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In France, dirty tricks in a highbrow market
April 20, 2020 Successes & Messes

Most of us believe we’re savvy enough to keep from being scammed by con artists in a sales negotiation. But, as the Bernard Madoff scandal showed, even the rich and seemingly business savvy get taken for a ride sometimes. The latest high-profile swindle to hit the news, this one in France, reminds us of the need to stay vigilant.

An industry interloper appears

In 2002, a shadowy figure named Gérard Lhéritier burst onto the genteel European and American market for rare manuscripts and books, reports David Segal in the New York Times. In auctions and private negotiations, Lhéritier and representatives of his company, Aristophil, paid inflated prices for letters from Fidel Castro, Abraham Lincoln, and Charles Dickens; first editions by Jack Kerouac and Balzac; sketches by Salvador Dalí and Andy Warhol; and numerous other treasures.

Within years, Aristophil owned an estimated 5% of the global market for rare books and manuscripts, leaving many dealers shut out of the market.

In addition to offering sellers many times the going rate for their manuscripts, Lhéritier reportedly paid some dealers monthly retainers of 10,000 euros (approximately $10,800 today) for leads. Other dealers, for a fee, signed off on generous appraisals of Lhéritier’s documents, which he used to lure investors.

Buying legitimacy

As he amassed an impressive collection of artifacts, Lhéritier divided their appraised value into shares and began selling the shares like stock in a corporation, according to the Times.

Lhéritier spent lavishly to build a reputation as a respected manuscript dealer out of nothing. He opened the Museum of Letters and Manuscripts in a tony neighborhood in Paris, bought a $40 million mansion to house Aristophil, and gave out awards and donations. His high profile and largesse led Europeans to “rummage through their libraries and sell off their treasures,” according to Segal.

Aristophil’s collection ballooned to 136,000 works. Ultimately, about 18,000 people, many of them elderly and of modest means, invested approximately $1 billion total in the documents. The investors later claimed that Aristophil falsely promised to buy back their shares for at least 40% above their original price after five years.

The crash and the aftermath

As time passed, more and more of Aristophil’s aging investors tried to cash out their shares. Aristophil stalled for time. In an odd twist of fate, Lhéritier won the equivalent of $215 million in a European lottery in 2012 and poured about $40 million into Aristophil, but it was just a temporary reprieve.

Investors’ complaints led to media coverage and a police raid in 2014. Lhéritier, then in his late 60s, was arrested and charged with fraud. He stood accused of running a classic Ponzi scheme that depended on a continual influx of new investors to stay afloat. It came out that Lhéritier had been involved in a similar scheme involving commemorative stamps in the 1990s.

French authorities seized Lhéritier’s collection and hired a company to auction it off to help repay investors, a process that will take years. Because he so grossly inflated the value of the manuscripts, they are fetching only about one-tenth of what investors paid for them. Some investors have been forced to sell their homes or cash out their retirement savings. One committed suicide.

While the criminal case against him is adjudicated, Lhéritier continues to live in a $6 million villa in France. In an interview with Segal, Lhéritier denied he had done anything wrong and insisted he was unfairly targeted by regulators and investors for being an industry “disruptor.”

Eight more auctions of Aristophil’s former holdings are planned for this year. One of the main buyers in these fire sales is Jean-Claude Vrain, a dealer who was indicted for “gang fraud” for selling documents to Lhéritier and then appraising them at exorbitant rates.

Being a better noticer

The sordid story of Lhéritier’s alleged fraud highlights just how willing we are to suspend disbelief when confronted with opportunities to win big. In the Madoff scandal, it should have been obvious to experienced investors that his steady returns on investment, seemingly immune to stock-market volatility, were too good to be true. Similarly, Lhéritier’s lack of reputation and his unorthodox approach in the rare-manuscripts market should have raised red flags much sooner for experts, investors, and authorities alike.

In his book The Power of Noticing: What the Best Leaders See (Simon & Schuster, 2014), Harvard Business School professor Max H. Bazerman notes that all of us are susceptible to positive illusions—that is, seeing the world as we want it to be. To reach more rational judgments, we need to test the “reality” we think we see by asking lots of questions, verifying claims independently, and otherwise examining whether our counterpart’s sales pitch makes sense in the real world.

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