De Beers as the American Santa Claus

For Angelique, the "Diamond Dream" is coming true. Angelique (not her real name) is a kindergarten teacher in Madison County.  She only paid $24 for diamond earrings at Wal-Mart, featuring two one pointers polished in Surat. Then she joined the class action that sues De Beers for defrauding the diamond jewelry consumer.  Now it's Christmas time and she will probably be getting somewhere around $75,000 as a member of the class of injured consumers that will have to divide the jackpot of no less than a quarter of a billion dollars, with the kind compliments of De Beers – the new American Santa Claus.

I may represent a minority of only one, and I apologize, but I think that this is utterly absurd, ridiculous and unjustified. I don't blame Angelique; if she can take a company like De Beers to the cleaners, why wouldn't she? The quarter-of-a-billion dollar settlement involves frivolous lawsuits by "victim" consumers, managed by professional class action lawyers who do this kind of thing to make a living – or rather to make huge fortunes. It has nothing to do with justice. There is no need for pretending otherwise.

I have never heard, not once, of a happy bride-to-be who, upon receiving a stunning, sparkling, lovely diamond engagement ring, tearfully embraces her future husband and whispers in his ear, "Oh gosh, my darling, have you been screwed by De Beers!"  Never in my life! Actually, a "cheaper" ring would probably have diminished the level of her happiness.

Let there be no misunderstanding. For most of the past century, De Beers acted as a ruthless, brutal and illegal cartel. Historically, there were many "victims," but these were, invariably, its own clients, who occasionally had to pay for the boxes, which were worth up to twenty-five percent less.  These Sightholders were, nevertheless, conditioned to smile, pay and say "thank you."  (They would then call their broker and complain "I really got a rotten box." The broker would put in his 1 percent worth and inform the Central Selling Organization (as it was called then) that his client was "slightly less than fully satisfied.")  The cartel was then managing a nontransparent, opaque, inconsistent and arbitrary allocation system, though it worked amazingly well for a very long time.

This all changed abruptly and dramatically when Gary Ralfe became De Beers' first managing director. When the history books of the last five or six years of the diamond industry are written, Ralfe can truly be portrayed as the main architect and driving force of the company's transformation into a legally compliant, far more transparent, corporate and responsible organization.  In my view, he "saved" the company – and, in the process, as the independent director in De Beers' privatization process, he certainly contributed to the Oppenheimer family's wealth rising a digit or two on the scale of billions of dollars. The industry and the shareholders of De Beers may not realize yet how formidable Ralfe’s contribution will appear in a historic perspective. But he is leaving at the middle of a process – not the end. De Beers still remains rather vulnerable. It wants to be legally compliant in each jurisdiction in which it operates; this is a noble objective. It is a correct policy – but it takes time to get there.

So, while I'm truly saluting Gary, it is incomprehensible that De Beers consistently refused to represent itself in court in the United States. All these judgments, handed down by default, for which a quarter of a billion dollars are now offered, represented rather frivolous suits that were certainly defendable. Some charges were utterly ridiculous such as claiming that a "Diamond is Forever" is false advertising because you cannot prove that it is forever. Some of the lawsuits brought in professors in ill-fated attempts to "prove" by how much the consumer had been overcharged (had suffered). There is no prevailing consensus on this and no really convincing way has yet been found to show the damage that may range from as little as two percent to whatever figure one may well justify. In the Leider versus Ralfe class action, the judges have so far dismissed any formula aimed at quantifying this so-called (and maybe imagined) damage.

Manufacturers are the “true” victims
If De Beers was a cartel, who then suffered?  To me, the "real victims" were always those in the manufacturing sector, who had to buy rough at non-competitive prices, but needed to sell the resultant polished in a highly competitive environment.  They became – and still are – the "squeezed" level of the pipeline. The suckers. The financiers of the downstream pipeline and of the upstream producers to whom they pay in cash. Large profits were made by the non-cartel producers who laughed all the way to the bank, having the benefit of high market prices for rough diamonds, with the kind courtesy of the cartel and its members. They enjoyed a "free ride".

One judge correctly noted in a still outstanding case that the distance between De Beers and the consumer is too far to establish precisely the impact of alleged overcharged rough prices on the end consumer. The diamond moves through rough dealers, polished manufacturers, polished distributors, jewelry manufacturers, jewelry distributors, and jewelry retailers before ending up in the hands of the Angeliques of this world.  Certainly, some of those intermediaries (Sightholders) could be viewed as collaborators rather than victims – though my preference would be for the latter.  One legal opinion considered Sightholders as definitely carrying part of the "guilt," if there is any.  Also, non-Sightholder dealers or manufacturers have been viewed as "victims" who were illegally denied access to rough.

The De Beers press release stresses that "the settlement of the US class action litigations against the international business of De Beers will not be financed from, nor will it have any material impact on, any of the company's mining operations in southern Africa. Indeed, we believe that the settlement will be beneficial to De Beers' partners and stakeholders in southern Africa as well as elsewhere in the world." 

It was nice of De Beers to assure its producer stakeholders. The previous $10-million (Ohio) court settlement was stated in its last balance sheet as a one-time, non-recurring cost to the company. We hope that these “one-time events” will not now become a tradition. We certainly expect that this $250 million may impact the company's 2006 earnings, unless the private shareholders want to foot the bill. One Sightholder made a back-of-the-envelope calculation that this settlement amount represents two and a half years of Value Added Services (VAS) income, drawing the shaky conclusion that ultimately clients will pay for the settlement in SOC contract period.

Yours truly admits to be puzzled.  I honestly think that De Beers should have vigorously fought each and every lawsuit tooth and nail -- from the most frivolous one to the most serious one – as if its life depended on it. It should have shown the courage to defend itself. But the company chooses not to. It chooses not to recognize the jurisdiction. That seems like a major error, legally and morally.  By its actions, De Beers certainly invited a multitude of cases. This era may now have ended.

The plaintiffs in the proposed settlement lawsuits will still have some 30 days to make up their minds whether they consider the amounts offered large enough. The jackpot may yet have to be upped. Surely, many lawyers and consultants will make more money by trying to devise formulas on how to divide the fruits of the legal labor. 

We pay – but are not guilty…
De Beers stresses that, "this settlement does not involve any admission of liability on the part of De Beers and will bring an end to a number of outstanding disputes."  The public perception will be quite different. You don't play Santa Claus with a quarter of a billion dollars because you haven't done anything wrong.  Luckily, consumers in America are unlikely to read much about this in the newspapers.  Nevertheless, the timing of the announcement was unfortunate. Today, each shopping day before Christmas represents one percent of annual diamond jewelry sales in the United States, making this an awkward time to tell the consumer that she may be "illegally" overcharged.  First the GIA and now De Beers. These are not happy days.

The real question is whether this enormous payment will pave the way for De Beers to stride into the United States, with its head held high, through the front door with a halo of lasting acceptability, respectability and legality. I would like to give De Beers the benefit of the doubt and assume that the company may know things that I don't. But I have my doubts. There are more serious cases pending where judgments by default have been handed down (such as Leider versus Ralfe and W. David versus De Beers), and where only the amount of (trebling) damages are left to be awarded. It may well be that the present proposed settlement will enable De Beers to represent itself properly and avoid larger penalties.  We don't know.

The younger team that takes over from Gary may never have to make these "settle or not to settle" decisions that has consistently plagued the De Beers of the past. If that is the outcome of the present settlement, it may have been worth it. It certainly will make Gareth Penny’s and Varda Shine’s corporate lives easier. We think this settlement will either set the going market price of future settlements (and may even encourage the filing of additional cases), or it is the last anti-trust settlement De Beers will have to make. It’s too early to tell.

Have a nice weekend.