Lugano Diamonds Founder Faces FBI Probe Over Alleged Investment Scheme

Federal authorities are currently investigating off-balance-sheet transactions related to Lugano Diamonds & Jewelry, a chain of high-end boutiques that has accused its founder of misrepresenting diamond investments brokered with wealthy clients. FBI agents have interviewed individuals who struck deals with Lugano founder and former chief executive officer Mordechai “Moti” Ferder as part of an investigation into the business, according to people familiar with the matter. A spokesperson for Lugano stated that the boutique is cooperating with the probe.

Lugano, based in Newport Beach, California, filed for bankruptcy protection recently and sued Ferder in June. The company alleges that Ferder manipulated Lugano's accounts by disguising gem-backed financing as direct sales, creating potential liabilities exceeding $100 million. Ferder currently resides in his native Israel, according to court documents filed by the company. A dozen individuals or firms have also sued Ferder, Lugano, or related parties over the diamond investment contracts.

According to Lugano’s lawsuit, Ferder allegedly offered clients stakes in valuable diamonds already owned by the boutique, promising substantial returns once the gems were sold. The lawsuit claims Ferder told Lugano personnel that these deals were standard sales. Ferder has denied these allegations, claiming both Lugano and its majority owner, Compass Diversified, were aware of the investment contracts.

Lugano interim CEO Josh Gaynor indicated in a June email to a suing investor that those interested in "any parallel criminal investigations" may wish to contact an FBI agent assigned to the complex financial crime squad in the agency’s Los Angeles field office. Ferder’s lawyer, Jeffrey Reeves, maintains his client's innocence, stating that Ferder denies any criminal wrongdoing and has not been contacted by the FBI or the Department of Justice. Reeves added that Ferder intends to file counterclaims against Compass Diversified, Lugano, and others.

Compass Diversified, which acquired a 60% stake in Lugano in 2021, confirmed it has been cooperating with authorities and conducting an extensive internal investigation. The conglomerate released restated earnings on Monday and noted in a securities filing that its internal investigation determined Ferder "deliberately engaged in fraudulent activity" by recording fictitious sales and misrepresenting the value of Lugano's inventory. Compass CEO Elias Sabo stated the firm is now focused on cutting debt and moving past this issue. The firm is considering selling some businesses to reduce debt, a strategy shared with investors last week.

Lugano is planning to sell its business in Chapter 11 bankruptcy. Following Compass’s acquisition, Lugano opened additional locations in the U.S. and London, though the London boutique was recently closed. In September, a holding company that owns Ferder's shares in Lugano, as well as a title to an Aspen property, also filed for bankruptcy protection. Ferder ceded control of this holding company to Lugano’s chief restructuring officer.