Diamonds Weren’t Forever

The new factory inspired curiosity and suspicion from the beginning. Why would anyone build a diamond-cutting plant in San Francisco, thousands of miles from the established center of the diamond industry in Manhattan?

Visitors who got a look inside the two-story space occupied by Golden ADA Inc. emerged even more mystified. The out-of-the-way facility, built from scratch by people unknown to anyone in the diamond trade, was the most advanced gem-cutting factory in the world.

It had the most powerful computers, the most modern machines and security devices that included handprint-matching units and scales to weigh workers as they went in and out.

Diamond professionals might have been even more surprised had they known the truth about Golden: It was at the center of a series of international scams allegedly involving persons close to the Russian KGB and cronies of President Boris N. Yeltsin.

Golden’s activities have led to charges in civil court here that its principals stole more than $171 million in gold, silver and diamonds from the Russian government; to one of the largest tax seizures ever by the IRS in San Francisco, and to the indictment in Russia of that country’s top diamond official.

The affair is the subject of a “high-priority” criminal investigation by the FBI and a U.S. grand jury in San Francisco, according to a source close to the case. It also has become a cause celebre in Moscow, where it is seen as evidence of the complicity of well-placed bureaucrats in the plunder of the country’s riches--an issue rivals are certain to use against Yeltsin in his reelection bid.

Golden “testifies to the huge scale of possibilities for corruption in Russia,” said Yuri Y. Boldyrev, deputy chairman of the Accounting Center, a Russian government watchdog agency.

In the United States, Golden almost from its inception in 1992 gave signals that it was not your average jewelry company. There were dark hints of connections with Russian organized crime and the KGB; at least once, ownership allegedly was transferred at gunpoint.

Golden acquired an unlikely hoard of corporate assets that included mansions, condominiums, luxury cars, yachts and aircraft. Ultimately the saga entangled two San Francisco politicians who hoped in vain that the venture might give them entree into the diamond business.

Golden leaves enduring questions about who were the scammers and who were the scammed.

In papers filed in San Francisco federal court, the Russian government contends that the company was nothing more than a scheme to defraud the Russian people of tens of millions of dollars. Among those who may be implicated is Yevgeny M. Bychkov, a Yeltsin ally and longtime head of the Russian Committee on Precious Metals and Gems, the source of the raw diamonds and other valuables transferred to Golden.

Bychkov last month became the highest-ranking casualty of the burgeoning scandal when Yeltsin fired his old friend. The president also cleared prosecutors to charge him with allowing Golden to embezzle state capital.

It is evident that Golden was part of a secret but officially sanctioned scheme to subvert the Russian government’s contract with De Beers Consolidated Mines, the worldwide syndicate that controls the supply and price of diamonds. That contract obligates Russia to channel virtually all its rough diamond exports through South Africa-based De Beers.

A review of court documents and interviews with those close to the affair show, above all, a gang that couldn’t shoot straight.

“I think this is the biggest case of gross negligence or mismanagement and the sheer amateurish handling of business I’ve ever seen anywhere in the world,” says Jack Immendorf, a Bay Area political figure and businessman who spent eight months in 1995 as Golden’s chief executive, trying to unravel its finances.

Principal Players

The saga of Golden ADA begins with the odd trio of Andrei Kozlenok and brothers Ashot and David Shagirian.

Kozlenok is a dapper and charming Russian entrepreneur in his mid-30s with apparent personal and family connections to KGB officials and to Yeltsin’s presidential security service, according to Moscow sources. In Moscow, he had surfaced with ventures that sold Russian gas masks to Kuwait, Ukrainian marble to Israel and security escorts to foreign businessmen in the Russian capital.

“He was a hustler,” says Willis Garriott, a San Francisco police lieutenant who was Golden’s director of security from 1992 to 1995 and knew all of the principals. “He was really intelligent, but he lacked common sense, he had no organizational or management skills and he had no experience in the diamond business.”

Since selling Golden late last year, Kozlenok has been spotted in Bermuda and Kuwait. Sources say he was briefly detained last month by Belgian tax authorities over Golden’s activities there. But police released him and he disappeared.

The Shagirians’ history is even cloudier. It is known that they were born in Armenia when it was part of the Soviet empire. When and why they emigrated to the United States is not known. Both also have disappeared.

“These guys were sidewalk curb painters in the Bay Area two years before they became multimillionaires” through the joint 40% ownership they acquired from Kozlenok, says former FBI agent Paul Chamberlain, a Beverly Hills private investigator working for the Russian government on the case.

Acquaintances say Kozlenok met the Shagirians through a mutual friend in Los Angeles when he was looking for English speakers who were familiar with the Bay Area. They became his errand boys, and he eventually rewarded them with a putative 40% interest in Golden.

The three cut flamboyant figures. “Kozlenok liked to think that he was a tough guy,” says Garriott. “They all seemed to talk violently, which probably went back to their bluffing their way through life in Russia. But a lot of their discussion was based on what they saw in Rambo-type movies.”

Kozlenok arrived in California in October 1992 with $1.3 million in seed capital from the Kristall Factory, a diamond-cutting shop operated in Moscow by Bychkov’s agency, which is known by its Russian acronym, Komdragmet. A few months after Kozlenok incorporated Golden as its 60% owner, Komdragmet sent the firm $90 million in polished diamonds, pre-1917 gold and silver coins and other valuables.

The idea, according to an affidavit from Komdragmet Deputy Chairman Boris A. Pozdnyakov, was for Golden to use the goods as collateral on a $500-million line of credit from a U.S. bank for the Russian government.

But others, noting the implausibility of such a financial arrangement, say the transfer had a different purpose: Golden was to sell off the goods, using the proceeds to build a state-of-the-art diamond factory to process Russian rough stones outside the scrutiny of De Beers and the rest of the diamond establishment. (The DeBeers contract allows Russia to cut its own stones at its own factories, but is unclear on whether those factories could be established outside Russian borders, as Golden was.)

Either way, Russian observers are convinced that Kozlenok operated with top-level approval.

Huge Spending Spree

Once the consignment arrived, Kozlenok and the Shagirians converted it into cash, selling $10 million in polished diamonds in England and melting five tons of gold coins to raise $50 million.

They then embarked on a world-class spending spree.

In three days in October 1993 they bought three luxury yachts in Marina del Rey for more than $1.2 million. A few weeks later, they laid out $3.8 million for three homes in upscale Orinda and Lafayette, outside San Francisco. In the next few months they added more boats, five Lake Tahoe condos, a $377,000 Rolls Royce, two Aston Martins at $336,000 each, a Gulfstream jet for $20 million and a helicopter for $1.7 million.

“They would just send checks out,” recalls Garriott. “They paid top dollar for everything, and everything was in a rush, too.”

He and others believe the trio allowed themselves to be mercilessly ripped off. They were double- and triple-charged for equipment installed on the boats; Golden later asserted in court that one intermediary insisted on and received a $500,000 kickback from the seller of the yachts.

Perhaps the worst deal was their purchase of the building at 999 Brannan St. in which they were to establish the diamond factory. It was appraised at about $6 million; they wrote the owner a check for $10.6 million and insisted on escrow closing within a week.

“The owner was very happy,” says Garriott, a friend of the owner. “He said it made his year.”

Meanwhile, according to court papers filed by the Russian government, Kozlenok was further dipping into Golden assets for his own use, draining as much as $734,000 from 1992 to 1994. He may also have spirited cash and assets to other countries and back to associates in Moscow. In all, as much as $100 million of the $171 million in goods Golden eventually received from the Russian government has disappeared, sources say.

The diamond-cutting shop, however, was genuine. By 1993, it was established on the top floor at 999 Brannan and staffed with Russian craftsmen on temporary visas. Komdragmet then proceeded to throw good money after bad, agreeing in February and March 1994 to send nearly $89 million in rough diamonds to be cut, polished and returned to Russia.

Instead, Ashot Shagirian later recalled in a court affidavit, Kozlenok sold more than $70 million of the uncut diamonds in Antwerp, Belgium. The proceeds ended up in Golden’s California bank account, where much of it got dissipated on more cars, boats and real estate.

Affair Unravels

By mid-1994, trouble was brewing. In June, a Kozlenok ally running a Golden subsidiary called Star of the Urals was arrested in Russia for tax evasion. When police raided the Moscow office shared by Star and Golden, they uncovered documents relating to Komdragmet’s $88 million in shipments of rough stones. They also found indications that the exports lacked official authorization.

Simultaneously, Kozlenok’s relations with his partners were deteriorating.

Komdragmet’s demands to be paid for the diamond consignment were unnerving the brothers. Apparently hoping to placate Moscow, Ashot Shagirian transferred $10 million in cash to Komdragmet in partial settlement of the debt.

Kozlenok “became enraged” when he learned of the transfer, Ashot Shagirian said in an October 1995 affidavit. “It was my impression that [he] did not want to pay any money whatsoever to the committee.”

Instead, he ordered the brothers to relinquish their 40% interest in Golden for $5 million cash and to leave the company. When they balked, “he told us we could either ‘take the $5 million or a bullet in the head,’ ” Ashot Shagirian recalled in the affidavit. “My brother and I chose to take the $5 million.”

By the end of August 1994 the Shagirians were gone. Kozlenok brought in as chief executive officer Belgian-born diamond expert Peter Michaels. But he infuriated Kozlenok by proposing to Komdragmet his own plan to repay $70 million in 13 monthly installments, beginning with a $25.5-million lump sum in December 1994.

Only $2 million of that sum was paid before Kozlenok fired Michaels on Dec. 22. One week later, Komdragmet received a shipment of polished diamonds that Golden claimed was worth $6.2 million--the last payment the Russians ever received from Golden.

Kozlenok hired a new chief executive: Immendorf.

Many people familiar with the case believe Kozlenok hired Immendorf on the time-honored Russian principle that political influence translates into economic power. For Immendorf was a prominent Democratic Party figure, having been a campaign manager for then-Mayor Frank Jordan. Moreover, his management team included Quentin Kopp, a lawyer, state senator and former San Francisco County supervisor.

Immendorf, however, says Kozlenok simply thought his background as a private investigator would help Golden find and husband its far-flung assets.

“I was the cleanup crew,” he says, adding that he was convinced at the time that Golden was legitimate and viable. “We had no hint that anything criminal was going on, or we wouldn’t have become involved.” Kopp also denied any knowledge of suspicious activity.

But Immendorf does acknowledge thinking that Golden’s asset mix was odd. Moreover, when he tried to sell off such luxuries as the corporate jet, which was costing $200,000 a month in crew, maintenance and airport charges, Kozlenok vetoed every move.

Immendorf also tried to play hardball with the Russians, hinting by letter in January and February of 1995 that any repayment of Golden’s debt would be “delayed” unless Komdragmet agreed to send the company 10,000 carats in new rough stones every month to keep the factory in operation.

Komdragmet rejected the plan, in part because Immendorf also suggested that the Russians had overvalued the original rough diamonds. Because of that, he was arguing, Golden owed the Russians $34 million, not the $70 million they were then demanding. Komdragmet officials rejected the contention out of hand.

Fallout and Effects

But the Golden saga already was nearing its end game. Russian authorities closed in on Bychkov, opening a formal criminal investigation of his ties to Golden in June.

Soon after, Immendorf--saying he was tired of Kozlenok’s lack of cooperation--quit in disgust and embarrassment.

A few weeks later, Kozlenok sold Golden to Bay Area businessman Rajiv Gosain for $20 million and left the United States.

Whether Gosain has paid the $20 million is unclear. In any event, his lawyer portrays him as the latest in a long line of unfortunates to be taken in by Golden’s apparent promise, only to be dismayed by its problems.

Three weeks after he took over, the Russian government sued Golden for racketeering, fraud and theft of the $171 million in valuables and diamonds.

One week after that, the Internal Revenue Service--acting on the Al Capone-era principle that fraud and theft are taxable transactions--slapped a $63-million lien on the company and seized all the corporate cars, aircraft, artwork and jewelry it could lay its hands on. The lien is the largest tax seizure that regional spokesman Lawrence Wright can recall in his 20 years at the IRS.

But the agency claim may be short-lived. If the Russian government prevails in its claim that the goods held by the IRS are the proceeds of large-scale larceny, they probably will be returned to Moscow.

And there the scandal is likely to continue to flower. As the unpopular Yeltsin faces a resurgent Communist Party in the lead-up to the June 16 presidential election, the Golden saga is being widely aired by the media and by opposition figures, who treat it as proof that the Yeltsin administration has become at least as corrupt as the Soviet regime it replaced.

“Golden ADA is [only] one illustrative case,” said Boldyrev of the watchdog agency. “There are so many others it is no longer possible [for Yeltsin] to scare anyone into voting against the Communists.”

Hiltzik reported from San Francisco and Boudreaux from Moscow.