Grossman LLP | Following Mid-Trial Settlement, Art World Continues to Feel the Aftershocks of the Knoedler Forgery Scandal
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  • Following Mid-Trial Settlement, Art World Continues to Feel the Aftershocks of the Knoedler Forgery Scandal
    After much legal wrangling, a jury heard testimony last month in the first civil trial arising out of the art forgery scandal that took down one of New York’s most prominent galleries.  The story began in 2011 when word spread that, over the course of more than a decade, the once-venerable Knoedler Gallery had sold about $60 million worth of artworks—purported to be by Pollock, Motherwell, Rothko, de Kooning, and other giants of the Abstract Expressionist movement—that later turned out to be forgeries.  Since then, more details have emerged; in short, the works all came to Knoedler through a Long Island art dealer, Glafira Rosales, who claimed to represent an anonymous collector liquidating a collection of previously-unknown masterpieces.  But the seller was a fiction, and the works were actually created by a little-known artist in Queens at the behest of Rosales (who in 2013 pled guilty to a litany of federal crimes).

    After the gallery closed in disgrace, bilked collectors began pursuing civil claims to recover damages from Knoedler in connection with the fakes.  Defendants included not only the gallery itself, but its parent company; the owner of the parent company, Michael Hammer; the gallery’s director, Ann Freedman; another gallery employee, Jaime Andrade; Rosales and her alleged co-conspirators; and in one case, a Rothko expert who had weighed in on one of the pieces.  Many of the plaintiffs’ legal theories posited, essentially, that Freedman and Knoedler must have known the works were forged; for her part, however, Freedman has maintained that she too was an unknowing victim of Rosales’s scheme.

    Over time, several of the swindled buyers’ cases settled out of court, while others continued to litigate.  As the cases wound their way through the legal process, the presiding judge, Paul Gardephe of the Southern District of New York, has weighed in with thoughtful rulings about the plaintiffs’ claims, which ranged from violations of the federal Racketeer Influenced and Corrupt Organizations Act (RICO), to state law claims including fraud, breach of warranty, and unilateral and mutual mistake.  See, e.g., De Sole v. Knoedler Gallery, LLC, 974 F. Supp. 2d 274 (S.D.N.Y. 2013) (allowing most of plaintiffs’ claims to proceed past motion to dismiss); Fertitta v. Knoedler Gallery, LLC, No. 14-CV-2259 JPO, 2015 WL 374968  (S.D.N.Y. Jan. 29, 2015) (allowing most claims, including those filed against Rothko expert Oliver Wick, to proceed to discovery); Martin Hilti Family Trust v. Knoedler Gallery, LLC, No. 13 CIV. 0657 PGG, 2015 WL 5773895 (S.D.N.Y. Sept. 30, 2015) (allowing most claims to proceed past motion to dismiss); De Sole v. Knoedler Gallery, LLC, No. 12 CIV. 2313 PGG, 2015 WL 5773847, at *1 (S.D.N.Y. Sept. 30, 2015) (ruling primarily in favor of plaintiffs on motion to dismiss claims in an amended complaint).

    Eventually, two groups of plaintiffs appeared to be headed for trial—the De Sole plaintiffs, led by Sotheby’s chair Domenico De Sole, and the Howard plaintiffs, led by private equity manager and art collector John Howard.  This fall, the court denied summary judgment for the defendants in the De Sole and Howard cases (S.D.N.Y. Docket Nos. 12-CV- 2313 and 12-CV-5263 respectively), and set a trial date for January.  De Sole v. Knoedler Gallery, LLC, 2015 WL 5918458, (S.D.N.Y. Oct. 9, 2015).  Following the summary judgment ruling, the Howard plaintiffs reached a settlement.  But the De Sole plaintiffs made it clear that they would forge ahead with a trial.

    In January, the trial commenced.  Many in the art law field provided extensive analysis of the trial as it unfolded, including week by week or even day by day coverage.  But as the trial entered its third week, shortly before Freedman and Hammer were expected to testify, news broke that Freedman had settled with the De Soles.  A few days later, the remaining defendants in the case also settled.

    So while the world didn’t get to find out what Knoedler’s key players might have said on the witness stand, it’s safe to say that, even without a jury verdict, the art market will never be the same.  The cases and the trial shined a spotlight on issues that will shape art deals for years to come.  First among those issues is the all-important question of due diligence; on what information can and should a collector rely in buying art?  (And on the other side of the transaction, what is expected of a dealer or gallery in terms of verifying a work’s authenticity and provenance?  And how might those duties shift if red flags begin to pop up?)  Testimony about forensic examinations of the fakes highlighted the importance of not just connoisseurship but scientific analysis in today’s art world.

    The trial also drew attention to how different Knoedler buyers stood on different legal footing depending on how they “papered” their deals.  For example, at trial, a dealer who advised the De Soles, discussed how another buyer of a purported “Pollock” work had conditioned his purchase on the stipulation that the work would be authenticated by the International Foundation for Art Research; when IFAR refused to authenticate it, Knoedler refunded that buyer’s money.  And overall, the entire Knoedler saga raised the question of the extent to which the opaque business practices scrutinized in the case—secretive or anonymous sellers, questionable provenances, conflicting expert opinions about a work, and multi-million-dollar deals transacted with little formal documentation—were not unique to Knoedler but rather are common throughout the high-end art industry.

    In the meantime, while the De Sole plaintiffs’ chapter has ended, the story isn’t over.  A few other cases against Knoedler by other collectors are in various stages of discovery and pre-trial; it remains to be seen whether more settlements might be forthcoming.  And on the criminal side, it was recently announced that one of Rosales’s suspected co-conspirators, Jesus Angel Bergantinos Diaz, will be extradited from Spain to face charges in the U.S. related to his alleged role in the forgery scheme.  (The actual creator of the forgeries, Pei Shen Qian, fled to China after being charged.)  The art world will likely continue to feel the aftershocks from this spectacular forgery scandal for years to come.