This week’s riddle: What do Rapaport and the Gemological Institute of America (GIA) have in common? The obvious answer: they both recently tried their utmost to see how fast they could destroy the remnants of their own reputations. It truly seems like a breathtaking race. The good news for the GIA is that, so far, it finished in second place – but only barely so. The last time we wrote about the GIA, President Donna Baker sent a memo to staff lamenting “you have probably heard recent trade columns have impugned the good reputation of GIA.” She is quite right: reputation is what it is all about.

“Some pundits,” she wrote, “want us to make a list of past suspects ‘public.’ ‘Naming names’ based on suspicion alone is wrong, and doing so would put GIA at great legal and moral risk…It is troublesome that old rumors persist despite everything we have done – including being honest and forthright throughout this situation with you, the media and the industry through individual meetings, forums, news interviews, news releases and the like…We belong to an organization that was founded on the belief that truth, knowledge and transparency are the deterrents of fraud and misconduct,” wrote Baker.

I never commented on this memo from March of this year, as I respected the prerogative of the GIA’s president to tell her employees whatever she wants. However, I frowned at the words “suspicion alone” – which represent a downgrade of all the evidence that was gathered and that led to the submissions of more than a dozen boxes of evidence to the FBI. The tone of Baker’s message suggests that nothing happened, as if the 15 years or more of money-for-upgrades were just the figments of some “pundits’” imagination.

Anyone familiar with the internal decision-making process at the GIA when it decided which clients should get a “letter” denying them further stone-submission privileges of the GIA lab knows that letters went out only to parties where the GIA had hard evidence against them. When there were only suspicions, the GIA limited itself to sending boxes of suspicious materials to the FBI. Did the GIA pay millions of dollars to Max Pincione in New York because he was going to disclose mere suspicions? Come on, Mrs. Baker. It is far too early to rewrite history. That being said, we must respect the GIA’s desire to avoid facing legal risks. I believe in Baker’s sincerity when she considers “truth, knowledge and transparency are the deterrents of fraud and misconduct.”

Last week, the GIA had an opportunity to bring some information relating to Certifigate into the open after being slapped with a subpoena from an unrelated court case between Ohio jewelers James Stafford against his brother John Stafford. In short, and as our previous editorials have described in full, the court order, issued by a California judge on behalf of an Ohio court, demanded that the GIA disclose any correspondence with Julius Klein Diamonds (JKD) relating to any suspension of rights to utilize the GIA (including its labs) for any reason of alleged violations of GIA’s code of ethics or suspected misconduct.

Prior to the date of the deposition and submission of documents, the GIA (which is not a party to the litigation) used all available legal means to object (on grounds of lack of relevancy, etc.) and to get the subpoena quashed. It was not successful. The date was etched in stone.

The GIA’s fight against bringing potentially “bad” stuff into the open contradicts its declared commitment to transparency, honesty, accountability, etc. – who was the GIA fighting to protect? The law is the law – and the GIA was ordered to present documents, if any existed, on May 27 in San Diego. What could be more fortuitous for the GIA than to be forced by law to release documents that could confirm or fully exonerate an alleged party of the Certifigate community of bribers? Such an action could have helped bring closure to the larger industry issue, in many respects. It also would present the GIA as a law-abiding corporate citizen at the same time.

As such, the GIA should have welcomed the opportunity and should have been grateful for the chance to be seen as “pushed with its back to the wall” on this matter – and then grudgingly, but fully, openly and unconditionally cooperate with the court. However, as the following extracts from the California deposition show, the GIA, for reasons unknown, decided to defy the court and, in a sense, reinforce to the industry the feeling that the GIA is not interested in discussing what really happened.

The GIA took the lowest possible road: its main reason cited for refusing to say anything is that all documents, all correspondence with clients – in essence, everything – is considered protected trade secrets and, as such, “privileged” information that they don’t need to disclose. I couldn’t believe it and I, quite furiously, asked (and received) further explanations. I couldn’t imagine that an organization like the GIA would consider information on bribery, document fraud, false certificates, kickbacks, corruption at the highest level (as we know now) to be “protected trade secrets.” The subpoena didn’t ask for the technology behind color grading machines or genuine intellectual property that needed to be protected.

In the United States, a uniform definition of the term “trade secret” has been adopted in well over 40 states and it means: “information, including a formula, pattern, compilation, program device, method, technique, or process that (i) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use; and (ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.”

My citation comes from the Uniform Trade Secrets Act of 1979. The Act apparently needs urgent updating to reflect the new meaning bestowed on the term by the GIA. The GIA lawyer said to rely on the Ohio Trade Secrets Statute, which, it was noted, is similar to the relevant California law. The fact that a court and a court of appeals refused to accept these arguments should speak for itself. When the California judge angrily dismissed these trade secret privilege contentions by the GIA and ordered this law-abiding and highly principled institution to deliver the documents, the GIA still refused – risking being found in contempt of court and risking blows to its reputation.

Though the GIA representative at the deposition was a public relations department spokesman, apparently no serious thoughts were given as to how the stakeholders (including employees) would react to the new GIA nomenclature of privileged trade secrets.

The GIA, in all fairness, mentioned various other legal reasons to me why it decided to refuse to produce the documents – and none of these sounded convincing. But none of these other reasons were actually raised at the GIA deposition: the trade secret argument was the main reason that lawyers of one of America’s largest law firms could come up with.

One needs to read the transcript to truly appreciate the depth of the ethical and integrity hole the GIA seems to have been digging for itself:  

Question [by Mr. Todd Neal, lawyer for the Defendant John M Stafford]: Mr. Clary [a reference to GIA employee Michael Ray Clary] have you had an opportunity to review the subpoena which was served on GIA?

Answer: My – I looked it over yesterday.

Question: Are you aware that the subpoena requests GIA to produce documents here today?

A: Yes.

Q: Sir, before getting into the questions, what I'd like to do is find out what documents you will be producing here today.

Ms. Dix [Lawyer for the GIA]: No. GIA is not producing any documents today.

Mr. Neal: No documents will be produced in response to the request?

Ms. Dix: No documents will be produced.

Mr. Neal: Are documents being withheld on the basis of privilege?

Ms. Dix: Yes.

Mr. Neal: Is there privilege log?

Ms. Dix: I don't believe there's a privilege log, but we have filed a Motion to Quash that I believe sets forth the basis for the privileges that are asserted.

Mr. Neal: My understanding is the Motion to Quash does not address paragraphs 1 and 2 of the document request.

Ms. Dix: That's true. And those would also be considered proprietary trade secret documents because they're the proprietary business records of GIA that GIA does not make available to the public and would be treated the same as Request No. 3 through 6.

Mr. Neal: Okay. Let me just make sure I understand your position before I get back to the questions. Category – paragraph No. 1 is requesting – if it's in my notes – documents sent by any person on behalf of GIA to Julius Klein Diamonds that relate to certain matters described in that paragraph. Your position is that any documents that would be responsive are protected by trade secret privilege?

Ms. Dix: Any documents that are GIA's communications between its clients or other business entities are trade secret documents subject to trade secret privilege. In this instance, I also believe and will now interpose the objection that the documents are not relevant to any issue in this lawsuit and, therefore, there's no basis for GIA to produce them here.

We’ll leave out most of the ensuing exchanges with the Ohio judge, who was called by the parties from the California deposition venue. The GIA’s lawyer told Judge McGee that “they are being asked to supply proprietary third-party documents between GIA and other parties that are unrelated to this [Stafford brothers’] case in any possible way.” The lawyer argued that “they are asking for proprietary business records for some other agenda that they have that are unrelated to this lawsuit.” The GIA has objected to producing the documents and its lawyer stressed to the judge, “at least the majority of documents are also subject to various privileges.”

The judge told the GIA that she “was not playing games. I said the deposition would go on, and I meant a meaningful deposition.”

Any reasonable person could come up with a variety reasons why the GIA would want to avoid a “fishing expedition,” why it would want to procrastinate, why it would want to refuse to cooperate – and we might even have sympathy for some of these reasons given the circumstances of the subpoena. The GIA was right when it said the information was needed for a “different agenda” – we wrote this in a previous column. But nothing justifies seeking to classify the bribery stuff as “privileged trade secrets” and by defying court orders.

The legalistic GIA management fails to appreciate that this isn’t just a legal issue. As an institution it should consider the ramifications of its actions on all its stakeholders, its employees, its clients, its governors, and even government.

I pained myself with the question of “who and what are they trying to protect – and what for.” This all took place at about the same time that I learned that the Internal Revenue Services (IRS) in the United States are apparently refusing to release for public scrutiny the tax returns of the GIA for 2006. As a non-profit organization, exempt of taxes, the GIA’s annual reports are – by law – public record. As the organization is managed by self-appointed governors and it doesn’t really have shareholders or an annual meeting where management can be held accountable by the shareholders, the IRS returns are the main vehicle through which the public (including pundits in the press) can get some glimpses into the insight of the organization.

Apparently, the GIA has taken the highly unusual step of requesting a “protective cover” over its 2006 tax returns. What is in there that cannot stand public scrutiny? Bonus payments for successfully having dealt with the 2005 Certifigate scandal? Payoffs (of at least a full year’s of salary) for employees who had been fired for ethics violations and who received money for signing a non-disclosure form – i.e. for keeping their mouths shut? Or penalties paid to government in some kind of deferred prosecution agreement?

What can be the reason for the GIA to hide its 2006 tax returns? Is there a connection with the insistence that everything is a privileged trade secret? Just as with the Rap price increase, now we’ll have to wait for the subsequent explanations (or, if any will be presented to GIA stakeholders). But as one of Donna’s pundits (which is quite a derogatory characterization), I would suggest it isn’t trade-press columns that impugn the good reputation of GIA. We are merely reflecting on what the GIA is doing – not on what it did a few years ago under different leadership, but what it is doing today. It simply doesn’t add up.

Have a nice weekend.