Caveat Collector

Industry insiders say a code of silence exists when it comes to forgeries. Some wealthy collectors are simply too embarrassed to admit they’ve been duped. Others who suspect that their pieces are forged want to avoid casting doubt on the authenticity of the works, thereby reducing their value. Rather than come clean, some attempt to unload their forgeries on others.

Jacob, who has worked with the FBI and Interpol to help stop collectibles crime, says she once telephoned a client to report that a fine art painting was not genuine, then added it to her database of fakes and forgeries. When she sent a written report on the piece’s inauthenticity by courier (which the client asked her not to send), the client refused delivery and retuned the package unopened. “What do you think that person is going to do with that work of art?” she asks.

Trust, But Verify
There are only two sure ways for clients to avoid forgeries—either become connoisseurs in the items they’re collecting or hire recognized experts to vet the items.

Becoming an expert takes time and diligence. With some collectibles, it’s particularly hard to gain the proficiency to distinguish genuine items from clever forgeries. The taste of wine, for example, can vary greatly depending on how well (or poorly) it was stored. The labels or corks might be a better indicator of authenticity. Incompetent fraudsters have been known to misprint château labels and place the wrong corks in bottles.

A number of services exist that can help advisors and their clients authenticate various items, such as the Certified Guaranty Company, which grades comic books and magazines, and Professional Sports Authenticator, which evaluates memorabilia such as trading cards, balls and uniforms. Companies that grade coins with numismatic value and weed out forgeries include Professional Coin Grading Service and Numismatic Guaranty Corporation.

Locating competent and independent experts may require some serious detective work. Anyone can claim that a collectible is authentic, based solely on personal opinion. If an “expert” is wrong, his or her opinion may not necessarily be legally actionable. Jacob says it’s crucial to get recommendations and check credentials. “There are people who have held themselves out as experts who have not written a book, put together an exhibition in any museum or contributed to any kind of scholarship,” she says.

Bruins, whose firm performs research to ensure that clients don’t buy a forgery or overpay for an item, recommends getting a second opinion on very expensive pieces. “Price information is not always easy to come by. Two experts may disagree on the value. There’s a level of subjectivity in art valuations,” she says.

For well-known works, due diligence often starts with checking the artist’s catalogue raisonné, a comprehensive scholarly reference text that includes each work known to have been created by a particular artist, with information such as the title of each piece and any alternative titles, along with inscriptions, dates, mediums, sizes, exhibition histories and the “provenance” of each item. Provenance is essentially the chronology of ownership, custody or location of a work since the artist created it.

Verifying provenance doesn’t just help determine whether a work is authentic, it also provides clues about who has legal title to the piece. Many collectibles are subject to theft, wartime looting, archaeological looting and smuggling. Clients who purchase costly collectibles should at minimum check stolen property databases such as the Art Loss Register, a worldwide catalogue of over 400,000 pilfered paintings, sculptures, jewels and other items.

But Judith Pearson, president of New York-based ARIS Title Insurance Corporation, says stolen items account for only 25% of title exposures in the collectibles markets. Seventy-five percent of the risk comes from encumbrances, such as creditor and tax liens, and issues involving lack of legal authority to buy, sell, give, donate or loan items. Title insurance helps protect against the risk of title defects that could result in the loss of multimillion-dollar pieces through litigation.

Pearson cautions that common phrases on provenance documents, such as “owned by a private collector” and “sold by a dealer,” are signs of the market’s opacity. Although wealthy collectors often wish to keep their ownership of important works confidential to avoid becoming targets of thieves, vague terms can also mean trouble. “Those red flags, or what we would call ‘gaps in ownership,’ may be really small gaps, or really big gaps, but gaps almost always exist,” says Pearson.

Pearson says ARIS can reduce the risks of title defects through underwriting protocols and access to confidential ownership information that transacting parties often don’t, or won’t, share with each other. “We identify the gaps, determine how defensible they are and insure over them,” she says.

Erskine recommends that his clients ask for title insurance policies when purchasing expensive collectibles, in part because even buying through reputable auction houses is not enough protection. Auction houses perform some due diligence, but as the seller’s agent, they can typically rely on the seller’s representations about ownership without assuming legal title risks. Unless they’ve committed fraud, the limited warranties that auction houses provide will generally absolve them of responsibility for selling items with title defects.

In the “buyer beware” world of collectibles, the greater a client’s desire to believe that a unique piece is a once-in-a-lifetime buying opportunity, the more caution an advisor should likely urge.

As Erskine puts it, “There are probably new scams being thought up every day. And the number detected is nowhere near the number actually being perpetrated. Even the most experienced collector can get scammed, so if the deal sounds too good to be true—it probably is.”