Lugano Holdings Inc., the high-end jewelry boutique operator owned by Compass Diversified, has officially filed for Chapter 11 bankruptcy protection in Delaware. This significant development comes only months after the company brought accusations against its former Chief Executive Officer, Mordechai Haim Ferder, alleging that he stole millions of dollars from the business and severely misrepresented investment deals with high-net-worth clients, contributing to its financial distress.

Ferder, who established Lugano in 2004, resigned from his position as CEO in May. Following an extensive internal investigation conducted by Compass Diversified, Lugano initiated a civil lawsuit in June. The complaint specifically accused Ferder of orchestrating a sophisticated fraud by forging invoices and sales documents. Furthermore, it detailed how he allegedly concealed the true nature of transactions with wealthy individuals, leading them to believe they were investing in diamonds with promises of a stake in the precious stones and repayment at "substantially above market, interest rates."

The lawsuit claims that Ferder deliberately disguised these complex financing arrangements as straightforward, ordinary sales. This alleged accounting manipulation caused the incoming funds to be incorrectly recorded as revenue rather than liabilities. As a direct consequence, the former CEO is accused of misleading Lugano's stakeholders and auditors, presenting a distorted and inflated picture of the company's actual performance and overall valuation. Compass Diversified had acquired a majority interest in Lugano in 2021, based on a valuation of $256 million, with Ferder and his affiliated entities retaining approximately 40% of the business.

The financial impact of these alleged deceptions is substantial. Lugano, which had previously projected generating $470 million in revenue and $180 million in operating income for 2024, is now revising those figures to reflect "substantially lower levels." In its Chapter 11 petition, the company listed at least $100 million in assets but more than $500 million in liabilities. Elias Sabo, CEO of Compass Diversified, stated that the bankruptcy filing establishes "a defined and orderly process to bring the Lugano matter toward resolution."

As part of the bankruptcy proceedings, Lugano has received an offer to sell its business to Enhanced Retail Funding. This proposed deal must be approved by a bankruptcy judge and remains subject to the possibility of better offers emerging during a Chapter 11 auction. To facilitate the bankruptcy and sale process, Compass Diversified has agreed to provide Lugano with $12 million in Chapter 11 financing. Despite these legal and financial challenges, Lugano has assured that its jewelry boutiques will remain open and continue to operate normally. The case is formally identified as Lugano Diamonds & Jewelry Inc., number 25-12055, in the US Bankruptcy Court for the District of Delaware. Additionally, Lugano's Chief Restructuring Officer, J. Michael Issa, noted that other lawsuits have been filed against both the company and Ferder since the summer, with Ferder reportedly residing in Tel Aviv and potentially in the process of moving his assets out of the United States.