A House Divided Behind the velvet curtains at Sotheby's, two tycoons waged a titanic battle for control of the 256-year-old auction house.
By Shawn Tully

(FORTUNE Magazine) – On a Sunday afternoon in April, two days after returning from a trip to London, Detroit shopping-center developer Robert Taubman flew to New York City to see money manager Ron Baron. Taubman had just been nominated as a director of Sotheby's Holdings, the 256-year-old art auction house controlled by his father, A. Alfred Taubman. Baron, Sotheby's largest shareholder, wasn't happy.

It didn't take long for the shouting to begin. Five minutes after Taubman arrived at Baron's Park Avenue duplex, Baron ordered him to leave. The screaming was so loud, say sources close to the combatants, that Baron's wife, Judy, lounging upstairs, thought it sounded as if someone were being badly beaten.

The scrappy, voluble Baron and the dour, linebacker-sized Taubman simmered down enough to exchange accusations. Baron bellowed that an outrageous price-fixing conspiracy had flourished on Alfred Taubman's watch and that the older Taubman had no right to keep control of the auction house. It was "horrible," Baron yelled, that after Sotheby's had forced Al Taubman off the board in February, he had the gall to name his son as a director.

Taubman fired back that Baron should stop moaning, that he always knew the risks of investing in a company with special shares that enabled the Taubmans to control the board. The Fords of Ford Motor and the Sulzbergers of the New York Times used their privileged stock to ensure that those great names remained in their hands. The Fords had no intention of relinquishing those rights, Taubman roared, and neither did his family. Baron's demands, he charged, were nothing more than a brazen grab for control.

That was the last time the two men talked. Since then they have engaged in a titanic--and until now largely untold--battle to shape the destiny of the storied auction house. Much has been written about the circumstances that led up to the Park Avenue showdown and the events that unfolded afterward: the price-fixing by Sotheby's and Christie's, which between them controlled 90% of the $4 billion auction market; the forced resignations of Sotheby's chairman, Alfred Taubman, and brassy chief executive, Diana Brooks; the proposed $512 million settlement of a class-action lawsuit brought by 100,000 victims of the commission-rigging scheme; and Brooks' agreement with federal prosecutors to plead guilty in exchange for testimony against her former boss, who is still the target of a criminal investigation.

But in focusing on the legal cases, the media missed the drama that took place behind the velvet curtains--in the Sotheby's boardroom, in the high-stakes negotiations with plaintiffs attorney David Boies, and in the private machinations between the Baron and Taubman factions. The cast of characters included a shrink (Sotheby's board member and former Moviefone chairman Dr. Henry Jarecki), a media baron (Conrad Black), and a 92-year-old oilman (Max Fisher). Even Warren Buffett played a role. Indeed, the story of how Sotheby's was saved from financial ruin, pieced together by FORTUNE from interviews with directors and other insiders, none of whom wanted to be named, may turn out to be not only more fascinating but of more lasting significance.

When the price-fixing scandal broke in January and Sotheby's stock plummeted, the biggest loser was the company's largest shareholder, Ron Baron. But the turmoil also provided Baron with an opening: It was his chance to end Taubman's privileged status at Sotheby's and take charge of the company himself. Baron, 57, is a blithe spirit with a highly original approach to investing. Unlike Taubman, a 75-year-old shopping-center developer whose taste runs from blue bloods to Old Masters, Baron prefers pop art, baseball memorabilia, rock & roll, and old buddies from his days at New Jersey's Asbury Park High School. His office overlooking Central Park is adorned with Roy Lichtenstein prints and the 1920 contract that sent Babe Ruth from the Boston Red Sox to the New York Yankees. At a conference in October for investors in his Baron Capital funds, Baron provided a surprise treat--a performance by one of his heroes, Neil Diamond. And he sang along as Diamond crooned, "Money talks, but it don't sing and dance...."

As an investor, Baron is the Warren Buffett of small- and mid-cap stocks. Baron Capital's mutual funds have provided excellent returns by finding overlooked companies Baron believes have enormous growth potential, then holding on to them as they get big. Some of his discoveries include Charles Schwab, telecommunications equipment maker Flextronics, and the employment agency Robert Half.

Baron started buying Sotheby's stock in 1998. He thought the company was undervalued and could flourish if it harnessed its auction business to the Internet. Baron immediately began lobbying Brooks and Taubman to sell lower-priced goods on the Web, where costs are far less than at live auctions and Sotheby's could swell its revenues by handling large volumes of paintings, porcelain, and rugs. Though the results so far aren't particularly promising, Baron remains convinced that Sotheby's can find significant future growth in cyberspace. "With the help of the Net, Sotheby's can raise its revenues from $400 million to $3 billion in ten years," Baron says, pacing the Persian rugs in his office in ostrich-hide shoes. "That could multiply the stock price tenfold."

By the end of last year Baron had poured about $500 million into Sotheby's, at an average price of $20 per share--5% of his funds' $9 billion in assets--giving him a 41% stake in the company. His admiration for Taubman buoyed his confidence. "He's a retailing genius who could go into a department store, open the drawers to check the inventory, and tell you if it was well managed or not," says Baron. He marveled, for example, that Taubman had installed giant elevators in Sotheby's newly refurbished building on Manhattan's Upper East Side, elevators big enough for trucks to haul in entire estates. And, he says, Taubman had reassured him that despite the two classes of shares, he wouldn't be treated as a second-class owner. "I'll treat your shares exactly the same as mine," Baron says Taubman told him before he started his buying binge.

By contrast, Taubman had acquired his controlling stake in Sotheby's for a mere $37 million in 1983, when it was on the verge of collapse. When he took it public four years later, he followed the example of his longtime friend Henry Ford II: He established a special class of B shares--"killer B's" to Sotheby's insiders--that gave him extra voting rights and guaranteed him sovereignty.

That put Baron in a weaker position than Taubman, even though he owns nearly twice as much stock. He can choose only a quarter of the board's 16 members, while Taubman gets to name the rest. To most investors, the killer B's and the regular A shares look the same; both are selling at about $22 a share. But because the class B shares pack extra power, an acquirer could have taken full control of Sotheby's--its board, strategy, everything--simply by buying Taubman's 22% stake. (Sotheby's board has the right to match any offer by finding another buyer or purchasing the shares itself for the same price.) The prospective buyer would have to pay Taubman a premium of 15% to 20% for his shares. Regular stockholders, like Baron, would watch Sotheby's change hands without getting the fat markup in share price that normally sweetens a takeover for all the owners.

Until the scandal broke, Taubman's killer B's didn't bother Baron. But when the stock dropped from $30 to around $15 in the wake of the price-fixing allegations, he began to fret. He feared that by stacking the board with cronies, including his own son, Taubman could engineer a settlement that protected his own pocketbook at the expense of Sotheby's. And that Baron would be left holding a huge stake in a wounded company.

The screaming match with Robert Taubman confirmed Baron's worst fears. Whatever assurances Baron thought he had from the older Taubman were now off the table: "He said his interest is better than my interest," Baron recalls. So Baron started a guerrilla campaign against the Taubmans. For the first time, he exercised his right to name directors. And he lobbied the board with an intriguing plan to save Sotheby's from huge damages, proposing that Taubman pay all or most of the fines in the class-action lawsuit by changing his B shares into regular shares, then distributing them to the plaintiffs. Besides reviving the value of Sotheby's stock, the plan, by eliminating the killer B's, would make Baron Capital the company's controlling shareholder.

That set the stage for a dramatic eight-hour board meeting in New York City on Aug. 3. For some of the directors, it was the first time they had laid eyes on Sotheby's recently expanded glass cathedral, a building that had Taubman's name written all over it--in the soaring auction room framed with skyboxes, where the likes of Billy Crystal get to bid in private; in the top-floor gallery that bathes van Goghs in glorious natural light; and in the boardroom itself, decorated with the sunsets and gardens of Childe Hassam and other American impressionists. But Taubman himself was nowhere to be seen: He was off fly-fishing for salmon in Iceland.

The Sotheby's directors who sat around the blond-wood conference table contemplating the company's fate had a different cast from previous boards. In the past Taubman had chosen a combination of British aristocrats with little management experience and personal friends who happened to be lawyers or businessmen. Now the board was loaded with feisty entrepreneurs. Baron had picked the chairmen of two companies he had invested in--Steven Dodge of wireless-equipment maker American Tower and George Blumenthal of NTL, the British communications giant--as well as money manager Brian Posner and former Moviefone chairman Henry Jarecki, who also teaches psychiatry at Yale. Jokes Baron: "Having a shrink on the board sure can't hurt Sotheby's."

The Taubman-appointed directors included some old friends, such as Canadian media mogul Conrad Black, longtime attorney Jeffrey Miro, and Max Fisher, the Michigan oilman who had given Taubman his first big break in the early 1950s, commissioning him to build or renovate 153 gas stations. Lending an air of statesmanship was the new chairman, Michael Sovern, a former president of Columbia University. (Miro and Robert Taubman recused themselves from all discussions about a settlement.)

Sovern explained to the board--and the directors agreed-- that Sotheby's had two objectives. First, it had to settle quickly. The legal cloud was discouraging collectors from selling their art through Sotheby's. Employees were leaving in droves, lured by smaller competitors like Phillips, recently purchased by French luxury-goods purveyor LVMH. Even a few months of crippling lawsuits could wreck the auction house's business.

Second, Sotheby's had to settle for an amount it could afford. It had invested $191 million to expand its headquarters and start an Internet business, and the Web venture would burn a lot more cash before it got traction. In management's estimation, Sotheby's couldn't afford to pay more than $100 million without seriously damaging its financial health.

But the stakes were much higher than that. Sotheby's lawyers told the directors that David Boies, the attorney spearheading the class-action suits, estimated the damages--excessive commissions charged to both buyers and sellers as a result of the price-fixing scheme--at $285 million. Since plaintiffs in antitrust cases can demand treble damages, Boies planned to pursue the auction houses for more than $850 million. The lawyer who had humbled Microsoft had a strong incentive to win big: A federal judge in New York, Sovern told the board, had approved a deal giving Boies' firm 25% of any damages over $400 million.

Some of the Baron-appointed directors, including Jarecki, favored having Taubman pay any settlement by surrendering his special shares. But Sotheby's lawyers explained that because the B shares were enshrined in Sotheby's charter, even the board couldn't force Taubman to relinquish them. The partisans quickly dropped the idea and didn't push for a lawsuit that might have forced Taubman's hand. "The Baron-appointed directors," says one board member, "proved far more independent than he ever imagined."

In most antitrust cases, the co-conspirators agree to cooperate so that the plaintiffs can't play one side against the other to swell the settlement. But the contempt between Sotheby's and Christie's was so great that they refused to align their strategies or even talk. That freed Boies to exploit their mutual distrust. He could settle with either Sotheby's or Christie's for a relatively small amount, then, with the house that settled first providing damning evidence against the other, chase its hapless co-conspirator for a bigger sum. Boies, Sotheby's lawyers told the board, was prepared to make just such a deal with Christie's.

By the time the directors left at 7 P.M., they were alarmed. "There was a feeling that Christie's had far deeper pockets than Sotheby's," says one director, "so that Christie's could afford to settle first and start a lawsuit that could ruin us."

Over the next seven weeks Sotheby's, Christie's, and Taubman bulled and parried their way through whirlwind negotiations. For Sotheby's, the only escape was to get Taubman to make a huge payment--the option Baron had proposed, except Taubman would pay in cash instead of stock. If he refused, Sotheby's couldn't afford to settle before Christie's, leaving it vulnerable to protracted suits and a ruinous settlement.

Taubman wasn't offering much cash. But Sotheby's had leverage: It could sue Taubman to recover part or all of any damages. In late August, Boies proposed the deal that got Taubman moving. He said he would accept a $100 million settlement from Sotheby's. The auction house would then let Boies sue Taubman instead of having Sotheby's file suit against its former chairman. The plaintiffs would get the first $130 million in damages--assuming Boies could prove Taubman's involvement in the price-fixing scandal--and anything more than $130 million would be split with Sotheby's.

The board rejected the deal. But at the same time the directors sent a strong message to Taubman: Unless he stepped forward, Sotheby's would settle separately and leave its former chairman standing alone.

It was Max Fisher who helped orchestrate the final deal. The revered elder had always been a hands-on director. He insisted that lower-level employees get bigger percentage raises than executives, and he scoured expense accounts for frivolous spending. "He has a bear trap for a brain and smells b.s. a mile away," says one director. "He had an amazing way of guessing what the opposition was doing." At board meetings Fisher would occasionally lean forward and close his eyes, creating the impression that he was sleeping. "Trust me, he wasn't napping," the director says. "Max was just pacing himself." What Fisher wanted to know was why Sotheby's wasn't talking to Christie's. He told the board it had to bury its mistrust for its rival and reach a settlement. "Max kept insisting that Boies was trying to keep the two sides apart," recalls a director. "It didn't make sense to Max that Christie's wouldn't work with us on the settlement. And he was right."

Boies continued to play hardball. In mid-September, telling each auction house that the other was the real villain, he offered a new deal to both Sotheby's and Christie's: Settle for $212 million and help him win even more money from the other side. The message was simple--whoever settles the case first gets a big discount.

Sotheby's wanted to take the deal, but as Fisher and other members of the board predicted, so did Christie's, and they couldn't both get it. Fearing an impasse that would force Boies to sue both houses, Fisher proposed that Sotheby's and Christie's split the difference. On Sept. 24, each agreed to pay $256 million in damages. And Taubman promised to underwrite the lion's share of the settlement himself--$156 million. It was a supreme irony that the rival auction houses, which came to grief by secretly colluding to fix commissions, only managed to escape disaster by joining hands.

Taubman's decision to finance the settlement wasn't an easy one. He was worried that the huge payment might be perceived as an admission of guilt. But he was convinced that it made excellent economic sense. Sotheby's will have to pay only $50 million in cash. The other $50 million will be distributed to plaintiffs in the form of coupons that can be used to reduce commissions on art sold at Sotheby's, thereby binding the collectors to the very house that fleeced them in the first place. Sotheby's will also pay a $45 million criminal fine over five years, with no interest, and issue $40 million in new stock to help settle shareholders' suits. (Taubman is contributing an additional $30 million toward the latter settlement.) In the weeks following the settlement of the class-action suit--which is still pending final approval by a federal judge--Sotheby's share price jumped 30%, to $27 a share, swelling the value of Taubman's holdings by $90 million, about half the amount he agreed to pay. (It has since fallen back to about $22.)

As for Baron, the directors he appointed helped persuade him not to sue Taubman to force him to eliminate the B shares. "I would hope Ron is persuaded not to prolong the agony of the company in which he's a major shareholder," says one board member. Baron also got advice from one of his heroes, Warren Buffett. The Oracle of Omaha told Baron it's always better to avoid being consumed by litigation, such as the legal confrontation chewing up so much of Bill Gates' time at Microsoft.

Baron's fears that Taubman will make a deal at his expense are receding. Doing the wrong thing in the eyes of the Justice Department--achieving a big gain to the detriment of other shareholders--could hurt Taubman's chances of escaping indictment. Plus the directors hate the idea. "Taubman would have to be brain dead to try to pull off something like that," says one board member. "He may have already injured the company. He's in no position to get incremental compensation. He'd meet all kinds of resistance."

How did Sotheby's get itself into such a mess? For 17 years Taubman exercised complete sovereignty over the auction house. He revolutionized its business, promoting customer service over snobbery, transforming Sotheby's from an elitist club into an emporium for the new-money masses, bringing buzz to the auctioning of rugs, paintings, and jewelry. In the process he transformed himself--from a shopping-mall maven, the son of a German-Jewish immigrant whose construction business collapsed during the Depression, into the monarch of a glamorous kingdom. He decorated his mansions in Palm Beach and Southampton, N.Y., with paintings by Degas and Pollock. He palled around with celebrities and tycoons.

Taubman was a brilliant thinker, but he wasn't much of a manager. He never fired anyone, hated making tough decisions, and detested saying no. He also had a terrible temper. He often called Sotheby's officials, but it was seldom to talk about budgets or earnings. Instead he would rant about something his wife had told him--that Christie's had captured a collection from Sotheby's, that Christie's salespeople attended more cocktail parties.

Innovative ideas clearly weren't enough to keep Sotheby's thriving. Taubman needed someone who could implement his ideas, a decisive, hands-on operator with the strengths he lacked. He found her in Dede Brooks, a jocular, magnetic, self-confident woman, nearly six feet tall, who grew up on Long Island's tony North Shore and left Citibank in 1979 to work at the auction house. Friends say Taubman was cowed by strong women--among them his second wife, Judy Mazor, a former Israeli beauty queen 22 years his junior--and he was no match for Brooks. He allowed her to run Sotheby's largely unchecked, and former employees say the chairman's proxy made her arrogant. Whether or not Taubman told Brooks to fix prices, as prosecutors suspect, it's likely that her hubris encouraged her to act above the law.

Brooks made no effort to emulate the muted sophistication of most Sotheby's women, sporting canary-yellow or magenta suits, a leonine coif, and politically incorrrect fur coats. She treated Taubman like one of his buddies would. "Hiya, boss!" she'd intone in a loud basso, slapping the chairman on the back. Her style captivated Taubman. In 1994, when CEO Michael Ainslie retired, Brooks was named to succeed him.

At first, associates say, Brooks was a compassionate, sensitive boss. But as her power grew, a dark side emerged. She wanted to run every part of Sotheby's, regardless of whom she crushed. Until the mid-1990s a team of experts negotiated the terms of sale with wealthy clients seeking to auction famous works. Brooks took over their roles, hammering out all the important deals herself. "I enjoyed working with her until she essentially took over my job," recalls David Nash, former head of Sotheby's department of impressionist and modern art. "After that I didn't enjoy it." Nash quit, as did his wife, contemporary art expert Lucy Mitchell-Innes, and a number of other experts.

Brooks appointed herself Sotheby's head auctioneer. Her booming, unmodulated voice and stiff manner generated little excitement and didn't help sales. But she consolidated her power, getting practically anything she wanted from Taubman, including a grant of 850,000 stock options in 1998, six times what any other manager received. The award infuriated executives, yet Taubman barely heard their complaints. Dede, and Dede alone, ran the business. She ignored Taubman's comments in meetings, often rolling her eyes. But the boss didn't complain. Brooks had become indispensable.

The conspiracy to fix prices began in 1995, when a dreadful market created the temptation to cheat. With Sotheby's and Christie's desperate for works of art, sellers played the two houses against each other, driving commissions down to 2% or even lower. "Marketing expenses ate up our revenues," recalls Robert Monk, a former head of contemporary art at the auction house. "We were making almost no money."

In early 1995, Brooks made a dramatic presentation to the board. She proposed that Sotheby's change its commission structure from a flat to a sliding scale: Sellers would pay Sotheby's 10% to auction a $10,000 highboy and just 2% on a $5 million Matisse. But the biggest change wasn't the scale. Brooks recommended that Sotheby's make its commissions nonnegotiable. "She said, 'We'll hold fast, with no discounts--what we want is profits,'" recalls a director who was at the meeting. "'We'll compete on service, not on price. If we lose consignments, we lose them.'" According to the board member, Brooks added, "Let Christie's buy market share, but it would be crazy for them to undercut us and beat their own brains out."

What the board didn't know was that Brooks was already meeting in limos and restaurants with Christopher Davidge, her counterpart at Christie's, colluding to set identical fees and refuse discounts so that sellers could no longer shop between the two houses. With the price war over, Sotheby's profits started climbing. The conspiracy was in place that would forever loosen Taubman's grip on Sotheby's.

Whether Taubman told Brooks to make a deal with Christie's --as Brooks now claims he did--is still under investigation. Taubman insists, through his lawyers, that he's innocent. And his ex-lieutenants swear by his ethics. Richard Kughn, former president of his real estate firm, says Taubman wouldn't build in any part of the country where kickbacks to contractors or politicians were de rigueur. Kughn's successor, Robert Larson, recalls that in the 1970s, Prudential Insurance, Taubman's partner in the Woodland shopping center in Grand Rapids, returned a check, claiming Taubman was overpaying. Prudential was technically right. But Taubman decided that as he understood the deal, Prudential deserved the larger payment. "It's not in the man's character to do something illegal," says Larson.

But documents supplied to federal prosecutors last January by Davidge after he was sacked by his boss, French luxury-goods czar Francois Pinault, are said to provide evidence that the plot began with a 1993 conversation between Taubman and Christie's then-chairman, Sir Anthony Tennant. Prosecutors are currently weighing whether to indict Taubman; if convicted, he faces a maximum sentence of three years in jail.

Insiders say it's only a matter of time before Sotheby's is sold. The list of potential buyers includes Bernard Arnault, who heads LVMH and is said to covet the auction house for his luxury-goods portfolio. Taubman, who lost an estimated $600 million in the perilous real estate market of the early 1990s, may have to sell or borrow against his Sotheby's stock to pay his share of the damages. Most of all, his friends say, the thrill is gone. "It wasn't a big investment, but for Al it was a very romantic one," Max Fisher once said. Friends of both men say Fisher is heartbroken by Taubman's woes. But for Fisher--as for other members of the board who took matters into their own hands--duty comes before friendship.

In the end, neither Taubman nor Baron will control Sotheby's future--Taubman because of his legal woes, Baron because his attempted coup simply failed. But both men gained partial victories: The board's independent actions saved the value of their investments. Taubman and Baron may soon be gone from the scene. And all that will remain of the Taubman era is a splendid glass cathedral, in which a new owner can display his trophies and patrons of the art world can pray for a good price on a Picasso.

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