Klein Arbitration Award – Was the Decision Consistent with Historical Implications?

diamonds-938490_960_720In diamond moguls’ fight over $200 million arbitration award, jurisdiction was key

(Reuters) – The well-chronicled Israeli billionaire Lev Leviev, sometimes called the “King of Diamonds,” won confirmation this week of an arbitration award against another international diamond dealer, Julius Klein, in federal court in Manhattan. All told, Leviev’s judgment against the Klein entities, which had been his partners in three joint ventures, totals about $209 million.

That number, as well as Leviev’s outsized persona, made U.S. District Judge Jesse Furman’s just-unsealed opinion fodder for the New York tabloids – especially because one of the arbitrators who originally awarded Leviev all of that money was convicted of tax fraud in Belgium in the middle of the Klein arbitration. Litigation over the validity of arbitration awards is usually pretty dry stuff. The facts of the Leviev case are about as sexy as these things get.

But there’s also a pretty interesting legal question at the heart of Judge Furman’s opinion. This case mostly hinged on the appropriate jurisdiction for the Kleins’ challenge to the arbitration award, since New York State Supreme Court and federal district courts are guided by different precedent on the significance of an arbitrator’s criminal record. The Kleins, as you’ll see, tried to use Leviev’s own previous resort to state court against him. Leviev, meanwhile, had to convince Judge Furman that he was a defendant, even though he was the one who initiated the arbitration. In the end, Judge Furman said, the Kleins lost their “far from frivolous” attack on the arbitration award because federal law requires deep deference to the arbitrators’ decisions. Had the challenge been heard in state court, the outcome – and the tabloid headlines – might have been quite different.

Leviev brought the arbitration in February 2013, after he and the Kleins couldn’t reach an agreement on a fair buyout price from their 10-year joint venture. (This account is drawn from Judge Furman’s opinion.) Leviev and the Kleins each chose one arbitrator; the arbitrators selected the third member of their panel, Jacob Bronner. Bronner, like the other two arbitrators (and, for that matter, Leviev and the Kleins) is in the diamond business. He disclosed that he had professional relationships with the other arbitrators and a social acquaintance with Leviev but said those engagements should not create justifiable doubt about his impartiality.

At around the same time as Bronner’s appointment, Leviev filed a petition in New York State Supreme Court, seeking a preliminary injunction against the Kleins for the duration of the arbitration. The state court judge denied the petition, holding that Leviev should address his request for an injunction to the arbitrators. In December 2013, the arbitration panel awarded Leviev an interim judgment of $102 million. In 2014, after the Kleins paid him about $67 million, Leviev went back to state court to have the $102 million interim award confirmed.

The Kleins opposed confirmation, arguing both that it was premature because the award was not final and that Bronner had engaged in misconduct by failing to disclose the extent of his relationship with Leviev. The state court judge agreed Leviev had jumped the gun by seeking confirmation of an interim award but also ruled that the Kleins had waived the right to object to Bronner’s participation on the panel because they allowed the arbitration to proceed after they learned of his connections to Leviev.

In early 2016, after more unpleasantries involving alleged conflicts amongst the arbitrators, the panel held a seven-day hearing in Israel. Before the arbitrators ruled, however, the panel’s own counsel disclosed to Leviev and the Kleins that Bronner had been convicted in Belgium, along with about 100 other defendants, “of tax fraud and other offenses relating to a scheme involving the use of sham transactions to nominally export diamonds from Belgium while, in fact, reselling them on the black market,” as Judge Furman described the offense.

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Leviev v. Klein – Devastating Corporate Divorce – Something Missing….

 

 

Theory: The Current “Black Diamondgate” Smuggling Investigation in Israel may be Reason to Reconsider Klein Ruling

In February/March of 2017, it was announced by numerous papers that the US Federal Court had upheld an arbitration award against the Julius Klein Group, in an ongoing and very messy corporate divorce. We believe that the courts got the decision wrong and the basis of our comments is a single sentence reported by The NY Post on September 18, 2013, when the battle between the parties began. 

In an article entitled: Diamond king in heated battle with jewelry partners

It is quoted as follows:

“The two sides first joined forces in 2002, and Leviev claims he has a 43.5 percent interest in the joint venture, KLG Jewelry.

But Leviev, 57, says he hasn’t been paid any profits since last September as the parties have attempted to reach a settlement agreement for a “complete corporate divorce.”

Leviev wants the court to prevent his colleagues from selling “highly mobile and not easily traceable” diamonds.”

In 2013 Leviev, by his own admission, acknowledged the mobility of diamonds, the ease with which they could be transported from one place to another and frankly, how easy it would be to hide assets in either uncut or unmarked diamonds. We believe that with the new investigation into Leviev and a potential well orchestrated diamond smuggling operation in Israel, the Kleins may have legally available means to open this case for a reevaluation. In other words, who was really hiding what from whom? Were the Kleins really hiding assets or was Leviev manipulating a system he knows all to well.

We have posted for further reading information of interest, including a number of the legal opinions. We have been through the cases and the arbitration information and we do not think that the result was appropriate, particularly in retrospect.

We also question the integrity of the arbitration and by implication the ligitation that followed given Leviev’s own position at the time and the current “Black Diamondgate” investigation in Israel.

Read as follows:

The lawsuit information:  

http://static.reuters.com/resources/media/editorial/20170301/levievvklein–opinion.pdf

Lev Leviev Secures $209 Million Judgment Against Julius Klein Group

Published On: Tue, Feb 28th, 2017

Lev Leviev Secures $209 Million Judgment Against Julius Klein Group

Julius Klein Group asset seizure efforts to commence; Klein Family Martin, Abraham, Moishe and Malka Klein Personally Liable for Debt

lev-leviev 514x360
A Manhattan federal judge on Monday has confirmed an arbitration award holding Julius Klein Group and four of its principals responsible for paying $209 million to LGC USA Holdings, Inc., an affiliate of the Leviev Group led by Israeli billionaire Lev Leviev.

Leveiev accuses his business partners Julius Klein Group, led by Martin, Abraham, Moishe and Malka Klein of freezing him out of three highly lucrative gem companies, in the Manhattan civil suit.

In what may be a record judgment in the diamond industry, Judge Jesse M. Furman confirmed an arbitration ruling from last year and ordered the Kleins to be responsible for paying LGC $142 million immediately. In addition to more than $66 million that has already been paid, for a total of $209 million. This representing the face amount of the award of $111.9 million plus prejudgment interest at 9 percent from Feb. 2014 – Feb. 2017.

The federal court judgment also includes prejudgment interest in the amount of $27.9 million each day from Feb. 2014 – Feb. 2017, the date of entry of the final judgment.

The Julius Klein Group unsuccessfully claimed that the substantial financial award should be set aside because the arbitrators were allegedly biased and corrupt. But the judge rejected these and all of the Kleins’ other arguments in ruling for LGC.

Lev Leviev and the Julius Klein Group formed a joint venture KLG Jewelry in 2002 where Leviev had a 43.5 percent stake.

LGC, led by president Chagit Sofiev-Leviev, intends to pursue collection in a vigorous manner from the debtors including Julius Klein Diamonds LLC, Julius Klein Group Holdings LLC, Julius Klein Diamonds Inc, Klein Tenancy, KLG Jewelry LLC, Sunrise Venture LLC as well as Martin Klein, his wife Malka Klein, his business partner Abraham David (A.D.) Klein and A.D.’s son Moishe Klein.

“The Leviev Group will take all steps available, including seizing corporate and individual assets, to collect this judgment after the lengthy legal procedures now have resulted in this final ruling,” said Charles Michael, the partner at Steptoe and Johnson who represents the Leviev Group.

The Julius Klein Group had tried to keep the arbitration loss secret. As one news report described: “Lawyers for Leviev’s nemesis, the Julius Klein Group, desperately tried, and failed, to seal the Manhattan federal court case related to the whopping award.”

During the arbitration, the Kleins engaged in unseemly stalling and threatening tactics to derail the arbitration, including the filing of a rabbinical proceeding against one of the arbitrators.

 

 

ADDITIONAL SOURCES:

Inside the Leviev–Julius Klein Corporate Divorce

https://www.jckonline.com/editorial-article/inside-the-leviev-julius-klein-corporate-divorce/

“Given this has become a high-profile case, it’s worth looking at its background. Prior to the lawsuits and arbitrations, the two sides had been partners for more than a decade. According to an affidavit signed by Lev Leviev, in 2001, his company and the Kleins created two companies, Sunrise and Vivid Collection. (The latter eventually shut down amid a lawsuit.)

Following that, Leviev became joint venture partners with the Kleins in three companies: Julius Klein Diamonds, Sunrise Ventures, and KLG (which runs the Leviev retail chain). For years, the Klein family operated those businesses. The Klein side claims that Leviev was never involved in its day-to-day operations, but the Leviev side griped in a complaint filed in New York State Court in September 2013 that “the businesses were operated in secret, without providing [LGC] any of the information they were entitled to concerning these entities’ operations.”

In 2012, LGC wanted out, and eventually decided to be bought out of all the partnership companies. The current dispute is over the valuation of LGC’s stakes in those companies.

Following industry custom, this issue was meant to be a settled by an arbitration, which commenced in May 2013. The Klein and Leviev sides chose one arbitrator apiece—Chaim Pluczenik and Israel Zahavi, respectively. Zahavi and Pluczenik picked the third, “neutral” arbitrator, Jacob Bronner. Pluczenik later resigned, calling the process “biased” and “unfair,” and was replaced by Eytan Cohen.”

 

Federal Court Enters Judgment Holding Julius Klein Diamonds, Its Principal Martin Klein & Three Others Responsible for Paying $209 Million to a Lev Leviev Company

https://www.businesswire.com/news/home/20170228006120/en/Federal-Court-Enters-Judgment-Holding%C2%A0Julius-Klein-Diamonds

“The Julius Klein Group unsuccessfully claimed that the substantial financial award should be set aside because the arbitrators were allegedly biased and corrupt. But the judge rejected these and all of the Kleins’ other arguments in ruling for LGC. (A detailed opinion is expected to be publicly released.)”
The litigation is LGC USA Holdings, Inc. v. Julius Klein Diamonds, LLC, et al., U.S. District Court for the Southern District of New York, Case Nos. 16 Civ. 5294 and 16 Civ. 5352.

 

Lev Leviev Wins $209M Judgment Against Julius Klein Group

http://idexonline.com/FullArticle?Id=42902

“The case has been bitterly contested and led to death threats and an alleged smear campaign to the arbitrator initially assigned to decide on it, the New York Post reported.”
“A Manhattan federal judge ordered the Julius Klein Group to pay $142 million to Leviev’s LGC USA Holdings. That sum is in addition to the more than $66 million that has already been paid, according to the report.”