The Collapse Of Lugano Diamonds And How It Tarnished Compass Diversified

The diamond was a pear-shaped 6.43-carat fancy intense blue, internally flawless stone set in a ring and worth nearly $11 million. In a July lawsuit, New York City-based Scarselli Diamonds says it sent the rock to a Lugano Diamonds salon in Miami in January 2025, but only after it had done months of due diligence on Lugano, completed 14 other consignment transactions worth $44 million with them, and received confirmation that Lloyd’s of London would cover its value if anything went wrong. When Scarselli shipped the diamond to Lugano CEO Mordechai “Moti” Ferder on January 28, 2025, it allegedly was to show a potential buyer in Miami, then return upon demand.

So it was a surprise in late February when Scarselli asked Lugano to return that diamond and several other consigned pieces in time for the Hong Kong jewelry show in March and everything was returned except for the blue diamond. “Still working on this one,” Ferder allegedly responded over Whatsapp.

Then in April, days after Forbes featured Ferder and Lugano’s incredible success—based on audited results in SEC filings—Lugano’s parent company, investment firm Compass Diversified, apparently got a tip to look more closely into how their star CEO was financing inventory. The slick diamond chief was visiting his native Israel at the time and never came back. Compass with Lugano’s other executives quickly launched a forensic accounting investigation that found irregularities in sales, cost of sales, inventory and accounts receivable.

They determined that Ferder had “created fake sales transactions to inflate its reported revenues,” sold inventory that either didn’t exist or didn’t belong to Lugano, and entered into numerous unreported financing arrangements with third parties that were kept off Lugano’s balance sheet.”

In May, Lugano — now led by former Bulgari executive Josh Gaynor, who had joined Lugano the previous year —admitted that it didn’t know the whereabouts of numerous diamonds (including Scarselli’s blue diamond). Scarselli sued Lugano, Compass and Lloyd’s two months later in Orange County Superior Court for $13.5 million, describing the missing blue diamond in the complaint as “a gemstone that may not see its equal for decades.” Over email, the jeweler’s owner Davide Scarselli declined to comment. He is one of two dozen diamond investors who claim Lugano owes them $1.5 million or more.

In its lawsuit against Ferder, Lugano, which shuttered showrooms in London, Connecticut and Washington, D.C. but still operates six others as well as a traveling equestrian boutique, accused the former CEO of stealing the blue diamond. Lugano filed Chapter 11 bankruptcy protection in November. In mid January it was sold to a division of retail liquidation specialists Gordon Brothers.

While there are many losers from the alleged fraud at Lugano, the biggest of all is Compass Diversified, a publicly traded investment firm (commonly referred to by its ticker symbol CODI) that owns controlling stakes in middle market companies like canned-heat maker Sterno Products.

In September 2021, Compass paid Ferder $198 million cash for a 60% stake in the Newport Beach, Calif-based jeweler. “Lugano has a disruptive business model that brings significant value to its customers and we believe, build on our transformation to accelerate the collective growth potential of CODI,” Compass CEO Elias Sabo stated soon after the acquisition. At that time, Compass was riding high, its market capitalization peaking in December 2021 at $2 billion.

For a few years, Lugano seemed to be a shiny jewel in the Compass portfolio. It ran ads featuring Mike Bloomberg’s daughter Georgina, a well-known equestrian, as well as billionaire Sheila Johnson. And it appeared flush enough to pledge $30 million to dozens of nonprofits including $1 million to an Orange County music school and $2.5 million to make the Orange County Art Museum admissions-free for 10 years. Its revenue leapt 50% to $471 million in 2024 and ebitda soared to $195 million, up from $30 million in 2021.

Such great results from Lugano made it easier for Greenwich, CT-based Compass to finance the rest of its disparate businesses – it currently has stakes in eight companies including Sterno; PrimaLoft, a maker of insulation used in down jackets for such brands as Patagonia, Helly Hansen and Lululemon; and feminine hygiene products outfit Honey Pot.

What’s to be gained from such an agglomeration, Forbes asked Compass CEO Sabo a year ago. Sabo, who did stints at CIBC Oppenheimer and billionaire Tom Barrack’s hedge fund Colony Capital, joined Compass in 1998 at age 27. Two decades later, the executive who was known to race cars in his spare time became CEO of Compass, then valued at about $1 billion at the time.

His answer: “Very simply put, if I finance ten businesses with $50 million of ebitda all separately, it’s going to be way more costly than if I finance them all together as one $500 million.”

His goal, he explained, was to create a kind of mini-Berkshire Hathaway. Unlike Berkshire, however, Compass charges each subsidiary a management fee. Per an analysis of SEC filings, the fee is roughly 2% of each portfolio company’s “net adjusted assets” plus an incentive management fee of .25% of assets if return on equity exceeds 12% for three years in a row. Management also gets 20% of any profits when it exits a portfolio company. There is some apparent wiggle room: PrimaLoft, for instance, negotiated a 1% fee in 2023. In the case of Lugano, the assets were largely equivalent to its inventory, which by the end of 2024 had reached $700 million in value (before the restatements) on the back of $660 million of loans from Compass. Sabo and his management team thus would have been paid $14 million that year to oversee Ferder’s vanishing pile of jewels.

Back in late 2024, Sabo had described to Forbes how these incentives encouraged his team to keep a close eye on the portfolio companies including Lugano. “What we do is we actively own our companies. We help set strategy. We create a culture of accountability,” he said. “So we are much more intensive in the way that we interact and work with our companies.” Asked about the fact that its model incentivized Compass to buy businesses that hold a lot of inventory and require working capital, Sabo replied, “That is one way to look at it. I can allocate capital to a heavy working capital business like Lugano and I look at the return on invested capital that one gets there, which is really off the chart and unlike any business that I’ve ever seen.”

As it turns out, it was also too good to be true. Since the fall of Lugano, Compass – which has largely wiped the jeweler from its website – has had to issue financial restatements. In December it re-stated three years of consolidated financials which showed that Lugano’s 2024 revenue were 85% lower than previously reported. Meanwhile, Compass restated its 2024 consolidated revenues from $2.2 billion to $1.8 billion; its net income swung from a $12.8 million profit to a $209 million loss; and balance sheet assets were lowered by $750 million to $3.3 billion. Shares of Compass have collapsed 70% in the past year; the company is now worth just $500 million.

Without Lugano’s purported profits, Compass also defaulted on $1.8 billion in debt, about a third of which it had lent to Lugano over several years. Compass had to seek forbearance agreements from a consortium of lenders led by Bank of America and JPMorgan Chase. Among the lenders’ new conditions: that Compass cut fees it was charging subsidiaries in half, and cap them at $10.5 million per quarter. Compass management has also pledged to return $43 million in excessive fees previously earned from Lugano to shareholders and to eat 20% of the Lugano losses by foregoing $100 million or so in future profit splits with shareholders.

As for the jilted gem owners and investors, they are still hoping to get their diamonds or at least some money back, and are seeking a court order to freeze the proceeds from the sale last June of Ferder’s home in Corona del Mar – at what plaintiffs allege was a below-market $7 million – to a holding company set up by an Orange County real estate broker and friend of Ferder. It’s now on the market for $9.2 million.

The core of the alleged scam, according to copies of contracts included in court filings, seemed to involve selling stakes in specific diamonds to rich clients by promising them hefty profit splits when the stones were fitted into jewelry and ultimately sold to a different rich client. While they waited for someone to buy the piece, Ferder promised to pay interest on their capital.

One such plaintiff, Kristoffer Winters, claims he’s owed $9 million for diamond investments he made in 2023 and 2024. Contracts show he paid Ferder $3 million to buy 50% of three diamonds. While Ferder worked to find a buyer he allegedly promised to pay Winters interest of 10% of principal per month. After one interest payment, Winters says he received nothing and now believes Ferder may not have owned the diamonds at all.

According to Compass’s SEC filings, Lugano’s books reflected cash inflows from such sales as ordinary revenues. Nowhere did it note that Lugano was obligated to repay the principal or share any profits. Accountants hired by Compass later determined that Ferder’s diamond deals had to be restated as $184 million in obligations to be repaid.

How could Compass and Sabo miss all these signs? They didn’t, insists Ferder’s attorney Jeff Reeves, who says Ferder is being scapegoated and the allegations are “a sad and obvious attempt at deflecting blame.”

Reeves claims the financing arrangements were common practice in the luxury jewelry industry, and Compass with its audit committee, internal auditors and external auditors had to know what was happening. “Compass missed nothing. It was aware of what was happening,” says Reeves. “There was no fraud here.”

Reeves also denies Lugano’s allegations that Ferder “stole millions more from Lugano by authorizing fraudulent wire transfers to his own Haim Family Trust.”

“No money was ever diverted to Mr. Ferder, his family, or any entities affiliated with him,” says Reeves. “Every dollar paid by third parties under these agreements went directly to Lugano,” says Reeves. “Claims to the contrary are not only wrong – they are actionable.”

Furthermore, he claims Compass is now engaging in a cover up. “The decline in revenue that Compass is asserting is fiction” and part of a false narrative to obscure Compass’s own culpability for failing to adequately oversee Lugano’s financial reporting. Compass knew about the deals and “they left them in place so they could enjoy the operational benefits,” says Reeves.

Sabo, 54, declined through a spokesperson to speak to Forbes on Lugano’s collapse or whether he’s fired anyone over it. For now Compass alleges Ferder “relied on a complex network of undisclosed counterparties” and “took exceptional actions to ignore or override the controls” put in place by Compass “to evade detection.” Lugano also alleges that his son Tom Ferder, formerly a business development executive at Lugano, was involved in the scheme, using his connections to arrange off-the-books diamond deals. In SEC filings it also alleged that Ferder manipulated Lugano employees “who exhibited a lack of due care.”

Ferder’s attorney says this alleged “complex network” included virtually everyone at Lugano including interim CEO Josh Gaynor (who is not giving interviews) and confirms that his client, who faces no criminal charges, intends to file counterclaims. “None of what Compass is now alleging, if it were true, could have occurred without the knowledge and involvement of numerous people,” says Reeves. In its response to Forbes, Compass says “CODI rejects the suggestion that we participated in, condoned, or benefitted from Mr. Ferder’s conduct.”

Sorting out this mess has been quite a headache for Compass and has taken up a lot of its time. In a statement to Forbes, it says it has no reason to believe the fraud extended beyond Lugano and that Sabo and his team “are making changes across people, process, and structure to further strengthen oversight and controls.” Wisely, they’ve decided to outsource their internal audit function “to an outsourced model” and added a new “risk and compliance oversight role” reporting to the audit committee. Sabo himself quit GT race car driving with Flying Lizard Motorsports last year.

What’s left of Lugano was purchased by Enhanced Retail Funding, a division of liquidation specialist Gordon Brothers, likely for less than $200 million. Lugano continues to operate in bankruptcy, with several shops including ones in Chicago, Houston and the flagship salon at Fashion Island in Newport Beach, still open.

An upcoming moment of truth will be in July 2027 when its senior secured credit facility, which S&P rates B+, matures. To reduce leverage, Compass might start selling other businesses soon. As Sabo said in a recent investor conference call, “our model has always been, everything is for sale at all times.” Portfolio Manager Jim Tringas at Allspring Funds thinks they could find ready buyers for $190 million (2025 revenue) Boa, which makes patented closure systems for helmets, shoes and boots (as an alternative to laces and buckles). Compass invested some $460 million into Boa, buying an 83% stake and lending it money. It could also be a good time to sell $160 million (revenue) Arnold Magnetics, maker of rare earth magnets and other high-tech metal gear in which it invested $130 million back in 2012. Their biggest subsidiary in terms of revenues is manufacturer 5.11, which sold $540 million of its tactical law enforcement gear last year.

A Compass stalwart, Tringas has held onto his shares. “My model did not assume massive fraud at Compass’s biggest subsidiary,” he sighs. But with the nightmare mostly past, he believes Compass will have no trouble bringing its debt load back to within four times ebitda by selling subsidiaries. Looking on the bright side, Tringas says that Compass will now have significant tax loss carryforwards that they can use to shield capital gains from the tax man.

One longtime Lugano customer who’s not giving up on it is Orange County entrepreneur Charlie Zhang. The Chinese immigrant arrived in southern California with $20 in the early 1980s and turned it into the Pick Up Stix chain of restaurants that he sold to TGI Fridays in 2001. He’s a member at Lugano’s Newport Beach salon but hasn’t bought anything since the scandal broke. While he’s looking for other donors, Zhang is still hoping that the $1 million Lugano pledged to his nonprofit learning academy Orange County Music & Dance in Irvine comes through. “I’m still a member, no intention to cancel,” says Zhang, who says he misses his friend Moti. “I am a positive person.”