The art market has witnessed several high-profile fraud and theft cases involving art advisers and dealers in recent years. Last year, art dealer Inigo Philbrick was sentenced to prison after pleading guilty to an $86 million fraud. A US court found that Philbrick had engaged in deceptive practices, including selling the same artwork multiple times, misrepresenting the ownership and value of artworks, forging documents, fraudulently obtaining financing and misusing clients’ funds. This is a theme that plays out in all corners of the art market across the globe and the fallout can affect innocent third parties, whether they are purchasers or sellers, lenders, advisers or trustees. The best protection is by exercising due diligence and seeking legal safeguards wherever possible.
Philbrick advised individuals and companies in acquiring and selling works of art, in return for which he received a commission on each transaction he facilitated. Philbrick’s role as an “adviser” has been heavily scrutinised by the press and courts alike, as his arrangements often constituted a “sham” to conceal his fraudulent activities: he used his position as an adviser to gain access to prestigious art collections and to influence art transactions for his benefit. The accusations against him included breaching his fiduciary duties to those engaging him as their agent and acting dishonestly vis-à-vis his principals.
Lessons for trustees
Cases like this serve as a reminder of the importance of safeguarding assets and choosing advisers wisely. Advisers and representatives must be independent, transparent and accountable and act in their principal’s best interests. These are familiar concepts to trustees who are responsible for protecting and enhancing the trust fund for the benefit of trust beneficiaries. Managing a trust’s art collection is no different; trustees have a fiduciary duty to act in the best interests of the trust and its beneficiaries. This duty requires trustees to exercise prudence, diligence and care.
When settlors contribute artworks or the shares in companies holding art collections into trust, the trustees or company directors (as the case may be) assume certain obligations and responsibilities.
In the case of direct holdings in particular, the trustees should ensure that the transfer of ownership to the trustees is well documented and check there are no issues with previous ownership. In addition, trustees should request appropriate documentation and investigate the artworks before they are transferred into the trustees’ names or before the trustees expand the existing pool of assets by investing in new works of art. Trustees are responsible for assessing whether an artwork is worthy of investment and will enhance the value of the trust fund. This involves checking historical sales of the artist’s works with auction houses and enquiring about sale prices with galleries before committing to a purchase. Whether an artwork will hold its value and be easily marketable in future will often depend on the quality of information and documentation that accompanies it, including, if applicable, Certificates of Authenticity.
When selling an artwork, one of the primary fiduciary duties is to take reasonable steps to obtain the highest possible price. Trustees should conduct thorough research to determine the artwork’s value and identify different sales avenues, such as auction and private treaty sales. In maximising sale prices, trustees should balance any additional costs against the sale price to determine the most financially beneficial option. If there are any concerns over an artwork which might affect its value and/or the ability to convey good title to the purchaser, including in relation to its history, provenance, condition or authenticity, the trustees should ensure that any issues have been investigated and resolved before the work is put on the market. To protect themselves as well as trust property, trustees must ensure they comply with all applicable laws and consider the tax implications on any sale or purchase.
Use of underlying companies
Similar issues will arise where art objects are held indirectly by the trustees, via underlying companies. Although primary responsibility in this case lies with the company directors, the trustees’ fiduciary responsibility is typically not extinguished completely, even in the presence of anti-Bartlett clauses in the trust instrument, circumscribing the trustees’ duty to interfere in the affairs of such underlying companies.
Specialist advice should be obtained throughout to ensure trustees and company directors are not caught out by the risks associated with a largely unregulated market.