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This “Real Deal” Jeweler’s Nightmare Scenario with Lab-Grown Diamonds and How Retailers Suggest He Handle It

Should this retailer agree to his client’s demands?

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A lot had changed in the four years since Keith Thomas took over the day-to-day operation of The Gem Vault from his mom. Volume and profits were on a steady incline. The Vault ’s bridal business had nearly doubled over four years as Keith’s new ideas began to take hold. 

ABOUT REAL DEAL

Real Deal is a fictional scenario designed to read like real-life business events. The businesses and people mentioned in this story should not be confused with actual jewelry businesses and people.

ABOUT THE AUTHOR

Kate Peterson is president and CEO of Performance Concepts, a management consultancy for jewelers. Email her at [email protected]

Keith felt especially grateful for his dad’s early jump onto the “we buy diamonds and gold” train. Nearly 20 years’ worth of his dad’s sharp eye and good deals left the store with a great selection of diamond qualities and sizes, and often made them price-competitive with internet sellers. 

When a diamond jewelry rep who had been visiting the store since Keith was in high school stopped by about 18 months ago, Keith made time to listen as he made his best pitch for his new lab-grown diamond line. Keith had done some homework on the “lab-grown phenomenon” and believed that it was here to stay. He also knew that his mom and dad were both firmly opposed to carrying synthetics in the store. But the rep was able to counter every argument. He talked about the need to service today’s eco-minded and socially responsible consumer and pointed out that all of the stones were clearly inscribed, making inventory mistakes unlikely. He offered to leave Keith with a 25 stone memo complete with a cool in-store display and iPad to tell the story. Keith agreed — and after six months, lab-grown diamonds represented nearly 35 percent of loose diamond sales at The Gem Vault.

Keith was on the floor one day several months ago when Ian Sandren came in looking for an engagement ring. Ian had just moved to town for a job as the new art director at a local marketing firm and had been sent in by a colleague who was a long-time customer of the store. He said that he had seen information on lab-grown stones on the store’s website, but that he was only interested in seeing natural diamonds. He said that while he didn’t have a problem with the concept in general, he didn’t feel at all comfortable with the idea of a synthetic in his fiancée’s engagement ring. Keith assured him that all of the lab-grown stones in the store were clearly marked. He pointed out that reports from independent grading services were available if Ian chose, and that his engagement ring would be accompanied by a detailed appraisal that included a statement of natural origin. 

After spending several hours with Keith over the course of three visits, Ian chose a 0.98-carat round diamond (G, VS2, ideal cut) from the store’s stock and a beautifully designed platinum and diamond mounting with a total price of $9,200. The center diamond did not have a grading report, but Ian was comfortable with the grade assigned by the store’s appraiser. The finished ring was delivered two weeks later, and Ian loved it. 

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That was the last Keith heard from Ian until last week, when he signed for a registered envelope addressed to him personally. In it was a letter, along with a copy of a GIA report. In his letter, Ian said that his fiancee’s father — an insurance broker — highly recommended that his daughter get a GIA report on the diamond and took her to a local jeweler friend who agreed to help. The diamond was taken out of the mounting and sent to GIA New York. When the diamond and report came back, GIA had identified the stone as laboratory grown. Grades for color, clarity and cut (near colorless, very slightly included, XXX) did match those assigned by the Gem Vault appraiser.  After receiving the report and before resetting the stone, the jeweler took the mounting to a nearby manufacturer who, with proper screening equipment, was also able to identify four of the 20 melee in the setting as synthetic. 

Ian made it clear that he believed Keith and the Gem Vault had been either terribly careless or deliberately fraudulent. He said he had to assume that he was not the only customer who had been sold a synthetic under the guise of a natural diamond. He demanded that Keith supply documented natural diamonds of the quality for which he’d paid to replace the synthetic stones, and that the Gem Vault refund the price paid for the ring to compensate for his and his fiancée’s stress and expense.

Keith was mortified. The only possible explanation he could come up with was that the synthetic center had been purchased by the store in an over-the-counter transaction and that the supplier of the mounting was far less cautious than they claimed. He was committed to making it right with Ian — but it was clear that he was staring down a potential public relations nightmare. He had no way of knowing how many other synthetic melee or larger non-disclosed loose diamonds had been bought and/or sold by the store, but he didn’t think he could live with the idea of not finding out.

The Big Questions

  • Should Keith agree to Ian’s demands? If he does, is it appropriate to ask for a confidentiality agreement?
  • Is there a way to ensure that he identifies any other synthetics that he might have unknowingly sold without incurring overwhelming expense and/or creating a public relations nightmare?
  • Should he stop selling synthetics and adhere to his parents’ recommended “natural only” strategy?

Expanded Real Deal Responses

Ira K.  Tallahassee, FL

Keith is probably not the first and certainly not the last that this will happen to, but if he doesn’t mind a $5,000-$7,000 loss, he can pay Ian off. Offer Ian either a refund or a new ring with natural GIA-papered diamond, a discount on his wedding rings and a sincere apology.

As a thought: how do we know that someone couldn’t or wouldn’t switch a natural for a synthetic and then work this as a scam?

Bruce A. Sherwood Park, Alberta

Keith should obviously supply his customer with the same or better quality diamonds as those for which he was charged. That makes the purchase complete and it should not be accompanied with a refund of the original sale. Do not ask for a confidentiality agreement because any fallout from this client will be best handled confidently and professionally if and when it surfaces. He must recheck all of his diamond inventory, whether it is expensive or not! As for carrying synthetic alongside natural, he will face the same dilemma we all do when we weigh the decision regarding synthetic. This problem was not caused by him carrying synthetic, so it should not enter into how he proceeds in future.

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Marcus M. Midland, TX

In my opinion, buying diamonds off the street has always had its risk and been a tricky game. Now, with lab-grown diamonds in the mix, forget about it. I never buy off the street and refuse to buy into the lab-grown diamond business. Am I missing out on some sales? Maybe, but I’m also safeguarding myself from potential disasters like this. Keith absolutely has to make this right for Ian and he needs to make it very clear that it was a careless mistake on his end but that he would appreciate keeping it confidential. And I don’t know what he can do about ensuring he didn’t do this to other customers, but he better get on top of it quick. He should also really think about going back to his original family business plan and stick to selling naturally grown diamonds. Good luck Keith.

Rex S. Houston, TX

In today’s environment, it is almost negligent to sell a center diamond over a half-carat without a recognized and respected independent lab report. They represent a minute cost compared to the item. We have almost exclusively used GIA after we have all the diamonds we buy from the public recut to ideal proportions. Through this process, we have two outside layers to examine and verify our diamonds as not being treated or lab-grown. At JCK last year, I put a deposit down on the GIA id100 and received it yesterday. Last week, our entire staff was trained on the device at the IJO show. It is the only device to quickly test for lab-grown HPHT and CVD; all of the other machines only test for HPHT. Get the machine test for everything, always!

Daniel S. Cambridge, MA

Not only should he immediately do what the customer asked, but he should go over and above that. Give him a large credit to be used at the store or give him back 20 percent of the price on the diamond purchase as well. He’s screwed up big time and he’s responsible. And yes, he should go back to selling naturals only, have all the stones in the store certed, refuse to buy from the supplier of the mounting anymore and tell him to take back any other goods of his that they have and refund the money for the setting. It’s all on him. A costly lesson, but one that more jewelers today should be paying attention to as well. Know your suppliers. Insist they take responsibility and don’t buy off the street. It’s a whole new world out there now.

Stacey H. Chicago, IL

1) Keith should call his lawyer! There’s an excellent chance that some kind of fraud has taken place, and that the real victim is KEITH! Way too many other people handled that ring for Keith to be certain that the other jeweler did not swap out the stone to make him look bad and steal the sale.

He should not admit any kind of guilt; he should tell Ian that he will look into it and get back to him later in the week. If Ian wants a refund, he has to prove that the stone he is returning is the one he bought.

2) Keith should call the GIA and arrange to have his whole loose inventory checked, graded and inscribed ASAP. The appraiser at the store should be sent for more training to recognize synthetics!

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3) Keith should call the supplier for the band and tell that guy he wants a full refund on every piece he has left, and return them all! Maybe his lawyer will write that letter for him!

Michelle S. Towson, MD

Disclosure, disclosure, disclosure. A client can’t get enough of it. In addition, making everything right as far as the client who didn’t get the genuine diamond is a must!

Emily J. Minneapolis, MN

First and foremost, Keith should contact a lawyer for advice. This could have major consequences on his business and he needs to get all the facts before he acts. I would also ask to see the grading report and confirm with the GIA that this was a legit report. I would be more likely to offer a full refund on the ring and take it back, OR replace the diamonds with natural diamonds at no cost and then throw in a free wedding band or another similar bonus. But I don’t think giving the customer an entirely free ring would be my first choice; that’s why a lawyer could be handy to confer with.

Going forward, I would not stop selling lab-grown diamonds, but I would stop stocking the store with them. Have a few rings with lab-grown as examples in a special location, clearly tagged and then just bring in loose lab-grown diamonds by request for custom work.

Susan G. New York, NY

Keith must admit fault and accept responsibility. It’s unfortunate that this happened, but it did and he has to make the necessary changes so that it doesn’t happen again.

Going forward, he must continue to sell natural and synthetic diamonds and make sure he knows what he is doing. His diamond suppliers can help him to identify natural from synthetic. There are also trade organizations and labs that will identify a diamond and colored stones for that matter. Maintaining proper record keeping is important as well.

Mistakes happen; dealing with them is critical to the future of the business.

Jim A. Missoula, MT

The moral of the story is stay as far away as possible from synthetic diamonds. Short-term profits aren’t worth the long-term hassles.

Mack T. Walterboro, SC

First thing I would do is express how deeply sorry I am that this happened and explain to him where the diamond was purchased from and how I too had unknowingly purchased and sold a lab-created stone. I would then replace the lab-grown with naturals of equal grading with GIA reports to accompany them. I would not give a refund, but I would make it right. If explained correctly, the customer will understand and be sympathetic. After all, Keith is just as much the victim as the customer in this situation.

Shari L. Georgetown, KY

I would not give in immediately to his demands, but yes, this needs to be made right. Honesty is best policy. This is a nightmare that I am afraid will become a familiar story.

 


The Rest of the Story: More Insights From Kate Peterson

As many of our Brain Squad members pointed out, Keith had two critical priorities in this situation: To protect himself and his business and, as Ira Kramer (Diamond Exchange of North Florida, Tallahassee, FL) said, assuming he was not being victimized himself, to make his client whole.

Keith called Ian immediately after receiving his letter. He offered a sincere apology for the inexcusable mistake, assured Ian that he would make things right, and asked Ian to bring the ring back to the store as soon as possible. Ian seemed to be reassured by Keith’s immediate response and genuine concern. They set an appointment to meet a week later.

During that week, Keith took a page from Rex Solomon’s (Houston Jewelry, Houston, TX) play book. He researched the synthetic screening devices on the market and after much discussion with his parents, decided to make a major capital investment in a highly rated scanner that works on both loose and mounted goods. The initial expense (nearly $18,000) was painful — but he was thinking forward both to his plan for resolving his current situation and to ensuring that he could use this experience as a powerful brand positioning tool going forward. He took the time to check out the jeweler who handled things for Ian’s fiancée. He learned that the store was very highly regarded in the community and was a part of several major trade organizations. Keith called the owner of the store, Warren Barret, to confirm the details of the situation. He explained how it all happened, and was quite surprised when Mr. Barret said, “You know, this could have happened to any of us. No one on my end caught it either until we saw the GIA report. There is a lesson in this for all of us.” By the end of the conversation, he felt confident that Barret’s was not simply trying to take the sale and that they were not part of any sort of scam. Moving on to the stone in question, Keith examined the GIA report carefully, and verified that, as closely as he could tell, the plot on the report matched the plot done by his own appraiser. By the time they met, Keith was sure that Ian’s story was accurate, and the problem was his to deal with. He had a new diamond (1.02ct, F, VS1, XXX, with a GIA report) as well as four matched melee with an affidavit from the supplier verifying natural origin, ready and waiting.

As Mack Thomas (Infinger’s Jewelry, Walterboro, SC) suggested, during their meeting, Ian was far more understanding and reasonable than Keith expected. He said that Mr. Barret had called him and explained that he believed this really was an honest mistake, and asked that he give Keith an opportunity to make it right. In the end, Keith replaced the synthetic stone with a more valuable diamond, replaced the synthetic melee in the ring, paid for all costs associated with getting the GIA report on the synthetic and gave Ian a $500 gift card to use toward his wedding bands. Ian was happy, and by his calculation, the hard cost to the store for resolving the immediate issue was about $2500 all in (plus whatever they paid for the synthetic originally).

Once the situation with Ian was handled, Keith contacted his sales rep for the mounting manufacturer, explained the problem, and let him know he was returning all remaining stock and discontinuing the line. He also laid out a schedule for checking every piece of diamond jewelry in the store with the new screener he ordered. Keith was still left with the task of working out a plan to examine as many of the diamonds sold by the store over the past five years as possible (discretely, of course). He asked his marketing company to come up with a ‘complimentary service’ promotion that would encourage customers to come back into the store once his new screening device was up and running. He didn’t really expect to find more problems, but he was prepared just in case, and he felt much better knowing that he was making an honest effort.

Whether or not to continue carrying synthetics is a question still in discussion for Keith and his parents. Keith is considering whether the brand value of saying (legitimately) ‘all naturally sourced and verified’ is bigger than the potential business loss associated with not offering the alternative for interested customers. His bigger concern lies in how he might deal with the customers who purchased lab grown diamonds from the store over the past year.

What’s the Brain Squad?

If you’re the owner or top manager of a U.S. jewelry store, you’re invited to join the INSTORE Brain Squad. By taking one five-minute quiz a month, you can get a free t-shirt, be featured prominently in this magazine, and make your voice heard on key issues affecting the jewelry industry. Good deal, right? Sign up here.

Kate Peterson is president and CEO of Performance Concepts, a management consultancy for jewelers. Email her at [email protected].

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