THE FINE ART OF FRAUD.

Date01 December 2022
AuthorFaekova, Natalia

"Timothy Sammons had lying, scamming and stealing down to a fine art", said the Manhattan District Attorney Cyrus Vance Jr after the British art dealer was sentenced in July 2019 to four to twelve years in prison for defrauding his clients of up to $30 million. (1) A former head of Sotheby's Chinese art department who had galleries in London and New York and who brokered multimillion-pound deals for wealthy clients, misinformed consignors about the timing of certain sales, used works entrusted to him as personal collateral to secure millions of dollars in loans and redirected proceeds of sales to pay off other victims of his Ponzi-like scheme, between 2010 and 2015.

Following closely on, from 2015 to 2019, Inigo Philbrick, dubbed the 'Mini- Madoff' (2) of the art world, also ran a Ponzi-like scheme or rather "a carousel on which the same works were sold or used as collateral for loans more than once". (3) Through his galleries in Mayfair and Miami, Philbrick scammed at least 23 victims, ranging from individual art collectors to well-established gallerists, investors and lenders. Estimated losses from his fraud exceed $86 million. (4) This year he was sentenced in the US to seven years in prison. (5)

While worthy of a Netflix mini-series, the adventures of Philbrick, Sammons and others like them (6) have a real-life cost to their victims. Philbrick's fraud has "led to an immense financial loss" for Daniel Tumpel, and his family, and has turned "the last two and a half years into the most horrendous and difficult years of [their] lives." (7) Tumpel is the owner of Fine Art Partners, a former client of Philbrick's, on whose behalf Philbrick purchased art works only to resell them to other investors without Fine Art Partners' knowledge, as well as using the art as collateral for loans.

The prospects of recovery are slim. Sammons was declared bankrupt in 2017. (8) Philbrick, it was said by the prosecution, does not have sufficient assets to pay his victims. (9) As was summed up by US Attorney Damian Williams during Philbrick's sentencing submissions:

[...] The defendant has left it up to his victims to fight amongst themselves to unravel his fraudulent art deals and recover their losses. Many civil lawsuits filed by victims in various jurisdictions are pending to resolve disputed ownership claims over multiple artworks. The Government expects that many victims, unfortunately, will never be made whole. (10) This article will examine the civil and criminal remedies available to victims of this type of art fraud. Whilst both Philbrick and Sammons were convicted in the US and the related civil claims span not only England but also multiple other jurisdictions, this article will focus exclusively on the treatment of relevant facts under English law.

The article will first set out some factual scenarios taken from the fraudulent dealings of Philbrick and Sammons. It will proceed to describe the civil remedies available to the victims of such fraud, applying those principles to the factual scenarios. There will then be a short section on criminal law. The conclusion will be that whilst the civil route is more relevant to asset recovery than criminal prosecution, the civil law also fails to give adequate protection to the original owner and fails to shield a bona fide purchaser from lengthy litigation. One solution could be for the owners of artworks to ensure prospective buyers have notice of their title by, for example, registering it with an art database.

CASE STUDIES IN FRAUD

Given the length and complexity of the fraudulent schemes perpetrated in both cases, it is not practicable to give a full overview of Philbrick's and Sammons's fraudulent dealings, but it is worth describing three transactions here, so that they can serve as illustrations for the application of the legal principles.

THE SIGNAC

Linda Hickox was the owner of an oil painting entitled Calanque de Canoubier (Pointe de Bamer) made by the Impressionist painter Paul Signac in 1896 (the 'Signac'), which she displayed in her apartment in New York. Ms Hickox consigned the Signac to Timothy Sammons to act as her agent for the sale of the painting and signed a Sales Agreement with his US entity, Timothy Sammons Inc ('TSI'), on 9 March 2012 (the 'Sales Agreement'). It turned out that TSI had been dissolved since April 2011, but Ms Hickox was unaware of this at the time. The Sales Agreement instructed TSI to act as agent for the sale of the Signac, and incorporated a letter from the gallery which stated:

The purpose of our reporting to you in this way is to provide you with unbiased information to enable you to make an informed decision on how and where to sell [...] Once the decision for sale has been taken and the method determined, we will ensure that you get the best possible result [...] Sammons sold the Signac without consulting Ms Hickox and pocketed the proceeds. Ms Hickox took various steps to try to recover the price of the painting, but as Sammons was declared bankrupt, she issued proceedings in England in 2020 against Simon C Dickinson Ltd ('SCDL'), a London gallery that acted as agent for the buyer, seeking a Norwich Pharmacal Order to find out the identity of the purchaser. (11) The order was granted, thus challenging the custom and practice in the art world not to reveal the identity of private buyers. (12) As will be seen below, this case will provide a useful illustration of the scope of the tort of conversion and applicable limitation periods.

THE BASQUIAT

Starting in approximately 2016, Inigo Philbrick began to obtain loans from Athena Art Finance Corporation ('Athena'), a company based in Manhattan, New York that specialises in providing loans secured by art pledged as collateral. On 31 March 2017, Philbrick, operating through 18 Boxwood Green Limited ('Boxwood') a shell company incorporated in the Bailiwick of Jersey, entered into a loan and security agreement with Athena (the 'Athena Loan Contract') for a $10 million revolving loan secured by a revolving pool of artworks approved by Athena (the 'Collateral Pool'). The loan amount was later increased to $13.5 million.

In August 2016, Philbrick entered into an agreement with Alexander Pesko, who was acting on behalf of Satfinance Investment Ltd. ('Satfinance'), to jointly purchase a 1982 painting by Jean-Michel Basquiat titled Humidity (the 'Basquiat'). During negotiations with Pesko, Philbrick provided Pesko with a fraudulent contract purporting to show that Philbrick had agreed to purchase the Basquiat from SKH Management Corporation ('SKH') (13) for $18.4 million. In fact, the Basquiat had been purchased by Philbrick, acting through Inigo Philbrick Limited ('IPL'), in a private sale through Phillips auction house in New York for $12.5 million, pursuant to a 'Buyer Agreement' dated 27 July 2016. (14) Satfinance and IPL, entered into a Partnership Agreement (the 'Partnership Agreement') whereby Satfinance paid IPL 50 per cent of the purported $18.4 million purchase price of the Basquiat and also provided a $3 million loan to IPL secured by the Basquiat. The Partnership Agreement appears to have been drafted without input from lawyers and contains several contradictions. (15) Under the Partnership Agreement: (i) Satfinance would hold 'foil title' (presumably, meaning 'legal title') to the painting; (ii) subject to Satfinance's foil title, Satfinance and IPL would hold jointly the painting and would share equally in any profit or loss; (iii) IPL retained possession of the painting. (16) The stated purpose of the Partnership Agreement was a "quick sale"17 of the painting at a profit. It appears that the Basquiat was in New York at the time the Partnership Agreement was concluded.

Next, in November 2016, pursuant to an oral agreement Philbrick sold a 12.5 per cent ownership stake in the Basquiat to gallerist Damian Delahunty for a total of $2.75 million. Philbrick falsely told Delahunty that he was purchasing the Basquiat from SKH for $22 million and provided Delahunty with an unsigned contract purporting to show the sale from SKH to Philbrick. Philbrick did not tell Delahunty about Satfinance's ownership interest in the Basquiat, and likewise did not disclose to Pesko the sale to Delahunty. It seems that the painting was still in New York at the time of this transaction.

In March 2017, after Philbrick had sold percentage ownerships of the Basquiat to Satfinance and Delahunty (and encumbered it with a $3 million loan), he sought to pledge the Basquiat to Athena as part of the Collateral Pool. (18) In the process, Philbrick falsely represented to Athena that he was the sole owner of the Basquiat and did not disclose the interests of Satfinance or Delahunty. In April 2017, Athena approved adding the Basquiat to the Collateral Pool, and provided Philbrick with an additional $3.25 million in financing as a result. Pursuant to the Athena Loan Contract, Philbrick provided Athena with physical possession of the Basquiat. (19) Satfinance, Delahunty and Athena subsequently became locked in litigation over the ownership of the Basquiat. (20)

We will use the Basquiat case study to illustrate the passing of title in a sale by a mercantile agent and a seller in possession.

THE KUSAMA

In May 2019, Andre Sakhai purchased the artwork Infinity Nets by Yayoi Kusama for $850,000 from the Victoria Miro Gallery (the 'Kusama'). Mr Sakhai subsequently learned there was some damage to the Kusama during shipping. Sakhai sought Philbrick's help to restore the painting, as Philbrick had a good relationship with a conservator. On 8 July 2019, Mr Sakhai authorised the transfer of the Kusama to Philbrick's storage facility for this purpose i.e., so that Philbrick could arrange for the painting to be restored, not sold. On 10 July 2019, Philbrick, without authority, sold the Kusama to another collector and transferred it to that collector's storage facility in New York without informing Sakhai of the move or...

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