Lugano Diamonds: $718M Fraud Fallout and Chapter 11 Liquidation

Lugano Diamonds & Jewelry Inc., a Newport Beach-based jewelry retailer operating salon-based boutiques in Aspen, Palm Beach, and Fashion Island, filed for chapter 11 bankruptcy protection on November 16, 2025, in the U.S. Bankruptcy Court for the District of Delaware. The filing came six months after Compass Diversified Holdings (NYSE: CODI), which acquired 60% of the company for a $256 million enterprise value in September 2021, disclosed that founder and CEO Mordechai Haim "Moti" Ferder had allegedly orchestrated a fraud involving fabricated invoices, unauthorized "Investment Contracts," and empty-box diamond shipments that affected more than 60 high-net-worth individuals. By the time of filing, CODI was owed approximately $718 million—nearly three times what it paid for the company—while the FBI investigated Ferder, who reportedly relocated to Israel.

The case, detailed in the First Day Declaration filed by Chief Restructuring Officer J. Michael Issa, centers on alleged fraud at a jewelry retailer and the resulting financial exposure to Compass Diversified (CODI), its publicly traded parent company. CODI's stock dropped 60% in a single trading day after disclosing the investigation, followed by securities class actions and steps including a dividend suspension and forbearance agreements with lenders.

Company Background

The company began in 2004 when Mordechai Haim "Moti" Ferder founded Lugano with a vision of creating "one-of-a-kind wearable works of art". Ferder, who came to the jewelry business from Israel, positioned the company to serve high-net-worth clients through a salon-based sales model. Lugano operated boutiques in affluent destinations—Fashion Island in Newport Beach, Aspen, and Palm Beach—where clients viewed custom pieces, some priced into seven figures.

The business model included "Lugano Privé," a members-only club requiring philanthropic commitments for membership. Operating from a 7,500-square-foot private space, the club hosted events and gatherings for members. Lugano also pursued sponsorships, including serving as the official jeweler of equestrian events including the American Gold Cup.

By the early 2020s, Lugano had approximately eight boutiques in North America and locations in London and Toronto. The company's reported revenues approached $500 million. In September 2021, Compass Diversified Holdings—a NYSE-listed holding company with a portfolio spanning branded consumer goods, niche industrial businesses, and healthcare companies—announced the acquisition of a 60% stake in Lugano for an enterprise value of $256 million. Under the transaction terms, Ferder retained 40% equity and continued as CEO.

The transaction provided capital for expansion while giving CODI exposure to the high-net-worth consumer segment. Investigators later alleged that the financial performance underlying the acquisition's valuation may have been overstated through fabricated transactions.

The Alleged Fraud Scheme

The matter surfaced in April 2025 when CODI launched an internal investigation into what it initially characterized as "irregularities" at Lugano. Founder Moti Ferder allegedly entered unauthorized "Investment Contracts" with high-net-worth individuals, which court filings describe as a scheme to defraud clients and inflate reported financial performance.

According to bankruptcy filings and investor lawsuits, Ferder approached wealthy individuals—often the same clients purchasing jewelry through Lugano's boutiques—with opportunities to "co-invest" in specific diamonds. Investigators allege that Ferder created fabricated invoices to document fictional sales and shipped empty boxes while claiming valuable diamond contents, which misrepresented financing arrangements as sales and inflated revenue and profitability.

Scale of the Alleged Fraud.

CODI disclosed that Lugano's previously reported 2024 revenues of approximately $470 million and operating income of approximately $180 million were "overstated". Individual investors claimed losses in the millions, with one lawsuit alleging approximately $7.9 million in unreturned funds and another claiming approximately $6.4 million.

Investor lawsuits assert that Ferder diverted funds to personal uses including a luxury home in Aspen. More than 40 creditors were allegedly defrauded of "hundreds of millions of dollars" through the scheme.

Lugano Privé and client relationships. The company launched "Lugano Privé," a members-only club requiring philanthropic commitments for membership. The club hosted events and gatherings for members, and the company used salon-based sales relationships in its boutiques. Bankruptcy filings state that fraudulent transactions were recorded in ways that misrepresented financing arrangements as sales, which inflated reported revenues.

Discovery, Investigation, and Flight.

The timeline of the fraud's discovery and its aftermath:

On May 7, 2025, CODI filed an 8-K with the Securities and Exchange Commission disclosing non-reliance on previously issued financial statements and announcing Ferder's immediate resignation as CEO—with no severance payment. The disclosure was followed by forbearance agreements with CODI's lenders, a suspension of the quarterly dividend, and civil lawsuits.

By summer 2025, Ferder had reportedly relocated to Israel, though he continued to engage with U.S. legal proceedings through counsel. On November 14, 2025—just two days before the bankruptcy filing—Ferder filed a response through his attorneys at Stinson LLP denying the fraud allegations. The FBI had by then opened an active investigation, with federal agents interviewing individuals who had struck "off-balance sheet" financing deals with Ferder.

The Liquidation Process

Lugano initiated its voluntary chapter 11 cases on November 16, 2025, with a plan to execute an expedited sale process timed to the holiday selling season. The Sale Motion outlined a stalking horse arrangement with bidding procedures designed to close by year-end. The company entered bankruptcy with a stalking horse bidder in place and a timeline designed to close by year-end. The court entered an Interim Order approving the agency agreement on November 20, 2025.

Prepetition Capital Structure.

The debt structure at filing showed the change since CODI's 2021 acquisition:

Obligation	Amount
Revolving Loans (to CODI)	$211.7 million
Term Loans (to CODI)	$466.7 million
Letter of Credit Obligations	$2.63 million
Total Debt to CODI (August 2025)	$701.3 million
Total Debt to CODI (Petition Date)	≥$718.2 million

CODI paid $256 million for 60% of Lugano in September 2021. By the November 2025 bankruptcy filing, Compass Diversified was owed more than $718 million—nearly three times its original acquisition price—through accumulated revolving and term loans that funded operations and, according to allegations, concealed the fraud's impact on the company's cash flows.

Beyond its secured debt to CODI, Lugano carried additional prepetition obligations including approximately $12.25 million in philanthropic pledges (consistent with the "Lugano Privé" membership requirements), $604,650 in accrued taxes, and $235,300 in employee wages and expenses.

DIP Financing.

CODI proposed $12 million in debtor-in-possession financing under the DIP Motion to fund the chapter 11 case:

The DIP structure—with CODI serving as both majority equity holder, sole prepetition secured lender, and DIP lender—created creditor dynamics that generated disputes throughout the case. CODI's position as the single dominant creditor gave it significant control over the sale process while raising questions about whether unsecured creditors' interests would receive adequate protection.

The Sale: Enhanced Retail Funding as Stalking Horse.

The company entered bankruptcy with Enhanced Retail Funding, LLC—described as a well-capitalized firm with "a century of jewelry sector experience"—positioned as the stalking horse bidder under a hybrid agency and equity agreement.

The timeline reflected the holiday sales schedule:

The schedule—from petition to sale closing in approximately 44 days—left limited time for alternative bidders to emerge or for creditors to investigate the company's assets and liabilities. Enhanced Retail was designated the successful bidder on December 20, 2025, after the scheduled auction was cancelled due to the absence of competing qualified bids. The court entered the Final Approval Order on December 31, 2025.

Key Objections and Disputes.

The case generated significant creditor conflict despite its abbreviated timeline.

Insider Bonuses: The Official Committee of Unsecured Creditors, appointed November 24, 2025, filed a Limited Objection to proposed "stay bonuses" for company executives potentially totaling approximately $7 million—structured as 5% of gross sales. The UCC argued these payments failed to meet the requirements of Section 503(c) of the Bankruptcy Code, which restricts retention payments to insiders in chapter 11 cases absent specific showings that the payments are necessary to the business.

Direct Payment Structure: The UCC objected to the sale structure under which proceeds—including the approximately $66 million Guaranteed Amount—would flow directly to CODI as secured creditor, effectively bypassing the bankruptcy estate. The Final Approval Order ultimately prohibited direct payments to CODI without further court order. This structure raised concerns about whether recoveries would exist for general unsecured creditors and whether the estate would retain sufficient funds to pursue potential causes of action.

The Missing Blue Diamond: The dispute involved a 6.43-carat Fancy Intense Blue diamond allegedly consigned to Lugano by N.B.S. Diamonds Inc. (operating as Scarselli Diamonds). NBS claimed the diamond was missing and demanded either exclusion from the sale or segregation of proceeds equivalent to the diamond's value. The dispute highlighted inventory control issues alleged in the case.

Landlord Objections: Multiple Irvine Company entities, landlords at the Fashion Island flagship location, initially objected to the sale terms, citing insufficient due diligence time and inadequate assurance of future lease performance under Section 365(b)(3)'s shopping center protections. These objections were resolved by December 20, 2025.

Store Closures and Lease Rejections.

The company moved to shed locations:

The remaining locations—including the Fashion Island flagship, Aspen, and Palm Beach boutiques—conducted "Going Out of Business" sales timed for the holiday season under Enhanced Retail's agency arrangement.

Parent Company Impact: CODI's $718 Million Fraud Exposure

The Lugano fraud affected Compass Diversified Holdings and its shareholders and lenders.

CODI's stock declined by 60% in a single trading session following the May 7, 2025 disclosure. Securities class actions followed, with plaintiff's firms including Hagens Berman filing on behalf of investors who purchased CODI shares based on financial statements that included Lugano's allegedly fabricated performance.

In December 2025, CODI completed its restatement of previously issued financial statements, characterizing the fraud as "pervasive, complex and isolated to Lugano." The restatement required CODI to revise its consolidated results for multiple reporting periods, removing revenues and income that had been based on Lugano's fraudulent reporting. CODI's management took actions including suspending the quarterly dividend, entering forbearance agreements with its own lenders, reducing management fees, forming a Special Committee of independent directors to oversee the Lugano investigation, and issuing notice of default on approximately $680 million in obligations. The Special Committee, formed July 16, 2025, retained Barnes & Thornburg LLP to investigate potential claims against equity holders, affiliates, directors, officers, and advisers.

Professional Retentions

Debtors' Professionals.

Other Key Professionals.

The Debtors retained multiple ordinary course professionals addressing the case's unique complexities: Shoemaker Ghiselli + Schwartz LLC for diamond claimant disputes and government investigations, Brown, Neri, Smith & Khan LLP for the Ferder litigation, RSM US LLP for tax services, CDF Labor Law for employment matters, and Brown Law APC for insurance coverage issues.

Industry Context: Luxury Jewelry Market

Lugano's filing occurred within a luxury jewelry market that remains substantial and growing. The global luxury jewelry market was valued at approximately $49.1 billion in 2024, with projections reaching $82.1 billion by 2030. Alternative estimates place the market at $65.97 billion in 2024 with expected growth at 7.8% CAGR through 2033.

The Lugano case involves high-value inventory, and consignment arrangements in the diamond trade can complicate ownership tracking, as the missing Scarselli diamond dispute illustrates.

The jewelry industry operates with limited regulatory oversight compared to financial services. Retailers face no federal licensing requirements comparable to those governing securities dealers or investment advisers.

Key Case Timeline

Frequently Asked Questions

What caused the Lugano Diamonds bankruptcy?

The bankruptcy was triggered by the discovery of alleged fraud by founder and CEO Moti Ferder. After CODI launched an internal investigation in April 2025, it discovered that Ferder allegedly fabricated invoices, entered unauthorized "Investment Contracts" with wealthy individuals, and shipped empty boxes while claiming valuable diamond contents. The scheme allegedly inflated the company's revenues and operating income while defrauding more than 60 investors.

How much money did Lugano allegedly defraud from investors?

More than 60 individuals and entities claimed losses from the alleged scheme, with total alleged fraud reaching "hundreds of millions of dollars." Individual investor lawsuits cite specific losses of $7.9 million and $6.4 million. The company's previously reported 2024 revenues of approximately $470 million and operating income of approximately $180 million were disclosed to be "overstated."

Who is Moti Ferder and where is he now?

Mordechai Haim "Moti" Ferder founded Lugano in 2004 and served as CEO until his resignation on May 7, 2025—the same day CODI disclosed the fraud investigation. He resigned with no severance payment. Ferder reportedly relocated to Israel and is the subject of an ongoing FBI investigation. He filed a response denying the fraud allegations on November 14, 2025, two days before the bankruptcy filing.

How much does Lugano owe to its parent company?

By the petition date, Lugano owed CODI approximately $718 million—nearly three times the $256 million enterprise value CODI paid for its 60% stake in September 2021. The debt includes approximately $211.7 million in revolving loans and $466.7 million in term loans.

Who is buying Lugano's assets?

Enhanced Retail Funding, LLC was designated the successful bidder on December 20, 2025, after the scheduled auction was cancelled due to lack of competing qualified bids. The company guaranteed 40% of the aggregate cost value of merchandise, estimated between $147.8 million and $175 million, under a hybrid agency and equity agreement.

Is the FBI investigating Lugano?

Yes. FBI agents are actively interviewing individuals who struck deals with Ferder, investigating "off-balance sheet" financing arrangements and the alleged fraud scheme. The federal criminal investigation runs parallel to the bankruptcy proceedings and multiple civil lawsuits.

What happened to CODI's stock after the fraud disclosure?

CODI's stock dropped 60% in a single trading day following the May 7, 2025 disclosure of irregularities and non-reliance on prior financial statements. Securities class action lawsuits have been filed against CODI on behalf of investors.

What is the missing blue diamond dispute?

N.B.S. Diamonds Inc. (operating as Scarselli Diamonds) claims a 6.43-carat Fancy Intense Blue diamond was consigned to Lugano and is now missing. NBS demanded either exclusion of the diamond from the sale or segregation of proceeds equivalent to its value. The dispute highlights the inventory control failures that allegedly accompanied the fraud scheme.

Why did the UCC object to "stay bonuses"?

The Official Committee of Unsecured Creditors objected to proposed insider bonuses potentially totaling approximately $7 million—structured as 5% of gross sales—arguing they fail to meet the requirements of Section 503(c) of the Bankruptcy Code, which restricts retention payments to insiders during chapter 11 cases.

Will Lugano's stores remain open?

The company immediately closed stores in Greenwich, Washington D.C., London, and Toronto through lease rejections. Remaining locations including the Fashion Island flagship, Aspen, and Palm Beach boutiques conducted "Going Out of Business" sales timed for the holiday season. All locations are expected to close as part of the liquidation process.

Who is the claims agent for Lugano Diamonds?

Omni Agent Solutions, Inc. serves as the claims and noticing agent for the Lugano Diamonds bankruptcy. The case (No. 25-12632) is pending in the U.S. Bankruptcy Court for the District of Delaware before Judge Craig T. Goldblatt. Creditors can access case documents and file proofs of claim through Omni's case website.

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