They Blinded Me with Scio—or, How a Promising Diamond Grower Ended Up a Mess

Scio Diamond—and the overall lab-grown diamond industry—has tons of potential. That has been its blessing—and its curse. 

It’s a blessing because without that potential, it’s doubtful that Greenville, S.C.–based Scio Diamond, which has lost $13 million over the last year—after its predecessor Apollo reportedly spent some $40 million—would still be around. It’s been a curse because people see only the potential, without recognizing that growing diamonds remains a challenging business. (For one, they are hard to grow; you can’t just a dial in a recipe to produce the stone you want.) And it’s led to a series of often-nasty and costly legal and shareholder battles over Scio, which led last month to the resignation of most of its board. 

But let’s start at the beginning. Apollo Diamond was founded in 1990 by Boston scientist Robert Linares, and quickly made waves—and got publicity most start-ups would die for—with its process to grow colorless diamonds using the chemical vapor deposition (CVD) method. Unlike companies like Gemesis—which has been generally focused on the gem market—Apollo’s intended business model was to make some quick money selling gems, and then use that to gain a foothold in the infinitely more lucrative industrial market, where synthetics could have applications from everything from water purification to semiconductors. 

And yet, for all the publicity it attracted, repeated plans to mass-produce colorless gems never materialized, and the company had to deal with the industry’s long-standing ambivalence toward man-made stones. Apollo had hoped to go public and ramp up operations in 2008, but was hampered by the economy and financial crisis, and, like many companies, found itself in dire fiscal straits.

In 2011, after two previous attempts, Apollo finally went public in a reverse IPO, where a company buys a shell public entity, and then purchases its old assets—in this case for about $2 million. One of the driving forces behind this new company, called Scio, was Edward Adams, Linares’ son-in-law, who became Scio’s chairman.

The company finally was public, but some shareholders weren’t happy; in May 2012, two investors brought a lawsuit against Adams and his law partner Michael Monahan (a then-board member). The suit complained about the fees the law firm extracted for their work on behalf of the company, and alleged that, with each new iteration of the company, they increased their ownership stake. It also charged that the duo’s roles as company directors and attorneys for the various entities constituted a conflict of interest. The initial litigation was settled but three related suits followed, all making similar charges, sometimes with identical language.  

In response, the company protested that it had “stayed afloat only through additional loans and services provided by the Linares family” and that the moves saved it from “bankruptcy and wip[ing] out the interests of its shareholders.” Most of the suits were settled, dismissed, or remanded to mediation. But they were a heavy drain on the company’s resources, insiders say. 

Meanwhile, things in the executive suite were no more stable. In November 2012, the company’s first CEO, Joseph Lancia, departed, over disagreements with the board, according to one suit. The CEO who replaced Lancia lasted a month, and also resigned because of “different views of corporate governance,” the suit says. The third CEO was Michael McMahon, formerly the company’s chief operating officer, who set up joint ventures in China to mass produce gem diamonds with two trade partners. (Those partners are listed in SEC documents as Shrikant Mehta and Danny Ratusby.)

Some of the new deals had potential, but the turmoil wasn’t over yet. Earlier this year, a coalition of shareholders holding some 14 percent of the company’s stock formed an activist group called Save Scio. Headed by local businessman Bernard McPheely, a former Scio director who resigned from the board after less than a year, the group launched an often-rancorous proxy battle to install new directors on the board, including CEO McMahon. Its solicitations repeatedly noted that the company only had three board members—Linares, Adams, and Antwerp Diamond Bank veteran Theo Strous—and two of them were members of the same family. It also attacked the directors’ bonuses and consulting fees, at one point calling the company a “personal piggy bank” for its founders. All this wrangling reportedly caught the attention of the SEC, which according to the Minneapolis Star Tribune served investigative subpoenas on the company. (A company spokesman said he has “no information on the SEC investigation.”) 

Under siege, the board made a number of moves to stave off Save Scio. It adopted a “poison pill” to limit its influence; it appointed three new board members; and in June, it made yet another executive change by terminating CFO Jonathan Pfohl as well as CEO McMahon, who was considered an ally of the dissidents.

It was too late. Days after the two terminations, the board reached an agreement with the activists. Linares, Adams, and Strous all resigned as directors, and a new board was constituted with McPheely as chair. An agreement ended the lawsuits, proxy battle, and poison pill. In the bloody power struggle for Scio, the dissidents had won a near-total victory.

Shortly after, the interim CEO Gerald McGuire and interim CFO Douglas Walker both resigned their positions after about a week in those jobs. Then a week later, one of those resignations was reversed, and McGuire was named permanent CEO, president, and director. Former CFO Pfohl also returned. Which means the company is now on its fourth CEO in three years, as well as its third CFO, if you count the interim that lasted about a week.

McGuire, the new man in charge, boasts 25 years in the semiconductor business, which the company said “is expected a strong growth area for Scio in the years ahead.” However, one source knowledgeable about diamond growing expressed skepticism about this new direction: “Diamond semiconductors are still pie in the sky. [De Beers-owned synthetic manufacturer] Element Six will be the first ones there, if anyone can do it.”

In any case, the new team will have its work cut out for it if it truly hopes to save Scio. Its SEC filings regularly feature “going concern” warnings. A $1 million loan matured on June 20, and there has been no official word how (or if) it will be paid. Its stock is trading at under 1 dollar. On a July 17 conference call, McPheely, now company chairman, said he couldn’t give any financial details, as the company was still working on its (tardy) 10-K. McGuire did announce the company hopes to break even in “six to nine months.” The duo also declined to give details on production, or even the Chinese joint venture, which executives had previously been upbeat about. 

So right now, Scio has some advanced technology and some promising deals. But after a tumultuous three years, it remains to be seen if it can truly produce salable diamonds or just lawsuits and rancor. As one investor on the conference call put it: “Make us some money, will ya?”

JCK News Director