Justice Delayed, Justice Denied
February 28, 08The “community of bribers,” some of the estimated 25 individuals engaged in various ways in the Gemological Institute of America (GIA) Certifigate fraud that took place over at least two decades, on two sides of the continent, held a quiet celebration in May 2007. These people knew then something that I only realized belatedly: the U.S. Attorney’s office in New York might not (or never) charge any of the individuals who either bribed or received bribes, who falsified grades (both upgrades and downgrades), and who ignored treated stones and declared them to be natural.
Their celebration may have been premature – I now know for certain that the U.S. Attorney’s office in New York has not yet closed the Certifigate files. In fact, only a few days ago, two of the top GIA graders in New York, who were fired when the scandal first broke and whose names were passed on to government investigators (and who are now grading at another laboratory), have been called in for questioning.
But the extremely slow pace of the investigation, combined with market rumors that key players in the New York market are exerting political pressures on law enforcement officials “to slow down,” have led responsible and concerned industry representatives to quietly call on the U.S. Attorney to prod his office to expedite the investigation.
Thus, the files on alleged bribe recipients are definitely still open; it isn’t totally clear if the same is true for all of those who did the bribing. As I have said before, wherever there is a bribe recipient, there also must be a briber. The U.S. Attorney’s office ought to be reminded – day after day – that the GIA Certificate fraud is probably the largest consumer and trade fraud ever perpetrated in the diamond business.
The GIA Certifigate fraud has all the elements of large organized crime – it involved multiple players within and outside the GIA who banded together to defraud. Those who enriched themselves at the expense of “good” companies and of innocent consumers should not be allowed to get away with it. And, as has been pointed out recently to the U.S. Attorney, the industry will not allow the perpetrators of the fraud to get away with it. We are now entering into a “new phase” in Certifigate.
Before going further we need to ask the following question. What did the “community of bribers” know last year that we had not yet realized? The short answer: the statute of limitations on some of the evidence had run out. The infamous handwritten note listing names of bribe recipients, etc., which was part of the evidence introduced in the Max Pincione against Vivid Collection, Moty Spector, Ali Khazeneh and GIA lawsuit filed in New York in 2005, referred to crimes all committed prior to May 2002 – many of these payments took place in the previous century. The court documents, the written evidence, and the note were all part of the materials to be used by the prosecutor when indicting companies or individuals implicated by these papers.
However, there is a statute of limitations on the use of evidence. Federal law in the United States (§ 3282 Offenses not Capital) states that “Except as otherwise expressly provided by law, no person shall be prosecuted, tried, or punished for any offense, not capital, unless the indictment is found or the information is instituted within five years next after such offense shall have been committed.” New York State Laws have a similar provision. Quoting New York Code (Section 30.10 - Timeliness of prosecutions; periods of limitation), it says that a “criminal action must be commenced within the period of limitation prescribed in the ensuing subdivisions of this section,” and “A prosecution for [the relevant] felony must be commenced within five years after the commission thereof.” If the U.S. Attorney has no additional or more recent evidence, he cannot build a case anymore on the aforementioned evidence. The chances for successful prosecution thus diminish when time drags on and on.
In November 2005, GIA chairman Ralph Destino announced that he had turned the names of “diamond dealers who may have violated GIA’s Code of Ethics over to law enforcement officials.” This followed “the termination of four employees of GIA’s New York lab” acting on recommendations of the investigating lawyer, Thomas F. O’Neil III, of law firm DLA Piper Rudnick Gray. Thus, the law enforcement officials had the names of fired employees, of implicated diamantaires, and an extensive GIA-fraud-related lawsuit that had been filed in April of that year. Indeed, it has been recently reconfirmed to me that some 12 or 13 large packages of materials were passed on by the GIA to the authorities – though I am not sure “which authorities” and “where.” What can possibly be the U.S. Attorney’s justification for not having issued a single indictment more than two years later?
One of the fired employees had been quoted as saying that “she wasn’t going to jail for any XX diamantaire,” and she was, as they say, “singing.” She fully cooperated with the law enforcement officials. She wasn’t the only one. We have independent information on a senior member of the bribing community that come forward and, frankly, we are puzzled with the absence of any indictment.
New York’s Assistant U.S. Attorney, Harry A. Chernoff, is in charge of the Certifigate file. It is his office that allowed the Statute of Limitations to take effect in respect to some evidence. Much of the evidence cannot be used anymore, nor can it serve as sole basis for an indictment. We recently asked Chernoff: (1) whether the files of the investigation of those individuals mentioned in that note or in the files passed on to him by the GIA are still open, or whether the case has been closed; and (2) if still open, whether he expects that at some point formal charges may still come about against any one of the implicated parties. We were immediately called by an amazingly skillful spokeswoman, Yusill Scribner, who kindly, eloquently, and persistently explained that the law prohibited her to answer our questions. With great charm and friendliness, she succeeded in disclosing nothing.
My industry sources believe that political pressures were exerted on the U.S. Attorney’s office to drop the case. We don’t know that – but nothing would surprise us. There are many parties who are interested in just forgetting that this whole fraud ever took place. Major players, also people who are not directly involved, continue to express great concern about harming consumer confidence. As we have seen with conflict diamonds (and the Hollywood movie about them), there is hardly any relationship between the timing of a certain negative occurrence and the emergence of broad consumer realization that something may be wrong with certificated stones. We have sympathy with those views.
We believe there is a case where the overall industry interest must be weighed against the premise that those who commit major crimes against the industry and its stakeholders shouldn’t be allowed to reap the benefits and get away with it. A few high-profile trials with active industry support will, if anything, show consumers that this is an industry that will not tolerate unworthy and illegal activities.
GIA Harms Its Own Brand
There is a perception in the market that the GIA could or should have done more than it has done so far. And without taking away any of its accomplishments, we believe it could have done more. I was greatly enthusiastic of the new management taking charge and the measures they took in turning the GIA around. Indeed, I have given chairman Ralph Destino and president Donna Baker not just active support, but also an extensive honeymoon – to allow them to show the industry that they really are serious in settling Certifigate. I have now concluded – and maybe I had been naïve the whole time – that the GIA clearly has no interest in a string of court cases that will inevitably drag the name of the GIA through the mud.
Though the GIA has made it clear that its lawyer, Tom O’Neil, has passed information to the U.S. Attorney’s office, we don’t know “how much” or “what kind” of information. In previous columns, we had raised the question about whether the lawyer and law firm that were hired to investigate and manage the scandal from within the GIA and to defend the GIA in court against civil charges of fraudulent activities would also be the logical person/firm to ensure that the government gets all the information it needed to press criminal charges against bribers. We may ask that question again in light of the apparent fact that no indictments have been made yet based on the information passed to the authorities.
Earlier this week, while waiting for a flight in a lounge at the Geneva airport, I got an off-the-record phone call from a clearly agitated GIA top executive, who I had asked to comment on a draft of this article. This person hammered on about all the great steps the GIA had taken after regime change took place. I was made to believe that it was me who was clearly unfair by doubting the GIA’s resolve on Certifigate. The caller’s tone had become a mixture of condescension and anger – how did I dare to question them? The caller was truly upset with me – and that may really say much about the situation: the credit we all had given to the new GIA management may have run out.
Somehow, I was reminded of the infamous presidential statement “I have had no sex with that woman,” which was technically correct but nevertheless quite inaccurate. This is more than just a matter of semantics. The GIA doesn’t talk about crimes committed by members of the organization. It has its own vocabulary that doesn’t reflect the severity of what we are dealing with. It has never referred to its bribing clients as criminals. The closest it has come is the reference to “diamond dealers who may have violated GIA's Code of Ethics.” Somehow the understating of reality may warrant the feeling that things are not really very serious. They are.
A New York industry leader described the GIA’s failure to live up to its promises in the following slightly awkward way: “You have a room full of people and you are asking for a volunteer to carry out a difficult task. Someone in the back of the room is hesitatingly waving his hands. That’s the GIA. It should have been on the first row jumping up and saying ‘me, me, me!’” The GIA should be seen in the forefront of action to clear and salvage its name by pounding day after day on the doors of the U.S. Attorney and by communicating publicly and loudly that it wants justice to be done. Maybe the GIA doesn’t want to release the names of the parties involved but it should be able by now to very explicitly share with the stakeholders the so-called ethics violations that it has discovered after painstaking research and investigation of thousands of documents and grades. Getting away from spin and being more forthcoming will do wonders for the GIA image.
The GIA tells me that on a continuous basis “all information received on the fraud goes to [lawyer] Tom O'Neil and, if it is new information, on to the law enforcement agency with whom GIA is in contact. The GIA believes that law enforcement authorities have the best resources with which to fully investigate.” Indeed, the GIA states that it “has given and will continue to give full cooperation to law enforcement authorities.”
The GIA cannot ignore that the feeling in the market about its resolve is different. Let me simply state that I truly want to believe them – but it is absolutely necessary that the GIA ensures that all their stakeholders, including clients and employees, are also convinced it is in the front of the room, loudly waving and volunteering in any way shape or form to bring the criminals to justice.
The GIA is entitled to do anything to protect its name. However, it needs to realize that the only way to protect its brand is for justice to be done. It knows better than anyone else that consumers have been defrauded for hundreds of millions of dollars, through certificates duly issued by the GIA. Where do I find a press release by the chairman of the GIA expressing deep worries about the slow pace of the investigations? Did the GIA ask publicly what justification there can be for more than two years of further checking after evidence was already handed over to the government?
From New York to Carlsbad
What has personally disturbed me more than anything else is that the GIA dismissals have been limited to those individuals directly implicated by the evidence that surfaced in the Pincione case, and that the trail to California – where the fraudulent upgrading practices were born – was never followed. In that respect, I am actually encouraged by the recent questioning by the U.S. Attorney of an ex-GIA supervisor who could tell the authorities about the history of the fraud.
It was this very New York supervisor who was sent in the early 1990s to the lab in California to find out what “is wrong there.” GIA management couldn’t understand at the time why New York dealers with offices in the same building of the New York lab would send their large stones for grading to California. Why would they waste money (shipping, insurance, time) if they could get the certificate by just going up a few floors? How come California gave “better grades” than New York?
The New York supervisor spent half a year or so in California and it is my information that he thoroughly understood what was going on there. Then he reorganized the lab’s structure and ordered that from then onwards all large goods could only be graded in New York. This caused considerable resentment among his West Coast colleagues, who saw an attractive side-business falling away. He did, however, leave a loophole: California-based companies could still submit their large goods to the local lab.
This gave rise to the establishment of “stone submission services.” A senior grader resigned and set up his own business, submitting New York stones as if they were his own. Eventually, the bad practices surrounding the big stones re-emerged in New York. I hope that this history is well-documented in the files that GIA lawyer Tom O’Neil presented to the authorities. After all, the GIA claimed it also investigated the West Coast and it is highly unlikely that a far-away journalist would have more information about Carlsbad than Tom O’Neil – who lives in the place and whose job description requires him to know and to pass the information on to the authorities.
Looking Beyond the GIA
Following my story on an arbitration involving a fraudulent upgrading business, I got several phone calls from good people asking me “to let go” – the GIA Certifigate is now part of the past. “The United States is heading into a recession. The business is bad. We don’t need this publicity. Just let go,” they say. This goes beyond the GIA. Powerful diamond companies, including those who have not been implicated in the scandal, have expressed an enormous interest in not letting this go on any further. It may well be that there are many (or even most?) players in the industry that feel that the past is the past and that we should move on.
It certainly makes life easier for producers to maintain their best practice principles and keep their clients, hiding behind the excuse that there is no legal proof for them to act otherwise. It is also convenient for the diamond banks. Maybe it is convenient for everyone – except for the industry “suckers” whose business declined since they couldn’t pay the premiums on the rough (which bribers were willing to pay), or couldn’t compete in the polished markets. And, except for the consumers – who may never know that their trusted suppliers defrauded them.
We understand these views. I believe these people think we have “a choice” – that by keeping silent, the matter will go away. Somehow, we don’t think there is that choice. Somehow, we don’t think the subject will quietly disappear into oblivion. Too many people were counting that both the GIA and law enforcement officials would make sure that justice would be done – too many people are still very angry out there. The U.S. Attorney may or may not issue indictments. We believe that irrespective of the legal processes, the issue will not disappear.
The GIA, the U.S. Attorney and the industry at large may not comprehend the groundswell of anger that continues to surround the subject. So far, the industry-at-large has put its trust in the New York law enforcement system. It also trusted the GIA to go the extra mile (or even the extra thousand miles if necessary) to assist the authorities. The industry hasn’t been pro-active.
However, if indictments are not forthcoming, I expect a “phase 2.” A situation in which injured parties may organize class actions, a situation in which consumer protection bodies may call for a certificate recall, a situation in which concerned retailers may become worried that – whenever a consumer comes back with a problem – he’ll have difficulty in dealing with the liabilities he may face. I am resigned to the fact that the Statute of Limitations certainly may have helped some people to “get away” – but it isn’t over yet. Should it be?
Have a nice weekend.