Silence of Sotheby’s: Rybolovlev’s $380m Lawsuit Covered up from Investors

Sotheby’s, the world’s top auctioneer, might have some explaining to do. On October 2, the British-founded American-based company was hit by a lawsuit filed in New York by two BVI entities on behalf of Dmitry Rybolovlev, a Monaco-based Russian billionaire. He is seeking at least $380 million in damages, which is more than three times the size of Sotheby’s net profit of $119 million reported in 2017. The house’s stock continues to drop yet the investors are kept pretty much in the dark.

Sotheby’s: The House Always Wins?

The plaintiffs claim Sotheby’s “aided and abetted” the Swiss art dealer Yves Bouvier in what allegedly was a $1 billion fraud. From 2003 to 2014, Bouvier was employed by Rybolovev as his art advisor and agent tasked with finding and facilitating acquisition of artworks by world famous masters. The magnificent collection totaled 38 pieces of art by Modigliani, Gauguin, Monet and others. It was not until late 2014, however, the Russian learned that Bouvier was in fact secretly buying the works himself and then reselling them to him adding up to 80% to the price. Moreover, about a third of the artworks were initially traded to Bouvier through Sotheby’s private sales. It’s hardly a coincidence, as he and Sotheby’s chairman for private sales worldwide Samuel Valette have been working together for years. As follows from the emails, Valette also helped Bouvier to find artworks Rybolovlev might be interested in and wrote false statements justifying exaggerated prices the Swiss charged his client. Bouvier even used to carry around electronic signatures of Valette and Dr. Franka Haiderer, Sotheby’s chairman valuations Europe. They were on the flash drive Monegasque police recovered from him during 2015 arrest on fraud charges, along with several scanned copies of Sotheby’s logo. All this indicates that the house was perfectly aware of what its employees were up to with Bouvier and even helped to cover it up.

Moral aspects of the story aside, Sotheby’s, for the very least, should have notified the investors of the lawsuit via proper disclosure as required by the U.S. Securities and Exchange Commission's regulations. If one of the 200 wealthiest men in the world is willing to take away the amount you make in roughly three years, that’s certainly something the investors might be interested in. However, no material event has been reported by Sotheby’s so far. On Thursday, the shares hit year low $41.51, shedding $7 in a little more than a week. The market cap dropped by some $350 million.

The Past Transgressions

Sotheby's should know that misleading investors may cost a public company dearly. In the well-publicized case of Enron energy corporation, the management concealed huge debts of a seemingly successful company by setting up partnerships in which the losses could be kept off balance sheet and imaginary revenues generated. By misrepresenting earnings investors were completely oblivious to the true financial condition of the company. On December 31, 2000, Enron's stock was priced at $83.13 and its market capitalization exceeded $60 billion. In October 2001, SEC opened a formal investigation into Enron’s transactions. On December 2, Enron filed for bankruptcy. The company’s stock was delisted from NYSE with a final price of $0.67 several weeks later. In 2006, Enron’s former CEO Jeff Skilling was indicted on 35 counts of fraud, insider trading and other crimes. He agreed to testify against Ken Lay, company’s founder and fellow former CEO to receive 14 years in prison instead of 24. Lay was subsequently found guilty on all six counts of conspiracy and fraud but died before serving his term. Enron’s bankruptcy was the largest in history at the time. Congress passed the Sarbanes-Oxley Act of 2002 in response to the scandal "...to protect the interests of investors and further the public interest in the preparation of informative, accurate, and independent audit reports.” Five years ago, Tsuyoshi Kikukawa, former chairman of Olympus, and two other former executives received suspended sentences for their role in orchestrating a vast accounting fraud at the Japanese optical equipment maker. All three had admitted lying to regulators and shareholders for over a decade in an effort to hide more than $1.3 billion of losses on speculative investments made by the company. It also paid some $687 million in advisory fees in a cover-up attempt. In November 2011, Olympus’s stock lost 70% in just three weeks. A phantom account scandal at Wells Fargo put the U.S. bank's disclosure policies under a harsh spotlight two years ago. The probe disclosed that Wells employees had created roughly 2 million accounts for customers without their knowledge in order to meet internal sales targets. The bank has fired 5,300 people over the scandal. Despite press reports that a federal regulator and the Los Angeles prosecutor were investigating sales practices at retail branches, the bank, which agreed to a $190 million settlement, gave investors no indication of the scale of the problem. The “surprise” instantly took $19 billion off Wells Fargo market value.

The Moment of Truth

So the writing is now on the wall for Sotheby’s. Apparently the house is keeping silence out of fear. It did have strained relations with the investors over the past few years. One of the major shareholders, Third Point LLC’s Dan Loeb criticized Sotheby’s for weak strategy, lack of experience in online trading and excessive perk packages. The Sotheby’s management, however, didn’t go down without a fight: it spent over $20 million on a campaign against Loeb in first nine months of 2014 alone. They concluded a truce eventually: in 2014, Loeb’s Third Point got three seats on Sotheby’s board. Last time Sotheby's was in the middle of a major crisis, the stock prices responded accordingly: from a high of $47 in 1999, the firm's shares plummeted in February 2000 to a meager $14.50. After all, you got to be honest with your investors if you are a public company. The more you set aside the unpleasant moment of truth, the more painful the eventual bite in the back will be - that's probably the main takeaway from the Sotheby's - Rybolovlev case.

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