Gem Buyers Beware: Get Rich Quick Scams
July 15, 2016
People’s love of diamonds and other gemstones runs deep. Even the most ancient cultures prized them for adornment and as tangible symbols of wealth.
In modern times, the unscrupulous play on people's deep love for gemstones and the notion of a gem’s lasting value. They employ dubious get rich quick schemes – so-called diamond and gem investments – to take advantage of the gullible and scam them.
While quality gemstones generally maintain their value if purchased at a fair price and held over a long period of time, scammers tempt buyers by promising get-rich-quick profits or protection for their money in times of economic uncertainty. The “deal” often degenerates and the buyer is left holding greatly overpriced gems.
There are several different ways these scammers go about taking consumers’ money. Here are four of the most common get rich quick scams.
Gem Scam #1: The “Boiler Room”
This very common scam begins with an unsolicited phone call or email, or perhaps a website link bearing a provocative headline lurking in the corner of a legitimate news or ecommerce site. The seller shows or describes sumptuous-looking gemstones and goes on to tell prospective buyers how they can get rich quick by obtaining stones worth as much as 10 times their purchase prices by “buying direct from the source.”
Those who follow up are subjected to a high-pressure, often convincing sales pitch – always centered around the threat that this opportunity for big profits will be gone in a flash. Or this variation: “We have a European buyer who has given us a much better offer ... if you buy this gemstone, you could resell it through us for a tidy profit.”
If the buyer hesitates, the real pressure starts: “Most people lose opportunities because they are afraid. Are YOU afraid of making $50,000 or even $100,000?” By now, the vast majority of prospects have tuned out − but some people can’t resist a “bargain” and send them a check.
Often, the scammers gain their victims’ trust by first offering a stone for $100 or $200. They then call the customer back offering to repurchase it for a substantially higher price, but strongly suggest they apply that credit to a much costlier stone − $2,000 to $5,000 − that has even greater appreciation potential. If the customer takes the deal … well, you know what happens next.
A typical example of this get rich quick scam: Some years ago the newspapers wrote about a physician who, after receiving several phone calls from such an operation, purchased two emeralds for $12,150. When the buyer had them appraised, their combined value totaled about $900. The company that sold him the emeralds raked in more than $35 million from other buyers before it closed down.
Scammers usually try to delay consumer complaints by sending the gemstones in sealed containers with the warning that breaking the seal will invalidate any buy-back guarantee.
Prosecutions are rare in most of these cases because these scammers shut down operations after complaints to law enforcement and consumer agencies begin to filter in. And quite often they go back in business under a new name in search of more victims.
Gem Scam #2: The Ponzi Scheme
A more elaborate version of the Boiler Room scam is a Ponzi scheme. Early investors are paid large returns on their purchases to get the attention of financial advisors who then, often unwittingly, place their clients’ money into gemstones from that seller.
One recent get rich quick scam involved a company that claimed to control amber “mines” in the Dominican Republic and Argentina and offered buyers shares with the profits to be paid in Bitcoin, the cyber currency. Investors who put up $10,000 were promised returns as high as 6,400%. The U.S. Securities and Exchange Commission (SEC), which shut the operation down in 2015, reported that after a few initial investors were paid, the remainder lost all of their funds. The SEC confirmed losses of $32 million, but estimated that the total could go as high as $100 million.
Gem Scam #3: “Financial Security” Scams
Another type of diamond and gem investment scam targets individuals who fear hyper-inflation or cataclysmic financial and social collapse. Scam operators obtain names from sellers of other “survivalist” or “hard-asset” products and relentlessly target prospective buyers with the message that cash and stocks will become near worthless in the coming crash − but they can preserve their wealth by holding gemstones and diamonds. While the pitches are different, the operation and outcomes are usually the same.
While most of these companies close down fairly quickly before law enforcement agencies have a chance to react to complaints, they invariably sell buyers’ information to other scammers, who then offer to buy the stones at a fraction of their cost or a trade-in against the purchase of a much more valuable stone. This stone, of course, turns out to be as worthless as the first one.
Gem Scam #4: The Tourist Trap
While not exactly a get rich quick scheme, this gem scam takes advantage of those looking for that ‘great deal’ when making a gem or jewelry purchase. The scam is face-to-face, and often happens to people relaxing on vacation.
Tourists love to purchase jewelry on their trips, especially in resort destinations and cruise ship ports. And while there are many trustworthy, established businesses selling gemstones in these places, there also are scammers selling imitation or highly treated stones worth a tiny fraction of their purchase price.
The pitch often starts with a “tout” who approaches window shoppers outside established retailers. They have a “friend who’s a gem wholesaler” and, sure enough, that $1,000 ruby ring in the retailer’s window is only $400 from the back-alley dealer. By the time the buyer finds out it’s a synthetic or a glass-filled ruby of little value, he or she is back home with no recourse.
Know How to Protect Yourself
How do you protect yourself from scammers and distinguish them for honest sellers?
Criminologists call such scams “crimes of persuasion,” which means the seller is skilled at penetrating natural defenses and logic with get-rich-quick promises of wealth or they play to the fears of their “mark.”
Be alert. Be wary of unsolicited telephone calls, emails or Internet sellers offering gems for investment. Keep your natural defense system working.
Remember the grander the promise, the greater likelihood of disappointment. If a 10-fold profit sounds too good to be true, then it surely is. There are no honest shortcuts to wealth and high profit in the gemstone and diamond business. The vast majority of gemstones and diamonds are traded through long-established networks where prices are well-established. Prices do vary greatly when you are talking about the quality of the gemstone – as with any natural product, there is a very broad range of quality available and prices vary accordingly.
For example, a one carat diamond that is highly flawed and has a very noticeable tint, will trade for less than 10% of a flawless stone of the same size with top color. The story is much the same with ruby, emerald and sapphire. So, chances are the beautiful stone you see in the photographs will look a lot less appealing when the package arrives.
Prices of gemstones do not fluctuate so wildly that they make it possible for a buyer to make a 5, 10 or 1,000 percent profit within a few months. If stones rose in price that quickly, the seller would be keeping them for his or herself and not be trying to sell them to you.
Learn about the factors that influence gemstone values. Take the time to understand the 4Cs of diamond quality (color, clarity, cut and carat weight) and their effect on price. Familiarize yourself with common gemstone treatments, synthetics and imitations. Learn how the quality and value of gemstones are determined, and you’ll be better prepared to recognize a legitimate offer. GIA’s Gem Encyclopedia is an excellent source of information about diamonds and gemstones and the factors that make them rare, appealing and valuable.
Insist on a world-recognized, independent, grading report like GIA’s for any gemstone purchase. A GIA Diamond Grading Report provides an objective assessment of a diamond’s quality based on the 4C’s and discloses any permanent treatments that may have been done to enhance its appearance. For added security, GIA will laser inscribe the report number on the diamond’s girdle.
GIA reports are also available for all colored stones and pearls. These reports identify whether or not the gemstone is natural or synthetic and describe any treatments made to it.
If you’re presented with a gemstone and a GIA report, you can use Report Check to verify that the report results match those listed in the GIA database.
Research gems by seeing them in person. Visit retailers and, if they have a GIA Graduate Gemologist on staff, ask her or him to show you examples and tell you about the gem so you can make an informed purchase. If you have any doubts about a gemstone with a report that you already own, they will be able to help you determine whether or not it is the gem described in the report.
A gemstone may not bring instant profits − but it will enhance your life by its beauty.
Russell Shor is senior industry analyst at GIA in Carlsbad.