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INSIDE RALPH ESMERIAN'S DOWNFALL
By Ricci Dipshan
Diamonds.net
http://www.diamonds.net/news/NewsItem.aspx?ArticleID=35911&ArticleTitle=Inside+ Ralph+Esmerian%E2%80%99s+Downfall
May 31 2011
A jewelry connoisseur with a museum-worthy collection now faces jail
time after a series of reckless business decisions.
RAPAPORT... The American Folk Art Museum's Senior Curator Stacy C.
Hollander once wrote that "to enter Esmerian's world is to abandon
one's usual mundane considerations. All that matters is quality,
beauty, rarity and the creative song of the individual's hand at
work." A Paris-born, French-Armenian, fourth-generation gem dealer,
Ralph Esmerian was once a revered figure in the diamond and jewelry
world, a collector whose antique and rare items were almost legend,
decorating the walls of the Louvre and the American Folk Art Museum.
"He exemplified the presence of a royal nature to the gem industry,"
noted colored diamond expert Alan Bronstein of Aurora Gems, an
appraiser for the colored diamonds involved in Merrill Lynch's
bankruptcy case against Esmerian. "He was a genius at recognizing
gems but he got caught in an ever-greater, grandiose desire fed by
the world of cheap finance. He made a lot of foolish mistakes."
While Esmerian's world may have centered around aesthetics and beauty,
his downfall focused on a recklessness and naïvete in all matters
financial, leaving the once-crowned king of collectors facing jail
time. The undoing of one of the diamond and jewelry industry's most
renowned figures followed a dramatic and scandalous turn of events
that many attribute to his resounding lack of business acumen.
"In certain instances, he obviously used poor judgment," said Audrey
Friedman, owner of New York-based Primavera Gallery. "I think a certain
amount of it may have been due to inexperience in business, but he
also might have been poorly advised by other people, and reaching a
point where he was in desperate straits and not sure what to do."
Esmerian was arrested in November 2010 and pled guilty to charges of
bankruptcy fraud, wire fraud and concealing assets in connection with a
scheme to embezzle funds. He entered the plea in a New York courtroom
in April 2011, marking not only the end of his professional career,
but also the end of several tense years spent trying to outpace his
debt and regain financial solvency. On July 22, 2011, Esmerian will
be sentenced for his crimes, for which he faces eight to thirty years
in prison. At the time of his sentencing, as required by the court,
he will remit all capital owed to his victims, and give up claims to
all property or proceeds involved in his offenses.
Attempts to contact Esmerian for this story were unsuccessful, with
neither he nor his attorneys offering public statements on his past
crimes or his impending sentencing.
Road to Auction The seeds of Esmerian's downfall were planted in the
fall of 2005 and the spring of 2006, when he decided to buy retail
estate jeweler Fred Leighton from retiring owner Murray Mondschein,
securing two loans from Merrill Lynch totaling $177 million to finance
the purchase.
These loans were backed in part by the jewelry and rare items he
had accumulated through his company, R. Esmerian, Inc. (REI), which,
according to court documents filed later, held inventory valued at
around $192 million. In an indication that Esmerian was overextending
himself financially, in December 2006, he pledged the same collateral
- REI's inventory - to Acorn Capital Group LLC to secure another
loan in the amount of $40 million, an illicit activity known as
double-pledging.
To run Fred Leighton, Esmerian hired Peter E. Bacanovic, a former
Merrill Lynch broker most famous for serving five years in prison
for his role in the Martha Stewart insider trading case. It is not
clear whether Bacanovic played an instrumental role in securing the
Merrill Lynch loans for Esmerian, though it has been the subject
of much speculation. During Bacanovic's time at Fred Leighton,
however, the retailer went downhill - in 2008, it defaulted on its
loan obligations, freeing Merrill Lynch to auction off at Christie's
the items Esmerian had put up as collateral.
Interestingly, the auction, which was first set to take place on
April 15, 2008, then postponed to the following day, did not mention
Esmerian by name, instead describing the items as belonging to an
"American Connoisseur." Prior to the sale, a furious Esmerian charged
Merrill Lynch and Christie's with selling his items at prices that were
"dangerously low." While not all agreed with Esmerian's complaint,
there were many who questioned why the bank had never confirmed
the value of the items before granting the loan. One off-the-record
source wondered, "Why didn't Merrill Lynch do its due diligence and
get a second appraisal on the jewelry? The guys over there were just
interested in getting their commissions on the loan, so they went with
what they were given." Indeed, it isn't hard to see how Merrill Lynch -
which was itself imploding in the subprime scandals that began in 2007,
and was just four months away from being sold to Bank of America -
could have been out to make quick capital with the Christie's auction.
To prevent Christie's from going through with the auction, Esmerian
had Fred Leighton file for bankruptcy. That legal end run confounded
auctioneers at Christie's, who canceled the "American Connoisseur"
sale - much to the ire of those awaiting the chance to bid on
Esmerian's goods. A few days after the aborted auction, however,
Christie's struck a deal with Esmerian to sell a 141-carat diamond
brooch that belonged to Empress Eugenie, wife of Napoleon III, to
the Louvre Museum for $10.6 million. Members of the Esmerian family,
however, refused to sign off on the deal. Jacqueline Esmerian King,
Esmerian's sister, along with three of his other siblings, filed a
suit alleging that the brooch belonged to a family trust set up by
their late grandmother, and that the sale was, in effect, illegal.
That case is still pending, though the brooch remains at the Louvre.
Other auctions featuring some of Esmerian's inventory have sprouted
up occasionally since 2008, including an October 2009 auction at
Christie's. Private auctions of Esmerian's inventory also have
occurred, with the most recent sale, featuring 56 items, being held
through June 27, 2011. Proceeds from that sale will go to firms
comprising the Acorn Capital Group LLC.
Esmerian and Friends Around the same time that Esmerian secured
his second loan from Merrill Lynch - still part of the $177 million
total - in the spring of 2006, he entered into a deferred jewelry
purchase agreement with the limited liability company (LLC), Jeweled
Objects. The LLC was owned and operated by Esmerian's longtime business
adviser Mitchell May, with whom he had shared office space since 2006,
and Robert Hoberman, his accountant for more than 15 years. With the
ink on the new Merrill Lynch loan still wet, Esmerian sold 38 pieces
of REI's inventory, including jewelry, sculptures and antiques, for
$8.95 million to Jeweled Objects, with the contractual obligation
to buy it back in one year at 20 percent interest. At least six of
those 38 items were designated as Fred Leighton debtor property and
already were promised to Merrill Lynch.
As it turned out, Esmerian wasn't the only one who needed to borrow
money to finance deals. To fund its initial purchase of Esmerian's
38 items, Jeweled Objects raised $5.25 million from an eclectic mix
of investors, including charitable organizations and retirement funds.
Investors were told by the company that the collateral value of the 38
items was actually more than three times the purchase price. Should
Esmerian fail to repurchase or lease his items back, Jeweled Objects
argued, the investors would be sitting on more than $28 million
in security. As the investors would soon find out, however, their
security against an Esmerian default was more smoke and mirrors than
actual value - in the end, the collateral was really worth less than
2 percent of the price Jeweled Objects had established.
In May 2006, Benjamin Zucker, president of Precious Stones Company,
appraised 20 of the 38 items for just shy of $24 million - a price
that his appraisal document said represents "a fair market value
for objects that have a provenance of being acquired and collected
50 years ago." The other 18 objects were appraised for around $4.8
million, though the appraiser for those items has not been identified.
In court papers filed against Jeweled Objects in March 2010 by
investors seeking to recoup their losses, Esmerian, Zucker, Hoberman
and May are accused of employing a "highly subjective methodology"
in their appraisal by using the prices of "particular, idiosyncratic
potential buyers," who would pay above and beyond market price for
the items, to justify their inflated value. An August 2009 Christie's
appraisal of the 20 items that Zucker had pegged at $24 million set
the market value for the items at $432,500.
Richard Lawler, president of GBC Inc., a Boston-based jewelry surplus
wholesaler and appraisal company, said that in his dealings with
Esmerian, he too found a significant difference between Esmerian's
values and those that could be realistically recovered by a lender.
"In all of our appraisals on manufacturers and wholesalers, we
have never run into a situation where there has been a meaningful
disagreement with our findings by either party. Predating this case,
we had experience with the inventory that was owned by Esmerian. It
went well beyond even the exclusive Fred Leighton merchandise. The
value placed on those unique historic pieces by Esmerian, by his
insurance companies and by his appraisers, was considerably higher
than its worth to the lenders. GBC knew this but apparently the
lenders did not. They could have circumvented a big part of their
problems by having a proper appraisal done on the collateral before
entering into the loan arrangement."
Lawler, whose company had no knowledge of the defendants or their
appraisals for Esmerian, went on to say that, "the phrase 'fair market
value' is always open to a significant range of interpretation and
should be carefully considered before being accepted by a lender."
Why investors believed that Esmerian's items were worth over 50 times
their value reflects Esmerian's stature as a revered figure in the
industry. "Esmerian came from a family that was extremely well known
and well respected in the industry and I think that everybody just
assumed that Ralph was extremely rich. Not many people in the industry
knew what he owned and didn't own," observed Donald A. Palmieri,
president of the Gem Certification and Assurance Lab (GCAL).
Esmerian's reputation, however, could not save him when the bills
came due. While Esmerian did make some payments to Jeweled Objects
to repurchase his items, he and the company agreed to push the
final due date for repayment back by one year in March 2007, and
then again in March 2008. Each time, Jeweled Objects collected
additional collateral from Esmerian's personal assets, including
some of his folk art paintings and antique furniture. In March 2010,
when Esmerian's financial troubles became public, and Jeweled Objects
investors realized their collateral was wholly undervalued, they sued
the company, Esmerian and Zucker for damages in excess of $50 million.
Jeweled Objects, which declared bankruptcy a month after the suit was
filed, had filed its own court papers earlier in October 2009, seeking
to recoup $7.4 million in losses from Esmerian. The company's investors
quickly dismissed the filing as an attempt for Jeweled Objects to
appear legitimate after conspiring with Esmerian to defraud them out
of their capital. As evidence, they point to the fact that May and
Hoberman assisted Esmerian in obtaining the loans from Merrill Lynch,
while collecting substantial finders' fees for themselves. They also
claim that the two had intimate knowledge of REI's finances.
While May and Hoberman have not denied their knowledge of REI and its
accounting, they do insist that they were never acquainted with Fred
Leighton's books or its financial state.
There is, as of yet, no legal connection establishing Esmerian,
May and Hoberman as conspirators. But there is, however, evidence to
suggest that dealings among them were informal and off the books. In
May of 2006, the same month the deferred jewelry purchased agreement
was signed, Jeweled Objects consigned one of the 38 purchased items,
a 9.77-carat emerald ring, to Fred Leighton, and Esmerian soon sold the
ring to an individual for $250,000, keeping the profits for himself.
Jeweled Objects eventually reported the lost income from the ring in
their court case in 2009, but did not take any legal or public action
against Esmerian prior to that time.
Scramble Furtive one-on-one sales, as in the case of the emerald ring,
were characteristic of the way Esmerian double-pledged his items -
and the way he got more and more entangled in bankruptcy and wire
fraud. The most famous example is Esmerian's sale of a pledged Endymion
butterfly brooch in May 2008 for $2 million. After wiring half of the
profit to his personal Swiss bank accounts, he learned through Merrill
Lynch that his buyer had put the brooch up for auction at Christie's
Hong Kong, pricing it at $3.2 million. Forced to buy the item back at
auction, Esmerian went about frantically selling off other inventory
to raise the capital, including more items that were Fred Leighton
collateral, as well as a brooch and pendant that legally belonged to
a private collector and longtime customer of REI.
In his double-pledging and double-selling, a portrait emerges of
Esmerian as a deceitful swindler who carelessly tried to cover his
tracks. In July 2008, for example, he sold a pledged 13-carat Burma
ruby diamond ring for $2 million through wire transfer to his personal
bank account. A year later, he testified in bankruptcy proceedings
that the ring was in a vault at REI's Manhattan offices, and that he
"had an offer," which he "turned down yesterday" from a potential
buyer. Esmerian became so caught up in his web of debt that by the
end of 2009, he pledged shares of his apartment to an individual
in exchange for forgiving him a $3 million outstanding balance. He
failed, however, to notify a business adviser of his, who just four
months prior, was given 50 percent of his apartment shares.
Given Esmerian's fall during the collapse of the financial industry,
it is hard not to see some of his problems as part of the larger
problems of easy credit and backroom financial deals. "He was really
caught in this web," said Bronstein, adding that "there are a lot
of other people who got caught it in, too, but they are not as big
as Esmerian." Many, however, argue that whatever the circumstance,
Esmerian sealed his own fate by participating in illicit transactions.
"If he is committing fraud and claiming it's consignment, and it's
not - that is just plain fraud," said Cecilia Gardner, president and
chief executive officer (CEO) of Jewelers Vigilance Committee (JVC).
To a certain extent, Esmerian's downfall exposes cracks in an
industry that handles transactions based on trust. Primavera Gallery
Owner Friedman, for example, noted that "the jewelry ndustry is an
industry where people do millions of dollars in business deals with a
handshake." It remains to be seen whether the Esmerian scandal will
force the industry to think of itself as a place where, according
to Bronstein, "there are few checks and balances like there are in
other industries in keeping track of what belongs to whom."
Esmerian's downfall has reverberated well beyond its initial
participants, leaving a lasting impact on the industry that could
affect business for years to come. "It is important to realize that the
victims of this case are not only Merrill Lynch and Acorn Capital,"
observed Lawler. "Also affected are the vast majority of companies
in the jewelry and diamond industry that rely upon banks and other
lending institutions to fund their business."
By Ricci Dipshan
Diamonds.net
http://www.diamonds.net/news/NewsItem.aspx?ArticleID=35911&ArticleTitle=Inside+ Ralph+Esmerian%E2%80%99s+Downfall
May 31 2011
A jewelry connoisseur with a museum-worthy collection now faces jail
time after a series of reckless business decisions.
RAPAPORT... The American Folk Art Museum's Senior Curator Stacy C.
Hollander once wrote that "to enter Esmerian's world is to abandon
one's usual mundane considerations. All that matters is quality,
beauty, rarity and the creative song of the individual's hand at
work." A Paris-born, French-Armenian, fourth-generation gem dealer,
Ralph Esmerian was once a revered figure in the diamond and jewelry
world, a collector whose antique and rare items were almost legend,
decorating the walls of the Louvre and the American Folk Art Museum.
"He exemplified the presence of a royal nature to the gem industry,"
noted colored diamond expert Alan Bronstein of Aurora Gems, an
appraiser for the colored diamonds involved in Merrill Lynch's
bankruptcy case against Esmerian. "He was a genius at recognizing
gems but he got caught in an ever-greater, grandiose desire fed by
the world of cheap finance. He made a lot of foolish mistakes."
While Esmerian's world may have centered around aesthetics and beauty,
his downfall focused on a recklessness and naïvete in all matters
financial, leaving the once-crowned king of collectors facing jail
time. The undoing of one of the diamond and jewelry industry's most
renowned figures followed a dramatic and scandalous turn of events
that many attribute to his resounding lack of business acumen.
"In certain instances, he obviously used poor judgment," said Audrey
Friedman, owner of New York-based Primavera Gallery. "I think a certain
amount of it may have been due to inexperience in business, but he
also might have been poorly advised by other people, and reaching a
point where he was in desperate straits and not sure what to do."
Esmerian was arrested in November 2010 and pled guilty to charges of
bankruptcy fraud, wire fraud and concealing assets in connection with a
scheme to embezzle funds. He entered the plea in a New York courtroom
in April 2011, marking not only the end of his professional career,
but also the end of several tense years spent trying to outpace his
debt and regain financial solvency. On July 22, 2011, Esmerian will
be sentenced for his crimes, for which he faces eight to thirty years
in prison. At the time of his sentencing, as required by the court,
he will remit all capital owed to his victims, and give up claims to
all property or proceeds involved in his offenses.
Attempts to contact Esmerian for this story were unsuccessful, with
neither he nor his attorneys offering public statements on his past
crimes or his impending sentencing.
Road to Auction The seeds of Esmerian's downfall were planted in the
fall of 2005 and the spring of 2006, when he decided to buy retail
estate jeweler Fred Leighton from retiring owner Murray Mondschein,
securing two loans from Merrill Lynch totaling $177 million to finance
the purchase.
These loans were backed in part by the jewelry and rare items he
had accumulated through his company, R. Esmerian, Inc. (REI), which,
according to court documents filed later, held inventory valued at
around $192 million. In an indication that Esmerian was overextending
himself financially, in December 2006, he pledged the same collateral
- REI's inventory - to Acorn Capital Group LLC to secure another
loan in the amount of $40 million, an illicit activity known as
double-pledging.
To run Fred Leighton, Esmerian hired Peter E. Bacanovic, a former
Merrill Lynch broker most famous for serving five years in prison
for his role in the Martha Stewart insider trading case. It is not
clear whether Bacanovic played an instrumental role in securing the
Merrill Lynch loans for Esmerian, though it has been the subject
of much speculation. During Bacanovic's time at Fred Leighton,
however, the retailer went downhill - in 2008, it defaulted on its
loan obligations, freeing Merrill Lynch to auction off at Christie's
the items Esmerian had put up as collateral.
Interestingly, the auction, which was first set to take place on
April 15, 2008, then postponed to the following day, did not mention
Esmerian by name, instead describing the items as belonging to an
"American Connoisseur." Prior to the sale, a furious Esmerian charged
Merrill Lynch and Christie's with selling his items at prices that were
"dangerously low." While not all agreed with Esmerian's complaint,
there were many who questioned why the bank had never confirmed
the value of the items before granting the loan. One off-the-record
source wondered, "Why didn't Merrill Lynch do its due diligence and
get a second appraisal on the jewelry? The guys over there were just
interested in getting their commissions on the loan, so they went with
what they were given." Indeed, it isn't hard to see how Merrill Lynch -
which was itself imploding in the subprime scandals that began in 2007,
and was just four months away from being sold to Bank of America -
could have been out to make quick capital with the Christie's auction.
To prevent Christie's from going through with the auction, Esmerian
had Fred Leighton file for bankruptcy. That legal end run confounded
auctioneers at Christie's, who canceled the "American Connoisseur"
sale - much to the ire of those awaiting the chance to bid on
Esmerian's goods. A few days after the aborted auction, however,
Christie's struck a deal with Esmerian to sell a 141-carat diamond
brooch that belonged to Empress Eugenie, wife of Napoleon III, to
the Louvre Museum for $10.6 million. Members of the Esmerian family,
however, refused to sign off on the deal. Jacqueline Esmerian King,
Esmerian's sister, along with three of his other siblings, filed a
suit alleging that the brooch belonged to a family trust set up by
their late grandmother, and that the sale was, in effect, illegal.
That case is still pending, though the brooch remains at the Louvre.
Other auctions featuring some of Esmerian's inventory have sprouted
up occasionally since 2008, including an October 2009 auction at
Christie's. Private auctions of Esmerian's inventory also have
occurred, with the most recent sale, featuring 56 items, being held
through June 27, 2011. Proceeds from that sale will go to firms
comprising the Acorn Capital Group LLC.
Esmerian and Friends Around the same time that Esmerian secured
his second loan from Merrill Lynch - still part of the $177 million
total - in the spring of 2006, he entered into a deferred jewelry
purchase agreement with the limited liability company (LLC), Jeweled
Objects. The LLC was owned and operated by Esmerian's longtime business
adviser Mitchell May, with whom he had shared office space since 2006,
and Robert Hoberman, his accountant for more than 15 years. With the
ink on the new Merrill Lynch loan still wet, Esmerian sold 38 pieces
of REI's inventory, including jewelry, sculptures and antiques, for
$8.95 million to Jeweled Objects, with the contractual obligation
to buy it back in one year at 20 percent interest. At least six of
those 38 items were designated as Fred Leighton debtor property and
already were promised to Merrill Lynch.
As it turned out, Esmerian wasn't the only one who needed to borrow
money to finance deals. To fund its initial purchase of Esmerian's
38 items, Jeweled Objects raised $5.25 million from an eclectic mix
of investors, including charitable organizations and retirement funds.
Investors were told by the company that the collateral value of the 38
items was actually more than three times the purchase price. Should
Esmerian fail to repurchase or lease his items back, Jeweled Objects
argued, the investors would be sitting on more than $28 million
in security. As the investors would soon find out, however, their
security against an Esmerian default was more smoke and mirrors than
actual value - in the end, the collateral was really worth less than
2 percent of the price Jeweled Objects had established.
In May 2006, Benjamin Zucker, president of Precious Stones Company,
appraised 20 of the 38 items for just shy of $24 million - a price
that his appraisal document said represents "a fair market value
for objects that have a provenance of being acquired and collected
50 years ago." The other 18 objects were appraised for around $4.8
million, though the appraiser for those items has not been identified.
In court papers filed against Jeweled Objects in March 2010 by
investors seeking to recoup their losses, Esmerian, Zucker, Hoberman
and May are accused of employing a "highly subjective methodology"
in their appraisal by using the prices of "particular, idiosyncratic
potential buyers," who would pay above and beyond market price for
the items, to justify their inflated value. An August 2009 Christie's
appraisal of the 20 items that Zucker had pegged at $24 million set
the market value for the items at $432,500.
Richard Lawler, president of GBC Inc., a Boston-based jewelry surplus
wholesaler and appraisal company, said that in his dealings with
Esmerian, he too found a significant difference between Esmerian's
values and those that could be realistically recovered by a lender.
"In all of our appraisals on manufacturers and wholesalers, we
have never run into a situation where there has been a meaningful
disagreement with our findings by either party. Predating this case,
we had experience with the inventory that was owned by Esmerian. It
went well beyond even the exclusive Fred Leighton merchandise. The
value placed on those unique historic pieces by Esmerian, by his
insurance companies and by his appraisers, was considerably higher
than its worth to the lenders. GBC knew this but apparently the
lenders did not. They could have circumvented a big part of their
problems by having a proper appraisal done on the collateral before
entering into the loan arrangement."
Lawler, whose company had no knowledge of the defendants or their
appraisals for Esmerian, went on to say that, "the phrase 'fair market
value' is always open to a significant range of interpretation and
should be carefully considered before being accepted by a lender."
Why investors believed that Esmerian's items were worth over 50 times
their value reflects Esmerian's stature as a revered figure in the
industry. "Esmerian came from a family that was extremely well known
and well respected in the industry and I think that everybody just
assumed that Ralph was extremely rich. Not many people in the industry
knew what he owned and didn't own," observed Donald A. Palmieri,
president of the Gem Certification and Assurance Lab (GCAL).
Esmerian's reputation, however, could not save him when the bills
came due. While Esmerian did make some payments to Jeweled Objects
to repurchase his items, he and the company agreed to push the
final due date for repayment back by one year in March 2007, and
then again in March 2008. Each time, Jeweled Objects collected
additional collateral from Esmerian's personal assets, including
some of his folk art paintings and antique furniture. In March 2010,
when Esmerian's financial troubles became public, and Jeweled Objects
investors realized their collateral was wholly undervalued, they sued
the company, Esmerian and Zucker for damages in excess of $50 million.
Jeweled Objects, which declared bankruptcy a month after the suit was
filed, had filed its own court papers earlier in October 2009, seeking
to recoup $7.4 million in losses from Esmerian. The company's investors
quickly dismissed the filing as an attempt for Jeweled Objects to
appear legitimate after conspiring with Esmerian to defraud them out
of their capital. As evidence, they point to the fact that May and
Hoberman assisted Esmerian in obtaining the loans from Merrill Lynch,
while collecting substantial finders' fees for themselves. They also
claim that the two had intimate knowledge of REI's finances.
While May and Hoberman have not denied their knowledge of REI and its
accounting, they do insist that they were never acquainted with Fred
Leighton's books or its financial state.
There is, as of yet, no legal connection establishing Esmerian,
May and Hoberman as conspirators. But there is, however, evidence to
suggest that dealings among them were informal and off the books. In
May of 2006, the same month the deferred jewelry purchased agreement
was signed, Jeweled Objects consigned one of the 38 purchased items,
a 9.77-carat emerald ring, to Fred Leighton, and Esmerian soon sold the
ring to an individual for $250,000, keeping the profits for himself.
Jeweled Objects eventually reported the lost income from the ring in
their court case in 2009, but did not take any legal or public action
against Esmerian prior to that time.
Scramble Furtive one-on-one sales, as in the case of the emerald ring,
were characteristic of the way Esmerian double-pledged his items -
and the way he got more and more entangled in bankruptcy and wire
fraud. The most famous example is Esmerian's sale of a pledged Endymion
butterfly brooch in May 2008 for $2 million. After wiring half of the
profit to his personal Swiss bank accounts, he learned through Merrill
Lynch that his buyer had put the brooch up for auction at Christie's
Hong Kong, pricing it at $3.2 million. Forced to buy the item back at
auction, Esmerian went about frantically selling off other inventory
to raise the capital, including more items that were Fred Leighton
collateral, as well as a brooch and pendant that legally belonged to
a private collector and longtime customer of REI.
In his double-pledging and double-selling, a portrait emerges of
Esmerian as a deceitful swindler who carelessly tried to cover his
tracks. In July 2008, for example, he sold a pledged 13-carat Burma
ruby diamond ring for $2 million through wire transfer to his personal
bank account. A year later, he testified in bankruptcy proceedings
that the ring was in a vault at REI's Manhattan offices, and that he
"had an offer," which he "turned down yesterday" from a potential
buyer. Esmerian became so caught up in his web of debt that by the
end of 2009, he pledged shares of his apartment to an individual
in exchange for forgiving him a $3 million outstanding balance. He
failed, however, to notify a business adviser of his, who just four
months prior, was given 50 percent of his apartment shares.
Given Esmerian's fall during the collapse of the financial industry,
it is hard not to see some of his problems as part of the larger
problems of easy credit and backroom financial deals. "He was really
caught in this web," said Bronstein, adding that "there are a lot
of other people who got caught it in, too, but they are not as big
as Esmerian." Many, however, argue that whatever the circumstance,
Esmerian sealed his own fate by participating in illicit transactions.
"If he is committing fraud and claiming it's consignment, and it's
not - that is just plain fraud," said Cecilia Gardner, president and
chief executive officer (CEO) of Jewelers Vigilance Committee (JVC).
To a certain extent, Esmerian's downfall exposes cracks in an
industry that handles transactions based on trust. Primavera Gallery
Owner Friedman, for example, noted that "the jewelry ndustry is an
industry where people do millions of dollars in business deals with a
handshake." It remains to be seen whether the Esmerian scandal will
force the industry to think of itself as a place where, according
to Bronstein, "there are few checks and balances like there are in
other industries in keeping track of what belongs to whom."
Esmerian's downfall has reverberated well beyond its initial
participants, leaving a lasting impact on the industry that could
affect business for years to come. "It is important to realize that the
victims of this case are not only Merrill Lynch and Acorn Capital,"
observed Lawler. "Also affected are the vast majority of companies
in the jewelry and diamond industry that rely upon banks and other
lending institutions to fund their business."