Federal authorities are investigating off balance-sheet transactions involving Lugano Diamonds & Jewelry, a chain of high-end boutiques that’s accused its founder of misrepresenting diamond investments he brokered with wealthy clients.
Lugano
FBI agents have interviewed individuals who struck deals with Lugano founder and former chief executive officer Mordechai “Moti” Ferder as part of an investigation into the business, according to people familiar with the matter. A Lugano spokesman said the boutique is cooperating with the probe.
The Newport Beach, California-based chain of about a half-dozen shops, which is majority owned by Compass Diversified, sued Ferder in June and accused him of manipulating Lugano’s accounts by disguising the gem-backed financing as direct sales. Lugano filed for bankruptcy protection last month and Ferder is residing in his native Israel, according to court documents filed by the company.
Lugano, Ferder or related parties have been sued by about a dozen individuals or firms over the diamond investment contracts. The boutique has claimed Ferder entered into financing deals that together may represent more than $100 million in liabilities to the business. Compass said in May it would restate its financial statements.
Ferder’s lawyer Jeffrey Reeves said his client hasn’t been contacted by the FBI or the Department of Justice.
“Mr. Ferder maintains his innocence and denies any criminal wrongdoing,” Reeves said. “We remain focused on defeating the civil claims brought against him as well as prosecuting the counterclaims he intends to file against Compass Diversified, Lugano, and others.”
An FBI spokesperson didn’t reply to multiple requests for comment.
Lugano said in its lawsuit filed in a state court in California that Ferder offered clients stakes in valuable diamonds that the boutique already owned, promising hefty returns once the gems were sold. The lawsuit claims Feder told Lugano personnel that the deals were ordinary sales. Feder has denied the allegations and claimed Lugano and Compass were aware of the contracts.
Lugano interim CEO Josh Gaynor said in a June email to an investor who sued Ferder that those “who have expressed interest in any parallel criminal investigations” may wish to contact an FBI agent, according to court documents filed in an investor lawsuit. The agent has been assigned to the complex financial crime squad in the agency’s Los Angeles field office, according to papers filed in unrelated court cases.
A Compass spokesman said the firm “has been cooperating with the authorities investigating this matter, as well as conducting our own extensive internal investigation.”
Compass released its restated earnings on Monday and said in a securities filing that its internal investigation determined Lugano’s former chief executive officer “deliberately engaged in fraudulent activity” by recording fictitious sales and misrepresenting the value of the jewelry boutique’s inventory. The conglomerate is now focused on cutting debt and “putting this chapter behind us,” Compass CEO Elias Sabo said. It is considering selling some businesses to reduce debt, it told investors last week.
The group acquired a 60% stake in Lugano in 2021 for $198 million and opened additional locations in the US and London, which was recently closed, according to court papers.
The boutique is planning to sell its business in Chapter 11. In September, a holding company that owns Ferder’s shares in Lugano as well as a title to an Aspen property also filed for bankruptcy. Ferder ceded control of the holding company to Lugano’s chief restructuring officer, according to court papers.
