A serious threat to the stability of the diamond invention came in the late 1970s from the sale of "investment" diamonds to speculators in the United States. A large number of fraudulent investment firms, most of them in Arizona, began telephoning prospective clients drawn from various lists of professionals and investors who had recently sold stock. "Boiler-room operators," many of them former radio and television announcers, persuaded strangers to buy mail-order diamonds as investments that were supposedly much safer than stocks or bonds. Many of the newly created firms also held "diamond-investment seminars" in expensive resort hotels, where they presented impressive graphs and data. Typically assisted by a few well-rehearsed shills in the audience, the seminar leaders sold sealed packets of diamonds to the audience. The leaders often played on the fear of elderly investors that their relatives might try to seize their cash assets and commit them to nursing homes. They suggested that the investors could stymie such attempts by putting their money into diamonds and hiding them.
The sealed packets distributed at these seminars and through the mail included certificates guaranteeing the quality of the diamonds—as long as the packets remained sealed. Customers who broke the seal often learned from independent appraisers that their diamonds were of a quality inferior to that stated. Many were worthless. Complaints proliferated so fast that, in 1978, the attorney general of New York created a "diamond task force" to investigate the hundreds of allegations of fraud.
Some of the entrepreneurs were relative newcomers to the diamond business. Rayburne Martin, who went from De Beers Diamond Investments, Ltd. (no relation to the De Beers cartel) to Tel-Aviv Diamond Investments, Ltd.—both in Scottsdale, Arizona—had a record of embezzlement and securities law violations in Arkansas, and was a fugitive from justice during most of his tenure in the diamond trade. Harold S. McClintock, also known as Harold Sager, had been convicted of stock fraud in Chicago and involved in a silver-bullion-selling caper in 1974 before he helped organize DeBeers Diamond Investments, Ltd. Don Jay Shure, who arranged to set up another DeBeers Diamond Investments, Ltd., in Irvine, California, had also formerly been convicted of fraud. Bernhard Dohrmann, the "marketing director" of the International Diamond Corporation, had served time in jail for security fraud in 1976. Donald Nixon, the nephew of former President Richard M. Nixon, and fugitive financier Robert L. Vesco were, according to the New York State attorney general, participating in the late 1970s in a high-pressure telephone campaign to sell "overvalued or worthless diamonds" by employing "a battery of silken-voiced radio and television announcers." Among the diamond salesmen were also a wide array of former commodity and stock brokers who specialized in attempting to sell sealed diamonds to pension funds and retirement plans.
In London, the real De Beers, unable to stifle all the bogus entrepreneurs using its name, decided to explore the potential market for investment gems. It announced in March of 1978 a highly unusual sort of "diamond fellowship" for selected retail jewelers. Each jeweler who participated would pay a $2,000 fellowship fee. In return, he would receive a set of certificates for investment-grade diamonds, contractual forms for "buy-back" guarantees, promotional material, and training in how to sell these unmounted diamonds to an entirely new category of customers. The selected retailers would then sell loose stones rather than fine jewels, with certificates guaranteeing their value at $4,000 to $6,000.
De Beers's modest move into the investment-diamond business caused a tremor of concern in the trade. De Beers had always strongly opposed retailers selling "investment" diamonds, on the grounds that because customers had no sentimental attachment to such diamonds, they would eventually attempt to resell them and cause sharp price fluctuations.
If De Beers had changed its policy toward investment diamonds, it was not because it wanted to encourage the speculative fever that was sweeping America and Europe. De Beers had "little choice but to get involved," as one De Beers executive explained. Many established diamond dealers had rushed into the investment field to sell diamonds to financial institutions, pension plans, and private investors. It soon became apparent in the Diamond Exchange in New York that selling unmounted diamonds to investors was far more profitable than selling them to jewelry shops. By early 1980, David Birnbaum, a leading dealer in New York, estimated that nearly a third of all diamond sales in the United States were, in terms of dollar value, of these unmounted investment diamonds. "Only five years earlier, investment diamonds were only an insignificant part of the business," he said. Even if De Beers did not approve of this new market in diamonds, it could hardly ignore a third of the American diamond trade.
To make a profit, investors must at some time find buyers who are willing to pay more for their diamonds than they did. Here, however, investors face the same problem as those attempting to sell their jewelry: there is no unified market in which to sell diamonds. Although dealers will quote the prices at which they are willing to sell investment-grade diamonds, they seldom give a set price at which they are willing to buy diamonds of the same grade. In 1977, for example, Jewelers' Circular Keystone polled a large number of retail dealers and found a difference of over 100 percent in offers for the same quality of investment-grade diamonds. Moreover, even though most investors buy their diamonds at or near retail price, they are forced to sell at wholesale prices. As Forbes magazine pointed out, in 1977, "Average investors, unfortunately, have little access to the wholesale market. Ask a jeweler to buy back a stone, and he'll often begin by quoting a price 30% or more below wholesale." Since the difference between wholesale and retail is usually at least 100 percent in investment diamonds, any gain from the appreciation of the diamonds will probably be lost in selling them.
"There's going to come a day when all those doctors, lawyers, and other fools who bought diamonds over the phone take them out of their strongboxes, or wherever, and try to sell them," one dealer predicted last year. Another gave a gloomy picture of what would happen if this accumulation of diamonds were suddenly sold by speculators. "Investment diamonds are bought for $30,000 a carat, not because any woman wants to wear them on her finger but because the investor believes they will be worth $50,000 a carat. He may borrow heavily to leverage his investment. When the price begins to decline, everyone will try to sell their diamonds at once. In the end, of course, there will be no buyers for diamonds at $30,000 a carat or even $15,000. At this point, there will be a stampede to sell investment diamonds, and the newspapers will begin writing stories about the great diamond crash. Investment diamonds constitute, of course, only a small fraction of the diamonds held by the public, but when women begin reading about a diamond crash, they will take their diamonds to retail jewelers to be appraised and find out that they are worth less than they paid for them. At that point, people will realize that diamonds are not forever, and jewelers will be flooded with customers trying to sell, not buy, diamonds. That will be the end of the diamond business."