Fake-Rothko Trial Makes Stock Market Look Perfectly Sensible

  • Art market on display as opaque in $8.3 million ripoff
  • Eyed by experts, sold by Knoedler, made by Chinese immigrant

Today’s anticipated testimony by art dealer Ann Freedman, who sold dozens of fake paintings as president of the Knoedler & Co. gallery in New York, fell through when a Manhattan federal court judge unexpectedly dismissed the jury for the day shortly after the lunch break.

Freedman, who spent the past two weeks as a defendant in a $25 million fraud trial, was expected to testify for the plaintiffs, following a mid-trial settlement of the claim against her by Sotheby’s Chairman Domenico De Sole.

De Sole and his wife, Eleanore, sued Freedman for selling them an $8.3 million painting by Mark Rothko in 2004 that turned out to be a forgery painted by a Chinese immigrant in Queens. The De Soles also sued Knoedler, a once-prominent, now shuttered Manhattan gallery, and parent company 8-31 Holdings Inc. The De Soles settled with Freedman on Sunday, but the dealer’s testimony was anticipated as part of their ongoing dispute with Knoedler.

The fake Rothko exhibited in court.

Source: cgr-law

The trial is airing usually secretive details of high-end art transactions and making public the dicey nature of the authentication process. Witness testimony and court exhibits underscore how the market’s opacity can make it vulnerable to manipulation.

“At the time it didn’t cross my mind they were selling fake art,” De Sole told the jury last month. “I went to the best gallery in America.”

Key Role

The trial, which began on Jan. 25, is the first public hearing from one of the biggest art frauds in recent history. From about 1994 to 2008, Knoedler allegedly sold dozens of forged paintings by such postwar artists as Rothko, Jackson Pollock and Willem de Kooning to collectors including hedge fund manager Pierre Lagrange; Jack Levy, a former global co-chairman of mergers and acquisitions at Goldman Sachs Group Inc.; and John Howard, chief executive officer of private equity fund Irving Place Capital. Having made $32.8 million in profit from the sales, according to testimony by a plaintiffs’ accountant, the gallery shuttered as claims from defrauded clients piled up.

Founded in 1846, Knoedler Gallery played a key role in selling masterpieces that established American museum collections, according to the Getty Research Institute. Clients included Andrew Mellon, Henry Clay Frick and Cornelius Vanderbilt. In 1971, the gallery was sold to collector Armand Hammer whose grandson, Michael Hammer, was its chairman when it closed in 2011.

Hammer, who heads 8-31, was scheduled to testify Tuesday afternoon. Freedman was set to take the stand after him, according to her attorney Luke Nikas. Before the proceedings were to resume after lunch, U.S. District Judge Paul Gardephe told jurors they were dismissed for the day because of unexpected circumstances, without elaborating.  

Charles Schmerler, an attorney representing the gallery, said the Rothko was shown to several leading experts before the sale, indicating no intention to defraud clients.

“If someone was trying to get away with a scam, does that make any sense?” Schmerler asked in opening remarks.

What Happened?

While witnesses including Rothko’s son Christopher, top art historians, conservators and a forensic examiner shed light on the story, Freedman may be best positioned to answer the key question: How could this happen?

The De Soles’ lawsuit, filed in 2012, was one of 10 claims against Freedman, seeking total damages of more than $100 million, according to Nikas. It’s among six that have been settled, he said in an interview. Nikas and Greg Clarick, an attorney for the De Soles, confirmed the accord but declined to comment on terms, which weren’t made public.

“Ann is pleased to be able to reach this settlement,” Nikas said in a statement. “She stands behind the work that she sells. From the very beginning of these cases, Ann never wanted to keep a penny of the commissions she made on these works.”

Freedman, 66, earned about $10.4 million from the sales of forged works as part of her profit-sharing agreement, according to the testimony of accountant Roger Siefert, who was hired by the De Soles to analyze Knoedler records.

Knoedler and Freedman “were uniquely in possession of information that raised myriad red flags” about the Rothko’s authenticity, the De Soles said in their 2012 complaint. The $25 million they were seeking in damages represents the 1956 painting’s theoretical value today had it been authentic, their attorneys said during the trial.

Ruth Blankschen, chief financial officer for 8-31, was questioned during the morning session by Aaron Crowell, an attorney for the De Soles.

She testified that the holding company had no income and drew funds to cover expenses from subsidiaries including Knoedler. Hammer’s $400,000 annual salary and profit-sharing compensation was paid by 8-31, she said. Between 2001 and 2012, the holding company paid for Hammer’s $1.3 million American Express card expenses and bought him luxury cars, including a $482,000 Rolls-Royce and a roughly $500,000 Mercedes-Benz, Blankschen told the jury.

‘Secret Santa’

Freedman told the De Soles that the fiery, red-and-black Rothko was sold by a son of a deceased Swiss collector, a client of the gallery, according to the complaint. A former Knoedler employee testified that Freedman referred to the collector as "Mr. X” and “Secret Santa.”

In fact, the suit alleged, the painting was supplied by Glafira Rosales, a little-known Long Island art dealer. It was one of about 40 previously unknown works purportedly by postwar American masters that Rosales sold to Knoedler over more than a decade. The works were done by Pei-Shen Qian in Queens, who told Bloomberg in a December 2013 interview that he was painting for hire with no knowledge of any fraud.

Three months earlier, Rosales pleaded guilty to U.S. criminal charges in connection with an international scheme involving tax fraud and money laundering. Qian wasn’t charged.

“Ann believed it was one of the most important discoveries in art history,” Nikas said in his opening statement. “It was like finding dinosaur bones. The art world was tricked.”

‘No Soul’

Witnesses said Freedman had warning signs years before the postwar art market’s acceleration turned Rosales’s works into the gallery’s main income stream.

“Ocean Park” works by Richard Diebenkorn were among the first consignments. The artist’s daughter Gretchen Diebenkorn Grant testified that when she saw them at Knoedler she expressed her concerns to Freedman. The works were sold around 1994, she said.

“I felt they had no soul,” she testified. “We had doubts about their authenticity.”

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