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GIA Bribery Scandal


#1

Ouch! What none of us want to hear. As if it isn’t hard enough to
convince the public that the vast majority of jewelers are honest.
Just came across this printed in today’s Wall Street Journal:

Lisa, (Blue Jay wars at birdfeeder central. No space for the towhees
and junkos. Dang Jays!) Topanga, CA USA

Diamond Industry Rocked By Allegations of Bribery Amid Lawsuit,
Top Grader Of Gems Fires Four Workers; Saudi Royals Ask for
Refund

By ANN ZIMMERMAN
Staff Reporter of THE WALL STREET JOURNAL
December 20, 2005;

Bribery allegations at the nation’s top rater of diamonds are
rocking the jewelry business and tarnishing trust in the system
for valuing gems.

The Gemological Institute of America, which grades diamonds
for independent dealers and big retailers such as Tiffany & Co.
and Bailey Banks & Biddle, recently fired four employees and
shuffled top management after a four-month internal probe of
its policies.

The institute also is in talks to settle a lawsuit filed last
spring by a diamond dealer accusing workers in its New York
laboratory of taking bribes to inflate the quality of diamonds
in grading reports, said people familiar with the situation.

The institute’s grading system is relied upon by most dealers
and retailers in determining the worth of diamonds. Since the
quality of gemstones is impossible for a layperson to evaluate,
independent labs like the Gemological Institute are vital in
determining a diamond’s worth. While standardized measures are
used in valuing diamonds, their price – unlike that of gold
and other precious metals – varies widely depending on factors
such as internal flaws and the absence of a yellowish hue.

The suit that sparked the institute’s internal probe claimed
the fraud was uncovered after two diamonds that were sold for a
total of $15 million to members of the Saudi royal family were
taken to an independent appraiser – and found to have a lower
grade that made them worth far less.

“The investigation uncovered a handful of employees and a
handful of clients who violated GIA code of ethics,” said Ralph
Destino, chairman of the institute and chairman emeritus of
French jeweler Cartier, in an interview. “That code precludes
contact between employees and clients and the exchanging of
gifts. The amount of stones involved also were not more than a
handful.”

In recent years, retail sales of diamonds have been growing at
twice the rate of the rest of the jewelry business, thanks to
strong marketing campaigns such as selling right-hand rings to
women who want to purchase jewelry for themselves. World-wide,
annual diamond sales total about $64 billion, roughly half of
which comes from the U.S.

The Gemological Institute was founded in 1931 to boost
credibility for the nation’s jewelry business. Today, it
employs 700 graders who evaluate far more diamonds than any
other organization in the world, in two labs based in New York
and Carlsbad, Calif. Its clients generally are dealers and
retailers seeking to value diamonds over one carat, though
individuals also can pay for the service. Fees depend on a
diamond’s size; grading a one-carat round diamond costs about
$100. In 2004, the institute, a nonprofit, had income of $104
million.

Among other things, the institute is credited with defining
the characteristics and measurements by which diamond quality
is determined. Called the four Cs, they are carat size, color,
clarity and cut. Its certificates certifying a diamond’s worth
are treated by retailers and buyers as the equivalent of a
guarantee.

“The GIA enables the entire diamond world to legitimize
premium prices for the best diamonds,” wrote Martin Rapaport,
owner of a diamond and price-listing firm, Rapaport
Group Cos., recently in his trade publication, Rapaport Diamond
Report.

In an interview, he added, “Regardless of the size of the
problem, it is a shock, and now the GIA has to improve.”

Cap Beesley, president of another grading lab, American
Gemological Laboratories, which primarily analyzes colored gems
such as rubies and emeralds, said the uproar underscores a need
for more verification of grading, since groups such as the
Gemological Institute are mostly hired by dealers.

“GIA is the closest thing to a monopoly, short of the DeBeers
[diamond cartel],” he said. “Ninety-eight percent of every
diamond document is a GIA throughout the world. The reference
point is being questioned. It is as if the equator is no longer
the equator, they moved it 20 degrees.”

Since its internal probe ended in October, the institute has
taken steps to regain credibility. Besides firing the four
employees, whom it has not named, it named a new head for the
New York lab, created the post of lab compliance officer and
brought Mr. Destino on board as chairman of the board of
governors, another newly created job.

The institute also eliminated a pricing structure under which
dealers could purchase an annual “membership” for $2,500, then
get a reduced rate on grading reports. Fees now are
standardized.

To quell concerns from dealers about the quality of stones,
the institute has offered to re-examine and issue a new grading
report on any diamonds free of charge for the next six months.

Mr. Destino said the institute examined transactions from the
past decade, looking closely at the last five years, and turned
over on “anything untoward” to the U.S. Attorney’s
office for the Southern district of New York. He declined to
provide further details, citing the continuing lawsuit.

The suit was filed in April by Max Pincione, a jewelry dealer
and former head of retail operations at elite jeweler Harry
Winston. Mr. Pincione claimed the Gemological Institute and two
diamond dealers conspired to inflate the grade of the two
diamonds that he sold to members of the Saudi royal family.

After their independent appraiser concluded the gems were of
inferior quality and thus should have cost significantly less,
the Saudis claimed they had been defrauded, the suit says. They
demanded their money back and refused to do further business
with Mr. Pincione.

Mr. Pincione claims an informant later gave him a ledger that
supported allegations that a supervisor at the institute was
being paid more than $3,000 a month to change grades on
diamonds.

The lawsuit and probe – details of which have been reported
in trade publications such as National Jeweler – have been
shaking the industry for months, partly because many things
remain unknown. Dealers want to know which wholesalers the
institute identified as possible culprits and how many stones
may have been fraudulently upgraded.

“This could have a significant impact on consumer confidence
in the industry,” said Joe Tacopino, Mr. Pincione’s attorney.
“We’ve been contacted by dozens of individuals who are
questioning the accuracy of their purchase.”

Thomas Moses, the newly appointed head of the institute’s lab,
said in a recent industry speech that only a small number of
diamonds graded over the past 10 years could have been
affected. “…The few dealers we believe violated our code of
ethics have been notified and told that we will not do business
with them going forward,” he said.

The Diamond Manufacturers and Importers Association of America,
a trade group, said it has shared its concerns with the
institute. “Obviously, we are concerned about consumer
confidence, the integrity of the GIA report, the Gemological
Institute as a body and the whole supply chain to the
consumer,” said president Ronald Friedman.


#2
Ouch! What none of us want to hear. As if it isn't hard enough to
convince the public that the vast majority of jewelers are honest.
Just came across this printed in today's Wall Street Journal: 

In reply:

GIA’s letter to the trade.

Agreed it is sad, but unfortunately there always appear to be a few
"bad apples" who spoil it for others. This may make the GIA stronger
in the long-term!

  Dear Friends, 

  As many of you know, GIA was named as a co-defendant in a
  civil lawsuit earlier this year. Allegations made in the
  lawsuit about the grading of two large diamonds triggered an
  immediate response from our Board of Governors. An internal
  investigation followed, and strong action was taken with the
  dismissal of four employees and the discontinuance of service
  for several clients who violated GIA's longstanding Ethics
  Policy. In addition, Tom Moses was appointed as the new head
  of the GIA Laboratory. 

  As expected, reports have circulated in the trade press about
  the lawsuit over the past few months, and this week the public
  media picked up the story. We have been working to resolve the
  dispute, and we are pleased to announce that the lawsuit has
  now been resolved. GIA is ready to put this matter behind us
  and move on. We thank the many friends and colleagues who
  stood by us during this difficult time, and reassure both the
  trade and public that they can have full confidence in the
  integrity of GIA's grading reports. 

  Although our investigation revealed the possibility of minimal
  past anomalies, we have, as a public service, set up a program
  to re-examine any diamond that GIA graded, free of charge, if
  an owner has concerns. We do, however, maintain that based on
  the credible evidence of the investigation, the number of
  stones that could have been affected is quite small. 

  GIA has been the standard bearer for quality and integrity in
  the diamond industry for decades. We are fully committed to
  assuring the jewelry trade and consumers that they can count
  on GIA to uphold these standards. We will continue to enhance
  and strengthen our policies and procedures and will not
  tolerate any ethical violations by our employees or clients. 

  The Institute has a history built on trust and integrity. The
  year 2006 will mark our 75th anniversary of education and
  service to the trade and public. We appreciate the support we
  have received over the years from our students, graduates and
  clients, and we assure you of our total commitment to the
  standards of excellence that mark GIA. 

  We wish you the very best this holiday season, and look
  forward to serving you with pride and passion in the coming
  years. 

  Yours most sincerely, 

Ralph Destino
Chairman

William E. Boyajian
President