Mastro Auctions is currently being investigated by the FBI:
Burr Ridge auctioneers subpoenaed in sports memorabilia fraud probe, sources say
Authorities said to be investigating possible ‘shill bidding’ to drive up prices on collectibles
August 05, 2008|By Jeff Coen, TRIBUNE REPORTER
There’s a lot of money to be made in the sports memorabilia business, as shown by an auction in Chicago late last week in which a single baseball card sold for $1.62 million.
But it’s not just collectors who have taken an interest in the buying and selling — federal agents in Chicago are looking into allegations of fraud, sources say.
The sources confirmed Monday that investigators handed out subpoenas to executives of Mastro Auctions at last week’s National Sports Collectors Convention in Rosemont.
Authorities are said to be investigating possible “shill bidding” in which bogus bids are submitted to drive up the prices of collectibles.
Mastro Auctions, headquartered in suburban Burr Ridge, handled the $1.62 million auction of a rare 1909 Honus Wagner baseball card Friday evening in Chicago. There was no indication that the card’s sale is of interest to investigators.
Spokesmen for both the FBI and the U.S. attorney’s office in Chicago declined to comment on the existence of any probe.
Mastro Auctions, one of the biggest auction houses in the sports memorabilia business, did not return a call Monday seeking comment on the subpoenas.
Mastro is led by president Doug Allen and reported revenues of $45 million in 2006. On the company’s Web site, Mastro bills itself as a premier choice for those seeking to sell memorabilia at auction.
“The level of ethics, credibility and service you’ll receive from Mastro Auctions is second to none in the industry,” the Web site says.
The National Sports Collectors Convention, billed as the largest in the country in the sports memorabilia hobby field, was held Thursday and Friday.
As part of the convention, Mastro auctioned off the Wagner card at the downtown Chicago ESPN Zone and sold the 600th home run ball hit by Ken Griffey Jr., who was traded to the White Sox last week.
The FBI exposed fraud in the sports memorabilia industry a decade ago. The nationwide probe, code-named “Operation Foul Ball” and centered in Chicago, resulted in the convictions of more than a dozen people in large part because of the undercover work of a former dealer.
That investigation revealed forgeries of sports stars’ autographs on thousands of jerseys, other sportswear and equipment. Distributors were convicted of selling millions of dollars in phony collectibles, including basketballs and jerseys purportedly signed by Bulls great Michael Jordan.
At the time, authorities said the industry itself estimated that forgeries made up as much as 70 percent of the sports memorabilia market.
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jcoen@tribune.com
Kinda Sorta Genuine
By NEIL A. MARTIN
SOMETIMES, EVEN THE EXPERTS CAN BE FOOLED.
Take James Spence, one of the country’s foremost sports-autograph experts. When a Fox-television news affiliate in Philadelphia asked him to verify the signatures on six baseballs signed by sports greats, he gave a firm thumbs-up to one apparently signed by former Phillies third-baseman Mike Schmidt. “Very, very typical of the way he would sign,” he told the station’s reporter. “Good speed, good letter formation, and reflects authority and spontaneity.” Informed that the station’s resident graphic artist had forged Schmidt’s signature the day before, Spence could only reply: “He did a fine job.”
That awkward episode unfolded a few years ago, when Spence headed up an autograph-authentication unit of Collectors Universe, a big player in collectibles whose stock is traded on Nasdaq (ticker: CLCT). Though Spence has since moved on, forming his own firm, the credibility of the unit, PSA/DNA, has increasingly drawn scrutiny. It is now battling two lawsuits challenging the integrity of certain authentications it made. And the company has taken an unusual flogging in the publications of two prestigious collectors’ organizations.
“It’s not uncommon to see a PSA/DNA [expert] ‘authenticating’ an autograph that is certainly not authentic,” says a scathing article in the current issue of Pen and Quill, a magazine of the Universal Autograph Collectors’ Club. It cited more than a dozen cases of what it called authentication foul-ups, including validation of a preprinted signature of Franklin D. Roosevelt, two Neil Armstrong forgeries and “autopen,” or machine-signed, signatures of George H.W. Bush, Bill Clinton, Ronald Reagan and Bruce Springsteen.
Collectors Universe stands by its work and says the Pen and Quill article has many factual errors.
“Credibility is our biggest asset and our reputation is the core of our business,” Michael Haynes, chief executive of Collectors Universe, told a group of institutional investors at a recent corporate seminar in New York.
The company’s autograph unit sometimes gives the OK to rubber-stamped and machine-made signatures, says a prestigious collectors’ magazine. Collectors Universe has sought to discredit the report.
Still, the lengthening list of allegations, along with the effects of an eroding collectible-coin business, could start to weigh on the shares of Collectors Universe, which has a modest market capitalization of $130 million. At 15, the stock is down from 20.60 about a year ago, in part because of disappointing coin sales, and some bears see it falling another 20% to 25%.
COLLECTORS UNIVERSE, BASED IN NEWPORT BEACH, Calif., is one of the largest players in its field. It provides services and products to dealers and collectors of coins, sports cards, stamps, autographs, sports memorabilia and more. In all, some $1.3 billion of collectibles come under its review in the course of a year, and annual revenues are running at $33 million. The stock has been publicly traded since 1999.
The PSA/DNA autograph unit, which, as its name suggests, counts DNA analysis among its tools, contributes less than 5% of revenues. But its verification services have been a model for the rest of the company, so the controversies involving the unit could have broad implications for the company’s image.
The sparring began last year when William Daniels, a long-time collector and dealer of sports memorabilia in Lebanon, Ind., filed a suit against PSA/DNA and online auctioneer MastroNet. The suit, now in the discovery phase in Boone County (Indiana) Superior Court, accuses PSA/DNA of fraud in connection with verifying the authenticity of some 2,000 autographed glossy color photographs of sports figures that Daniels purchased for nearly $20,000 in a catalog auction from MastroNet in December 2004.
Each photo came with a letter of authenticity from PSA/DNA. But, Daniels claims, some 65% of the photos turned out to be damaged, tattered, torn and creased, with signatures smeared or otherwise illegible. When he asked PSA/DNA about this, he claims, he was told by one of its authenticators that the firm had never actually reviewed the photos. Instead, according to Daniels, PSA/DNA had supplied MastroNet with blank letters of authenticity, leaving it to the auctioneers to fill in the details.
“This business is based on trust and faith and PSA/DNA is supposed to be a reliable third-party verifier,” Daniels said in an interview. “But how can they verify something they don’t look at? ”
MastroNet president Doug Allen says the claim that PSA/DNA didn’t review the items is “a total fabrication.” He said MastroNet records show that PSA/DNA authenticators were on the premises. He added that his firm had offered early on to reimburse Daniels if he would identify and return damaged photos, but that Daniels refused. Haynes, the Collectors Universe CEO, says his firm has no control of “the care and handling of items by the auction house or by the common carrier that may have delivered the items.”
Meanwhile, Collectors Universe was sued by a former employee, William Miller, for millions of dollars for issuing more than 14,000 certificates of authenticity bearing his name that were used without his permission to verify the legitimacy of various sports memorabilia. The company essentially blames an administrative glitch.
This past November, a jury in Superior Court of California found in Miller’s favor on the unauthorized use of his name, but the judge refused to rule on a damages claim, leaving it up to appeals court to settle the matter. The judge did award Miller $14,060, $1 per signature, representing Collector’s Universe’s profits on the autographs. Miller is appealing and asking for $750 per signature, or more than $10 million.
Senior Vice President of Finance Mike Lewis says the company “failed to adequately stop the flow” of the certificates after Miller said he no longer wanted his names on them. However, the firm believes that Miller suffered no damages and therefore there is “nothing to rectify,” Lewis says.
A $10 million award would be a considerable hit for Collectors Universe, given that it earned just $4.8 million for the fiscal year ended last June. The company acknowledges that a damages award could be “material,” but also points out that it has a $55 million cash cushion and no debt.
Some analysts dismiss the potential impact of the lawsuits on the company’s profitability and stock price.
Dalton Chandler, who follows the company for Needham & Co., which underwrote Collectors Universe’s initial public offering, maintains that the stock could top 19 in 12 months. That would leave the shares trading at lofty 30 times his estimated 2007 earnings of 65 cents a share.
That’s probably an optimistic valuation for a company facing some serious business challenges. The collector coin business, which accounts for 61% of total revenues, is being hurt this year by a sharp drop in orders from a key customer, the company has acknowledged. The customer accounted for 11% of the company’s coin-grading revenues. As a result, the consensus among analysts is for net earnings to fall 25% this year, to 3.56 million, or 40 cents per share.
Chandler is unfazed, saying the coin business “is in better shape than the evidence of the past few quarters suggest. We also think the company’s new diamond business has the potential of meaningful growth while increasing the company’s overall growth.” Late last year, the company entered diamond grading through two acquisitions.
Still, Russell Hoss, an analyst at investment bank Roth Capital Partners, recently downgraded his earnings estimate for the company — to 35 cents a share for the fiscal year ending in June from 51 cents a share — in part because of rising costs throughout the company. Hoss kept a Neutral rating on the stock, but lowered his target price to $11.50 from $14. That would be a drop of more than 25% from the current levels.
THE RECENT ARTICLES IN THE TWO collectors’ magazines have only added to the questions about the company. The bi-monthly Pen and Quill, put out by the oldest autograph collectors’ club in the world, has published what amounts to a five-page indictment of PSA/DNA’s authentication process, entitled “Who’s Watching the Watchmen.”
“It has become apparent that PSA/DNA has some weakness in authenticating autographs outside the sports field — as well as some glaring oversights from within the sports area,” writes author Steve Zarelli, a member of the collectors club. “It’s not uncommon to see a PSA/DNA [expert] ‘authenticating’ an autograph that is certainly not authentic.”
The Bottom Line:
The stock, which has fallen 26% from its 52-week high, could drop another 25% amid questions of credibility, the loss of a big coin customer and high costs in a diamond business.
Zarelli told of a collector who successfully bid for a game-used bat belonging to Ernie Banks, complete with a certificate of authentication from PSA/DNA. “What autograph?” Zarelli writes, “The bat isn’t signed by anyone.” Similarly, a “signed” Mark McGwire baseball card, authenticated and graded by PSA/DNA, turned out to be a rubber-stamped signature rather than hand-written, he writes.
In keeping with the club’s policies, a draft of the article was sent to Joe Orlando, president of PSA/DNA, for review before publication. But according to club president Michael Hecht, a Pasadena, Calif.-based Smith Barney stock broker by trade and longtime autograph collector by avocation, Orlando provided only a general response. “He sent me an e-mail saying they didn’t believe what we wrote was true but to go ahead and publish it and be damned,” Hecht says.
“Some dealers said it was finally about time that someone said what we wrote,” Hecht added.
Lewis of Collectors Universe said Orlando told the club the article was “filled with factual errors and opinions stated as fact.” The company declined to discuss the supposed errors in detail, either for Penn and Quill or for Barron’s.
Shortly after the Pen and Quill article came out, another collectors organization weighed in. The Manuscript Society, an elite New York-based organization of collectors of historical documents and manuscripts, reported on the Miller case in its Manuscript Society News, quoting Miller as saying Collectors Universe used him “as a pawn to deceive or even defraud the public. For the rest of my life, I will live with the uncomfortable feeling that at anytime I might be held responsible for someone who authenticated an autograph I never looked at.”
The controversy surrounding Collectors Universe hasn’t received much attention beyond the narrow audience for Pen and Quill and the Manuscript Society News. But that could change soon. Says Ken Lawrence, a stamp expert with the nonprofit American Philatelic Society’s expertizing service and a member of the organizations that published both articles, “For both these groups to be warning their members about Collectors Universe at the same time is very unusual and very serious.”
In addition, industry leaders are continuing to call for a “clean up” of the industry in general, with more requirements (such as the forensic testing we did):
NY Daily News Article on MEARS 2008 Auction House PolicyAugust 19 2007 at 4:16 PM |
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| Last week I spoke with Michael O_Keeffe of the NY Daily News about the MEARS Auction House Policy for 2008. Below is his article.
Dave Grob Hobby exec calls for industry cleanup BY MICHAEL O’KEEFFE Sunday, August 19th 2007, 4:00 AM Dave Grob, the policy director at Memorabilia Evaluation and Research Services, is pressing hobby leaders to clean up their cut-throat industry. For years, memorabilia executives have agreed that something needs to be done, although they have continued to act as if forged autographs, doctored baseball cards and other rip-offs are an irreversible fact of life. Last week, Grob announced new policies on his company’s Web site that he believes are a first step in cleaning up the hobby. If his clients don’t take those steps, Grob says, it’s only a matter of time before authorities do it for them. “Right now I know for a fact there are other ‘outside forces’ looking into this industry in a very serious manner,” Grob wrote. “My only hope this that the industry/hobby can reform itself and on its own.” Grob told the Daily News last week that the hobby’s future is at stake. “This is a commodity market, and people buy based on trust and confidence in the process,” he said. “This is an unregulated, multi-million dollar industry. It is interstate commerce. If people sour on sports memorabilia, they’ll spend their money somewhere else.” Auction houses that wish to work with MEARS will have to sign contracts by Nov. 10 agreeing to several conditions, including: Auction houses must disclose when they own or have a financial stake in an item. No shill bidding: Auction houses will not let employees or family members bid on lots owned by employees. Consigners will not be allowed to bid on their own items. Grob said MEARS authenticators Dave Bushing and Troy Kinunen – both also work as memorabilia dealers – have followed those principles for several years. “Sales are phenomenal this year,” Grob said. “People like the transparency of the MEARS process.” FBI Lays Subpoenas at National Sports Collectors ConventionI am often asked what I have to gain from writing negatives about the hobby/business in which I make my living. My answer is always the same – if there is a story out there to be told; I want to tell it. People are not stupid, and shielding them from the truth will not have any positive long-term benefits. In what may turn out to be a tremendous black mark for the industry, U.S. federal investigators raided the National Sports Collectors Convention (NSCC) in Chicago last week, delivering subpoenas to several hobby bigwigs to appear before a grand jury that is hearing evidence about fraud in their industry. The hockey autograph market is not part of the probe. The targets of the investigation apparently were Mastro Auctions, the largest of the sports memorabilia auction houses, and Professional Sports Authenticators (PSA), the largest and most established of the card grading services. Several hobby sources report that Mastro is under investigation for “shill” bidding, or entering fake bids on an item in order to drive up the price. PSA is being looked at for overgrading cards that have allegedly been doctored, or fraudulently altered. A New York Daily News story says Mastro is also being looked at for selling a potentially fraudulent Michael Jordan warm-up shirt last year. There is also discussion that the famous T206 Honus Wagner tobacco card, once owned by Wayne Gretzky and Bruce McNall, was altered and knowingly overlooked by PSA. FBI investigators also interviewed a former Mastro Auctions employee who is known to be a “card doctor”, somebody who fixes dog-eared corners, removes stains, flattens out creases, or takes other steps to improve the appearance and value of trading cards. It is considered strongly unethical to alter cards, and it is likely illegal for a grading company to knowingly neglect to report such an occurrence. “(The FBI) spent a lot of time at the PSA booth,” one sports memorabilia executive said. The difference in value of cards that have been altered and the same card in its original flawed condition can be hundreds of thousands of dollars. PSA was formed in 1991 to protect collectors from card doctors, counterfeiters, and other cheats. But the Daily News says they have also been a “lightning rod for controversy”. Many collectors and dealers claim PSA inflates grades for cards submitted by big-volume customers, such as Mastro Auctions. If these claims are true, than the company born to protect collectors may actually be a huge part of the problem. Facts of the investigation remain sketchy at this time, as neither Mastro nor PSA has chosen to comment. The Daily News first reported of problems with Mastro in a column dated July 8, 2007. Here a dealer bid on an allegedly fraudulent auction lot and commented to the FBI how Mastro was unable to produce any records as to the underbidders. It was apparently divulged during the discovery process that the consignor of the lot was also the same PSA employee who had authenticated it. There is numerous discussion in online chatrooms about how Mastro encouraged consignors to bid on their own items in order to generate a higher selling price. This would result in increased revenue for the consignor as well as higher commissions for Mastro. It is also an illegal practice in most States. Mastro Auctions reported revenue of $45 million in 2006. Their website states “The level of ethics, credibility and service you’ll receive from Mastro Auctions is second to none in the industry.” For anyone that thinks this incident may go away quietly, a recent story on the Sports Collectors Digest website quotes a source as saying this “will be much bigger than Operation Bullpen. The source went on to say that this is going to affect established hobby leaders and organizations, but will put the hobby on a good long-term course. This incident will renew calls to bring some sort of regulation to the industry. With the huge profits that have been generated over the past several years comes huge responsibility, and those responsibilities have not been met. Let me stress that none of the aforementioned companies have been charged with any crimes and a lot of information at this point is nothing more than conjecture. Everyone is innocent until proven guilty. I personally have never done business with Mastro Auctions and did not know of any of these accusations until today, but I find them shocking. When dealing in huge dollars, the auction houses and grading/authentication companies should have an arms-length relationship, lest the charges of impropriety begin. It’s funny what people will do when a million dollar card or hundred-thousand dollar jersey is at stake. It will be interesting to see how this one plays out. I personally knew of someone removing a crease from a 1952 Mickey Mantle over twenty years ago. This act increased the value of the card more than thirty fold. The “doctor” was given a 1975 Topps baseball set as payment. I have also had multiple former employees of the “major” auction houses tell me about all the fraud within the industry, especially dealing with shill bidding. Suffice it to say, I will never place a “ceiling” bid with a company that controls its own software. Just to reiterate, the hockey autograph market has not at all been mentioned in this probe. I feel this industry is small enough to self-regulate, and the majority of bad apples left the business several years ago. The lesson to be learned here is just because a reputable person or company tells you something is legitimate, that does not necessarily make it so. |
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