RAPAPORT… The American Folk Art Museum’s Senior Curator Stacy C. Hollander once wrote that “to enter Esmerian’s world is to abandon one’s usual mundane considerations. All that matters is quality, beauty, rarity and the creative song of the individual’s hand at work.” A Paris-born, French-Armenian, fourth-generation gem dealer, Ralph Esmerian was once a revered figure in the diamond and jewelry world, a collector whose antique and rare items were almost legend, decorating the walls of the Louvre and the American Folk Art Museum. “He exemplified the presence of a royal nature to the gem industry,” noted colored diamond expert Alan Bronstein of Aurora Gems, an appraiser for the colored diamonds involved in Merrill Lynch’s bankruptcy case against Esmerian. “He was a genius at recognizing gems but he got caught in an ever-greater, grandiose desire fed by the world of cheap finance. He made a lot of foolish mistakes.”
While Esmerian’s world may have centered around aesthetics and beauty, his downfall focused on a recklessness and naïveté in all matters financial, leaving the once-crowned king of collectors facing jail time. The undoing of one of the diamond and jewelry industry’s most renowned figures followed a dramatic and scandalous turn of events that many attribute to his resounding lack of business acumen.
“In certain instances, he obviously used poor judgment,” said Audrey Friedman, owner of New York–based Primavera Gallery. “I think a certain amount of it may have been due to inexperience in business, but he also might have been poorly advised by other people, and reaching a point where he was in desperate straits and not sure what to do.”
Esmerian was arrested in November 2010 and pled guilty to charges of bankruptcy fraud, wire fraud and concealing assets in connection with a scheme to embezzle funds. He entered the plea in a New York courtroom in April 2011, marking not only the end of his professional career, but also the end of several tense years spent trying to outpace his debt and regain financial solvency. On July 22, 2011, Esmerian will be sentenced for his crimes, for which he faces eight to thirty years in prison. At the time of his sentencing, as required by the court, he will remit all capital owed to his victims, and give up claims to all property or proceeds involved in his offenses.
Attempts to contact Esmerian for this story were unsuccessful, with neither he nor his attorneys offering public statements on his past crimes or his impending sentencing.
Road to Auction
The seeds of Esmerian’s downfall were planted in the fall of 2005 and the spring of 2006, when he decided to buy retail estate jeweler Fred Leighton from retiring owner Murray Mondschein, securing two loans from Merrill Lynch totaling $177 million to finance the purchase. These loans were backed in part by the jewelry and rare items he had accumulated through his company, R. Esmerian, Inc. (REI), which, according to court documents filed later, held inventory valued at around $192 million. In an indication that Esmerian was overextending himself financially, in December 2006, he pledged the same collateral — REI’s inventory — to Acorn Capital Group LLC to secure another loan in the amount of $40 million, an illicit activity known as double-pledging.
To run Fred Leighton, Esmerian hired Peter E. Bacanovic, a former Merrill Lynch broker most famous for serving five years in prison for his role in the Martha Stewart insider trading case. It is not clear whether Bacanovic played an instrumental role in securing the Merrill Lynch loans for Esmerian, though it has been the subject of much speculation. During Bacanovic’s time at Fred Leighton, however, the retailer went downhill — in 2008, it defaulted on its loan obligations, freeing Merrill Lynch to auction off at Christie’s the items Esmerian had put up as collateral.
Interestingly, the auction, which was first set to take place on April 15, 2008, then postponed to the following day, did not mention Esmerian by name, instead describing the items as belonging to an “American Connoisseur.” Prior to the sale, a furious Esmerian charged Merrill Lynch and Christie’s with selling his items at prices that were “dangerously low.” While not all agreed with Esmerian’s complaint, there were many who questioned why the bank had never confirmed the value of the items before granting the loan. One off-the-record source wondered, “Why didn’t Merrill Lynch do its due diligence and get a second appraisal on the jewelry? The guys over there were just interested in getting their commissions on the loan, so they went with what they were given.” Indeed, it isn’t hard to see how Merrill Lynch — which was itself imploding in the subprime scandals that began in 2007, and was just four months away from being sold to Bank of America — could have been out to make quick capital with the Christie’s auction.
To prevent Christie’s from going through with the auction, Esmerian had Fred Leighton file for bankruptcy. That legal end run confounded auctioneers at Christie’s, who canceled the “American Connoisseur” sale — much to the ire of those awaiting the chance to bid on Esmerian’s goods. A few days after the aborted auction, however, Christie’s struck a deal with Esmerian to sell a 141-carat diamond brooch that belonged to Empress Eugenie, wife of Napoleon III, to the Louvre Museum for $10.6 million. Members of the Esmerian family, however, refused to sign off on the deal. Jacqueline Esmerian King, Esmerian’s sister, along with three of his other siblings, filed a suit alleging that the brooch belonged to a family trust set up by their late grandmother, and that the sale was, in effect, illegal. That case is still pending, though the brooch remains at the Louvre.
Other auctions featuring some of Esmerian’s inventory have sprouted up occasionally since 2008, including an October 2009 auction at Christie’s. Private auctions of Esmerian’s inventory also have occurred, with the most recent sale, featuring 56 items, being held through June 27, 2011. Proceeds from that sale will go to firms comprising the Acorn Capital Group LLC.
Esmerian and Friends
Around the same time that Esmerian secured his second loan from Merrill Lynch — still part of the $177 million total — in the spring of 2006, he entered into a deferred jewelry purchase agreement with the limited liability company (LLC), Jeweled Objects. The LLC was owned and operated by Esmerian’s longtime business adviser Mitchell May, with whom he had shared office space since 2006, and Robert Hoberman, his accountant for more than 15 years. With the ink on the new Merrill Lynch loan still wet, Esmerian sold 38 pieces of REI’s inventory, including jewelry, sculptures and antiques, for $8.95 million to Jeweled Objects, with the contractual obligation to buy it back in one year at 20 percent interest. At least six of those 38 items were designated as Fred Leighton debtor property and already were promised to Merrill Lynch.
As it turned out, Esmerian wasn’t the only one who needed to borrow money to finance deals. To fund its initial purchase of Esmerian’s 38 items, Jeweled Objects raised $5.25 million from an eclectic mix of investors, including charitable organizations and retirement funds. Investors were told by the company that the collateral value of the 38 items was actually more than three times the purchase price. Should Esmerian fail to repurchase or lease his items back, Jeweled Objects argued, the investors would be sitting on more than $28 million in security. As the investors would soon find out, however, their security against an Esmerian default was more smoke and mirrors than actual value — in the end, the collateral was really worth less than 2 percent of the price Jeweled Objects had established.
In May 2006, Benjamin Zucker, president of Precious Stones Company, appraised 20 of the 38 items for just shy of $24 million — a price that his appraisal document said represents “a fair market value for objects that have a provenance of being acquired and collected 50 years ago.” The other 18 objects were appraised for around $4.8 million, though the appraiser for those items has not been identified.
In court papers filed against Jeweled Objects in March 2010 by investors seeking to recoup their losses, Esmerian, Zucker, Hoberman and May are accused of employing a “highly subjective methodology” in their appraisal by using the prices of “particular, idiosyncratic potential buyers,” who would pay above and beyond market price for the items, to justify their inflated value. An August 2009 Christie’s appraisal of the 20 items that Zucker had pegged at $24 million set the market value for the items at $432,500.
Richard Lawler, president of GBC Inc., a Boston-based jewelry surplus wholesaler and appraisal company, said that in his dealings with Esmerian, he too found a significant difference between Esmerian’s values and those that could be realistically recovered by a lender. “In all of our appraisals on manufacturers and wholesalers, we have never run into a situation where there has been a meaningful disagreement with our findings by either party. Predating this case, we had experience with the inventory that was owned by Esmerian. It went well beyond even the exclusive Fred Leighton merchandise. The value placed on those unique historic pieces by Esmerian, by his insurance companies and by his appraisers, was considerably higher than its worth to the lenders. GBC knew this but apparently the lenders did not. They could have circumvented a big part of their problems by having a proper appraisal done on the collateral before entering into the loan arrangement.”
Lawler, whose company had no knowledge of the defendants or their appraisals for Esmerian, went on to say that, “the phrase ‘fair market value’ is always open to a significant range of interpretation and should be carefully considered before being accepted by a lender.”
Why investors believed that Esmerian’s items were worth over 50 times their value reflects Esmerian’s stature as a revered figure in the industry. “Esmerian came from a family that was extremely well known and well respected in the industry and I think that everybody just assumed that Ralph was extremely rich. Not many people in the industry knew what he owned and didn’t own,” observed Donald A. Palmieri, president of the Gem Certification and Assurance Lab (GCAL).
Esmerian’s reputation, however, could not save him when the bills came due. While Esmerian did make some payments to Jeweled Objects to repurchase his items, he and the company agreed to push the final due date for repayment back by one year in March 2007, and then again in March 2008. Each time, Jeweled Objects collected additional collateral from Esmerian’s personal assets, including some of his folk art paintings and antique furniture. In March 2010, when Esmerian’s financial troubles became public, and Jeweled Objects investors realized their collateral was wholly undervalued, they sued the company, Esmerian and Zucker for damages in excess of $50 million.
Jeweled Objects, which declared bankruptcy a month after the suit was filed, had filed its own court papers earlier in October 2009, seeking to recoup $7.4 million in losses from Esmerian. The company’s investors quickly dismissed the filing as an attempt for Jeweled Objects to appear legitimate after conspiring with Esmerian to defraud them out of their capital. As evidence, they point to the fact that May and Hoberman assisted Esmerian in obtaining the loans from Merrill Lynch, while collecting substantial finders’ fees for themselves. They also claim that the two had intimate knowledge of REI’s finances. While May and Hoberman have not denied their knowledge of REI and its accounting, they do insist that they were never acquainted with Fred Leighton’s books or its financial state.
There is, as of yet, no legal connection establishing Esmerian, May and Hoberman as conspirators. But there is, however, evidence to suggest that dealings among them were informal and off the books. In May of 2006, the same month the deferred jewelry purchased agreement was signed, Jeweled Objects consigned one of the 38 purchased items, a 9.77-carat emerald ring, to Fred Leighton, and Esmerian soon sold the ring to an individual for $250,000, keeping the profits for himself. Jeweled Objects eventually reported the lost income from the ring in their court case in 2009, but did not take any legal or public action against Esmerian prior to that time.
Scramble
Furtive one-on-one sales, as in the case of the emerald ring, were characteristic of the way Esmerian double-pledged his items — and the way he got more and more entangled in bankruptcy and wire fraud. The most famous example is Esmerian’s sale of a pledged Endymion butterfly brooch in May 2008 for $2 million. After wiring half of the profit to his personal Swiss bank accounts, he learned through Merrill Lynch that his buyer had put the brooch up for auction at Christie’s Hong Kong, pricing it at $3.2 million. Forced to buy the item back at auction, Esmerian went about frantically selling off other inventory to raise the capital, including more items that were Fred Leighton collateral, as well as a brooch and pendant that legally belonged to a private collector and longtime customer of REI.
In his double-pledging and double-selling, a portrait emerges of Esmerian as a deceitful swindler who carelessly tried to cover his tracks. In July 2008, for example, he sold a pledged 13-carat Burma ruby diamond ring for $2 million through wire transfer to his personal bank account. A year later, he testified in bankruptcy proceedings that the ring was in a vault at REI’s Manhattan offices, and that he “had an offer,” which he “turned down yesterday” from a potential buyer. Esmerian became so caught up in his web of debt that by the end of 2009, he pledged shares of his apartment to an individual in exchange for forgiving him a $3 million outstanding balance. He failed, however, to notify a business adviser of his, who just four months prior, was given 50 percent of his apartment shares.
Given Esmerian’s fall during the collapse of the financial industry, it is hard not to see some of his problems as part of the larger problems of easy credit and backroom financial deals. “He was really caught in this web,” said Bronstein, adding that “there are a lot of other people who got caught it in, too, but they are not as big as Esmerian.” Many, however, argue that whatever the circumstance, Esmerian sealed his own fate by participating in illicit transactions. “If he is committing fraud and claiming it’s consignment, and it’s not — that is just plain fraud,” said Cecilia Gardner, president and chief executive officer (CEO) of Jewelers Vigilance Committee (JVC).
To a certain extent, Esmerian’s downfall exposes cracks in an industry that handles transactions based on trust. Primavera Gallery Owner Friedman, for example, noted that “the jewelry ndustry is an industry where people do millions of dollars in business deals with a handshake.” It remains to be seen whether the Esmerian scandal will force the industry to think of itself as a place where, according to Bronstein, “there are few checks and balances like there are in other industries in keeping track of what belongs to whom.”
Esmerian’s downfall has reverberated well beyond its initial participants, leaving a lasting impact on the industry that could affect business for years to come. “It is important to realize that the victims of this case are not only Merrill Lynch and Acorn Capital,” observed Lawler. “Also affected are the vast majority of companies in the jewelry and diamond industry that rely upon banks and other lending institutions to fund their business.”
