“As evidenced by the proof that was handed over to the [authorities], clearly the promise of immunity enticed somebody who was intimately involved in the sordid plot to become a stoolie. [People in this business] have been enjoying a clandestine fling with improprieties for so long, they probably figured they had a license.”
No, the foregoing isn’t about Sotheby’s-Christie’s, although it perfectly describes the situation. It’s a slightly modified quote from the indispensable Peter Vecsey’s N.B.A. column in last Friday’s New York Post , and it refers to the Draconian punishment visited by basketball commissioner David Stern on the Minnesota Timberwolves for colluding with forward Joe Smith to circumvent (cheat on) the salary cap-which is the key economic component of the league’s monopoly prosperity. It is also a good example of how private-sector self-regulation can work (or, some are saying, can be carried to extremes).
“Private-sector self-regulation” of a morally different sort may have been the operative fact in how Sotheby’s-Christie’s has played out, according to a theory of the affair I heard advanced over a very good dinner the other night by someone in a position to hear things.
The best kind of self-regulation is the kind that puts potentially troublesome competition out of business. According to the theory of the case floated the other evening, this is exactly what Christie’s owner François Pinault had in mind. Here’s my guess on how it might have worked, ideally (and put an accent aigu on that “ideally.”)
Mr. Pinault bought Christie’s in 1998, which was then the target of a federal investigation launched the previous year. At that time or shortly afterward, he became aware that Christie’s chief executive, Christopher Davidge, had made extensive notes of his conversations with opposite Sotheby’s number “Dede” Brooks regarding cooperation between the two auction houses: notes that might support the thrust of a federal investigation then underway into allegations that the firms had illegally colluded to fix commissions.
Given what’s known about the characters of the people involved, my novelist’s instinct suggests the following scenario: 1) Mr. Pinault, after taking over, decides to can Mr. Davidge, probably because the latter is so low-rent that he reminds Mr. Pinault of himself; 2) cornered, Mr. Davidge reveals the existence of the notes to Mr. Pinault and threatens to go public with them, thinking them to be a club he can use to beat a really juicy severance deal out of Christie’s; 3) Mr. Pinault, ever devious, sees what Mr. Davidge’s “club” could do if applied upside Sotheby’s head, and forces Mr. Davidge to hand them (they would be corporate property) to Christie’s lawyers and thence to Uncle Sam. Topsy-turvy, in other words.
In the federal lexicon, collusion automatically signifies that some innocent lamb has suffered financial loss as a result. I regard this supposition as both conjectural and specious; we are not talking about collusive sealed bidding on a subway-building or parking-meter contract, or about two competitors splitting the riches inherent in a federally ordained market duopoly, as was the case a few years back when AMR’s Robert Crandall made an ill-advised call to Southwest Airlines’ Herb Kelleher about doing a deal on fares in the DFW-Houston market. The latter, to his credit, hung up.
What Mr. Pinault saw in Mr. Davidge’s notes, my source speculates, was nothing less than an opportunity to destroy Sotheby’s. Advised by counsel that the Davidge trove could be traded for conditional immunity, which would limit Christie’s exposure to money damages in a civil suit, Mr. Pinault cut a deal earlier this year. At the time, Christie’s put out a press release emphasizing that “this concerns possible conduct prior to the tenure of our new management.” Just to let everyone know that François Pinault, who is definitely the sort of fellow who encourages people to take their wallets with them when they go to shower (see The Economist , Feb. 19-25, 2000, and March 11, 2000), is clean as a lily. Sure.
This left only Sotheby’s exposed to criminal prosecution. The best way to put a competitor down for the count is to tar it with the brush of criminality and-better still-to cause its top executives to go to jail or send them running for jurisdictions where they don’t take away your house.
The money, while potentially substantial, wouldn’t have bothered Mr. Pinault. A veteran of the U.S. business scene (having been dodgily involved in the “rescue” of Executive Life Insurance Company, a former cornerstone of the Michael Milken pyramid), Mr. Pinault is quite aware that class-action suits are cooked up by lawyers-and if you pay off the lawyers, the suits will go away. And indeed, that is what has happened.
Just in case any of you readers are worried about what might be called the “moral quality” of the civil litigation brought against the auction houses, here’s an example. I quote (in its entirety) an advertisement I found on the Net that was posted by the fine old firm of Lieff Cabraser Heimann & Bernstein.
“Christie’s and Sotheby’s are the two most globally recognized auctioneers of fine art, antiques, rare books, and other valuables. In 1998, they sold close to four billion dollars worth of goods-about 20 times the sales of their nearest competitor. On those sales, they both charged buyer’s commissions of 10-15 percent, and seller’s commissions that ranged from 2 percent … to 20 percent, resulting in commission income of several hundred million dollars each.
“For most of the 1990s, the commission structures of these two giants were identical. In February, 2000, we filed a class action lawsuit which alleges that the identical rate structures were not a coincidence, but were rather the result of a conspiracy between the two companies to raise and maintain high commissions paid by both buyers and sellers. The action is pending in the San Francisco Superior Court.
“Because many of the direct buyers who pay commissions to the auction houses are dealers who promptly resell the art, passing on the costs to their customers, the true victims of the defendant’s alleged antitrust violations are ‘indirect’ purchasers. California law allows indirect purchasers to recover three times their actual damages.”
What this business seems really to be about is hate. Mr. Pinault hates Sotheby’s, especially because at the time he bought Christie’s, there were rumors that Sotheby’s might be sold to LVMH’s Bernard Arnault, whom Mr. Pinault really hates! From everything one hears, people at Sotheby’s pretty much hated “Dede” Brooks for being too smart, too arrogant, too ny-kulturny : all the things the sort of people who work in the arts hate businesspeople for being.
And, of course, everyone hates the auction houses. Not without some reason, let it be said. In order to support stock prices and a lifestyle gloried in by wispy young men, commissions have been ridiculously high for the average seller. But my point is, the average seller knew this . And there were alternatives. This is like suing Merrill Lynch because the stock you told your broker to buy went down, and why didn’t someone send you to Schwab?
This is the sort of greed-driven excess the market is supposed to solve. If Macy’s overprices, here comes Wal-Mart! Of course, in the new dispensation, the courts are encouraged to take the place of the market. In the new dispensation, let it also be noted, the collective market power of a nation of 270 million people has managed to reduce its political destiny to Dubya and Grinnin’ Al, which has got to be quite possibly the single worst mass-market “choice” in the whole long history of Western consumerism.
I do find one congenial irony in all this. It may be that Mr. Pinault’s despised rival Arnault will end up with Sotheby’s after all. At a good price, too, thanks to the damage Mr. Pinault set in train du côté de chez Taubman. Of course, let’s not rule out the possibility that if this happens, Mr. Pinault and Mr. Arnault-two good pragmatic Frenchmen-won’t sit down and merge their respective auction-house holdings.
And then there’ll be one. And you know what? It’ll serve Uncle Sam right!