Julius Klein, Lev Leviev, and Looking at Arbitrations

Last week, Leviev Group of Companies (LGC) and Julius Klein Group (JKG) settled their often bitter feud stemming from the breakup of their long-running partnership.

In a June 29 filing with New York federal court, the two parties wrote that “the monetary portion of the final [arbitration] judgment…has been compromised and is fully discharged.”

What’s noteworthy here is not just the companies involved, but the size of the arbitration award that was in dispute: $209 million.

According to a February 16 court ruling, before their partnership dissolved, the two sides had contractually agreed to arbitrate any issues—and stipulated that the members of any arbitration panel should have “substantial experience in the diamond industry.”

The arbitration process has always provided a much-needed alternative to dragging disputes into the courts. This self-governed system is something the industry has always been proud of.

But the system has its downsides as well. This is a small trade. Most participants know each other. That became an issue in the Klein-Leviev arbitration: JKG raised questions about the intended neutral panelist, Jacob Bronner, and his purported ties to Leviev. And while New York federal judge Jesse Furman upheld the arbitration award, he allowed JKG’s objections were “far from frivolous.”

In April, the diamond exchange in Israel—which is where this particular arbitration took place—adopted a new policy: Big-money arbitrations (defined as $400,000 and above) will be presided over by a retired Israeli judge.

Israel Diamond Institute chairman Shmuel Schnitzer says he’s long been in favor of this change. He hopes that bringing in a neutral jurist will cut down on the disputes over the arbitrations and give people renewed confidence in the system.

“With a retired judge, people feel that justice is being done,” he says. “It’s always better to have someone who is 100 percent neutral.”

Attorney Ben Kinzler, who has handled a lot of arbitration cases, says that makes a certain amount of sense.

But he adds that “the [New York] Diamond Dealers Club has done a great job of restoring credibility to the arbitration tribunal. Arbitrations today are very much a viable alternative [to the courts]. If it’s a routine transaction, there is no reason why arbitrations in the industry can’t handle it.”

The problem here, he says, is that “the issues in this case were not ordinary trade issues. They were complicated business transactions.”

Arbitrations have a distinguished history in the diamond industry. Still, it’s worth looking at, as the Israeli bourse has, whether the standard model is applicable for all disputes.

 

JCK News Director

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