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During the 42 years that I have been an art dealer and collector, the one constant has been the integrity of Sotheby's (NYSE:BID). While there may have been a price fixing scandal many years ago, I was not affected negatively by this. In fact as part of the settlement, I was paid over $300,000. So I personally benefited.

Every time that there has been an issue between me and Sotheby's no matter how seemingly insignificant, the management and experts working at Sotheby's from Bill Ruprecht, the outstanding CEO, the heads of
departments, especially David Redden, the scholars, the catalogers, everyone in accounting, even the people in shipping have acted with honesty and with a view of keeping my relationship with them intact.
They have succeeded splendidly. I love Sotheby's. Doing business at the very highest possible standards is a significant part of their DNA.

The nature of the art business is that rich people expect to be treated with great care. No matter how outrageous the request, a smart team will find a way to give in and satisfy their client. Time and time again this has been the case for me and for other collectors that I have observed where Sotheby's has been involved. One major reason is that only 200 people make up 80% of Sotheby's sales. So keeping all of those people on board with fair dealing and great service is key. It is a daily impossible task that they succeed
at brilliantly. They are the masters at understanding their clients and building long term relationships based on always doing the right thing. From my view and experience their whole team should be commended and emulated. Their 200 top clients are a very valuable franchise because of this. I have spent over $90,000,000 with them in the last 4 decades and am proud to be part of that group.

It is my opinion that no other auction house in the world does this as well as Sotheby's. The skill, scholarship and integrity of the Sotheby's team is deeply impressive to me and has been for over 40 years in my business experience. One reason that Sotheby's are considerably better than Christies is that Sotheby's can liberally and cheerfully extend credit and give fair shipping rates. My experience with Christies is that this has not been the case for over 20 years. They have severely disappointed me again and again with their business practices. Recently an attempt was made to bid me up at an auction by a woman from Christies. She lied to me and told me someone else was bidding when there was not. When the lot did not sell because it did not reach the reserve, I was very unhappy. Nothing even close to this has ever happened at Sotheby's.

It is the integrity of Sotheby's over the long term that will cause it to hold a dominant position in the art dealing world. They recognize how important this is and do everything they can to add even more luster to their reputation with each passing day. I cannot imagine how they could do a better job.

Two increasingly worrisome events of the last decade pose great risk to Sotheby's in the short term. While I am sure that their team will find a solution that will preserve their existence, they are going to take a serious hit as word gets out to the general art buying public, US Attorneys and their equivalent counterparts in China.

The first danger is the overwhelming fundamental reason behind the high prices that are being paid for Chinese Art. The law in China now is that art can be traded for land owned by the Chinese government.
What is happening now is that two or more collaborators will drive up a work of art to 100 to 200 times more than their cost. That art will now be traded to a museum at this vastly inflated value in return for land. Real estate promoters can now acquire land for a small percentage of what their competition pays without access to this method. As a result most real estate developers are flocking to this scheme even though they have little if any interest in collecting art. Using their auction scheme, it is now possible to get $50,000,000 of land for a cost in the range of $1,000,000 to $2,000,000 if one knows the right government officials. This is the primary reason that most of the so called buyers in China are in the Real Estate business. They call themselves patrons of the arts but they are just market manipulators bidding at auction against their partners for artwork they already own. The "established" auction results then create inflated trading credits for the land that these developers wish to acquire.

This predominantly explains why Chinese art, especially Contemporary Art, sells for such inflated prices at auction in China. When the Chinese government decides to end this practice or decides to expose the perpetrators abusing this, the price of Chinese art will plummet. Collectors lured into this construct looking to unload their investments will find that they are lucky to get very much of their cost back. It is not a real collecting market at the current prices. It is a sham. In 2013 Chinese Art accounted for 12% of Sotheby's sales for $675m in 2013 and 11% of Sotheby's sales in 2012 for $465m. This is a market that could well plummet for Sotheby's in the short term should the Chinese government decide to end or limit this practice as it gets out of hand.

The second danger is similar but with much larger numbers and risk - this is the practice of a few American contemporary art dealers bidding against their partners to drive up prices. They do this for two reasons - The first is to establish auction values for unsophisticated collectors to lure them into "special deal" purchases at or under auction prices. The second reason is to give their clients a profitable exit with the opportunity to make substantial tax savings by giving the art away after they have owned it for a year. My guess is that almost no one reading this article knows anyone who has spent over $1,000,000 buying contemporary art. I have over 200 people who are members of the Forbes 400 on my mailing list who have been clients over the years and few if any of them collects contemporary art that I am aware of. And yet there are considerable
numbers of contemporary paintings that sell for over $1,000,000. I have no idea who is buying them. And I have been in this business for 42 years with major retail locations on Madison Avenue in the heart of
the Upper East Side in New York City, in San Francisco, Houston and Philadelphia. There certainly may be real collectors out there but I find it very hard to believe when virtually ALL of my billionaire clients always relentlessly negotiate for months just to make a $10,000 purchase. The richer they are, the tougher they are. And I certainly know NO ONE from this entire group who has spent more than $100,000 for contemporary art much less $1,000,000 and certainly not $10,000,000.

Of course, I am jealous and only until recently have come to realize that these crazy prices are not due to the selling skills of the dealers or intrinsic values of the artwork. It is a market built on collusion and fraud driving prices up at public auctions in New York City and London. After this initial spark, the madness of crowds takes over and the frenzy feeds on itself. But sooner or later the realization that this is the case will end the bubble as it has happened before with Tulips in the 17th century, the South Sea Bubble in the 18th century, Orchids in the 19th century, Automotive Stocks in the 1930's, Airline Stocks in the 1950's, Enron Stock, internet stocks and real estate.

Once this practice is discovered, tax deductions for so called "market value" will end and deductions will be limited to the buyer's cost. This will require an act of Congress to change the law but the abuses in the United States have been so vast, that the outrage of Congress will make this elimination of this deduction a very strong possibility. This will cause a severe downward pressure on prices. And, should the inner working of this market manipulation ever come to light they will prove to be irresistible for US Attorney's offices all
over the United States. A partnership that knowingly bids up works of art to create tax deductions for its clients will be irresistible for this branch of the US Government. This will be especially true if certain members of these partnerships are existing targets that these very same US Attorneys have so far failed to put in jail.

Right now Contemporary Art Sales represent 27% of Sotheby's sales of $1.2B in 2013 and 29% in 2012 or $1.1B.

A business model based on abuse of tax laws in the two largest markets in the world is highly risky. Tax laws can be easily changed by a vote of Congress especially since the elimination of tax deductions for fair market value will only harm the very rich and the museums that are their beneficiaries. The current administration clearly finds the support of both these groups a very low priority if a priority at all. And in China the land for art laws can change with the stroke of a pen.

These two areas of the art market, Chinese Art and Contemporary Art, represent close to 40% of Sotheby's current business model.

Sotheby's is faced with a massive challenge. My observation and firm belief is that they have not knowingly participated in anyway with this vast fraud in both the US and China even though their top Contemporary Expert and super salesman, Tobias Meyer, just quit. It is my firm belief that they will be found to be completely innocent of knowingly participating in these scams. However all the market manipulators that have been using Sotheby's to boost prices to stratospheric levels will drag them into a nasty, prolonged, expensive
legal morass. The unsophisticated buyers who bought in this mad run up will undoubtedly want to be made whole.

Once this long battle ends, Sotheby's will be again be good value when they go back to their core businesses of the last 250 years. There is no other auction house in the world that is even close to them in stature and integrity.

Source: Challenges For Sotheby's
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