Billionaires Should Know Art Dealers Can't Be Trusted, New York Court Says

A prospective buyer browses gallery space featuring Andy Warhol's Six Self Portraits and Jeff Koons' Popeye. Photographer: Julie Jacobson/AP Photo

Art enthusiasts say high-end contemporary art is a lasting record of our culture. Maybe it is, but the thing about “lasting” is that we’ll all be dead before we know who’s right. One thing is certain: From a commercial perspective, contemporary artworks have become trophies for the 1 percent. And those ultrawealthy buyers know what they’re getting.

Or so says the New York Supreme Court. Billionaire investor Ronald Perelman sued his longtime friend and art mentor, Larry Gagosian, owner of the eponymous chain of art galleries, over a Jeff Koons statue, Popeye, for which Perelman paid $4 million in 2010.  Perelman alleged that Gagosian mislead him on the “market price” of it and other works and their potential for resale. The appellate division of the New York State Supreme Court (PDF) isn’t having it. On Thursday it dismissed the case, arguing that Perelman should have known better. Associate Justice David Friedman wrote:

As a matter of law, these sophisticated plaintiffs cannot demonstrate reasonable reliance because they conducted no due diligence; for example, they did not ask defendants, “Show us your market data.”

The art market is notoriously opaque, especially when a work is first sold. Gallerists try to keep prices secret and tend to forbid reselling work without their blessing, threatening to freeze out and blacklist collectors who flout the rule. Some gallery owners have been known to bid on their own artists’ work at auction to increase prices.

All these practices are designed to prevent prices from becoming public. Defenders of the industry claim this is necessary to ensure career stability for contemporary artists, many of whom are still living and developing their body of work. Art can be faddish, they say, making prices fragile and subject to the whims of fashion. There’s something to that argument, though it would be more credible if the people who make it, the art dealers who own the galleries, didn’t have a financial interest.

It’s hard to imagine such a practice in more mainstream industries. But art collectors tend to be extremely wealthy and educated, and the court’s decision makes clear that these are folks who can and should defend themselves in the marketplace. It also makes plain the extra layer of risk involved in investing in art. Prices don’t simply go up or down, they don’t have any meaning in the first place, and dealers face mixed incentives.

Few will have much sympathy for Perelman, the 54th-richest person in the world, according to the Bloomberg Billionaires Index, or anyone who has millions to spend on one of Koons’s series of Popeye statues. (Lesser billionaire Steve Wynn paid $28 million for one in May.) The real losers in the decision may be the artists who face an increasingly risky and illiquid market for their wares.

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