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Diamond Group Widens Probe of Bribe Charges


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Diamond Group

Widens Probe

Of Bribe Charges

 

By ANN ZIMMERMAN and ANITA RAGHAVAN

March 8, 2006; Page B1

 

A probe into bribery allegations at the world's largest grader of diamonds has deepened.

 

Last fall the Gemological Institute of America fired four employees it accused of accepting bribes from diamond dealers as part of an inquiry into inflating the grades of stones. The GIA also severed ties with "a small community of dealers" that it suspected of bribing GIA staffers with cash, theater tickets and other gifts.

 

The organization has confirmed that in recent weeks it has banned an additional group of dealers from having their stones graded. The GIA wouldn't give names, but sources familiar with the investigation say it includes at least three more prominent dealers who sell to larger retailers or private clients.

 

"We felt there was enough evidence of unethical conduct to prompt us to send out another letter" notifying certain dealers that they could no longer submit stones to the GIA for grading, says Kathryn Kimmel, a spokeswoman for the GIA, which is based in Carlsbad, Calif. "We are trying to pursue all credible leads."

 

The GIA won't say how many dealers it suspects of paying off diamond graders, who judge diamonds on their lack of flaws and absence of a yellowish hue. Along with the size and cut of the stone, these grades largely determine the value of a diamond. A small difference in grade can mean a huge difference in price, often hundreds of thousands of dollars on larger stones.

 

If the scandal is as widespread as some dealers believe, it is conceivable that many consumers may have overpaid for their diamonds. The GIA has offered to regrade stones free, and says that numerous consumers have taken it up on the offer.

 

Sean Gilson, a retail jeweler in New Preston, Conn., says he hasn't bought diamonds of any consequence -- white diamonds over one carat, colored diamonds of any size -- in the past few months, because he is afraid the stones' grades have been inflated. "I have also told my customers, two in particular, who want to buy diamonds to wait five months to see what happens to diamond prices," he says. "I would love to make the sale, but not at the expense of my customers."

 

Other jewelers aren't worried. Peter Schneirla, vice chairman of elite jeweler Harry Winston and a GIA-trained grader, believes too much emphasis is being placed on grading certificates. "The top-tier jewelers, if they're not already, are going to do what we're doing, double checking the labs," he says.

 

When the scandal broke last year, the GIA portrayed the problem as an isolated incident that involved just a handful of dealers and stones. But industry veterans suspect problems at the 75-year-old not-for-profit concern are larger than the GIA acknowledges. "I stopped believing the GIA a long time ago," says Yaron Hahami, a New York-based diamond dealer. "I see the proof every day -- stones that don't match their certificates." The GIA would say only that the investigation is continuing.

 

Yet Mr. Hahami still gets his diamonds graded by the GIA -- and he usually buys stones that already come with certificates. The GIA grades about one million stones a year, so dealers feel, for the most part, that they have no choice but to use the GIA. Other labs, such as the International Gemological Institute Inc., grade stones sold by such retailers as Zale Corp.'s Zales Jewelers. The GIA grades some diamonds sold by Tiffany & Co., but the retailer has its own grading lab as well.

 

The accusations have reverberated beyond the clubby corridors of Manhattan's diamond district. De Beers SA, the South African miner and marketer of diamonds, is pressing the GIA to reveal if any of its sightholders -- select companies who are allowed to buy rough diamonds directly from it -- are caught up in the affair as dealers are growing increasingly skittish about doing business with names rumored to be involved. De Beers's marketing arm recently sent letters to its sightholders asking them to identify themselves if they were banned by the GIA.

 

Veterans of the $80 billion diamond-jewelry industry say they believe at least a half-dozen big dealers around the world bribed GIA staffers, giving the dealers enough of a financial edge to allow them to control the market in large uncut rough stones, which are in short supply.

 

The way it allegedly worked, dealers say, is that large dealers would submit disproportionately high bids, often 20% to 30% higher than prevailing bids, for rough stones, knowing that they would be able to sell these stones at a profit because they would be able to get a higher-than-deserved grade for the stone from the GIA. The dealers didn't want their names used because they continue to do business with the GIA.

 

Ralph Destino, the newly appointed chairman of the GIA, says charges that the diamond market was rigged in favor of large dealers are "preposterous." He added, "It's insulting and I am astonished that anyone could make such a claim."

 

Several smaller dealers, like Mr. Hahami, say they had trouble acquiring bigger stones in recent years because they were outbid by big dealers. "For years I wondered how these people could afford to pay these prices," he says. Bruce Smith, a New York diamond dealer who specializes in colored diamonds called fancies, says: "This has affected a lot of diamond dealers' business. Some have been forced to leave the industry, others are thinking about it."

 

The diamond-grading scandal first surfaced in April 2005, when New York diamond dealer Max Pincione filed a lawsuit in the Supreme Court of the State of New York in Manhattan, alleging that dealers had bribed GIA to inflate diamond grades. In May 2001, Mr. Pincione, a former head of retail operations at Harry Winston, had sold two diamonds to the Saudi royal family for more than $15 million. (Mr. Pincione was running his own business at the time.)

 

The Saudis later had their own appraiser inspect the diamonds, and the appraiser concluded their quality didn't match the GIA rating. The Saudis demanded their money back and refused to do further business with Mr. Pincione, who refunded the money. GIA officials say they have no way of knowing the basis of the less favorable appraisal by the Saudis.

 

The GIA settled Mr. Pincione's suit last December for an undisclosed amount.

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And this is why I refuse to call a report a cert and suggest that everyone look at every diamond they buy regardless of who grades it..

 

Are there people that you can trust to tell you the truth?? Of course.. Do some labs have better reputations than others?? You bet.. But when it all comes together in the end, it's how the diamond looks in person that matters..

 

My only real question now is how much the 'mainstream' will grab on to this and use it as another weapon to beat up on mostly honest people just trying to earn a living like everyone else..

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Your message reminds me of the old saying:

 

"Take a barrel of sewage and add a teaspoon of wine, and you get sewage. Take a barrel of wine and add a teaspoon of sewage, and you get... sewage."

 

Now that this story hit the pages of the almighty Wall Street Journal, there can be no doubt that this teaspoon of sewage is now mainstream.

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