Ralph Esmerian, once chairman of Fred Leighton, faces up to 30 years in jail after pleading guilty to three counts of fraud in connection with over $210 million in loans and the subsequent bankruptcy of the high-end jeweler.

This story first appeared in the April 18, 2011 issue of WWD. Subscribe Today.

Preet Bharara, the United States Attorney for the Southern District of New York, said Esmerian, 70, embezzled and double-pledged $48 million in jewelry and other assets that were used as collateral for loans to fund his 2006 acquisition of Leighton.

The fourth-generation jeweler acknowledged committing wire fraud, bankruptcy fraud and concealment of assets belonging to the estate of a debtor. In addition to fines that could top $750,000, he faces 20 years imprisonment on the wire fraud charge and five years each for the bankruptcy fraud and concealment charges.

Esmerian, who plead guilty in Manhattan federal court Friday and will be sentenced July 22, is nearing the end of a long fall.

Many considered the famed collector to be an ideal owner for Leighton, though he had more of an eye for jewelry than business. He borrowed at least $217 million from Merrill Lynch, Acorn Capital Group and others to acquire Leighton from its founder and looked to expand the retailer with stores in Beverly Hills and Las Vegas while growing Leighton’s watch collection and signature jewelry line.

“Hopefully the luxury market will keep up and prove to be fruitful for us,” Esmerian said at the time.

Two years later, the economy was in recession and Esmerian had fallen behind on his payments to Merrill Lynch, which wanted to auction off jewelry that he pledged as collateral.

In a dramatic confrontation in New York Supreme Court, a lawyer for Merrill Lynch said the bank could not risk a fallout in the high-end jewelry market. “They are in no position to bond that kind of exposure,” he said.

The hearing turned horse-trading session as the judge divvied up how millions of dollars of jewelry could be sold to cover the loan. But just as Christie’s was set to sell off 115 pieces, including several large, rare gemstones and French crown jewels, Esmerian put Leighton into bankruptcy protection to halt the auction.

At a day-long bankruptcy court hearing that ultimately delayed the auction, Esmerian appeared relaxed and chatted with his lawyers and reporters. The auction was eventually cancelled, but some pieces were sold privately by Christie’s.

According to statement from Bharara’s office, Esmerian didn’t even own some of the jewelry he used as collateral when he secured the loan from Merrill Lynch in 2006. And he continued to sell off the collateral without informing the bank. Other pieces were double-pledged, securing other loans.

The statement said “Esmerian repeatedly and systematically embezzled tens of millions [of dollars] worth of property of Fred Leighton and related debtor entities, sold that property, and kept the proceeds for himself or to pay off other debts” during the bankruptcy proceedings.

For example, Esmerian sold a 13-carat Burma ruby and diamond ring worth an estimated $2.94 million for $2 million and had the proceeds wired to his personal bank account.

Esmerian also repeatedly lied to the bankruptcy court and his creditors in sworn testimony, affidavits and other documents, the statement said.

“Ralph Esmerian’s flagrant abuse of the bankruptcy system, at the expense of the lenders who trusted him with their money and collateral, was breathtaking in scope,” said Bharara.

In 2009, Leighton was sold to a group of investors that included former Barneys New York principal Bob Pressman and jewelry firm Kwiat Enterprises.

“The guilty plea is a very sad day for Ralph Esmerian,” said Patricia Pileggi, Esmerian’s attorney and partner at Schiff Hardin. “He and his family have collected fine art and jewelry for four generations. He has now lost everything.”

Esmerian was arrested on Nov. 22 and was released on a personal recognizance bond.

“There are a number of mitigating facts that are relevant as to why he engaged in certain financial transactions,” Pileggi said. “We anticipate bringing those facts to the courts’ attention at sentencing.”

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