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David and Goliath

Aug 4, 2004 4:14 PM   By Martin Rapaport
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In an exclusive interview with Martin Rapaport, Walter David, president of W.B. David & Co., explains why the firm is suing De Beers.

Martin Rapaport: Why are you suing De Beers?

Walter David: De Beers has seriously injured our business. We are not willing to stand by and suffer the unjust consequences of their illegal activity. We are prepared to pursue this matter vigorously and bring it to a successful conclusion in America, De Beers largest market. American courts should determine if De Beers is operating within American law.

We have been put in an intolerable position. For over a year we tried to resolve our differences with De Beers on an amicable basis. We fully informed them of our position. Gareth Penny told me, “I plead with you in good faith to arrive at some form of resolution and commercial settlement without the involvement of attorneys.” But De Beers just stalled us. They never came up with any offer to resolve our differences — nothing whatsoever. We were left with no choice but to have the validity of our claims determined in a court of law.

MR: Are you a victim of De Beers Supplier of Choice (SOC) initiative?

WD: We believe that SOC is fundamentally flawed. De Beers did not sufficiently verify the accuracy of the information they used to establish the rankings of SOC applicants. Their failure to exercise reasonable due diligence corrupted the process. Furthermore, there is no real transparency about exactly how the rankings and ratings are weighed in the selection process. The only people that know the formula used in the final selection process is De Beers, if there really is one, and there is no way to confirm the objectivity of De Beers internal decision-making process. De Beers was not forthcoming about why we were rejected. They simply gave us the rankings that they subjectively assigned to us with nothing but a contrived and inadequate explanation. We challenge the integrity of the system used to generate these results.

De Beers has obviously made serious mistakes in their implementation of SOC. They must correct their mistakes and be held accountable.

MR: Do you want De Beers to stop SOC?

WD: I have no problem with the concept of growing demand but SOC is not really doing what it is supposed to do. SOC is supposed to promote a change in the dynamics of the markets, to move us from a supply-driven market to a demand-driven market. But what has happened since the introduction of SOC is that we have entered into one of the worst supply driven markets in history. Prices are rising because of shortages of supply, not increases in demand.

If a store was buying 25 1-carat diamonds, demand has not increased so that they now want 35 diamonds. What is happening is that the store cannot find the 25 diamonds they need at a price they want to pay. I am not going to deny that demand is growing based on the marketing initiatives of the sightholders. But the increases in prices we are seeing are almost completely driven by shortages of supply not increasing demand. SOC has made the market even more supply-oriented than it was previously.

MR: Is it possible to compete in the market as a nonsightholder?

WD: It is terribly difficult in today’s environment. The rough markets have gone crazy with very large premiums on Diamond Trading Company (DTC) rough prices. It is also difficult to obtain consistent supplies of rough necessary to support polished diamond programs for large retailers.

MR: Is there unfair competition from sightholders?

WD: Yes, terribly unfair competition. Sightholders are getting rough diamonds at cheaper subsidized prices. They are using the lower prices to buy market shares and to push out nonsightholder suppliers. Sightholders have extra profit margin available to support marketing programs — many of which are developed and coordinated for them by De Beers.

MR: Why are you suing sightholders and others?

WD: The sightholders and the advertising agencies are the alter ego of De Beers in the United States. De Beers and their sightholder codefendants are increasing the downstream market domination and the monopoly power of De Beers. The SOC distribution scheme that sightholders are a part of has reduced the availability of diamonds to such a level that highly efficient firms are being forced out of business. De Beers and their sightholders are working in collusion to dominate the diamond markets.

MR: How do you think the lawsuit is going to affect the diamond industry? What messages do you have for the diamond industry?

WD: Over the years many unfortunate things have happened in the diamond industry. Many people, myself included, did nothing about them. But there comes a point in time when many people are hurt very badly. And there comes a point in time when the people of the industry have to say “this is not right.”

Until recently everyone was able to live in the diamond industry. There was free movement of rough. You might have had to pay a few percent more, but everybody could find their place in the market. Now, because of De Beers, their sightholders and the way they are controlling the goods, the diamond business is being taken away from almost all of us. It is moving into the hands of an exclusive group of large companies. The opportunity to run a clean pure diamond business where someone simply and directly buys and sells diamonds in the open market is being taken away from us. De Beers and their mega-firms are stealing our right to deal in diamonds.

If we sit back and do nothing, we will have mega-sightholders controlling the whole industry and the rest of us will be forced out. And that is not right. We must stand up and say that the industry cannot exist under these circumstances. And we must do something about it. Unless this problem is rectified, we have every intention of taking our legal process as far as it can possibly go. If anyone thinks that the problem and our lawsuit will simply go away, they are wrong.

MR: Do you think other people should sue De Beers?

WD: It is not for me to determine what other people should do. If someone feels that they have been unjustly damaged and that they have a good case from a legal and commercial perspective, then they should not be afraid to stand up for their legitimate rights. Our message to the industry is that we should not be cowed or intimidated by De Beers.

MR: Do you think that the leaders of the diamond industry should be talking with government regulatory agencies such as the U.S. Justice Department?

WD: Yes. I think that De Beers actions have hurt many people in the industry and that the matter needs to be looked into at the highest levels.

MR: What message do you have for the diamond industry?

WD: Stand up for what you think is right. If you think that you have been hurt by the new dynamics of De Beers SOC and that free trade and the free movement of goods are being restricted, stand up. Some of us are taking strong positions on what is going on. It is unfortunate that after being a sightholder for 35 years we have to stand up and do this, but De Beers has left us no choice.
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Tags: De Beers, DTC, Gareth Penny, Government, Sightholders, United States
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