Paraiba.com Threatens to Sue AGTA and Others for $120 Million

Claiming that “the good name of Paraíba itself has been hijacked,” David Sherman, chief executive officer of Paraiba.com is threatening to sue the American Gem Trade Association and others—including the Gemological Institute of America, Brazil Imports Inc., and several individuals, including AGTA board members—for $120 million.

Sherman is objecting to the way AGTA defines Paraíba. The elbaite tourmaline has a color range from blue-green to violet (pictured in the ring). The gems were first discovered and continue to be mined in the state of Paraíba, Brazil, where its name originates. AGTA Gem Testing Center and other gemological labs have determined that the minerals that give these stones their unusual breadth of blue-green color is also included in gems found in other parts of the world, particularly in Africa. Therefore, the labs determined that other stones that have same characteristics can also be called Paraíba.

“There is only one stone that can be legitimately called Paraíba and it is exclusively mined in the province of Brazil that it is named for,” Sherman argued in a statement.

The proposed suit is charging AGTA and others with: Intentional interference with prospective business advantage; negligent interference with prospective business advantage; unfair competition or business practice; and RICO violation by mail fraud and wire fraud.

Sherman argues by allowing the use of the name “Paraíba” to be used for stones produced outside of Brazil—in locations as far away as Mozambique and Nigeria—the AGTA has failed to do what their charter requires of them.

In addition, Sherman says this determination has diminished the value of the rare gems and has cost him “devastating financial losses.” The proposed lawsuit is demanding that AGTA and others named in the suit to pay him $120 million: $20 million for “general and special damages” and $100 million in punitive damages. In addition, he is requesting an “appropriate injunctive order to prevent the continued conduct of defendants.”

Sherman has presented a copy of his proposed suit to AGTA. JCK also received a copy of the document. He says AGTA has until April 14 to provide him “injunctive relief,” which in this case means that those named in the suit would “purchase back from all individuals any certifications of African stones that have been issued as providing that they are Paraíba stones.”

Doug Hucker, AGTA chief executive officer, has told JCK that he has “received a letter from Sherman’s attorney who wants to sit down and talk about some concerns. And we are more than willing to sit down and talk.”

The Paraíba stones were of limited number, Sherman claims. The Paraíba mine, near the village of Sao Jose’ da Batalha where Sherman has mining rights, and the adjoining mines in the Brazilian state of Rio Grande Do Norte ran out of recoverable quantities of gemstones. As a result, the value of the existing stones maintained a high level of value and the value was increasing as time passed.

Some or all of the defendants named in the document, began to import, sell, and distribute the African stones throughout the United States. Sherman is claiming that these stones were fraudulently represented as being Paraíba stones when, in fact, the stones were neither from Paraíba nor of the same, unique chemical composition as a true Paraíba gemstone.

Sherman charges that these sales were for the purpose of inflating the price of the inferior stones by defrauding the public into believing the African stones were of a higher quality and were from the Paraíba area of Brazil.

Sherman says the African stone began to flood the markets, thus depressing the price of what he calls “real” Paraíba stones. The future value of these stones also fell because there is now what Sherman describes as a “virtually unlimited supply of such stones.”

“Authentic Paraíba tourmaline holds its neon color in stones as small as one-millimeter in diameter,” Sherman says. “But even without a trained eye people can see it is different from tourmaline mined elsewhere.”

In approximately 2005, Sherman says it became known in the jewelry industry that African stones were being passed off by those named in the document as Paraíba stones. To cover up their actions, Sherman alleges, that the AGTA and the others “entered into a conspiracy: they agreed to redefine as a Paraíba stone any cuprian elbaite that contained copper and manganese.”

“They stood to gain a lot from what they decided to do,” Sherman says. “They had a vested economic interest in preventing lawsuits for fraud, maintaining the value of the African stones, or in protecting the members of the gem association. AGTA had a clear economic interest in passing off the African stones as Paraíba stones.”

He continues, claiming that, “In 2005, the AGTA and other defendants collectively decided to redefine the term of Paraíba stones to include all cuprous elbaites regardless of place of origin. The AGTA used its power in the jewelry business as the final arbiter regarding the qualifications and certification of gemstones to widely disseminate the false information regarding the redefinition of Paraíba stones.”

AGTA is bearing the brunt of this proposed suit because it is in its “Code of Ethics and Principles of Fair Business Practices” that their members must protect the industry and their clients against misrepresentation and avoid exaggeration. They must be diligent in combating and exposing gemstone misrepresentation, and not take unfair advantage of another person or firm’s merchandise in order to promote and sell his or her own merchandise. Gems must not be misrepresented as to its origin.
 
In addition, all AGTA members must adhere to all Federal Trade Commission Rules:

Ҥ 23.1 Deception (general).

It is unfair or deceptive to misrepresent the type, kind, grade, quality, quantity, metallic content, size, weight, cut, color, character, treatment, substance, durability, serviceability, origin, price, value, preparation, production, manufacture, distribution, or any other material aspect of an industry product.

Note 1 to § 23.1:  If, in the sale or offering for sale of an industry product, any representation is made as to the grade assigned the product, the identity of the grading system used should be disclosed.

Note 2 to § 23.1:  To prevent deception, any qualifications or disclosures, such as those described in the guides, should be sufficiently clear and prominent. Clarity of language, relative type size and proximity to the claim being qualified, and an absence of contrary claims that could undercut effectiveness, will maximize the likelihood that the qualifications and disclosures are appropriately clear and prominent.”

On the AGTA Web site, it says that traders asked gemological labs to describe the gems on lab documents as “paraiba” tourmaline. This forced gems labs to come up with a definition for this variety.

One proposal was to determine the coloring agents. It was determined that the stone gets its color due to the presence of copper and manganese. “But building a variety definition based on composition alone is fraught with danger,” AGTA said on its Web site. First, the knowledge of what creates color changes as new discoveries are made. Second, color is also affected by things unrelated to composition, including size, cut, and inclusions.

AGTA does acknowledge that gemstones of similar color and chemical composition are mined in other parts of the world. However, it says that stones containing a certain amount of copper and manganese does not alone qualify them to be named paraíba. “The most important feature of a paraíba tourmaline is exactly that which made the gem famous in the first place—intensity of color.”

The AGTA GTC decided to follow the definition that was created by the Laboratory Manual Harmonization Committee, an organization made up of representatives from seven major international gem labs. In its definition, it says that, “the name ‘paraiba’ is derived from the Brazilian locality where this gemstone was first mined, however today it may come from a number of localities.”

AGTA added on its Web site. “While paraíba tourmalines were first found in Brazil’s Paraíba State, stones of similar color and composition have now been found in Rio Grande do Norte State (Brazil), Nigeria, and Mozambique. Some purists have argued that the paraíba variety should be limited to Brazilian stones, but the decision of the LMHC was that this variety will be defined by color and composition, not country-of-origin. Upon request, member labs of the LMHC will identify the country-of-origin on their documents, thus satisfying all clients.”

According to then AGTA president Rick Krementz, and posted on the JCK Web site as a comment to JCK’s February’s 2007 blog entry, “The Price War of Paraíba Africana Tourmaline,” he said: “To add some clarity to your paraiba comments: 1) Paraíba (upper case with an accent on the “i”) refers to the state in Brazil where these tourmalines were first found. Subsequently, many, if not most of these gems came from the neighboring state of Rio Grande de Norte. 2) “paraiba” (lower case without an accent) refers to the copper-containing elbaite tourmaline, first discovered in Brazil and later found in Nigeria and Mozambique.”

But Sherman isn’t buying the explanations.

“What the AGTA did was wrong,” he says. “We intend to go all the way. Ultimately, it’s the public that has been injured here. It’s in the interest of the gem industry in the long run to prevent this destructive sort of fraud.”