Trust but Verify? Some Lessons From Recent Art Prosecutions

Federal prosecutors in New York are continuing their focus on bringing significant art fraud-related cases. The prosecutions over the last few years appear to have some recurring fact patterns and themes, usually involving allegations that an art agent breached their fiduciary duty to one or more clients in high-value art transactions. The guilty plea last week in the Lisa Schiff art fraud case, involving charges that Schiff bilked her clients of $6.5 million through transactions related to about 55 pieces of art, is the most recent instance of this trend. The Schiff case provides a good reminder to players in the art market that they will be well served to exercise a healthy skepticism about counterparties and ramp up their due diligence processes — or else risk ending up as a victim in the next big case.

Until about mid-May 2023, Schiff had been a high-profile, well-respected art advisor. She was known for her prestigious roster of clients, including Leonardo DiCaprio. She gave interviews to the New York Times and maintained a storefront in Tribeca. But her business came crashing down after a former client and close friend, Candace Barasch, filed two civil suits in quick succession, alleging that Schiff had failed to remit $2.5 million plus interest owed on dozens of art transactions. In January 2024, Schiff filed for bankruptcy, disclosing around $7 million in debt owed by her consultancy business and herself. Ultimately, at least 50 creditors filed claims to Schiff’s assets, saying that she owed them for works she had brokered.

Last week, the world learned that Schiff also was facing criminal charges. In the information published alongside Schiff’s plea agreement, the U.S. Attorney’s Office for the Southern District of New York charged Schiff with two separate schemes. In one, Schiff kept the money from art sales she had brokered without telling clients that their art had sold. In the second, Schiff would take money from clients to buy art, but wouldn’t actually buy the art, instead keeping the money to pay her own debts. In her guilty plea, filed on October 17, 2024, Schiff agreed to forfeit $6.4 million. She will be sentenced in January 2025 and is facing a potential sentence term of up to 20 years.

Schiff’s case follows the famous prosecution of Inigo Philbrick, the art dealer who also pleaded guilty in the Southern District of New York to one count of wire fraud. The Philbrick case involved a $86 million scheme in which Philbrick sold and resold paintings owned by his clients without his clients’ consent, and forged papers to increase the art’s valuations. Philbrick was sentenced to seven years in prison, but was released in March 2024 after serving four years. Other cases include Nazem Ahmad’s indictment in April 2023, in which the government outlined how Ahmad allegedly used the art market to evade U.S. sanctions and funnel money to Hezbollah. The Netflix 2020 documentary, Made You Look: A True Story About Fake Art, spotlighted the famed Knoedler Gallery scandal whereby the gallery was prosecuted for allowing $80 million of forged art to pass into the market for over a decade. And a slew of civil lawsuits suggest a similar trend: artist Jeffrey Gibson’s August 2023 lawsuit filed against his former gallery, Kavi Gupta, alleging that the gallery withheld $600,000 for works it sold by Gibson, and the Orlando Museum of Art’s August 2023 lawsuit against its former director for staging a show of forged Basquiats that purportedly “shattered” the museum’s reputation.

There are several key takeaways from this trend.

• The government, especially the Southern District of New York, has shown an increased interest in exposing and charging art fraud. U.S. Attorney Damian Williams said that the Philbrick sentence was meant to “send[ ] a message to anyone who facilitates fraud in the art market that they will face serious consequences.” Of note is that the same Assistant U.S. Attorney led the prosecution of both the Schiff and Philbrick cases, which shows that prosecutors in the Southern District are continuing their long history of leading the way in art fraud prosecutions.
• Buyers in the art market should be vigilant and examine their due diligence practices. Prospective art buyers will be well served to conduct routine background checks on art galleries and dealers. Instead of relying on the good faith of their art dealer or adviser, buyers will be wise to obtain and carefully review all signed papers and contracts for any transaction undertaken by a dealer on their behalf.

For questions on this or any other subject, please reach out to the authors or any of their colleagues in Arnold & Porter’s White Collar Defense & Investigations practice group.

* The authors successfully represented Sotheby’s in Accent Delight v. Sotheby’s et al., involving claims by Russian oligarch Dmitry Rybolovlev against his one-time art dealer, Yves Bouvier, for fraud and breach of fiduciary duty in relation to over $2 billion worth of art transactions. After a three-week trial, the jury found in favor of Sotheby’s on all counts.

© Arnold & Porter Kaye Scholer LLP 2024 All Rights Reserved. This Blog post is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.