Photo by Giammarco Boscaro on Unsplash
 

Over the past several years, a bevy of high-profile art fraud cases have circulated in the news.

There was Inigo Philbrick, the dashing young dealer with a sterling pedigree, who allegedly defrauded a slew of collectors before going on the run and hiding out in Vanuatu, an island in the South Pacific, where the FBI eventually arrested him. 

Then there was the recent Netflix documentary “Made You Look," about dozens of expert forgeries sold by the Knoedler Gallery, which ultimately led to its downfall after an impressive 165 years in business. These scandals, and many others, point to an unfortunate truth — the art market, an unregulated financial sector, is rife with fraud, forgeries and confidence men. 

Daniel Kokhba is an attorney based in Manhattan who specializes in art law. Daniel works with galleries, artists, collectors, and estates to protect them from unscrupulous art world actors. Unlike many of his attorney brethren, however, Daniel actually goes to great lengths to keep his clients out of litigation. 

We spoke to Daniel about his legal practice and how best to navigate the art market’s more turbulent currents. From working with online escrow companies to hiring private investigators to background check art advisors, Daniel sheds some much-needed light on the art world’s darkest recesses.

This interview has been edited for length and clarity. 

Legal Disclaimer:  The answers provided below are for general information purposes only and not a substitute for fact-specific, privileged, attorney-client consultation or representation.

Daniel Kokhba of Kokhba Law

AA: Define your art law practice and how you began working in this particular field.

DK: My practice is effectively 50% outside general counsel and 50% litigation.

I largely try to keep my clients out of trouble, meaning out of litigation. I help them structure deals, give them advice, do their contracts, guide relations with staff, etc. For those clients who come in with a conflict, I try to get them out of it in the most practical and efficient way I can.

When I started my practice, I was largely doing commercial litigation with a focus on fraud, and then I realized that there's a lot of this fraud actually happening in the art sector so I started taking a look. 

I also had some prior interest in art — my wife, who is actually related to Marc Chagall, and I had begun collecting. So, the combination of all of those things made art law a natural thing to move into and now I’ve had my specialty art practice for about ten years, although I've been practicing law for closer to 20 years. 

AA: With the art market having taken a sizable hit from the pandemic, do you think we’re going to see a reemergence of art funds, similar to what happened after the 2008 recession? 

DK: In 2008, there had to be a transition for investors from mortgage-backed securities to something else — art funds were areas that people were looking to as a way to diversify their investments. So that was definitely happening around the 2008 recession, and we saw a lot of them fail. But now they seem to be coming back. 

And, now we’re also seeing them in different variations. Companies like Masterworks, for example, are offering people the ability to own shares, units, and partial ownership in very expensive artwork. These are very creative variations on the art fund, which give investors, who are not necessarily super wealthy, the ability to participate in alternative investments and that's been a relatively recent development.

AA: What should collectors be aware of when investing in art funds?

DK: One big red flag is if a fund has a total lack of experience in the art market. In that case, they’re effectively just playing around and experimenting with your money. 

Some other red flags would be opacity — if a fund doesn’t seem to bear any accountability or have any game plan as to how the investment is going to work out. Can they answer simple questions like: What's the buying and selling strategy? Where is the capital coming from? Where is the work sourced from? What’s the operating budget? Is there debt? How is the research and appraisal being performed? How are legal and compliance needs being met?

You always want to look at who the players are that are involved. Believe it or not, sometimes it's as simple as running a Google search — just plug in the name and you'll be able to see if there’s been some scam associated with that person or fund. If nothing comes up, then put in the name and add the word “scam” or “fraud” after it, and that might do it.    

I’ll also search the name(s) in a court litigation database, just to see if these people have ever been sued (or have sued others). Have there been disputes? If you do this very basic due diligence in the beginning, before going into business (with anyone, really), you can reduce the chances of getting into a very messy situation.    

It’s also important to ensure they have the underlying paperwork for the artwork that they're claiming to own, or that they're going to buy. If you can, you want to know from whom they are buying.

Are they buying from galleries? Are they buying from auction houses? Or are they just buying from some unknown party?

Then, there’s the prices — do the prices that they're paying for the work seem too good to be true? If they’re claiming to have acquired a Banksy for $100,000, and meanwhile the comps show that it’s worth closer to $2 million, then that’s a red flag. A lot of times if the price is too good to be true, think fraud, think authenticity, think bad provenance — ask questions and do due diligence.

One other thing to be aware of is priority claims. Does the seller, or the person selling it to you, or the fund that is buying the work actually have the right to own and/or sell it? Or are they borrowing it? The worst-case scenario is when you’ve invested in a piece, but suddenly find out that someone else has a priority claim and actually owns the work (or has a competing claim). 

We don’t have an art registry the way we often have for real estate — showing owners and lenders — so due diligence, as well as tailored and personalized contracts are extremely important.  

 

AA: Considering that the market remains mostly unregulated, is it ever possible to have total certainty that the other parties involved in an art deal are ethical actors?

In other words — how does one protect him/herself from con-artists in this market?

DK: If somebody is actually going to go ahead and commit straight fraud by creating fake documents, double-selling artworks, collecting payment but not delivering the art, etc. — it just becomes very difficult.

In addition to some of the things we talked about, consider using escrow until all conditions are met. One company that I think is adding a lot of value on this front is Escrow.com, which is effectively set up to facilitate a transaction between a buyer and seller by allowing the proceeds to be held in escrow. 

For a while, lawyers were actually making nice fees serving as escrow agents. That business model became complicated though because banks started not allowing it — there was too much concern about money laundering. So now there are online companies that will escrow the money. They'll want to see the contracts, and then they'll release the funds subject to the terms of the contract.    

 

AA: What about art advisors skimming commissions from both sides of a deal? Is there any way to safeguard against that (unethical) practice?

DK: Like in any profession, there are good apples and bad apples. You need to pick your fruit carefully. Clients need to ask questions, see documents and be vigilant. It’s not uncommon for some advisors to tell the buyer and the seller different prices, collect fees from both, and keep the difference in price.

Sometimes you have ‘back-to-back-to-back transactions,’ in which all these deals happen together — between sellers’ agents and buyers’ agents — with different prices, effectively allowing the agents to make very nice commissions unbeknownst to the clients. 

The seller and the buyer may not know the actual prices, and a lot of times they don’t know who the other one is, which is another issue. Fortunately, there's this growing need now to actually do some due diligence and know your seller and/or your buyer. I think it's improving, 

The art advisory business has, unfortunately, been tainted by some bad advisors and high-profile scandals. This is partially the result of the fact that the industry is not licensed. Unlike lawyers, doctors, and even real estate brokers, art advisors and dealers don't have a license. There’s no official licensing directory to search and check if they've got a disciplinary complaint against them, as you can with a lawyer or financial advisor.

Unfortunately, there's no real shortcut, you have to just do your due diligence.

It's not unusual for a collector or their counsel to actually hire a PI (private investigator) to do a background check on who they're dealing with. Know the parties, look at the paperwork, make sure you've got a contract — and, by contract, I don't mean a recycled form or a PDF-proof invoice, I mean a full-fledged contract with fact-specific, personalized, thought-out representations, warranties and contingencies.    

As a litigator, I like to tell my clients — before they sign — to think hard and carefully about what may go wrong with this deal, and let’s draft or edit this contract for those scenarios. Please don’t just plug names into some form, which may make things worse. Far too many expensive and avoidable litigations come about from poor contracts and misuse of forms. Litigation also comes about from ambiguity in contracts, so it's important to work hard to avoid that.  

Sadly, if the deal goes bad and the contract is unnecessarily ambiguous, and let's say we're talking about a seven- or eight-figure deal, then there's going to be litigation. Well, that's great for some lawyers, right? I see that as a serious conflict of interest and an ethical violation if a lawyer intentionally leaves ambiguity in a contract that could have either been removed or better drafted.   

At its core, you want to make sure that the team you're putting around you — advisors and lawyers — are working on your side, and that they don't have a conflict of interest. They should be working to protect the client for a fair fee — not focused on advancing their own interests.

AA: Why should someone retain your services, rather than go to a large firm?

DK:  A few reasons. I only take on select clientele and from there I personally and passionately represent them. Unlike some larger firms, I don’t delegate the work to junior associates as a learning billable exercise. I also have zero billable hour requirements. That sets me free from any pressure to bill clients to meet any law firm billing requirements or bonus targets.  

If I can resolve a problem in an hour or two, I am ecstatic and so is the client. When I approach a problem, a transaction, or even a litigation, I will try to resolve it as quickly and efficiently as possible, keep the client out of litigation, or — if they are already in litigation — end it as expeditiously as possible. I typically bill either on a flat fee or hourly fee, but I'm always mindful of the value for the client and the client’s ultimate endgame.

One thing that I sometimes propose — whether it's a collector or business — is if you can't afford to hire a lawyer to handle it for you from A to Z, then hire them to shadow you. It's something I like to call Cyrano de Bergerac representation. In this scenario, the lawyer is in the background, and nobody knows, and they help guide the client through the deal from start to finish. 

A lot of times in art deals, it's relationships, it's a social circle, and people don't want to make it seem contentious or appear distrustful by having lawyers openly involved. Well, you can have the best of both worlds by having the lawyer stay in the background so you're protected. This way you've got that voice in your ear keeping you in check and looking out for your interests.

AA: To summarize, what are the biggest red flags collectors should be aware of in a major art transaction?

DK: Let me list a few for you:

1. The real seller or buyer is not disclosed.

2. The price is too good to be true.

3. Provenance is being withheld.

4. The deal seems too far removed — meaning, you’re dealing with the agent of the agent of the agent, who may lack authority.

5. Missing paperwork.

6. The sale is presented as a massive bargain with urgency.

7. The seller or seller’s agent refuses to provide a bill of sale, certificate of authenticity, or sign a contract.

8. Advisors are involved who do not represent anyone, but they are trying to collect fees from everyone and create a transaction.

For the most part, people should just slow down a little bit. There's usually no literal, urgent need to buy an artwork on the spot. So, perform due diligence and make sure the person selling it to you has got the paperwork. If they don't, you're going to have a very hard time selling it later.

Also, once you’ve purchased a piece and secure the paperwork we talked about, it’s recommended to maintain excellent records. For many collectors, it makes sense to store all the accompanying documentation in an artwork database system like Artwork Archive. From resale to insurance to estates, the records will be needed and far too often they get lost, especially as people move from place to place.

Final thought — and this applies to any deal even beyond art —  leverage and risk. Who are you in the deal? Are you the seller of a unique one-of-a-kind work of art or are you among ten competing buyers? Knowing and understanding your leverage position and risk tolerance will help you formulate your strategy and your due diligence.   

Learn more about Daniel and Kokhba Law by clicking here. 

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