Sotheby S Price Fixing

Sotheby’s Price Fixing

About Sotheby’sFounded in 1744 in London, England, Sotheby’s is one of the oldest and largest auction houses in the world. Although Sotheby’s beginning was not as exalted as one would imagine for an auction house that has long catered to the extremely rich, it was still looked upon as a fashionable enterprise in eighteenth-century Britain. After the death of Sotheby’s founder, Samuel Baker, in 1778, the company remained under the direction of the Sotheby family. For nearly a century the auction house focused on the sale of fine books but has since expanded into the sale of art and related items. By 1917, Sotheby’s had grown sufficiently to require a new location. The firm moved the auction house from Wellington Street to New Bond Street in London. After the move, the firm embarked on a dramatic development process that enhanced its global image with several impressive art auctions. Sotheby’s became associated with elegant auctions that brought in increasingly large amounts of revenue. One of the firm’s most distinguished sales occurred in 1961, when Rembrandt’s Aristotle Contemplating the Bust of Homer was sold for $2.3 million to The Metropolitan Museum of Art. In 1964, Sotheby’s began its global expansion by acquiring the United States’ largest auction house, Parke-Bernet. Since this initial acquisition, Sotheby’s has continued to expand and now has sales rooms and offices in North America; the United Kingdom and Ireland; Europe and the Middle East; Asia, Africa, and the Pacific; and Latin America.

With the rapid growth of the firm, Sotheby’s went public in 1977. The firm’s shares were well received by investors, and their value doubled within two years of the public offering. Sotheby’s experienced market troubles in the early 1980s and was subsequently bought by A. Alfred Taubman in 1983. Under Taubman’s leadership, Sotheby’s reverted to private ownership. Sotheby’s thrived in the late 1980s; one example of the firm’s success was the sale of the Duchess of Windsor’s jewels in 1987, which made headlines as one of the largest international auctions ever. The sale brought in over $50 million. In 1988, Taubman decided to take the company public again.

Since the auction house’s beginning over 250 years ago, Sotheby’s has experienced numerous market swings that have caused the company to change the way it does business. In 2000, Sotheby’s expanded its operations by offering online auctions via Sothebys.com. The online auctions began on a successful note, aided by the sale of a print of the Declaration of Independence as well as panels from the Boston Garden’s parquet. Soon, however, the online auctions fizzled and the Web site became just an information tool for live auctions.

The Business Environment of Auction HousesThe world of auction houses includes two major players—Sotheby’s and Christie’s—and numerous second tier players such as Phillips. Sotheby’s and Christie’s control 80 to 90% of the $5 billion international art auction market. This 80 to 90% figure has remained remarkably consistent to this day.

Christie’s remains Sotheby’s prime competitor. Established by James Christie in 1766 in London, the firm is still headquartered there, although it has sales rooms and offices around the world, competing in essentially the same markets as Sotheby’s. Christie’s conducted some of the greatest auctions of the eighteenth and nineteenth centuries, including the sale of Sir Robert Walpole’s collection of paintings, which would form the base of the Hermitage Museum Collection in St. Petersburg. As noted on Christie’s Web site, “Christie’s auctions became major attractions on London’s social agenda.” Today, Christie’s focuses on auctions of art, books and manuscripts, collectibles, jewelry, motor cars, and vintage wines, among other property.

Auctions have long been viewed as fashionable events; maintaining this image is very costly. The major auction houses—Sotheby’s and Christie’s—spare no expense to market to extremely wealthy people. Both auction houses have renovated their locations to include grand multi-story lobbies and costly decorations. The appearances of the auction houses may give the impression that the firms are doing exceptionally well, but this wasn’t always the truth. Both Christie’s and Sotheby’s cut staff members while attempting to maintain their affluent image.

Auction houses typically earn their income from clients who pay a certain fee or percentage to the auction house for the sale of their items. However, when the items are well known, the auction house may waive the fee in order to gain publicity from the sale. Sellers also have the option of having the auction houses bid against each other to get the lowest fee or no fee at all. With the reduced fees collected, the auction houses have to find ways to reduce behind-the-scenes expenses but still show prosperity. According to Holman W. Jenkins, a reporter for TheWall Street Journal, the auction houses’ “costs are front-loaded: Each has to maintain a network of sumptuous offices and showrooms around the world. Each has to employ a staff replete with experts in art and finery who exude impeccable standards of personal snootiness.” Clearly, catering to the clientele of auction houses is a costly venture.

Key Executives at Sotheby’s and Christie’sIn the early and mid-1990s, key executives at Sotheby’s and Christie’s engaged in a series of meetings that would eventually result in the firms being embroiled in a price-fixing scandal.

Sotheby’s Executive A. Alfred TaubmanA. Alfred Taubman purchased Sotheby’s in 1983 and became chairman of the board of directors of the company; some people believe he purchased the company as a wedding present for his wife, a former Miss Israel. Before acquiring Sotheby’s, Taubman had been a successful shopping-mall developer. He founded Taubman Centers in 1950 in Detroit, Michigan, and played a significant role in reshaping retail in the United States by building regional shopping malls. According to Forbes magazine, Taubman had accumulated a net worth of nearly $770 million.

In the years after Taubman acquired Sotheby’s, the auction business suffered due to the economic downturn of the late 1980s. To generate needed cash and interest, Taubman took the company public in 1988, but he remained the principal stockholder. Many people credit the company’s turnaround to Taubman’s flair and business skills, which helped improve the popularity of the auction business for people who had not previously participated in auctions.

Sotheby’s Executive Diana “DeDe” BrooksDiana Brooks joined Sotheby’s in 1979 after beginning her career in the banking industry as a lending officer at Citibank. Brooks caught the eye of Taubman soon after he bought the company, largely due to her strong business skills and aggressive style. In 1994, Taubman appointed Brooks president and CEO of Sotheby’s. Brooks is credited with helping to improve the company’s bottom line as well as relaxing the British company’s fairly uptight culture. However, her aggressive style as a woman running a major company created many critics, although most of the time Brooks shrugged them off. During her time at the helm, Brooks helped lead many successful auctions that brought in new customers. Her first time running an auction at a podium was Jacqueline Kennedy Onassis’s estate auction, which, at over $34 million, was one of Sotheby’s largest and most notable sales.

Christie’s ExecutivesTwo of Christie’s executives—Sir Anthony Tennant and Christopher Davidge—were key figures in the price-fixing scandal. Tennant was “a British aristocrat who helped raise the fortunes of the Guinness company before becoming Christie’s chairman.” Davidge was the president and CEO of Christie’s. He was a self-made millionaire who struggled to overcome his working class background and to achieve a position in high society.

The Price-Fixing ScandalAfter a long period of eroding commissions due to clients playing the auction houses against each other, top executives from both Sotheby’s and Christie’s decided that they needed to act to regain profits. Taubman and Tennant are said to have met nearly a dozen times from 1993 to 1996, at which the two allegedly agreed to fix commissions that would be charged to clients. In attempting to keep these meetings secret, Taubman scheduled the entries in his date book as meeting with “Sir A.,” “Anthony,” “Tony,” or even “****.”

Although these business leaders had their plan in place, they had to get other executives to carry out the plan. According to Brooks’ testimony, Taubman “directed her to meet with her counterpart at Christie’s to set up a joint schedule of higher prices and coordinate other business practices and that he congratulated her when the scheme was carried out.” Davidge, who was Brooks’s counterpart at Christie’s, asserted that, “Tennant, after at least a dozen meetings with Taubman, instructed him to collude with Brooks.” According to the U.S. Department of Justice, at these meetings, Brooks and Davidge agreed to raise and publicly release non-negotiable sellers’ commission rates, exchange customer information to enforce the schedules, not to make interest-free loans to sellers, and not to raid employees from each other.

Christie’s introduced the non-negotiable commissions in March of 1995, and Sotheby’s followed suit in April of 1995. Because Christie’s and Sotheby’s combined had a vast majority of the auction business, clients didn’t have any choice other than to pay the non-negotiable commission fees. After the new schedules went into effect, the clients had no leverage in playing the companies against one another to get a reduced commission rate. According to some estimates, the non-negotiable commission schedule added nearly $15 million per year in additional revenue for each company, with little additional cost. Becoming suspicious about the price hikes of Sotheby’s and Christie’s, “American authorities launched a somewhat half-hearted antitrust investigation.”

Francois Pinault, a wealthy French executive, purchased Christie’s in 1998. Subsequently, CEO Davidge negotiated a $7 million severance package before resigning. In January of 2000, soon after he resigned and just as the American government’s investigation seemed to be fizzling out, Davidge delivered some 600 pages of documents to the Department of Justice in which he detailed the alleged price-fixing scheme in return for amnesty. Soon afterwards, Christie’s agreed to cooperate with the government, although by then numerous civil lawsuits had been filed; these suits were later combined into one class-action lawsuit. Taubman and Brooks were forced to relinquish their executive positions in February 2002 as the government probe rapidly progressed. After the evidence surfaced, Taubman blamed the price fixing on Brooks, saying that he was unaware of it, while Brooks contended that she was just following orders.

Impact of the Price-Fixing ScandalChristopher Davidge struck a deal to avoid prosecution. Anthony Tennant was indicted in the U.S. but could not be extradited because at the time collusion was a civil, not a criminal, charge in the United Kingdom. Thus, no one from Christie’s went to jail. This was not the case with the Sotheby’s executives. Diana Brooks pled guilty to price fixing and cooperated in the prosecution of Taubman. She did not serve any jail time and “received a relatively light sentence of six months of home detention, 1,000 hours of community service, and a $350,000 fine.” In addition, she agreed to give back nearly $3 million in salary to the company to settle claims against her. Alfred Taubman was sentenced to one year in prison and paid a $7.5 million fine for conspiring with Christie’s to set the commission prices. He also agreed to pay $156 million toward settlement of the civil lawsuits filed against Sotheby’s. On June 13, 2003, Alfred Taubman completed 10 months of a one-year prison term for his role in the price-fixing scandal. He served nine months at a federal prison in Rochester, Minnesota, and one month at a halfway house in Detroit, Michigan.

“Christie’s, like Sotheby’s, was forced to pay hundreds of millions of dollars to settle a class-action suit stemming from the case. In the aftermath of the conspiracy, many employees at both houses lost their jobs, and, at Sotheby’s, numerous employees’ stock-based retirement funds were wiped out as public shares in the company plummeted.” Sotheby’s and Christie’s each paid $256 million toward the $512 million settlement of the class-action civil suit. In addition to the civil penalties, Sotheby’s paid a $45 million fine to the government as a penalty for the price fixing.

Sotheby’s and Taubman—Where Are They at Today?During the last few years, Sotheby’s and Christie’s experienced a slump in art prices that may have been tied to a poor economy. However, Sotheby’s has been able to recover from the price-fixing scandal. Sotheby’s stock price hit a five-year low in 2002 but has since begun to climb back to normal levels. When Taubman and Brooks were forced to relinquish their executive positions in February 2002, William Ruprecht, a 25-year employee of Sotheby’s took over as CEO. Although Sotheby’s was drowning in debt, Ruprecht led the company’s return to financial success. Sotheby’s posted a substantial increase in commission revenues during 2004 and saw its operating margins return to the early-1990s levels of 20%. Bob Goldsborough, an analyst with Ariel Capital Management, observes, “Sotheby’s isn’t just surviving in the wake of the price-fixing scandal; it’s thriving.” Taubman still owns 80% of Sotheby’s class B shares, which gives him voting control of the company.

As a long-time avid supporter and promoter of Detroit, Michigan, Alfred Taubman returned to his philanthropic, civic, and nonprofit activities in that city subsequent to his release from prison. In late July of 2003, “[m]ore than 70 of metro Detroit’s most accomplished leaders gathered . . . at the Detroit Athletic Club to celebrate their friendship with Taubman.” Federal Appeals Judge Damon Keith observed, “The theme was one of friendship. We wanted Al Taubman to know that we support him, we appreciate all of his compassion and gifts that he has given to this city, state, and country.” In early November 2003, after delivering a speech to the annual University of Michigan Real Estate Forum, Taubman told reporters, in reference to the price-fixing scandal, that: “I still don’t know what I did supposedly. I wouldn’t break the law for anything in the world. I never have, and people who know me believe me.”

Questions for Discussion

1.Why is price fixing unethical?

2.Why would the business community and civic and political leaders continue to openly support someone who has been convicted of collusion and price fixing?

3.How can you explain Alfred Taubman’s assertion that “he didn’t break the law and didn’t know what he supposedly did,” when he had, in fact, been convicted, served prison time, and paid substantial fines?

Sources

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