear how much evidence there is that Mr. Taubman or Sir
Anthony initiated the conspiracy or intended to break any laws. Ms.
Brooks has told prosecutors that she was acting on the instructions of
Mr. Taubman and that she reported to him frequently, said participants in
the interview.
Early in her career at Sotheby's, Ms. Brooks and Mr. Taubman became
close, developing something of a father-daughter relationship, Sotheby's
employees have said.
But there were times, auction house officials said, when it was unclear
just who was boss. The Yale-educated Ms. Brooks, strikingly tall and
exuberant, was known for her strong personality, volatile temper and big
ego. Over the years she wanted to be perceived as the face and voice of
the auction house.
Mr. Taubman admired her energy, her ideas and, some employees say,
her upper- class background. She was reared on the North Shore of
Long Island. Mr. Taubman, who grew up poor in Detroit, was a self-
made millionaire many times over from developing shopping centers. He
was not part of the jet set collectors who make up Sotheby's top client
list. Yet he yearned for the glamorous life.
In 1983 he acquired the majority holding in Sotheby's and moved quickly
up the social ladder with his wife, Judy, a former Miss Israel. The status
he attained in controlling Sotheby's brought him invitations to hunts at
English country houses and society parties in the United States.
Mr. Taubman occasionally rubbed elbows with Sir Anthony at social
events in Britain or the United States, but people close to Mr. Taubman
contended that the two men never discussed business or collusion at
these events.
Some of those involved in the investigation say other people at both
auction houses knew of the conspiracy. But in the plea bargain with
Sotheby's, the Justice Department said it would not charge anyone at the
company except Ms. Brooks and possibly Mr. Taubman, as long as the
employees cooperated.
In any case, according to Ms. Brooks's own guilty plea and accounts
from lawyers and other people involved in the investigation, the
conspiracy was carried out by Mr. Davidge and Ms. Brooks, who met
secretly many times over six years and designed schemes that cheated
customers by limiting competition.
Collusion on Sellers' Fees One early meeting occurred at Ms. Brooks's
rambling apartment off Lexington Avenue on the Upper East Side of
Manhattan. Another time, Mr. Davidge took the Concorde from London
to New York, met Ms. Brooks in the back of a limousine near Kennedy
Airport and returned by Concorde the same day. Other conversations
took place in out-of-the-way restaurants in London and New York
where neither of them was likely to be recognized.
In recent months, prosecutors struggled to establish collusion between
the two houses when they set identical fees charged to buyers in 1993.
But the 1993 buyers' action did not figure in last week's guilty pleas by
Sotheby's and Ms. Brooks. In any case, Ms. Brooks and Sotheby's
admitted that there had been collusion between the two houses in early
1995 on sellers' fees, not long after Ms. Brooks was promoted from
president of Sotheby's America to chief executive of the entire company.
That March, Christie's announced that it was increasing the fee charged
to sellers at its auctions. Previously, sellers had paid a flat fee of 10
percent of the value of the item sold. The change replaced the flat fee
with a sliding scale that ranged from 2 percent to 20 percent, depending
on the value of the item. Six weeks later. Sotheby's followed suit,
announcing an identical fee structure.
What was not disclosed was that Mr. Davidge and Ms. Brooks had
agreed on the structure in advance and even decided that Christie's
would announce it first, according to court records. They also agreed to
exchange lists of preferred customers at each house who were not
charged a seller's fee or were charged lower fees because their
collections were so eagerly sought by the houses. Those customers could
be exempt from the new structure, but new exemptions were prohibited,
according to the agreement.
Fixing the fees and exchanging the lists limited the bargaining ability of
thousands of people who wanted to sell works at either of the houses,
which together dominate the industry with more than 90 percent of the
business worldwide. It was also a violation of the Sherman Antitrust Act,
which prohibits combinations in restraint of trade. The agreement to fix
sellers' fees was to become a major element of future civil suits against
the auction houses.
Cheating Monitor Reported
The Davidge files recount more than the fixing of commission fees.
Lawyers who have seen the files say they describe a meeting at which
Mr. Davidge and Ms. Brooks agreed to restrict the ability of sellers to
negotiate the terms of loans they received before the sale of works.
Auction houses commonly lend a seller money before a sale, often to
cover such things as estate taxes. The interest rate on the loan is
negotiable. But Ms. Brooks and Mr. Davidge set a minimum interest
rate, though it is unclear whether they adhered to the agreement.
Another matter the two executives discussed was monitoring each other
for possible cheating, said people and documents filed by the government
in the Brooks plea. The two exchanged their preferred client lists as a
way of policing each other and actually held meetings at which they
discussed the issue of cheating, people involved in the investigation said.
They also agreed to stop making charitable contributions to woo sellers
like family foundations, museums and libraries, the Justice Department
said.
Sotheby's and Christie's were so dominant that anyone who wanted a
job in the upper reaches of the auction world had to work at one of those
two houses. To keep employees in check and salaries down, Mr.
Davidge and Ms. Brooks discussed informing each other when senior
people from the opposing house applied for a job with them, according
to one of the Davidge memorandums. It is uncertain whether the anti-
poaching scheme was implemented.
In 1997, two years after the new commission structure for sellers was
implemented, a chill cut through the auction and art industry in New
York. For reasons that have never been made public, prosecutors in the
New York office of the Justice Department's antitrust division issued
subpoenas for records from 17 galleries and the two big auction houses.
Truckloads of records, from phone logs and date books to internal
correspondence and sales catalogs, were hauled away from Christie's
and Sotheby's.
Lawyers for the galleries formed an ad hoc committee and met to discuss
the investigation, but lawyers for the two auction houses declined to
attend, saying they had done nothing wrong, said gallery owners who
were involved in the committee.
Weeks passed and the federal investigation seemed to be going nowhere.
The threat seemed to fade as the auction business boomed alongside the
soaring stock market.
In 1998, François Pinault, a wealthy Frenchman whose holdings included
Printemps, France's biggest department store, and Château Latour
winery, bought Christie's for $1.2 billion.
The new owner and Mr. Davidge did not hit it off. People who worked
at Christie's said Mr. Pinault found Mr. Davidge's management style to
be abrasive and the personal styles of the two men clashed. Further, Mr.
Pinault had a history of buying a company, studying it for a year and then
replacing the top management.
By late last year, Mr. Davidge was on his way out. What remained was
deciding a severance package suitable to cushion the fall. But Christie's
negotiators were reluctant to meet his demands.
Perhaps it was only a negotiating tactic by the auction house, but Mr.
Davidge felt the company was setting him up to take the blame if the
dormant antitrust investigation resurfaced, friends said. He became
nervous enough to seek advice from a defense lawyer from Chicago,
William Joseph Linklater, who had been involved in several high- profile
antitrust cases in recent years.
Mr. Davidge then produced his correspondence with Sir Anthony, and
Mr. Linklater turned it over to Christie's criminal lawyers at Skadden,
Arps, Slate, Meagher & Flom in New York. Because of the subpoena
issued in 1997, the lawyers were obligated to turn over the records to
prosecutors.
A provision of antitrust law allows one of the participants in a scheme to
receive amnesty in exchange for coming forward and disclosing
everything it knows about the illegal activities. By mid-January, Christie's
lawyers had approached the prosecutors and received amnesty for the
company and its executives, including Mr. Davidge, who officially left the
firm on Dec. 24.
Within days, word had reached Ms. Brooks that the government
investigation had resumed with a passion. Lawyers involved in the inquiry
said Ms. Brooks received permission from Sotheby's to approach the
prosecutors and ask for amnesty for herself. She was told that she was
too late. Amnesty is limited to one party and Christie's had beaten her to
the door.
The first public word came last Jan. 28, when Christie's disclosed in a
statement that it "recently became aware of information relevant to the
antitrust investigation" and turned it over to the government.
Two days later, Herbert Black, a Montreal collector, filed the first civil
lawsuit against the two auction houses, accusing them of fixing prices.
Within weeks, hundreds of separate suits would be filed and later
consolidated into one class-action suit in Federal District Court in
Manhattan.
The fallout continued. On Feb. 21, Ms. Brooks and Mr. Taubman
resigned from Sotheby's. Members of Sotheby's board said Mr.
Taubman resisted for three days, arguing passionately that he had done
nothing wrong.
Chill Between Houses
As events spun out, the atmosphere at Sotheby's and Christie's grew
chilly. Experts who thought they were competing tooth-and-nail for the
best property felt angry and personally betrayed. Many were vocal in
their disgust, saying that the company heads had not just cheated
customers but their staffs as well.
The skirmishing intensified on two fronts. Both auction houses were
desperate to limit the fallout and officials telephoned and visited major
customers in an effort to calm them. At the same time, the houses were
fighting a rising number of civil suits in Federal District Court in
Manhattan, where lawyers for customers were being led by the firm of
Boies, Schiller & Flexner.
Ms. Brooks negotiated with prosecutors through the summer, trying to
structure a plea bargain in which she could avoid a prison sentence. In
interviews with prosecutors, she and one of her lawyers, Stephen E.
Kaufman, said she could provide evidence about Mr. Taubman's role in
the antitrust scheme, people who sat in on the sessions said. The
government refused to guarantee no prison time and she faces up to three
years and a potentially huge fine.
In pleading guilty on Thursday, Ms. Brooks agreed to let Judge Richard
N. Berman determine whether her cooperation warranted probation or
prison. She is scheduled to be sentenced on Jan. 5.
Prosecutors said in court papers on Thursday that Mr. Taubman was
now the sole target of the ongoing inquiry at Sotheby's. Ms. Brooks's
guilty plea and agreement to cooperate with the government means Mr.
Taubman may face incriminating testimony from his one-time protégé.
In a statement after the Brooks plea, Mr. Taubman vowed to fight in
court if necessary and said, "Whatever Ms. Brooks chose to do, she did
completely on her own without my knowledge or approval."
He has already agreed to pay $156 million of the $256 million Sotheby's
will contribute to settle the civil suits, plus another $30 million to settle a
stockholders' suit. Christie's will pay an equal $256 million.
Mr. Davidge has been interviewed several times in New York by
prosecutors, explaining the significance of his memorandums and filling in
details about his meetings with Ms. Brooks, said lawyers involved in the
case. As long as they continue to cooperate, he and Christie's are safe
from prosecution under the amnesty agreement and the auction house
indemnified its former chief executive against any civil damages. Sir
Anthony, who left Christie's in 1996, is not covered by the amnesty
because he has refused to cooperate with the investigation, top Christie's
officials said.
In the end, Mr. Davidge negotiated a severance package worth about
$7.5 million, though $3 million is being withheld until he completes his
cooperation in the case, according to court documents
Of late, Mr. Davidge has been seen frequently at London's better
restaurants and he recently sent out invitations to his wedding in
December, when he will marry an Indian woman who used to work at
Christie's. Some invitations included first-class tickets to India for the
ceremony, said people who received them. |
