Drew Brees Wins $6.1 Million Judgment for Diamond Fraud
Drew Brees, the quarterback of the New Orleans Saints, won a lawsuit against a San Diego jeweler. Brees contended that he purchased colored diamonds from the firm as an investment, only to learn that the diamonds had less value than the jeweler claimed.
The concept of “buyer beware” plays a role in investments. Purchasing shares of a company at its Initial Public Offering might be a good deal if the company grows as quickly as Microsoft or Amazon. Investors typically have no recourse, however, if the company goes the route of Pets.com, a company that declared bankruptcy less than a year after sold its first shares of stock.
While investors have no legal recourse when market conditions take an unexpected turn, the law does offer protections against fraud. Publicly traded companies must make certain disclosures to potential investors and those disclosures must be accurate. In general, sellers are not allowed to deceive buyers.
The same principles apply when investors purchase goods with the expectation that the goods will rise in value. It is not unusual for commodity prices to fluctuate. A buyer of gold, for example, might see gold prices drop because of a strong economy or improved trade relations.
When investors bet on a market, they have no protection against making a bad bet. On the other hand, if an investor purchases three ounces of 24 karat gold, only to discover later that the gold is 12 karat, the investor can sue the seller for making deceptive representations about what the investor was purchasing.
Does the investor have a duty to learn about the gold’s value before purchasing it? If Pat goes to a pawn shop, sees a gold ring, asks “How many karats?” and is told “Beats me,” Pat will probably be out of luck if the ring turns out to be worth less than Pat paid for it.
When no deceptive representations are made, “buyer beware” is the general principle that governs purchases. It is up to Pat to have the ring appraised before buying it if Pat wants to make a careful investment.
Drew Brees’ Investment in Diamonds
Drew Brees purchased colored diamonds as an investment between 2012 and 2016. His complaint alleged that he trusted CJ Charles Jewelers and its owner, Vahid Moradi, to provide honest information about the value of the diamonds he purchased. He contended that Moradi committed fraud by misrepresenting the value of the diamonds he purchased.
Brees later discovered that the diamonds were substantially overvalued. For example, Brees purchased a Harry Winston ring for $1.6 million. Moradi had purchased the ring at a Sotheby’s auction just a month earlier for $565,000. The collective value of diamonds for which Brees paid $15 million was about $6 million, according to a subsequent appraisal.
Moradi took the position that he was entitled to mark up the diamonds as she saw fit and that Brees should have obtained an appraisal before making the purchases if he wanted to understand what resale value the diamonds might have. The jury disagreed.
The jury agreed with Brees that Moradi was not just a retailer, but was acting as an investment advisor. Moradi therefore had a special duty not to mislead Brees about the actual value of the diamonds.
The case might have been different if Brees had purchased the diamonds as gifts rather than investments. A jeweler can charge any price, even an unfair price, if the jeweler does not make false representations about a product or its market value. When a jeweler falsely advises a customer that an overpriced diamond is a sound investment, the jeweler crosses a line.
The case sends a message to jewelers that it is one thing to sell a wedding ring to someone who is getting married and another thing to sell that ring to someone who wants to invest in diamonds. When the jeweler acts as an investment advisor, pointing the buyer to particular diamonds as a good investment, the jeweler has a duty to be honest about what the diamonds are really worth on the market.
The case may also send a message to consumers. The store that sells a diamond may not be the best position to provide an honest appraisal of a diamond’s value. Given the subjective nature of appraisals, it is always best to get an independent appraisal before buying a diamond as an investment.