In a disturbing parallel to a decade ago when Arizona became the recognized national center for fraudulent land sales, authorities here now say the state has emerged as the hub of a multi-million-dollar fraudulent gem and diamond sales racket.
"It's a national problem as far as I can see," warned Matthew Zale, director of the securities division of the Arizona Corporation Commission. "We have started several investigations, and they will continue for some time because of the magnitude of the problem."
Zale and other law enforcement officials say more than two dozen companies have set up operations in Phoenix and Scottsdale over the past three years and are soliciting clients over the telephone in more than 20 states, including Maryland, Virginia and the District of Columbia.
Using lists culled from business magazine subscriptions and form their own advertisements, fast-talking company salesmen are peddling rubies, sapphires, diamonds and other gems from telephone "boiler rooms" to unsuspecting retires and professionals who seek an investment hedge against inflation.
Often, when the purchasers eventually sell their gems, they find that they are worth a fraction of the guaranteed company appraisal. In other cases, the firms go bankrupt before the gems have been delivered.
"It's our number one problem here at the securities division," said Zale. "I'd say this has replaced land fraud. The dollar value is astronomical. The best guess is $50 million to $100 million here in Arizona. It's a huge business."
"A number of companies are under investigation," said Phil MacDonnell, an Arizona assistant attorney general. "But the information is so diffused and the victims so scattered that it's difficult to show a pattern of activity (by the companies) that is designed to defraud."
Nine federal and state agencies are investigating various gem firms, officials and court records indicate.
The state moved against two firms on Sept. 13 in a civil court complaint charging Intergem Inc. and Estate Jewel Liquidators with making fraudulent statements in connection with their gem sales. The suit seeks to prevent 25 company officials, directors and salesmen from continuing to market diamonds and other gems. The state also is seeking financial damages from the companies.
"Some of these people are now selling for other companies," Zale said. He added that some of the salesmen who sell for the Arizona gem firms under investigation also were salesmen for the land companies that flourished a decade ago and bilked investors across the country of an estimated $500 million.
Some officials fear Arizona again will be tainted as a fraud capital unless strong countermeasures are taken. The state has a new criminal code which makes prosecutions for racketerring and other fraudulent criminal offenses easier. But the state legislature has defeated other corrective steps such as requiring diamond dealers to register with the state as securities dealers.
"We have sufficient laws to take care of the problem," contended State Senate President Leo Corbet, a powerful Republican. "What we need is vigorous enforcement under the present (fraud) laws."
Zale and MacDonnell contend that criminal fraud cases are a difficult undertaking because sophisticated telephone hucksters know the legal loopholes, and because there is great deal of subjectivity involved in appraising diamonds and gems accurately.
Thousands of purchases may not yet even realize that they are victims because they often place the sealed packets of gems in a safe location and rely only on the companies' appraisals. In some cases, purchasers are told that guarantees will be voided if the package is opened and the gems are inspected closely. "The victims haven't been watching out for their own interests very much. They are not very sophisticated," MacDonnell contended.
As in the case with land fraud prosecutions, there is rivalry between federal and state law enforcement agencies. When a federal grand jury here issued a criminal indictment in November against Harold McClintock, the former president of the now-defunct DeBeers Diamond Investment Ltd., and three other company officials. MacDonnell and other state prosecutors complained that the federal prosecutors had usurped a state investigation.
A U.S. District Court judge in Phoenix threw out the DeBeers criminal indictment last Monday, claiming federal prosecutors erred when they did not tell the grand jury that McClintock and other company officials attempted to stop the alleged sales scheme. A defense attorney filed a court document claiming a company secretary was willing to testify that the defendants fired telephone solicitors who made allegedly fraudulent sales pitches.
Judge William P. Copple dismissed the case without prejudice, which means it can be refiled at a later datae. Assistant U.S. Attorney Stephen Dichter said officials are reviewing the case and have not decided whether to refile it.
"We had an open case on DeBeers, and the federal people just took it away from us," MacDonnell complained. He said there has been little cooperation between state and federal agencies.
"DeBeers -- which bears no resemblance to the DeBeers company of South Africa -- is a case recognized as landmark in the diamond area because the firm perfected the high-pressure telephone sales technique, reaped millions in diamond sales and spawned numerous imitators," Zale said. "It was one of the first, one of the biggest and it seems they all came after that."
The indictment charged McClintock and the others with fradulently conspiring to bilk 15,000 investors across the country of $30 million by selling low-quality gems at retail prices. About 100 of the alleged victims are listed in the court record, including several in the Washington, D.C., area with claims of up to $20,000. The case is set for trial in April. The company, meanwhile, is undergoing a Chapter XI bankruptcy court proceeding. c
"The diamonds are being sold to investors over the telephone as a hedge against inflation," said Zale. "Typical sales brochures have a chart showing the Dow Jones industrial average, the inflation rate, and diamonds outpacing both of those."
Arizona authorities have been cooperating with law enforcement agencies in New York, Massachusetts, California and Hawaii in exchanging information about the diamond companies. Authorities have ordered a crackdown against diamond companies soliciting customers in some of those areas.
"The Securities and Exchange Commission should be doing something about this, and they haven't done a thing," complained David Robbins, a New York special deputy attorney general who specialized in diamond investigations. Robbins is completing a nationwide survey of the diamond investment area.
He said New Yorkers now have increased protection as the result of an August court ruling that classifies diamond merchants as securities dealers. "The law now in New York is that if anyone sells diamonds as an investment, whether the company is based in New York or not, they must register with the securities bureau," he said. Robbins feels that other states should follow New York's lead.
"Obviously there are many legitimate people in the diamond business," Sale added. "Diamonds have been appreciating in value over the years. But there's also the group of illegitimate owners, the boiler-room operators and the typical scam artists going into this."
Zale and other officials warned that customers should be cautious of telephone gem solicitors, should compare verbal guarantees from salesmen with written guarantees in company literature and should have an independent dealer appraise their gems to help insure they are not being victimized.