The New York Times recently published an interesting article debating whether the art auction industry needs further oversight and regulation based on some dubious auction practices.

For example, there is no prohibition against “chandelier bidding,” in which an auctioneer begins a sale by pretending he spots bids in a room in order to increase the drama of the bidding process, when, in reality, he is only pointing to a light fixture or some other inanimate object and not real bidders.

Furthermore, all items for sale in New York City are required to have price tags that are conspicuously displayed, but most art galleries consider the practice tacky and ignore the law.

Perhaps the most controversial practice cited in the article is the use of guarantees.  Sometimes prior to an auction, the house will find a third party who is willing to pay a specific price (not disclosed to the public) in order to provide the seller with a guaranteed sale price.

But if the actual bidding exceeds the guarantee, the guarantor gets a cut of any proceeds above the guarantee.  So if a third party commits to a $10 million guarantee, and the bidding reaches $12 million, the third party receives a percentage – perhaps up to 50% –  of the additional $2 million.  And some auction houses allow the guarantor to bid on the work, raising their potential cut of the action.  Indeed, there are situations where the guarantor winds up bidding and buying the work at a higher price, and they still get to share in the financing fee.  The only disclosure to the public is a small symbol in the catalog noting that a work will be sold with a guarantee.   Critics claim that provides the guarantor with an unfair advantage.

Despite some complaints, bills written to curb these practices have gained little traction with New York state legislators.  If prices continue to spiral upward, so will the stakes involved, and it will be interesting to see whether these issues will capture the attention of any regulators.

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