Ann Freedman made a lot of money

Day 10 (Friday, February 5, 2016) of the Freedman/Knoedler/De Sole trial turned to the financial aspects of the sales of the fakes, with an accountant, Roger Siefert, who was hired by the plaintiffs, presenting his analysis of the gallery’s books.  Before that, James Martin finished his testimony about his forensic examination of the paintings, which I did not see—I heard he was just as engaging and effective as he was the day before.  I missed the first half hour Siefert’s testimony as well, but much of it was reiterated over the afternoon.  At the end of the day, the videotaped deposition of E.A. Carmean, the in-house scholar at Knoedler was shown, but only partially; this will continue Monday. 

Robert Siefert is a forensic accountant.  I was not there for the beginning of the testimony where they talk about the witness’ credentials, but he seemed very lucid on the stand.  Like James Martin, he was able to use normal language to explain some esoteric things, he was extremely prepared, and clearly is a seasoned expert witness.  The De Soles are playing to win, so my guess is that he is near the top of his profession.  Probably like most people who chose art as a career, math is not my strong suit and when they started talking numbers, I sometimes found it hard to follow.

What I did not find hard to follow was Ann Freedman’s eye-popping compensation.  I have always wondered how much these big-shots get paid, but it appears to be more than I ever imagined.  Freedman’s base salary was bumped up to $300,000 per year in 1998.  That didn’t surprise me—she was running one of the top galleries in New York, operating at a very high level.  That is (I am sad to say) a lot of money in the gallery world, even today, but she was at the top of the pyramid.  What did shock me was her “profit sharing”, which seemed just a fancy term for “commissions.”  In that same year, 1998, her commission on sales went up from 10% to 15% of the profit!  In 2002 it went up again and apparently was as high as 30% before the end.  That is just off the charts.  Usually, the salespeople get a salary plus 5% commission, from what I have heard.   In some situations, if a salesperson brings in a work from a seller and then sells it on, they might get 10% (5% for bringing it in, and 5% for selling it).  Galleries vary and it is hard to get solid information, and I am not speaking from personal experience, only from hearsay.  But I am willing to go out on a limb and say that I would be very surprised if any employee at a New York gallery that is not the owner gets a big salary AND 30% commission on sales. 

Turning to the Rosales fakes, Mr. Siefert said he calculated that Ann Freedman received $10.3 Million on top of her salary as profit sharing from the sales of these fakes from 1994 – 2008.  It also came out in the cross examination that she was equaling her profit sharing from sales of non-Rosales works in a number of years.  The chart on the screen was hard to read from afar and they were speaking quickly, but in two of the years they mentioned, 2003 and 2006, Freedman made $2.2 and $2.5 Million respectively from profit sharing in addition to what she got from selling the fakes,  meaning that in 2006, she knocked down over $5 Million, plus her salary. 

I mean, wow.  Again, she did not own the gallery, she just worked there, and she made $5 Million.  2006 was a very good year in the art business.  If I recall, even I made a decent living that year as a dealer.  But Freedman was living large.  Now I know how she can afford such an able legal team.

They also flashed up how much EA Carmean was making.  From 2004 - 2009, he made, total, about $330,000…again, don’t quote me, but that’s what I think I saw on the screen.  The highest was in 2008, when he made $78,000 and in 2009, he made $60,000.   The lowest was $36,000 in 2006.  I believe he was a free-lance employee at Knoedler throughout this period, from what has been said so far, doing research with a specific focus on the connection between David Herbert and "Mr. X."  This is actually a lot of money for such a job, especially since we heard that other Knoedler employees were conducting such research as well.  Maybe he was coming in every day (doubtful) and perhaps this is reimbursement for expenses and so forth, but (again, I am sad to say) free-lance research just doesn’t pay that much.  My strong suspicion is that he was being paid for his distinguished name and credentials.  This pay also might explain why he was such a dogged advocate for the works in the face of mounting evidence against them and why he might have suggested to James Martin, the conservator from Orion, to change his report.

I have said elsewhere that it really stinks that we cannot come up with a way to pay experts and scholars appropriately.  Here we have a case where an art dealer was making $5 Million one year, while the people she relied were getting paid much less.  It is sad that scholarly work is poorly compensated when it creates such immense value.  But looked at from another angle, there are ethical guidelines for scholars which, it could be said, Carmean crossed.  It certainly seems that his scholarly reputation has been diminished by his actions in the Knoedler case.  The relatively high level of pay Carmean received does little to tip the scales in the other direction.

At any rate, turning back to Siefert’s testimony, the bomb he dropped, which was in the De Sole’s complaint, is that without the Glafira Rosales pictures, Knoedler Gallery would have operated at a loss from the time she brought them her first treasure in 1994 until the gallery closed in 2011.

It needs to be pointed out that the two professions, accounting and art dealing, do not play nicely together.  In my experience, bookkeepers at art galleries and accountants who have such clients experience a very high level of frustration.  For one thing, the personalities are different: accountants deal in facts while art dealers think in hypotheticals and help their clients dream a little bit.  The purchase of a work of art rarely is done out of necessity and the structure of accountancy is sort of set up from the opposite point of view, that economic activity proceeds in some rational way out of transactions between parties that have financial benefits for both sides. 

Art galleries, then, are fairly atypical businesses from an accounting point of view.  Take, for example, the idea of a ‘receivable’.  When a manufacturer or their broker ships items to a factory in response to an order, they expect to get paid and they put a receivable on their books…indicating that they think they will be paid very soon.  Art dealers, by contrast, very often ship works ‘on approval’…no deal has been done yet.  Obviously, it’s not yet an occasion to put a receivable on one’s books.  But this can drag on for a while…the work could be ‘on approval’ for quite some time.  Even worse, the salesperson might create an invoice, in anticipation of consummating the sale when they go visit their client.  So now, the bookkeeper has a receipt for the work having left the gallery, as well as an invoice on their desk.  But it still is not a receivable! So they have to put such annoyances aside until all of a sudden they are told it actually is a sale, but, as often happens, the owner has decided on a different piece.

Along the way in this imagined transaction, a million other things can happen which, while not affecting its status on the books, can drive a bookkeeper crazy.  The sale is agreed, but the invoice is changed four times as the client changes their mind about which entity or family member will actually be buying the piece.  Or perhaps they decide they want the work in Aspen, so it comes back to the gallery and is shipped out of state, meaning sales tax is not collected, which means the bookkeeper has to re-do the sales tax return they had just drafted.  Or it is invoiced in December and paid for in February--in which year should the income be booked?. Or perhaps it is an editioned work and the wrong edition number is on the invoice and nobody tells the bookkeeper that until the previous year’s books have been audited and now it needs to be changed.

Then, let’s imagine that the work in question needed conservation.  Let’s say it went to the conservator with another work and the conservator created a bill without itemizing how much of the bill was for which piece.  Or maybe the dealer charged the client for shipping and then calculated a discount with the shipping charge added in.  The actual shipping expense needs to be backed out to figure the actual profit and it needs to be decided what to pay the consignor.

All of these things, of course, can be handled by a good bookkeeper by the use of copious journal entries and long hours at the computer, with a calculator and pencil and a pad of ledger paper handy.  But it also requires them to ask questions of the salesperson, who often is very busy and doesn’t really care.  I hasten to add that the salespeople and gallery owners do care deeply about having proper books and are very skilled at business (indeed, to keep a gallery of contemporary art open for any length of time requires a great deal of business acumen).  What I mean is that, as long as income is recognized and offset properly with expenses, most dealers will call it a day.  Why bother meeting with the bookkeeper to help them divvy up expenses among the various sales?  Should an expense be booked immediately or added to a cost-of-good sold and deducted only when the work is paid for?  Who cares!  There are a million other things that need to be done to insure the business stays afloat to get into that level of detail.

So, in the absence of sustained contact with the sales staff, the bookkeepers and accountants make these calls themselves.  In their first few months or years at the job, they might stand outside the bosses’ office for a while and might even occasionally gain access, but in the end, everybody realizes that little is gained and, as time goes by, if the business grows, the bookkeepers find themselves on another floor of the building or even in a different neighborhood altogether, only to awkwardly meet the sales staff at the holiday party or when the salesperson needs something immediately, like the check for their commissions.

So it is with this in mind that makes me think, to some extent, it was a mistake for the plaintiffs to put it as Knoedler “would have operated at a loss” if not for the Rosales fakes.  Basically, what Siefert did was take the overall numbers, subtract out the Rosales profits and, at the same time, he did his best to subtract out any expenses that related to these works, the idea being that if you remove the profits, it is only fair to remove expenses as well, to get an accurate picture of how the business was doing, aside from the Rosales works.

But under cross-examination, the defense lawyers were able to show that it didn’t always happen, that there had been some expenses that may have directly related to the Rosales materials that were missed.  Of course they were missed! Who has time for that crap when there is an art gallery to run?

Siefert replied that in the big scheme of things, the amounts missed were small compared to the massive numbers that the Rosales works were putting up.  He also said there were all sorts of notes handwritten on the invoices that described various expenses which didn’t make much sense and that of course he was going to miss some expenses, what with how art galleries are such strange businesses.  While his replies were plausible, it simply opened the door to some awkward questions for him and began to undermine the confidence we could all have in his spreadsheets by making it clear that was flying blind at least some of the time.

The defense also asked him if he had done any calculations about what Knoedler would have been able to do if they weren’t working so hard on the Rosales works?  Obviously that would have been impossible.  But it is a good point…if Ann Freedman hadn’t ever met Rosales, she probably would have been using her considerable abilities to persuade other potential consignors to let her sell their works of art.  Indeed, as her lawyer pointed out, in many years Freedman generated profits that equaled those from the tainted works…so it wasn’t as if she was completely useless at her job without these paintings.

Of course, this all assumes that all of Ann Freedman’s other professional activities were completely aboveboard and without unethical behavior that might have attracted other civil lawsuits, but I digress.

There was also the very important fact that Siefert included the years 2009, 2010 and 2011 in his calculations, when Knoedler stopped selling any Rosales works in 2008 and when Freedman left in 2009.  As well all know, those were absolutely awful years in general for most businesses and there were big losses for Knoedler.    If he had stopped the clock in 2008 or even 2009, the gallery was profitable, even without the proceeds of the Rosales works.

The point really isn’t that the gallery wouldn’t have been profitable at all, in my opinion, but rather that the profits on the fakes dwarfed all of Knoedler’s other profits, as well as the fact that and that they made way more than the consignor.  Overall, the proceeds from the Rosales works was over $69 Million, of which Rosales was paid $23 Million, leaving $46 Million for Knoedler, which is way more than they made on the rest of their operations.

The wide disparity between what the made off of Rosales versus the rest of their network is the smoking gun, if there is one.  As a general rule, the person who owns a work of art should make more than the gallery that sells it on their behalf.  In many cases, the gallery was buying the work directly from her and, it is true, that in these situations, a gallery will make a big mark-up, as they are generally taking on more risk.  But in this case, the works, had they been real, could have been readily sold by almost any dealer with half a brain, even taking into account the fact that the seller wished to remain anonymous. 

As I think of it, maybe that’s not true.  For example, if I had called up the De Soles and told them I had a Rothko that was from a guy who was the son of a guy and so on, they probably wouldn’t have bought it from me.  So in a sense, Knoedler was getting paid to erase any doubts, and the assumption was that a gallery like them knew a real from a fake and had done due diligence.  But my sense is, that even then, they were getting overpaid (Martha Parrish who testified last week…I missed that…made this very point).

At any rate, I think that the plaintiffs overreached when they got their guy to say that the gallery wouldn’t have been profitable, because to do so they had to throw in a few years that were irrelevant.  Even worse for them, it allowed the defense to point out that in 2011, the Knoedler building was sold for $18 Million, which, if you add that in, means that they made a big profit over those years.  Siefert said that this was liquidating an asset, and he was focusing on the core business activities, but again, the defense got to show that there were a lot of assumptions that the accountant made.  As it turns out, Knoedler was paying the underlying mortgage on the building.  The defense asked, why did you include those payments as an expense when you then excluded the monies from the sale of the building?  Again, this is a fair point.  Adding in those last few years when Freedman was gone and no Rosales paintings were sold seemed like a mistake.  The numbers speak for themselves: Knoedler made a profit of $36 Million from the Rosales paintings, with Ann Freedman getting an addition $10 Million, which is way more than they made doing anything else.  Why not just leave it at that?

While I think the defense did a pretty good job beating Siefert back, there was an odd sequence out of Luke Nikas, Freedman's lawyer.  In 1997, Freedman wanted to buy one of the Rosales works herself, so she traded Knoedler a Rothko work she owned in lieu of cash.  Knoedler later sold this work for $225,000.  Thus, Nikas asked the accountant, since the work she got in exchange was worthless, couldn’t we say that she actually LOST money for the years 1994 – 1998, since her commissions were very low from Rosales sales.  This makes no sense.  Not only was Nikas now himself guilty of cherry picking a time period (even assuming she ‘lost’ money, she got $10 Million from Rosales works by the end), unless Freedman knew the painting she traded for was worthless, how could anyone know she was on the losing end!

The judge couldn’t resist observing at this juncture that we are all assuming the painting she gave Knoedler was authentic.  Funny.

At any rate, Nikas has gone on and on already about how in the early years, Freedman actually made no commissions from the fakes.  I still don’t see where he is going with this, but I doubt he is without a plan. It may be that this will help Freedman deny there was a racket.  Nikas also repeatedly drew attention to the fact the Freedman was able to make a lot of sales and generate a lot of profits outside of the fakes.  This just drives home the tragedy of all of this for me.  She was a very effective dealer without all of this nonsense. 

There was also much testimony about 8-31 Holdings, the company that owned Knoedler (and still owns Hammer Galleries).  I must confess at these points to be a little bit lost.  One thing I am certain the plaintiffs were trying to make clear is that a lot of money flowed up from Knoedler to 8-31 and that this largely came from the fakes.  Additionally, and I may be unclear here, is that 8-31 engaged in a bit of financial slight-of-hand to perhaps hide the fact that this was a gush of money by classifying it as one thing and then reclassifying it as another down the road. 

Whatever the case, the testimony got very specific and dense, and the audience did not have a clear view of the various documents and spreadsheets, so it is hard for me to say.  Suffice it to say that the owner of 8-31, Michael Hammer, is a very rich man and makes full use of tax and corporate attorneys to structure his financial dealings in a complicated way that must help him protect his wealth.

The last half hour of the day was taken up by the videotape of Carmean testifying.  First the plaintiffs will get to show their edited version of the deposition; afterwards the defense will do so.  It already does not look pretty, especially in light of the changes that Carmean suggested to James Martin’s report as well as Jack Flam’s testimony.  The plaintiffs are focusing on how Carmean may have been the means by which the David Herbert fiction was disseminated into the Beyeler Foundation catalog essay for the Rothko show that included the De Sole's fake.

We are promised Ann Freedman and Michael Hammer on the stand soon thereafter.  Fasten your seatbelts.