What We Know About Nirav Modi's US Companies

RAPAPORT...The $2 billion fraud allegations against Indian jewelrytycoon Nirav Modi and Gitanjali Gems chief Mehul Choksi have shocked theindustry, as well as raising questions about the wider impact on the trade.One of the first casualties of the fallout was US jewelerFirestar Diamond, which, by virtue of being part of Modi's business empire,found itself thrust into a crisis. Firestar and two of its affiliates, Fantasyand A. Jaffe, filed a petition for Chapter 11 bankruptcy in the US on February26. Until recently, the details of Firestar's operations andconnections to Modi were a subject of much talk, but little confirmed fact.However, Mihir Bhansali, the president of the three companies, filed a courtdeclaration on February 28 under penalty of perjury, lifting the lid on thebusinesses and their ownership. Here, Rapaport News presents the key informationabout Firestar, Fantasy and A. Jaffe, and their interaction with the widerjewelry and financial community, as contained in that filing. What are Firestar Diamond, Fantasy and A. Jaffe? All three companies are wholesalers of finejewelry, operating out of New York, though their precise focuses differ.Firestar and Fantasy supply jewelry to major chains,including to Signet Jewelers brands Zales, Kay Jewelers and Jared, as well asto department stores Macy's and J.C. Penney. Other clients include wholesaleclub Sam's Club - which Walmart owns - and Costco. Allthose organizations either declined to comment on the nature of their supplyfrom Firestar and Fantasy, or did not respond to Rapaport News' request for information.Both jewelers also supply to the U.S Navy Exchange Service Command (NEXCOM), a provider of goods and services to military members. Firestar produces NEXCOM's Navy Star Diamond, a product that is exclusive to the exchange, a NEXCOM spokesperson said.Firestar also has several copyrights, trademarks andproduct-design patents, while both Firestar and Fantasy hold certainintellectual-property rights related to the Endless Diamond brand. Endless-cut diamonds - a Modi creation - arecurved, such that they can entirely surround a ring without gaps. (Modi giftedhis first Endless ring to his wife, according to an interview he gave with the FinancialTimes in November 2016.) Firestar and Fantasy have annual sales of about $90 millionbetween them, according to the court declaration. The two companies currentlyhave about $33.25 million-worth of jewelry on consignment with customers. A. Jaffe, meanwhile, is centered around its 125-year-oldluxury bridal brand, "A.JAFFE." The company sells fine jewelry to hundreds of independentjewelry stores in the US. Its sales have grown by double-digit percentages forthe past three years, it said. The company projected them to rise to $23million in fiscal 2018. Some $7.3 million-worth of its jewelry is onconsignment with clients. What's special about A. Jaffe's products? Its rings are recognizable by two features for which itclaims to hold certain intellectual-property rights. The first is the "quilt"style, a criss-cross design on the inside of the ring. The second is its rendering of the "European"shank - a style of ring shape with a slightly flattened base. A. Jaffe's version of the latter features a lower-case "a" on the bottom left of the ring, next to a smalldiamond. Have they always had those names? No. Fantasy, formed in 2012, has had that name ever since.However, when Firestar came into existence in 2004, it was under the nameJewelry Solutions International. It became Next Diamond in 2005. In 2007, itsname changed to Firestone, before a final switch in 2011 to Firestar Diamond. A. Jaffe is an older operation: It was founded in 1975 asSandberg & Sikorski Diamond Corporation, before dropping the word "Diamond"in 1995. It became A. Jaffe in 2011. Does Nirav Modi own them? Ultimately, yes, but in a complicated way. This is howBhansali's declaration explains the ownership structure: Modi is "directly or indirectly" the majority shareholder ofIndian company Firestar International. That company owns Hong Kong-basedFirestar Holdings, which owns Synergies Corporation, which owns Firestar Group,which owns Firestar Diamond, which owns Fantasy. Synergies, Firestar Group andFirestar Diamond are US corporations. Synergies also owns 95% of A. Jaffe, with the remainder heldby its founder, Sam Sandberg. Who runs them?Bhansali is the president and sole director of FirestarDiamond, Fantasy and A. Jaffe, and serves in the same role for Firestar Groupand Synergies. Ajay Gandhi is secretary and chief financial officer for those five companies. What do the allegations against Modi mean for thecompanies? Indian authorities investigating the claims began seizingand freezing assets belonging to Modi and his companies, resulting in theclosure of many businesses. The properties they seized included factories inIndia that produced most of the jewelry Firestar, Fantasy and A. Jaffe sell tocustomers. Those Indian companies also provided them with certain back-officeand support functions. "The sudden loss of its supply chain and back-office supporthas dramatically impacted the operations of the debtors," Bhansali said in hisdeclaration, referring to the three companies that filed for Chapter 11. The companies and their employees have worked "tirelessly"to seek alternative supply sources and back-office and support functions,Bhansali noted. Staff members also worked to reassure suppliers and clientsthat they had no involvement in the alleged wrongful conduct, and that theywere committed to carrying on their business and minimizing the damage. The negative publicity also affected operations, creatinguncertainty and confusion about Firestar and its affiliates' ability tocontinue as a viable business, the executive explained. Some suppliersexpressed reluctance to continue trading with the companies, while certainclients began to explore other potential contractors, he said. Why did they file for Chapter 11? The petition for bankruptcy protection was an attempt topreserve the companies' value and achieve a sale or other transaction thatwould provide the necessary resources, Bhansali said. The companies intend tocontinue operating, while seeking an injection of capital or a sale, either inpart or in full. Early expressions of interest in buying the businesses havebeen strong, he noted. "The debtors expect that the Chapter 11 process will adda sense of order, alleviatesome of the concerns expressed by vendors and customers,and create a forum in which potentialpurchasers for all or some of the businesses are willingto participate," the president continued.The companies also held discussions with the court and its lenders,Israel Discount Bank of New York (IDB) and HSBC Bank USA, about making certainfunds available to ensure the jewelers would have enough liquidity to sustainoperations.To whom do they owe money? Firestar and Fantasy's bank borrowings comprise a $12million revolving-credit facility with IDB, and a $16 million loan agreementwith HSBC, the document shows. As of February 26, the companies owed about $8.6million to IDB, and roughly $11.4 million to HSBC. Both banks have legal rights to all of the borrowers' assets(called a "senior lien"), meaning they can recover their money by selling offthose assets. As secured lenders, they have priority over other creditors. Modihas personally guaranteed the IDB credit facility, as have FirestarInternational and Firestar Group, the filing continues.HSBC declined to comment, while IDB did not respond to an email from Rapaport News. No creditors of A. Jaffe are "secured creditors," meaningnone of them holds any collateral. The companies also owe smaller amounts to certainunsecured creditors, though only three of them - creditors to A. Jaffe - are owedmore than $1 million each, according to the filing. Those three all appearalongside United Arab Emirates addresses.Main image: Sorbis/Shutterstock. Inset: An A. Jaffe quilted engagement ring featuring a halo diamond.