DIAMONDS : Secretive Club Polishes Its Image Amid Fight Over Pricing Disclosure

Nearly buried underneath social notices, a scrap of paper pinned to a bulletin board in the Diamond Dealers Club’s new headquarters here read: “Lost on 47th Street, pair of two-carat, pear-shaped earrings.”

The message might just as well have been about a lost umbrella or a pair of mittens. In fact, the earrings, wrapped in a plain piece of white tissue and fallen from a coat pocket, were worth thousands of dollars.

“Oh, sure, the owner will get them back from a tiny notice like that,” says Lloyd Jaffe, who for 21 years has been a diamond dealer at the club, of which he is a director. “That’s the way we work.”

For decades, trust among dealers and secrecy from outsiders have been the hallmarks of New York’s close-knit, multibillion-dollar diamond industry, where the skill of cutting, polishing and trading “ice” usually is passed from father to son or uncle to nephew.

Traditions Change

In the last few years, however, the club has learned that, while diamonds may last forever, traditions often cannot. Economic changes and regulatory challenges have pressured the industry to chuck its cherished privacy and instead make prices and business practices more public.

Since 1980, diamond prices have crashed, competition from cheaper labor in India and Israel has increased, and the Federal Trade Commission has launched an investigation into whether the club’s practices are anti-competitive.

In addition, Martin Rapaport, an irate club member, has brought the club unprecedented publicity by filing a $55-million lawsuit charging that the club booted him out to deny him access to prices.

Partly in reaction to such allegations and partly to polish an image tarnished by speculative, roller-coaster markets, the club has begun to warm up to the idea of visitors and publicity.

The new openness is not to everyone’s liking. Before a non-member can step onto the club’s exchange floor, escorts make sure the coast is clear of those dealers likely “to start screaming and cause a scene” says Jaffe, who also is chairman of the American Diamond Industry Assn.

“This is an exciting industry and we want people to know how we work. Some club members may not like it, but we need good relations with the world,” he says.

While only a few dealers resist any effort to modernize the club, nearly all see Rapaport as a fundamental threat to a decades-old way of doing business, including the most precious practice of keeping all trading prices secret.

Rapaport, a 33-year-old maverick who publishes a controversial weekly newsletter of the prices that sellers are asking for their diamonds, has sued the club for trying to oust him, an action that he says would have had the effect of withholding price information from him. The irony, which club members grudgingly acknowledge, is that Rapaport’s newsletter has become the price-list bible. Its several thousand subscribers rarely make a trade without consulting it.

Although Rapaport and the Diamond Dealers Club disagree on many points, they at least agree that the club is and should be to diamonds what commodities exchanges are to wheat or the New York Stock Exchange is to stocks: a safe, appropriately equipped place to trade. Its mandate is to provide members with a well-lighted, well-guarded area where gems can be weighed by an impartial third party, where disputes can be settled by elected arbitrators and where dealers can meet to chat about prices or exchange information about other industry trends.

Unlike other commodity or security exchanges, the club remains steeped in traditions forged mostly by the large number of Hasidic Jewish members, whose long beards, white shirts and black coats and hats stand out among the trendy punk attire common just a few blocks away in the fashion district. Each diamond trade remains a private transaction between buyer and seller; final prices are not recorded or made public. Dealers do not allow themselves to be photographed, yet they carry millions of dollars’ worth of diamonds in their coat pockets and trade them, wrapped in no more than tissue or small manila envelopes, with a handshake that is sealed with the words, “mazel un brucha, “ a Yiddish phrase meaning “luck and blessing.”

Community Leaders

Club members are the business leaders of the bustling area, through which 80% of the diamonds sold in this country pass. In effect, they serve as gatekeepers for the U.S. diamond-buying public, which last year bought 47 million pieces of diamond jewelry, or 36% of the world market, for $22 billion.

The FTC is investigating Rapaport’s allegations of anti-competitive behavior, stirring resentment among club members, who characterize the charges with a disparaging remark and a roll of the eyeballs. Such reactions elicit only a shrug from Rapaport, who spends 12 to 15 hours a day working on his newsletter, setting up a diamond “ticker tape” available through computer subscription services such as CompuServe and, in between, pursuing a Ph.D. in economics at New York University.

“This club is an exchange,” he says. “It brings buyers and sellers together and serves the economic function of a market. The more information there is about price, the more efficient it will be. No one has to cooperate with me, but if all the (club) members band together to keep me from getting information, that’s illegal.”

Then he breaks into a broad smile and says, “They may not like me, but, hey, this is the 20th Century.”

The club’s position, on the other hand, is that, because no two diamonds are alike, it is impossible to establish pricing standards. For that reason, the club says, Rapaport is artificially setting diamond prices.

Center of the Hub

America is far and away the leading buyer of diamond jewelry (Japan is second with 19% of the world market). New York is the heart of that business and the Diamond Dealers Club is the center of the hub.

The new home of the Diamond Dealers Club, its fifth since it was founded in 1931, symbolizes its powerful position. The plush gray and mauve quarters, opened in June, consume the second floors of two adjacent buildings on Diamond and Jewelry Way, the stretch of 47th Street between Fifth and Sixth avenues better known simply as New York’s diamond district.

The face-lift enhances the services the club offers. A televised message system has replaced the blackboards and chalk of the old quarters across the street. And, like every other office in the district, it is guarded by the most up-to-date television surveillance cameras and steel locks, doors and chambers.

More than decor is being updated, however. Market changes since the mid-1970s have made the industry more competitive, increasing the demand for price disclosure.

Rapaport, who early on sensed the opportunities in the changing market, turned the traditional practice of diamond pricing on its head in 1978 when he began publishing the Rapaport Diamond Report. Just two years earlier, the diamond market had started a wildly speculative ride upward. Inflation rates were rising, but federal law was keeping a lid on the interest rates banks could offer. To stay ahead, many investors began putting their money into such tangible items as gold, rubies and diamonds.

Prices Rocketed

As diamond prices shot up, more investors were enticed into the market. A D-flawless, one-carat diamond, which is the industry benchmark, sold for $10,000 in the mid-1970s. By 1980, when the speculative frenzy peaked, the same stone was worth $62,000 at the wholesale level. Then bank interest rates were deregulated, inflation ultimately slowed and a two-year recession began. The diamond market lost its luster fast. By 1984, the value of the benchmark gem had fallen below $14,000.

Inadvertently adding to the frenzy was the Gem Trade Laboratory of Santa Monica, which issues certificates rating diamonds according to cut, size, color quality and purity. Although the ratings have been around since the 1950s, their use became widespread in the mid-1970s, when companies selling diamonds as investments sprang up and used the certificates to convince investors that diamonds were a liquid and reliable purchase. The most notable company was International Diamond Corp. in San Rafael, Calif., which collapsed in 1982 and was sued by the FTC for consumer fraud and forced to repay $6.7 million. The Diamond Dealers Club’s new willingness to be more open reflects a need to dispel the bad image such failures created.

Of all diamonds mined, only 20% are of jewelry quality. The rest go to industry, where they are used in grinding processes. Though a small portion of diamonds mined, jewelry grade gems account for 80% of the industry’s revenues. That is why prices in that sector have been more subject to speculation. To cut and polish a stone to the glittering item most people think of, about 50% of the diamond is ground away to diamond dust, which then is collected and used to cut and grind other diamonds.

Profit Margins Fell

Representatives of the diamond cartel of De Beers Consolidated Mines of South Africa, which controls 80% of the world’s supply of raw diamonds, as well as diamond dealers in New York note that 1984 was a record year for diamond sales, with wholesale dollar sales in the United States up 19% from $19 billion in 1983. But the figures don’t tell the whole story. Profit margins are down, crushed between soft retail prices on one side and De Beers on the other, which stubbornly has kept high the price of uncut diamonds. The diamond market is still relatively soft; demand for lower-priced stones, in the range of $100 to $250 per carat, started to pick up two years ago, but demand--and prices--for higher-quality diamonds began to rise only a few months ago, dealers say.

The market has regained some of its pre-1970s stability, but demand for expensive diamonds remains slack. So diamond dealers, like many other sellers of luxury items, hope that the higher-priced stones once popular with investors now will become popular with so-called young urban professionals, the most affluent sector of the Baby-Boom generation. The industry, in dealer Jaffe’s words, is waiting to feel the effects of “the returned acceptance of conspicuous consumption.”

“It’s suddenly OK now for people to use material goods to show off their success,” Jaffe says. “What better way than diamonds?”

However, few in the industry want or expect a return to the go-go years of the late 1970s, when expensive grades of diamonds were touted as sound investments. Instead, dealers today encourage purchases of such stones on the basis of standard measures like quality, size, weight color and cut. “We’re not saying diamonds won’t appreciate over time. They will,” says William Goldberg, a prominent dealer on the street. “But people should buy for beauty and personal taste, not to make a quick turnover.”

Trails Inflation

A survey by Salomon Bros. in New York backs up Goldberg’s advice: From 1979 to 1980, the annualized rate of return on raw diamonds was 15.3%, more than double the 7.7% of the consumer price index, a common measure of inflation. But from June, 1980, to June of this year, the survey shows, diamonds offered an annualized rate of return of 1.2% while inflation was rising 5.7%.

“No one cared about (my) newsletter when prices were rising,” says Rapaport, whose offices are next door to the exchange. “But when they started falling, forget it. (Diamond) dealers just want to blame something so they blamed me.” Others, however, say Rapaport’s figures are inaccurate. Rapaport acknowledges that exact prices are difficult to pin down, but he defends his price list as a valuable approximation of current value.

“There’s the price the dealer asks, there’s the price the buyer bids, and then there’s the actual price, the one they haggle out,” Rapaport says. “I can only list the asking price because if I get too close to the real price they start throwing things at me.” It would not be the first time. Rapaport says that several dealers have threatened him physically and that one even chased him around the club.

Frustrated after repeated attempts to get Rapaport to stop publishing his price list, which many dealers said destroyed the traditional give-and-take of a diamond sale, the club in 1982 tried to compete with him by publishing its own list. It soon gave up, saying members would not supply prices. Members like Goldberg continue to question the accuracy of Rapaport’s numbers by questioning how and where he gets his information.

Criticized Dealers

The dispute turned even nastier when Rapaport published an article in 1982 criticizing the diamond dealers for having sold diamonds to companies like International Diamond Corp. that were promoting the gems as investments. The club said the article damaged its reputation and that of its members and, on June, 1982, suspended Rapaport for a year. The action left Rapaport and his publication out in the cold as far as price information goes, so he sued the club and 21 of its prominent members for $55 million in damages.

Although a New York State Supreme Court judge ordered him reinstated in March, 1983, Rapaport is pursuing his case. He seems to relish shaking up the industry, but he’s not talking too much about the case. “I’m a little sick of people dwelling on it,” he says. “Besides, I have to live and work here.”