Fraud Alleged in Diamond Asset Program : American Investia Agrees to $100,000 in Penalties in Deal With State

The state on Friday accused American Investia of fraud and deceit in the sale of unregistered securities purportedly backed by diamonds, which allegedly were obtained for $550 per carat and sold to investors for up to $4,600 per carat.

Melinda L. Brun, senior trial counsel for the state Department of Corporations, said the Beverly Hills firm collected about $16 million from California investors over the past five years.

A settlement filed simultaneously with the suit provides for American Investia and its president to turn over to customers the diamonds and funds held in reserve or in trust accounts. However, Brun estimated that investors will realize only 40 to 55 cents on the dollar from these assets.

The public’s average investment in the firm was $33,000, Brun said, and some investors put in their life savings. The minimum investment in the program was $10,000, and many customers put up more than $100,000, she said.

The company and its president, Lennart Martinson, consented to entry of a permanent injunction against them without admitting or denying allegations of the civil suit filed in Los Angeles County Superior Court by the California attorney general and the corporations commissioner.

Under the settlement, they also agreed to pay the state $100,000 in penalties. The company or Martinson are to pay $10,000 within six months and another $10,000 within a year. Then, Martinson is to pay the balance in increments of $10,000 every six months. They also are to pay the state $25,000 for its investigative costs.

As reported Thursday in The Times, American Investia advertised and sold investor “accounts” and promised annual returns that were well above prevailing money-market interest rates.

Many customers have called state agencies and The Times recently after becoming worried or angry about their investments upon hearing a taped message on the company telephone. As reported, the message said clients would receive a letter within seven days “detailing recent changes.”

The suit said the company misled customers to expect substantial returns without proportionate risks.

But the diamonds that supposedly secured the investment--a type known as “melee” and weighing from 7% to 14% of a carat--are worth “at best” less than 25% of the value of the accounts, the suit alleged.

It added that since October, 1984, the firm also set aside an amount equal to 25% of each investment and put it in an investor reserve account. Martinson and the company agreed to turn over these assets to customers, whom they have 30 days to notify. The state said the company has the diamonds stored at Wilmington Trust in Wilmington, Del., for many customers.

They are in sealed “cassettes” containing 10 diamonds, totaling about one carat each.

The amount of expected loss to investors depends on when they bought their diamonds and how much they were charged, Brun said.

The state said there is no retail market for the tiny diamonds, and the negotiated settlement gives customers a choice of taking possession or having a state-approved agent liquidate the diamonds for them.

The complaint said the defendants falsely told customers of a growing “secondary market” in the diamonds. In fact, the suit said, the only market that existed was that maintained by American Investia.

“When an investor liquidates his or her account,” the complaint said, “that investor is simply replaced with a new investor who must purchase these diamonds at inflated valuation.”

The suit also said that the initial difference between the cost to the defendants in acquiring the diamonds and the investors’ initial investment was claimed by defendants to be their operating capital. It noted that later the reserve accounts were set up with 25% of the money.