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De Beers $250 Million Payoff
Jan 6, 2006 10:49 AM
By Martin Rapaport
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RAPAPORT... Notice: This Article was first published January 6, 2006 on the front page of the "Rapaport Diamond Report" and online. It was posted online again on January 9, 2007. On the date of first publication De Beers Class action offer was $250 million, the offer was later increased to $295 million. We will be updating this article shortly.
Rapaport .... De Beers has entered into a complex $250 million settlement agreement with a number of class action lawyers to resolve outstanding lawsuits filed on behalf of millions of diamond consumers and thousands of diamond dealers and retailers. The agreement includes almost all the outstanding class action lawsuits against De Beers. Many of the suits obtained default judgments against De Beers due to the fact that until a few weeks ago De Beers refused to defend itself in the United States. The proposed De Beers settlement will have an important economic impact on members of the diamond trade and may require members to take proactive measures to ensure their rights and safeguard the industry.
Background
On November 29, 2005 the federal U.S. district court of New Jersey issued an “order conditionally certifying settlement class and granting preliminary approval of class action settlement.” The court “determined that an inquiry should be made as to the fairness, reasonableness and adequacy of the proposed settlement.” It approved a class consisting of everyone in the U.S. that purchased diamonds from January 1, 1994 until their class was approved. It excludes De Beers, its sightholders and competitors, any diamonds bought directly from De Beers or any of its entities and government entities. The court established two subclasses, one for resellers (i.e. dealers, wholesalers and retailers) and another for consumers. Following the court order De Beers wired $250 million to an escrow account in the U.S.
With few exceptions, the court order automatically includes anyone in the U.S. that has any claims against De Beers. This means that if you do nothing you are included in the settlement and give up all rights of claim against De Beers from the “beginning of time” until the court finalizes the settlement. You can exclude yourself from the settlement, retain your legal rights and give up settlement benefits by individually submitting a valid and timely request for exclusion. If you have not excluded yourself, you may “show cause why the court should not approve the settlement” and appear at the hearing, but you must make formal written objections that include “each ground for comment and objection.”
The court ordered the appointment of a Special Master that will recommend how the $250 million will be divided between resellers and consumers, the methods of entitlement and disbursement of the money, the amount to pay the attorney’s and plaintiffs, and how notices will be given. The court order excludes class actions by ANCO, representing nonsightholder rough dealers, and British Diamond representing dealers brought by Derek Parsons, president of the Miami Bourse. Other class actions continue, including an action for injunctive relief but no monetary damages brought by Leider in New York and for which this writer is an expert witness.
Issues
Class action settlements provide monetary damages for past misbehavior and injunctive relief, i.e. court ordered restrictions or actions, to assure there is no misbehavior in the future. In our opinion, injunctive relief restricting De Beers activities are much more important than monetary compensation. It is one thing to get a few dollars and another to give up your ability to make a living in the diamond business.
We are deeply concerned that the proposed injunctive relief in the class action settlement will not protect our industry, but will also enable De Beers to destroy the existing free markets in the U.S. Let us briefly review a few aspects of the proposed injunctive relief.
De Beers Proposed Injunctive Relief
We have rewritten the proposed injunctive relief to make De Beers positions clear in spite of the misleading way it is presented in court documents. See page 23 in Rapaport Diamond Report for full original text.
The proposed class action injunctive relief effectively says and proposes that U.S. courts agree that De Beers can “fix prices, and/or determine the quantity or quality of third party production or sales;” (1) if the Russian government allows them to. This is outrageous, given the fact that De Beers and Russia have worked hand in hand for over fifty years. Are U.S. courts to be subservient to Mr. Putin? Or (2) if doing so is part of an undertaking with a Joint Venture for the purchase and/or sale of rough diamonds. So, if ALROSA — or anyone else and De Beers — agree to market diamonds together they can ignore antitrust laws.
Furthermore according to proposed injunctive relief, De Beers can “enter into agreements, arrangements, or undertakings with any sightholder to set or fix the price of Gem Diamonds; restrict the entities to whom a sightholder may purchase or sell Gem Diamonds; restrict the geographic area in which a sightholder may sell Gem Diamonds” (3) if doing so is part of a process of selecting a sightholder approved by the European Commission. Including, but not limited to, evaluating of sightholders based on market position, distribution efficiency, and marketing activity.
Now this is truly frightening. Does De Beers really think that its supplier of choice (SOC) agreement with the European Commission (EC) will allow it to control sightholders in such horrible ways? Is this the future that De Beers has planned for us — to control our prices, who we deal with and where we sell? We know that the EC has been ineffectively reviewing SOC and ignoring the many complaints of trade organizations for several years, but how can De Beers think the EC will allow it to do such things? Is there no limit to De Beers chutzpah? How can they even ask a U.S. judge to approve this?
The class action proposals stand injunctive relief on its head. The injunctive relief suggested by De Beers has been approved by class action lawyers that are clearly compromised, if not totally blinded, by their interest in obtaining a huge financial settlement. The proposed injunctive relief is nothing more than a license for De Beers to destroy the free, fair and competitive diamond markets in the U.S.
De Beers is throwing $250 million on the floor, and pickpocketing the diamond industry as it bends down to pick up the money. It is a genius move on the part of De Beers’ lawyers, but not the way ethical people work in the diamond trade. They are using our legal system designed to protect us, against us.
Rapaport Proposed Injunctive Relief
The following is our proposal for real injunctive relief. If De Beers were to adopt such injunctive relief we encourage industry support of their class action settlement.
De Beers Injunctive Relief should include the following:
1. De Beers will not restrain in any way how anyone including its sightholders and Diamdel clients buy or sell diamonds
a. There is a clear problem with SOC market position, distribution and marketing criteria.
2. De Beers will not buy any rough or polished diamonds from third parties.
3. De Beers will not collude with any third party as to the price or market availability of rough or polished diamonds.
a. This includes not having anyone buy diamonds and park them and/or sell them at agreed upon prices.
4. De Beers will publish a transparent Economic Impact Statement detailing the impact of Supplier of Choice on freely competitive nonsightholder markets. The report will answer questions such as: How does SOC impact diamond companies at all levels of the distribution chain from miners to retailers? Particular emphasis should be placed on the impact of SOC on companies that do not do business with De Beers, or extensions of De Beers such as Diamdel and sightholders. It should answer questions such as can companies in the diamond industry exist if they do not buy from De Beers entities and/or clients of De Beers and Diamdel?
We respectfully ask all members of the diamond industry to consider the above injunctive relief and share their thoughts with us by email: legal@diamonds.net. After discussions with the trade and any possible modifications we will ask the entire U.S. diamond industry to support reasonable injunctive relief in the U.S. courts.
Let it be understood we are now warning the U.S. diamond trade there is a clear and present danger to the continued existence of free, fair and competitive U.S. diamond markets due to the unacceptable and misleading injunctive relief included in the De Beers class action settlement. Such misguided injunctive relief seeks to legitimize activities that may destroy freely competitive markets for rough and polished diamonds in the U.S.
The $250 Million
While it is obvious that injunctive relief has not greatly interested the class action lawyers, we are sure that the money will. We expect considerable infighting as the Special Master works to slice up De Beers $250 million pie. We expect the lawyers and administrators to try and pick up about $40 to $50 million leaving about $200 million for the people in the classes.
Derek Parsons, President of the Miami Bourse and owner of British Diamonds, one of the plaintiffs, has made a partial settlement. He included his class action in the state cases but not the federal case which he intends to pursue further. When we questioned how he could agree to the terrible injunctive relief he said that he compromised on the state case because it will provide $50 to $100 million for his class of nonsightholder diamond dealers. A major problem however, is that money might be allocated on the basis of invoiced diamond business providing large firms huge windfall profits but little to small firms and nothing to brokers.
Regarding injunctive relief, Parsons told us, “Any settlement in the federal case will have injunctive relief that will satisfy the needs of the industry.” Parsons may be overly optimistic. His federal case has yet to be tried in court and it seems unlikely that the other lawyers will leave the diamond dealers such large amounts. Then again, Parsons has done more than anyone else in the trade to move the U.S. class action suit forward and there is a lot of money on the table.
Given the fact that there are at least 70 million diamond consumers with rights in the consumer class it is likely that the bulk of the money may go to “jewelry trade organizations that protect the public.” This is incredibly ironic and absurd when you consider that no U.S. jewelry trade organizations have been protecting the public from De Beers abusive practices and overpricing. Other than the Miami and Los Angeles Diamond Clubs, no trade organization that we know of, has had the courage to speak out against De Beers practices.
Most, if not all, our trade organizations have been severely compromised by the fact that they receive donations from De Beers and/or its sightholders, have important members that rely on business with De Beers or Diamdel, or have elected officers that receive special treatment from Diamdel. In fact, De Beers in one way or the other does not just control the diamonds they sell, they often control the people in the diamond business, particularly the leadership of trade organizations.
Leadership
Should the Special Master decide to reward U.S. trade organizations for their work protecting the trade from De Beers, it will be fun to see how the organizations market themselves to get a piece of the De Beers booty. Will any of these organizations including — and perhaps especially — the JVC, which is charged with industry compliance, take a position regarding the proposed injunctive relief? Will our trade organizations support reasonable injunctive relief, if by doing so they threaten a great class action deal that provides them a financial windfall? Are our trade organizations more interested in money than principles? Are they more interested in themselves than their mission? De Beers lawyers figure that few if any in our industry will make a big issue of injunctive relief when there is so much money on the table. Are they right?
While we recognize the positive role played by many trade leaders and organizations we have to ask the following questions. How is it possible that in the most important and largest diamond case in the history of the U.S. diamond trade, the interests of our trade are not represented by our trade. Four self-appointed lawyers more interested in money than the future of our industry are now empowered to represent the entire U.S. diamond trade and all of our diamond consumers. The future of the diamond industry is at stake. Pray tell, where is our leadership? Will we as an industry ever have the courage to honestly and properly address the De Beers issue?
Conclusion
While this article takes De Beers to task for attempting to force a settlement that includes elements that are against the interests of the diamond industry, we recognize that De Beers is trying to legitimize itself and that such legitimization, if properly executed, deserves our support. We hope that this article will encourage De Beers to rethink how it deals with the diamond trade and agree to proper injunctive relief.
De Beers has an unprecedented opportunity to clean up its act and win the approval of the U.S. legal system and diamond trade. De Beers risks everything by taking a noninclusive legally opportunistic approach to legitimization. De Beers must learn to honestly listen to people who disagree with it and develop a consensus of real support for its role in the diamond industry not support based on fear, but support based on shared values and goals.
The diamond industry of the future has no room for De Beers’ arrogance or paranoia. The added value marketing concepts of Supplier Of Choice must be sustainable without De Beers threat of taking away one’s sight and destroying one’s business. It is time for De Beers to put away the stick and take out the carrot. Added value marketing is obviously the way forward and it must be encouraged in a positive and proactive manner. De Beers must give up control and allow free spirited competitive creativity to drive our industry forward.
De Beers must recognize that, subject to the rules of fair market competition, all people be they in Africa or on 47th Street have an inalienable right to diamonds and the livelihood they generate. De Beers critics including this writer are not against De Beers. We are simply and honestly a pro-diamond market. We envision a future where De Beers and strong independent sectors work together, or not together, creating better diamond products that compete evermore successfully with other luxury products. Now is the time for De Beers to truly and honestly stop trying to control the diamond industry. Let us all do our own thing and we will all prosper.
Said Hillel, “If I am not for myself, who will be for me? And if I am only for myself, what am I? And if not now — when?”
Proposed De Beers Injunctive Relief in Class Action Lawsuit
United States District Court — New Jersey
Order and Stipulated Injunction
Section IV. PROHIBITED CONDUCT
(A) De Beers shall not enter into any agreement, arrangement or undertaking with any Third Party Producer to:
(i) Be the exclusive purchaser or distributor of the Third Party Producer’s Rough Diamonds;
(ii) Set or fix the price of the Rough Diamonds sold by the Third Party Producer other than those purchased by De Beers from any such Third Party Producer; or
(iii) Determine the quality or quantity of the Third Party Producer’s Rough Diamonds Production or sales.
PROVIDED, HOWEVER, that nothing in this paragraph shall preclude De Beers from:
(i) Conducting business with ALROSAlrosa pursuant to the terms of the agreement between De Beers and ALROSA approved by the European Commission pursuant to Article 9 of Council Regulation (EC) No 1/2003 as of the date of the final approval of the Settlement Agreement between the parties dated November 8, 2005, and any non-material subsequent amendment or agreement between De Beers and ALROSA;
(ii) Entering into agreements, arrangements or undertakings which receive clearance or approval from an antitrust or competition regulator with authority to review such agreement, arrangement or undertaking, including the United States Department of Justice, the European Commission and/or
the competition enforcement agencies of the member states of the European Union, and the competition enforcement agencies of Australia, Canada, Russia and South Africa; and provided further that De Beers’ compliance in good faith with an order or law of a foreign sovereign government shall not constitute the basis of a finding of contempt of this Order and Stipulated Injunction; and
(iii) Entering into agreements, arrangements or undertakings with a Joint Venture for the purchase and/or sale of Rough Diamonds.
(B) De Beers shall not enter into any agreement, arrangement or undertaking with any Sightholder to:
(i) Set or fix the resale price of Gem Diamonds;
(ii) Restrict the entities from whom a Sightholder may purchase Gem Diamonds;
(iii) Restrict the entities to whom a Sightholder may sell Gem Diamonds; or
(iv) Restrict the geographic region or area in which a Sightholder may sell
Gem Diamonds.
PROVIDED, HOWEVER, that nothing in this paragraph shall preclude De Beers from selecting Sightholders under a process approved by the European Commission from time to time, including but not limited to evaluation of Sightholders based on the following criteria:
(i) financial standing and reliability;
(ii) market position in relation to particular diamonds or other market segments;
(iii) distribution efficiency, experience and ability;
(iv) marketing activities and skills;
(v) quality of manufacturing ability;
(vi) general business reputation;
(vii) compliance with the DTC Best Practice Principles; and
(viii) misrepresentation of simulants as natural diamonds.
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Tags:
Alrosa, Australia, Compliance, Consumers, De Beers, Diamdel, DTC, European Union, Gem Diamonds, Government, Jewelry, JVC, Luxury Products, Manufacturing, Production, Regulation, Russia, Sightholders, South Africa, United States
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