Friday, October 23, 2009
The American Conspiracy Chapter Eighteen
Since the diamond invention was a mechanism for restraining competition in diamonds, it was in conflict with the anti-trust laws in the United States. The Sherman Anti-Trust Act states unambiguously that "any combination or conspiracy in restraint of trade" is a criminal offense in the United States punishable by fines and prison sentences. The Justice Department first became aware of the extent of the conspiracy to stifle competition in the diamond trade in the early 1940s, when the FBI conducted a series of interviews with American diamond dealers concerning their wartime supplies. It learned that De Beers systematically restricted production, fixed prices, and allocated markets, all actionable offenses under federal antitrust law. Even De Beers' largest clients confirmed these operations. Harry Winston, for example, acknowledged to federal investigators that it was "a most vicious system," and characterized De Beers as "an outstanding monopolistic concern."
In 1945 the Justice Department at last filed an antitrust case against De Beers and its associates. The court found that despite the evidence, it lacked jurisdiction. Since De Beers was a South African corporation that distributed its diamonds in London, and that the title for these diamonds changed hands outside the United States, the judge ruled that De Beers could not be held accountable under the laws of the United States. The Justice Department thus had to abandon the 1945 conspiracy case against De Beers.
The legality of the diamond invention depended on De Beers maintaining a proper distance from its American customers. Yet the continued effectiveness of the invention required that it exert a measure of control, albeit invisible, over the crucial American market. This tension between the laws of the United States and the requisites of an international cartel forced refinements in the system.
Some came abruptly. For example, in the fall of 1973, the owner of a well-known diamond firm in New York City found that Monty Charles, at De Beers' Diamond Trading Company in London, would not accept any overseas calls from him. Before the war, his father had dealt directly with Sir Ernest Oppenheimer, and for twenty years or so he had always discussed by phone with Monty Charles the diamonds his firm needed for the coming year. Never before had Monty Charles refused to come to the telephone. Finally, after days of placing transatlantic calls, and arguing with the soft-spoken operator at Number Two Charterhouse Street, he was put through. Without giving the owner any opportunity to talk about diamonds, Monty Charles warned him, "This is the last time that I or anyone else here will speak to you. Do not, under any circumstances, call here again."
The diamond dealer was dumbfounded. How was he supposed to communicate with his main supplier of rough diamonds? Monty Charles suggested that he engage I. Hennig, a London diamond broker, to act as an intermediary in his future dealings with De Beers.
The New York dealer could not understand why his longtime relation with De Beers changed so suddenly. He quickly retained Hennig, which is owned by Hambros Bank, a financial advisor to Harry Oppenheimer and De Beers. The new arrangement required that the dealer order his consignment of diamonds from Hennig, who would nominally purchase them from De Beers. In return for handling these transactions, the broker received one percent of the value of the consignments.
Eventually, the broker explained that De Beers had changed its policy, not merely toward him, but toward all its American clients. Direct negotiation between De Beers and its American clients was no longer possible.
The reason for this sudden refinement in its dealings with American customers in 1973 was that De Beers again found itself under investigation for violating the American antitrust laws. Indeed, a new grand jury had been convened, and a long list of American dealers subpoenaed to testify about their relations with De Beers.
The antitrust division of the Justice Department reopened its investigation because it received a series of complaints indicating that De Beers might be secretly participating in the industrial diamond business inside the United States. Most of these reports came from tool and drill bit manufacturers, who believed that they were paying too much for industrial diamonds because of De Beers' manipulation of the market. In 1967, the Justice Department received an unsubstantiated report implying that Harry Oppenheimer had personally attempted to buy a controlling interest in a small diamond tool manufacturer in Verona, New Jersey. The American owner rebuffed him. The Justice Department also received word that a number of key men who had worked for the Oppenheimer interests were being placed in strategic positions in American diamond firms. There was, of course, nothing illegal about Oppenheimer buying corporate interests in the United States, or in his ex-employees working in America; but these unconfirmed reports, if true, seemed to signal a change in De Beers' strategy.
In late 1970, there was a new development in the case. An anonymous caller, speaking from a pay phone in a muffled voice, began providing the lawyers in the antitrust division with evidence that suggested that De Beers was attempting a secret takeover of the industrial diamond business in the United States. The mysterious caller rattled off a list of names, places, transactions, bank accounts and subterranean corporate connections in the diamond trade. He also gave detailed accounts of secret meetings between American dealers and agents of the cartel, and the names of witnesses who could confirm these charges.
The conspiracy he outlined went as follows: Before General Electric began mass-producing synthetic industrial diamonds, De Beers had been able to manipulate diamond prices from its offshore bases in London and Johannesburg. Now, however, with General Electric pouring out a virtually unlimited supply of industrial diamond abrasives, major users of industrial diamonds were no longer dependent on De Beers. The De Beers cartel then decided to intervene directly in the United States by covertly buying control of companies that distributed diamond grit and diamond drill stones. Through these companies, it guaranteed itself a share of the American market.
Although Justice Department lawyers were initially skeptical of this furtive source, they found that many of his leads checked out. Moreover, the specific details he provided could only have come from someone who had access to the inner workings of the international diamond cartel. Gradually, other witnesses began to confirm the story. Nevertheless, the informant adamantly refused to meet with the lawyers of federal investigators or to disclose his identity.
Even with the help of other informants, the task of tracing a conspiracy between De Beers and its putative American co-conspirators was extraordinarily difficult. To even approach the problem of establishing jurisdiction, the Justice Department lawyers had to weave their way through a bewildering maze of some 300 interlocking corporations, registered in Luxembourg and other convenient nations, which were either partly or fully controlled by the Oppenheimer interests. The lawyers also found that industrial diamond users, who were heavily dependent on De Beers and its subsidiaries for their supply of diamonds, were extremely reluctant to discuss openly their relations with De Beers.
Finally, in December of 1971, the lawyers requested that a grand jury be convened so that potential witnesses could be compelled to testify and, if necessary, granted immunity in return for their testimony. To break through the walls of the corporate labyrinth, they decided to focus their investigation on the activities of two American firms closely allied to the Oppenheimer interests. The first was Engelhard Minerals and Chemicals, Inc., a diversified company incorporated in Delaware and based in New York City; the second was Christensen Diamond Products, a manufacturer of diamond drills serving mainly the oil industry, based in Salt Lake City.
The founder of Engelhard Minerals and Chemicals, Charles Engelhard, was a well-connected American entrepreneur who had inherited a small metal fabricating company from his father. In the late 1940s, he had journeyed to South Africa to make his fortune. South African mines had a surplus of gold, but government regulations prohibited the exporting of gold bullion from South Africa without permits from the central bank, which were very difficult to obtain. Great Britain, which still controlled the financial affairs of South Africa, wanted to retain as much gold as possible within the sterling bloc. Engelhard found a legal loophole through that regulation: while it was illegal to export gold bars, it was legal to export objets d'art made of gold. Engelhard formed a company called Precious Metals Development that bought gold from the mines and cast it in the form of statues and other religious items. Engelhard exported these religious objets d'art to Hong Kong, where they were melted down and turned back into gold bullion, which could then be sold on the free market. (This ploy, used by Ian Fleming in his novel Goldfinger may had led to the apocryphal story that he based the Goldfinger character on Engelhard)
While living in Johannesburg, Engelhard became a close friend of Harry Oppenheimer. Both men were approximately the same age and came from the same German-Jewish background. Both men were born millionaires, who later owned and controlled their own family businesses. And both men also shared a passion for racehorses (at one point, Engelhard owned 250 thoroughbred horses). Oppenheimer invited Engelhard to join the board of Anglo-American Corporation, and for his part, Engelhard invited Oppenheimer to participate in a number of mutually profitable joint ventures.
The Justice Department investigators were especially interested in the relationship between Harry Oppenheimer and Charlie Engelhard. They theorized that Oppenheimer relied on Engelhard Minerals and Chemicals to provide the services, credit terms, and contacts necessary to keep its American clients from buying their synthetic diamond grit from General Electric. They concluded in a memo that "Oppenheimer turned to Engelhard to take up the GE challenge." Specifically, Oppenheimer had arranged for Engelhard's holding company, called Engelhard Hanovia, to become the American distributor for De Beers abrasive grits. "The idea was that grit sales needed a new 'American look,' with the old De Beers monopoly image less exposed," the lawyers noted. They concluded that the entire scheme was intended by De Beers to avoid "exposing gem monopoly to antitrust sanctions."
In reconstructing this complicated arrangement, the investigators found that it was based on a quid pro quo. In return for acting as an intermediary for De Beers, Engelhard received all the costs for setting up a Swiss company called Prometco, plus a guaranteed profit of 100,000 English pounds a year. It was a fairly lucrative deal for Engelhard, and it also accommodated his friend Oppenheimer.
The deal provided far-reaching benefits. In the mid- 1960s, Engelhard intervened on behalf of Oppenheimer to prevent the United States government from dumping its vast stockpile of industrial diamonds on the world market. Engelhard, who was one of President Lyndon Johnson's chief fund-raises, offered to buy up one and one-half million carats of diamonds from the stockpile on condition that the Government promise not to sell any more diamonds for five years. He then planned to resell the American diamonds to De Beers. Not only would Engelhard personally make a tidy profit from the exchange but as a Justice Department review notes, "The commitment by the United States not to sell any more of the stockpile would be for the very purpose of protecting the monopoly of the diamond syndicate." If the government entered into such an agreement, it would become increasingly difficult to bring an antitrust action against the monopoly at a later date. For this reason, the Justice Department vehemently protested the deal, and despite Engelhard's personal influence with President Johnson, its protest prevailed.
Engelhard had also begun to buy control of some important users of industrial diamond abrasives, including Supercut, Inc., then the third largest consumer of diamond grit in the United States, and Concut, Inc., a Midwest manufacturer of diamond tools and abrasive grinding wheels. These acquisitions provided Oppenheimer with leverage in the competitive battle, shaping up between General Electric and De Beers, for control of the synthetic market in America.
Just as the Justice Department was about to file antitrust actions, Engelhard relinquished its right to be exclusive distributor of De Beers' abrasive diamonds in the United States and devolved the distributorship to three industrial diamond dealers in New York, all of whom had close ties to De Beers. Engelhard arranged for Oppenheimer to buy a controlling interest in his far-flung empire, since he had no male heirs to take over. To do this, Oppenheimer set up HD Development Corporation, which was owned by Oppenheimer and Anglo-American.
Behind this whirl of corporate maneuvers, Justice Department lawyers suspected an attempt by De Beers to carve up the American market for both synthetic and natural diamond abrasives. According to their theory, Oppenheimer used Engelhard's companies in America as a cover under which De Beers could organize distributorships for its products, staff them with selected executives, and nominally give them to supposedly independent dealers. Proving the case in court, however, was a far more difficult matter, since when Engelhard was involved in the diamond business, Oppenheimer owned no part of it; when Oppenheimer bought control of Engelhard, it was no longer directly in the diamond business.
Moreover, as the grand 'Jury investigation gathered momentum, Engelhard Minerals and Chemicals severed all its visible connections with the diamond business. It not only disposed of the abrasive manufacturers it had bought, but locked away in its vaults all the records of its previous dealings with De Beers, its subsidiaries and its agents. Harry Oppenheimer and other South African directors of Engelhard, who were also directors of De Beers and Anglo-American Corporation, stopped attending the board of director meetings of Engelhard in the United States. The concern was that they would be subpoenaed to appear before the grand jury. The Justice Department heard from one of its sources that "the General Counsel for Engelhard ... had a fit" when this possibility was divulged to the American members of the board. Justice Department lawyers also received reports that the " [Baron] Rothschild on the De Beers' board, upset at being told that he could not come to the U.S. because of the diamond investigation, has now resigned from the De Beers board"; and that "Harry Oppenheimer is extremely upset at not being able to come to the U.S."
In order to accommodate Oppenheimer and the other South African directors, Engelhard Minerals and Chemicals agreed to hold board meetings in London and elsewhere outside the United States. In September of 1974, Engelhard directors flew to London and met with Oppenheimer and a number of De Beers executives. According to a secret justice Department source, who had access to that meeting, there was an intriguing discussion between Oppenheimer and a top executive of Engelhard, of the implications of the investigation. According to the September 27, 1974, justice Department report, the executive guaranteed Oppenheimer that there would be no criminal indictments of De Beers' personnel resulting from the diamond grand jury investigation. Moreover, "the executive demanded a substantial increase in his salary [because] ... he would be required to have closer dealings with De Beers."
This raised the possibility that the diamond cartel and its allies might have found some way of intervening in the antitrust division. In a previous antitrust case involving the ITT corporation, President Nixon had blatantly attempted to prevent the antitrust division from pressing its suit. On August 4, 1974, the Justice Department received information that the "De Beers organization is a large contributor to both political parties and should this investigation get to a stage where cases were actually filed [the antitrust division] would probably receive much political pressure." The informant also disclosed that one major diamond dealer in New York was in "constant contact" with Harry Oppenheimer and was somehow relaying to him "information on the progress of this antitrust investigation." The diamond dealer in question was further alleged by this source to have "arranged the meeting for Harry Oppenheimer with John Kennedy when Kennedy was President-elect ... at the Carlyle Hotel," and to have served as an intermediary between Oppenheimer and American concerns in a number of deals.
While this group of antitrust lawyers was at work trying to unravel cross ownership among firms that dominated the distribution and sales of diamond grit, a second team of lawyers was actively investigating an alleged conspiracy by De Beers to control the market for drilling stones. These industrial diamonds, ten to twenty times the size of abrasive grit, are crucially important for drilling for oil and other minerals. A single petroleum drilling bit, in which the block-shaped diamonds are inlaid in the metal cutting surface, may require more than $20,000 worth of diamonds; and without diamond drill stones, it would be practically impossible to drill many offshore and deep oil wells.
Unlike diamond grit, drill stones cannot be economically synthesized, and therefore the drilling industry is heavily dependent for its diamond drilling bits on the natural stones excavated from the De Beers-controlled mines in Africa.
In tracing through the subpoenaed records of the drilling companies in the United States in the early seventies, the antitrust lawyers found that a single American company and its subsidiaries supplied most of the diamonds for petroleum drill bits: the Christensen Diamond Product Company. Moreover, through informants and other sources, they learned that Christensen and his company had a long-standing involvement with the Oppenheimer interests.
Frank L. Christensen, a former football player from Detroit, had built up during the 1950s a firm that specialized in providing diamond-cutting ties to the automotive industry. When he visited Johannesburg, he developed a friendship with E. T. S. Brown, a robust De Beers executive, who headed its Industrial Diamond Division. Ted Brown, as he was called, spent considerable time showing Christensen around South Africa and he soon found in the ex-football star the sort of hard-driving entrepreneur he had been looking for to expand De Beers' sales in the United States. Brown's division had just developed a specially treated diamond that was especially efficient as a drilling stone, and he encouraged Christensen to use it to make drilling bits for the petroleum industry. Since De Beers itself could not operate in America, Brown began channeling the better quality bits to Christensen's firm, which rapidly increased its share of the American market.
In 1960, Brown made Christensen an offer he apparently could not refuse. A De Beers subsidiary in Luxembourg, called Boart International S.A., would buy a 50 percent share of Christensen's stock; working together, Christensen and De Beers would dominate the drilling business throughout the world. Christensen agreed, and in conjunction with Brown, who was also managing director of Boart International, he bought shares in other drilling contract companies in the United States and Venezuela. By 1970, Christensen and his silent partners at De Beers controlled well over 50 percent of the petroleum drilling business in the United States; through subsidiaries his firm also attained a dominant position in most other kinds of large-scale drilling industries all over the world. After subpoenaing a host of witnesses before the grand jury, the Justice Department concluded that Christensen and De Beers had acted in a "conspiracy ... to suppress competition among themselves, to require and increase consumption. of De Beers processed diamond drill stones, and to fix, maintain and stabilize world market process for such diamonds." A Justice Department analysis noted that "a key feature of the plan has been the formation of a worldwide network of companies 'Jointly owned by Boart and Christensen Diamond Products to consume De Beers processed diamonds ... [and] the acquisition of stock interests in Longyear and Boyles Bros., two of the largest consumers of diamond drill bits in the United States, and the foreclosure of the substantial purchase of diamond drill bits by these competitors to competitors." Since ownership of these companies was concealed through a tangle of corporations registered in Luxembourg and the Netherlands, the Justice Department concluded: "Much of this conduct was done so as to be secret and misleading, and much was done with full knowledge that there was grave risk of violating U.S. antitrust laws."
While the Justice Department lawyers were proceeding in 1971 to place the final pieces in their case against De Beers and its American associates, they learned of a startling new development. De Beers had relinquished its entire interest in Christensen Diamond Products by having its Boart International subsidiary sell back to Christensen Diamond Products all the stock that it owned in the company. This timely reorganization effectively undercut the entire antitrust case by legally divorcing De Beers from the American company, the main target of the long grand Jury investigation. Even though one of Christensen's major shareholders warned the Justice Department that the purpose of this sudden move by Oppenheimer was to avoid a protracted antitrust suit, and that "after the exchange of stock and rearrangement on the corporate structures ... De Beers would still control Christensen Diamond Products," there was little that the Justice Department could do. As one of the antitrust lawyers on the case explained to me, "After all, the remedy we had been proposing all along was to compel De Beers to sell its stock in Christensen, and when it did it of its own accord, it left us without much ground for proceeding against it."
In the end, the Justice Department had to settle for a token victory. Two distributors of diamond grit, Anco and DAC, both of whom had their De Beers distributorships devolved on them by Engelhard, were indicted for price-fixing. On April 8, 1975, both firms pleaded nolo contendere to charges, and received inconsequential fines, $30,000 for DAC and $20,000 for Anco. Both distributors and a De Beers subsidiary in Ireland entered into a consent judgment that enjoined them in the future from fixing the price of diamond grit in America, allocating territories or entering conclusive bids. Since, however, the vast majority of diamond grit was manufactured synthetically by 1975, and De Beers had no real monopoly over the supply of this synthetic grit, the court injunction had meant little to De Beers. Even without the injunction, De Beers already had to compete for its share of the diamond grit market in America.
In winning this battle, the Justice Department abandoned the war to break the De Beers stranglehold over gems and strategically important drilling stones, the very areas which have not been replaced by synthetic diamonds. The conspiracy case thus ended with the diamond invention intact.