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The Gavel Drops at Sotheby’s

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Meyer told Newsweek that negotiating to auction this 9-by-14-foot Warhol was a “near-death experience.” It sold for $105 million at Sotheby’s in November, besting the previous auction record for Warhol by more than $30 million.  

Over the following months, Sotheby’s management negotiated with the hedge-fund manager, offering concessions, including a board seat, if Loeb would quiet down his agitation. Then, late last month, Loeb pulled his trigger, announcing that he and two allies would be fighting for three seats in a shareholder election scheduled for May. The move set off a battle between the Sotheby’s Old Guard and a financier who views artworks as financial assets that trade in a market made by the auction houses. The confrontation figures to get bitter and bruising between now and May, but at its center there sits a rather more exalted question: How do you properly value art?

As an investor, Loeb likes to buy a stake in a company, force internal changes, and sell once the share price rises. He is what is known in finance as an “activist,” but the word doesn’t quite capture his aggression. He is famous for his scorched-earth tactics; his weapon of choice is a cutting letter addressed to management, often full of embarrassing internal details dug up by private investigators. “Sometimes a town hanging is useful,” Loeb once told the magazine Bloomberg Markets, “to establish my reputation for future dealings with unscrupulous CEOs.” He forced the resignation of one target, Yahoo’s Scott Thompson, by revealing he had falsely claimed a computer-science degree. He dubbed another his company’s “Chief Value Destroyer.”

Brutal as they are, Loeb’s diagnoses are often correct, which is why his hedge fund, Third Point LLC, now has $14 billion under management. He likes to say he sees himself primarily as a research analyst, but when it comes to Sotheby’s, his point of view was also shaped by his personal experience as a collector. Though Loeb declined to comment for the record for this article—he prefers to speak through his letters and delight in the ensuing media frenzy—he has made his views clear over the past few months in many conversations with dealers, collectors, and other denizens of the art world. He sees contemporary art as an expanding economy and thinks that Sotheby’s stock offers the only public route to investing in it. He says he just wants the company to more creatively leverage its powerful brand and prime position in the art market.

In his October letter to Ruprecht, Loeb accused the CEO, who was paid $6.3 million in 2012, of presiding over a “lackadaisical corporate culture” where senior executives “live a life of luxury at the expense of shareholders.” But Loeb’s argument went beyond the usual activist-shareholder complaints about waste and inefficiency. “There is a demoralizing recognition among employees,” Loeb wrote, “that Sotheby’s is not at the cutting edge.”

Loeb claims that Ruprecht has been slow to recognize the “central importance” of contemporary art. Like many other hedge-fund managers—Steven Cohen, Ken Griffin—he is an avid contemporary buyer, and though he is not in the topmost tier of collectors, he has a respected and growing collection. Instead of hoarding masterpieces like treasure, as collectors did generations ago, the hedge-fund guys tend to treat artists like growth stocks, preferring those not yet judged by posterity, because that’s where there’s room for major price appreciation. Economists have found that over almost any period, art’s returns have trailed the S&P 500. But what if you were the person who bought a $7,000 painting by Murillo in 2011 and flipped it at auction last September for $400,000, or the one who bought a Basquiat for $1.6 million a decade ago and sold it for $25 million last June? The rewards can be enormous for those who have an edge. It’s an opaque market, where secret side deals, price manipulation, kickbacks, and collusion are an everyday facet of business. It rewards inside information, and since the market is largely unregulated, players can trade on it without any fear of legal consequences. That’s fun.

Auctions are the primary engine of the market. The houses act similarly to exchanges, bringing together buyers and sellers and making income from commissions. Typically, if bidding on an item fails to meet a (secret) predetermined figure, the item is “bought in” and returned, at little cost to the house. If the item sells, the house collects fees from two sides: Consignors pay a 10 percent commission, while buyers are assessed an additional “premium,” currently between 12 and 25 percent, depending on the size of the bid. At least, that’s how the system is supposed to work on paper. In practice, everything is negotiable, and much is obscured (oftentimes including the identity of the seller and the buyer). Still, anyone can bid, and the price is publicized, which makes auctions the only open portal to the marketplace. Private dealers, by contrast, keep their prices secret and tend to frown on open speculation. Those who represent living artists tightly manage supply, selecting buyers according to subjective assessments of status. This can be maddening to those outside the circle—especially to Wall Street collectors accustomed to being able to purchase pretty much whatever they want.


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