Forget the so-called Diamdel restructuring. The genuine exercise of aligning and down-sizing the operation in line with the reduced future rough supplies has been put on hold. Why? Depending on who you talk to, it seems that two months ago, a potential Baring- or Enron-type situation came to light among De Beers top management, and it is rapidly turning into a major De Beers embarrassment. Since the crisis in Diamdel is still evolving and De Beers is still investigating, we’ll refrain from disclosing at this time all of the information we have already gathered.

That being said, this Diamdel crisis is major. In any corporation, when the head of finance gets fired “with immediate effect,” and when it is announced that the managing director is replaced by an interim managing director with immediate effect, it is clear that there must have been a “triggering event.” When, at the same time, all employees are unequivocally instructed not to have any contact with these key ex-employees on business matters, one starts to wonder.

The management of crises requires talent – and mismanagement exacerbates the problem. When De Beers in London calls the heads of the Israel Diamond Exchange demanding that Diamdel’s worldwide Head of Finance’s entry into the diamond complex be denied with immediate effect, it is clear that either Diamdel’s superiors at De Beers have lost their own sense of judgment – or they should have a pretty good reason to do so. They should have known that a blanket denial of access to the diamond buildings is rarely granted and, if so, only after due process and deliberations by the duly constituted management bodies. The measure is only evoked if the individual would clearly endanger the (financial) security of the members of the trade.

Violating Fiduciary Responsibilities?

The heads of Diamdel are supposed to advance the best interest of the company that employs them, avoid conflict of interests, and refrain from activity that would weaken or could lead to the collapse of the company. De Beers management in London (i.e. Group Managing Director Gareth Penny and Finance Director Stuart Brown) appear to believe that Diamdel’s Managing Director Mark Colao, and a yet uncertain number of colleagues, had an agenda, or a specific interest, which appeared quite the opposite of the official mission: The impression they received was that Colao and some colleagues wanted the closure of the Diamdel Israel office so that they could open up their own rough dealership serving the secondary market. De Beers management believes that, while serving as Managing Director of Diamdel, Colao apparently approached several producers asking for their business for his soon-to-open rough dealership. Sources familiar with Colao's situation deny this. What is critical is “when” the idea to start his own business first came into play.

Colao wasn’t going to go into business just by himself. In presentations made to other mining companies and other investors, assurances were given that the new rough dealership would bring its clients and suppliers some 120 years of De Beers experience. Colao, himself, brings 30 years. The Head of Finance, Simon MacFarland, who was also going to join him, is a newcomer with merely two years of experience. This gives reason to believe that there may be some three to five additional current (or ex) De Beers employees planning to join the new dealership. A Diamdel colleague who had been approached by Colao says that “he didn’t offer us a position. He merely said that if and when Diamdel is closed, it would be a good idea to use our skills in a new company. It was all left open.” Trying to do my 120 years arithmetic, it seemed that the number represents the cumulative experience of present Diamdel Israel staff – it didn’t represent specific commitments. We cannot verify that. The story is exceedingly complex.

Revision of De Beers Policy Decisions

The discomfort in London, however, has much to do with the policy recommendations made by the former Diamdel manager. Colao apparently urged De Beers management for many months to close the Diamdel operations in Israel, citing that such trading activity was not commercially viable. For better or worse, De Beers management now realizes that those who recommended the closure of Diamdel may have had a vested stake in it; after all, they may have wanted to create a vacuum in the market to be filled by their own rough diamond dealing company. It is here that questions arise about a possible violation of fiduciary responsibilities or “corporate infidelity” – if there is such a thing (depending, of course, on the critical question of “when” the idea to start his own business first came into play).

Sources close to Colao maintain that he, together with MacFarland, had created a business model for Diamdel which would leverage all the skills, infrastructure, experience available and also market rough from outside producers and thus become a more formidable player in the secondary market. In 2005 this worked very well. In 2006, the strategy was further developed, more people were hired, and MacFarland – in the middle of the Israel-Lebanon war- moved with his family to Israel. More investments were made in support of the new business model. Unfortunately, in 2006 the market turned against them, say Colao’s confidents. Is it “market”, “mismanagement” or a combination of both?

In any event, confronted with huge losses, in January 2007, De Beers management decided not to continue with the strategy of leveraging skills, etc. Instead, it was decided to restructure and, in this context, Diamdel Israel, Hong Kong and Shanghai, would be closed down. Leaving just a representative office for someone to arrange logistics during visits of De Beers people to Israel.  It was decided that there would be no more outside buying and that the purchases from two producers (KDC and Cempaka) would also discontinue. Mark Colao strongly supported the closure decision and he and MacFarland traveled to Australia to tell these producers that they would cease buying from them. Did, at the same occasion, the two inform them of their plans to open their own business and offer their services? We have received different answers to this question.

But, and that is crucial to understand, say inside sources, “the management of Diamdel, and virtually all of the staff, was working in the understanding that they all would be fired.” Is there anything wrong, one should ask, that managers who believe that the business they are managing will close, would be looking for other work? Colao, MacFarland and colleagues, however, knew already in January 2007 that none of them would have a future at Diamdel.

Was it not “suspicious” or strange that Mark Colao had supported the decision to close Diamdel way back in January? His friends say that Colao was committed to the strategy he had developed. If that business model was dropped, he, indeed, didn’t believe that Diamdel Israel would be viable and, in this context, he supported the closing. De Beers, apparently, thinks otherwise.

Was there a breach of fiduciary duties? Sources close to De Beers seem adamant about this. They claim that the De Beers IT systems, its travel budgets, its resources were used to plan and adjust the various business plans for the newly established competing company. That ostensibly seems wrong, though sources close to Colao deny this. There may have been other things – but we’ll leave that for future articles.

What will happen next? It is clear that the least De Beers management can – and should – do is put all decisions related to Israel’s Diamdel operations on hold. It has just created a state-of-the-art Central Processing Operation (CPO) for the sorting of the rough diamonds sold by Diamdel worldwide. Diamdel negotiated a superb tax arrangement for the CPO, making Israel an excellent choice from every perspective. There was no unanimity at the De Beers Executive Committee on whether Diamdel Israel should be closed down or just down-sized. Penny and Brown now owe it to themselves, to the integrity of the institution, and to their employees to reconsider the decision with unbiased merits.

Trying to Retain Control of Cash-Flow

Brown, who is responsible for Diamdel at the De Beers level, and who didn’t want to comment on issues involving specific employees, feels it important to stress that the restructuring process at Diamdel is genuine. He implicitly disagreed with my conjecture that the “restructuring” had become a convenient “cover” for the management crisis at the company.

Says Brown: “De Beers is restructuring the Diamdel operations to reflect the reality of the 21st Century diamond market. With the end of the Russian contract, DTC market share will be around 40%, with the majority of diamonds entering the cutting centers provided by other suppliers.  In addition, DTC London will have fewer gem stones to sell as these will increasingly be sold through the local DTC offices in producer countries.  The Diamdel restructuring is actually part of a Group-wide review of operations.”

Brown, who is probably the “second in command” at De Beers after Penny, makes the restructuring appear as if it is purely a supply issue. It is not. Diamdel’s financial losses can only be partly attributed to the trading activities. Management expenses – especially employee travel – had run out of control. The very first written instruction given to all Diamdel staff by Interim Managing Director Kevin Stapp was that all travel by any Diamdel employee needs to be centrally sanctioned until further notice. That central sanctioning will be directly handled by Stapp personally from London. Moreover, all expenditure in any offices above US$2K or equivalent, for whatever purpose, also needs to be centrally sanctioned, again through Stapp in London. [India’s HDC is exempted from that measure.]

It was explained to the employees that these measures “are typical of a turnaround plan and are necessary to help regain control of our cash flows in Diamdel.” The instructions applied “to all employees, irrespective of title or position.” Restructuring? These are steps representing “crisis containment management” and cannot be considered “typical” for a diamond trading company, which, in normal days, would have a $500 million-plus annual turnover. There is an issue here of trust in the local staff – and there is the uncertainty of not knowing who else may have acted against the best interests of Diamdel.

Since the internal investigations are still being conducted as we write these lines, we merely want to say that London management is also taking a look at some of the concrete trading deals made in the past few years, the terms of these deals, the parties to deals, etc. In an investigation, all kinds of issues are raised ranging from “cozy” relationships with or among stakeholders to the true market value of its diamond inventory. The admission that De Beers needs to “regain” control of its cash flow at Diamdel is indicative of very serious problems.

Finding a New Business Model for Diamdel

If De Beers were still a public company, it might have been obligated to report details of the management crisis – and the yet unknown consequences – to the respective stock exchanges. De Beers, in its new credo, states “we will always listen first, then act with openness, honesty and integrity so that our relationships flourish…” The proper thing to do would have been to issue a public acknowledgment saying that because of suspected “improprieties” of some individuals, the commercial standing of the company may have been compromised. De Beers may have to inject funds to cover some of the credit facilities at the two banks with which it works in Israel.

Diamdel generally has excellent people – and they are a great asset to De Beers, while fulfilling an important task in serving the secondary market. As such, there may not have been a compelling reason to close down such a large part of the operations. Throughout the staff consultation period during the restructuring process, the “integrity” problems were not mentioned; they emerged gradually. Naturally, one needs to be cautious when proceeding – as some findings may also have legal implications.

Brown has appointed Neil Ventura the next Managing Director of Diamdel, effective July 2, 2007. [Ventura is presently Secretary to DTC’s Executive Committee and Manager of the DTC managing director’s office.] Brown believes that Ventura “brings with him a deep knowledge and experience of the Diamdel business and a successful track record in a variety of leadership roles between 1998 and 2006 spanning both the supply and demand sides of Diamdel’s business, in both mature and emerging markets”. Ventura joined De Beers in 1989 and has fulfilled a number of global roles in regions as diverse as Angola, Democratic Republic of Congo, India, Belgium and Hong Kong.

Brown has given Ventura a wide mandate and believes that he is capable of “immediately influencing the future business model of the company.” Quickly bringing in a new head is, of course, the right thing to do. But it doesn’t solve the crisis; we believe that much of the bad news is yet come. A company that demands the highest standards of excellence, ethics and integrity from all of its clients – and actually sits in judgment of its Sightholders – should be able to instill and enforce at least similar standards among its most senior employees. The sustainability of De Beers' own business and marketing plans, and its credibility with all its stakeholders, depend on it.