Painting a Picture of Collectibles Fraud

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In early 2024, a collector sold the so-called “dynasty collection” of Michael Jordan’s six pairs of championship Air Jordan sneakers at auction for $8,032,800. The lot included signed limited photographs of Jordan holding one of the sneakers. In the world of collectibles, it’s a seller’s market where an original Pet Rock goes for anywhere from $30 to $100 and one of Princess Diana’s evening dresses fetches $1.5 million (11 times higher than estimated) at auction. This favorable environment for collectibles sellers has a dark side. According to Michael Schidlow, CFE, the market is susceptible to fraud. Schidlow, a professor and lecturer, is a compliance and risk management specialist with more than 15 years of experience in law, compliance, audit and consulting.

In his 35th Annual ACFE Global Fraud Conference session, Schidlow walked through the forms of deception that threaten the authenticity and value of luxury goods and collectibles. Through real-world case studies and analyses, he painted a picture of the sophisticated tactics fraudsters use to infiltrate the collector's market.

A Perfect Storm

After a 14% decrease in 2020, the collectibles market took off during the pandemic and subsequently experienced record sales through 2022. An influx of online shoppers eager for unique finds caused collectibles prices to surge and supplies to decline. Schidlow said spending specifically increased on “nonessentials,” mostly luxury goods. With demand on the rise, criminals stepped in to fill the supply chain gap with counterfeits, replicas and illicitly sourced goods.

“When you have a product that has manipulation or has obscurity or there’s opacity in the marketplace, all of these represent heightened opportunity for fraud,” he explained. “There is a lot of susceptibility to fraud because these are either difficult to obtain, difficult to value or valuate, or they are relatively unique in their nature, making them … unverifiable.”

Over the past five years, art and antiquities purchases have increased 50% year over year. Collectibles buyers have spent an average of $180,000 per purchase, primarily online, according to Schidlow. As the value and volume of these types of marketplaces are on the rise, he warned that the collectibles environment is vulnerable to financial manipulation.

Price Tag Ponzi

Schidlow provided the case of Stephen Burton as an example of collectibles fraud. Burton, accused of duping investors out of approximately $100 million, allegedly ran a fraudulent wine investment scheme with his co-defendant, James Wellesley. The indictment alleges that, from 2017 to 2019, Burton approached investors at conferences and elite wine sales events as a representative of his company, Bordeaux Cellars.

The indictment alleges the defendants claimed to investors that Bordeaux Cellars brokered loans, which would be fully collateralized by high-value collections of wine, between investors and high-net-worth wine collectors. The defendants promised investors that they would receive regular interest payments from the borrowers and that Bordeaux Cellars would keep custody of the wine, securing the loans while the loans were outstanding. As alleged, the high-net-worth wine collectors did not actually exist, and Bordeaux Cellars did not maintain custody of the wine purportedly securing the loans. Federal prosecutors say the defendants used incoming loan proceeds to make fraudulent interest payments to investors and for their personal expenses.

The scheme collapsed once Burton stopped making interest payments. He and Wellesley each face up to 20 years in prison.

Schidlow had this advice for CFEs: “As you do a forensic investigation, be mindful of where somebody may have inflated or artificially decreased the value of an asset, investment, item or a collectible.”

Trust But Verify

Schidlow said the red flags in the Burton fraud entail a lack of independent verification of collateral and weak due diligence in regard to the collateral. Schidlow said collectors can help protect themselves from falling prey to fraudsters by taking these steps:

  • Trace the provenance and origin of the goods. Look for publicly credible and/or peer-reviewed information on origin and provenance.

  • Verify the production history of the goods. Anomalies can increase price, but they can be indicative of reproduction.

  • Establish processes to consider potential counterfeit risk and likelihood. Given the type of good, is it at higher risk for illicit production?

  • Follow minimum requirements and processes to determine the identity of the seller. Are there considerations that would affect the volume being sold or the speed at which they’re being produced?