Maker of vibrat-ing seats fortheme parksnow shaking upmovie theaters.PAGE 12

L.A. hotels andretailers arepreparing toserve big influxof Chinese.PAGE 5

M A I L T O :

LOS ANGELES BUSINESS JOURNALVolume 35, Number 17 April 29 - May 5, 2013 • $5.00

labusinessjournal.com

T H E C O M M U N I T Y O F B U S I N E S S TM

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By ALFRED LEE Staff Reporter

Victor Vargas last spring came across a flieradvertising food truck insurance plastered to thewindshield of his taco truck. He called the num-ber on the flier and soon had $90,000 in cover-age on the truck – higher than average due to acostly new stainless steel kitchen he installed.

It was a prudent purchase: A few weekslater an electrical fire totaled the truck.

But instead of paying off the full $90,000,his insurance company only offered him$47,000, setting off a legal dispute. The prob-lem, Vargas’attorneys argue, is that Progressive

Please see INSURANCE page 56

UpFront

SPECIAL REPORT THE RACE FOR MAYOR

By DAVID NUSBAUM Staff Reporter

It will be L.A.’s biggest sports event sincethe 1984 Olympics.

More than 7,000 of the world’s top athleteswith intellectual disabilities will compete inLos Angeles in the 2015 Special OlympicsWorld Summer Games.

“The Special Olympics will have more ath-letes from more countries than the 1984Olympics,” said David Simon, president of theLos Angeles Sports Council and 2015 SpecialOlympics board member.

Organizers expect athletes, their families

Firm polishes up diamonds as investmentBy JAMES RUFUS KOREN Staff Reporter

AN armored truck rolls up your drivewayand an armed guard hands you a blackleather case. Buying diamonds as an

investment, you see, is not like buying stocks.But putting aside the unusual delivery aspects,

Chris Duffield and Kristopher Schellhas are bettingthat investing in diamonds could be the next big thing.

They founded Investment Diamond ExchangeLLC, or IDX, a Santa Monica firm that sells dia-

monds – the actual stones, delivered by thatarmored car – to investors with a standing promiseto buy them back. The company is one of a handfulof firms trying to turn diamonds into an investmentcommodity much like precious metals.

“The two key things any market needs are pricetransparency and liquidity,” said Schellhas, 30, aformer commodities trader at the Chicago Boardof Trade. “Those are two things the diamond

Please see INVESTMENT page 57

Please see SPORTS page 56

INSURANCE: Operators moving faster than coverage.

SPORTS: Special Olympicsto be biggest event in 31 years.

News &Analysis

Cinemas

Why Psy is nowsinging for asecond L.A.food company.PAGE 3

WHO’S BETTER FOR BUSINESS?

Gem of a Deal?

Will the next mayor of LosAngeles strive to make thecity business friendly? WillWENDY GREUEL orERIC GARCETTI work toeliminate the gross receiptstax, streamline the permitprocess and stop expandingliving-wage laws? Greuel andGarcetti recently met with theBusiness Journal to answerthese and other questionsdesigned to help businesspeople decide. PAGES 54-55

Medal EventShows Mettle

Food TrucksRunning Risk

‘The privatesector is

everything.Everything

that I’ve donein my time inpublic office

has come fromthe economicvitality of my

district.’ERIC GARCETTI

‘We needpeople who

get educatedhere say theyare going to

stay herebecause thisis where thejobs and theopportunities

are.’WENDY GREUEL

Jubilee: From left,Chris Duffield andKristopher Schellhaswith 2-carat stone atInvestment DiamondExchange’s office inSanta Monica.

01_042913.qxp 4/25/2013 7:32 PM Page 1

and 3,000 coaches from more than 170 coun-tries to travel to Los Angeles for competition in27 sports. They expect 2,000 media in atten-dance and 500,000 spectators at venues such asStaples Center, Pauley Pavilion and HomeDepot Center.

The nine-day competition will kick off withan opening ceremony at the Los AngelesMemorial Coliseum on July 24, 2015. It’s thefirst time the event will be staged in Los Angeles.

The LA2015 non-profit company managesthe 2015 Special Olympics, also known as theWorld Games. The organization, in downtownLos Angeles, has a fundraising target of $90million. It now has 11 full-time employees forfundraising and planning, but in the next twoyears leading up to the event, the organizationwill add 150 full- and 200 part-time employees.

The athletes and coaches will pay their ownway to get here. But once in Los Angeles, thehost committee will provide food, housing,medical care and even translators for partici-pants throughout the three-day welcome pro-gram and nine-day competition.

“We’re going to provide 360,000 meals over12 days,” said Patrick McClenahan, chiefexecutive of LA2015. “In total, we have 67 dif-ferent cost centers and a 1,300 line item budget.”

Transportation will be one of those costs.

Participants will be shuttled to 27 venuesthroughout Southern California.

Athletes and coaches will stay in dorms atUSC and UCLA; about 6,500 will stay at USCand 3,500 at UCLA.

The $90 million is a fraction of the $14.9billion that the 2012 London Olympics report-edly cost, although the regular Olympics typi-cally involve immense construction projects.

The Special Olympics follow a similar for-mat to the International Olympics, but for ath-letes who have intellectual disabilities.(Physically disabled athletes compete in theParalympics.)

The athletes will participate in 27 competi-tions and demonstrations, including badminton,basketball, gymnastics, powerlifting and sailing.

The Special Olympics was founded by

Eunice Kennedy Shriver, who organized the firstone in Chicago in 1968. Smaller events are heldannually across the world. The major internation-al competition alternates every two years withwinter and summer competitions. Pyeongchang,South Korea, staged the 2013 World Games win-ter competition. Athens, Greece, was the site ofthe last summer competition in 2011.

Winning bidThe bid for the upcoming summer games

was awarded to Los Angeles that year. A studycommissioned by the bid committee forecastan economic benefit for Los Angeles Countyof $415 million. That includes direct spendingof $128 million from attendees, $23 million foraccommodations and $28 million for produc-tion of the games. The event is expected togenerate tax revenue of $27.5 million.

For comparison, a Super Bowl can have aneconomic benefit for its host city of $150 millionto $300 million, with a high of about $500 million.

In other countries, the government is heavilyinvolved in bidding for these types of world-class events. For example, the 2007 SpecialOlympics in Shanghai received 85 percent of itsbudget from the Chinese government.

“Our basic premise and model is privatelyfunding this event through philanthropic dol-lars,” said McClenahan.

Sports: Special Olympics Seen as Big Score for L.A.

56 LOS ANGELES BUSINESS JOURNAL APRIL 29, 2013

Corp., his insurer, was treating his food truckmore like a regular car, in which the insurancepayouts typically equal only the depreciatedvalue of the vehicle. Vargas expected the full$90,000 to get him back in business.

“It wasn’t actually that different from mostautomobile policies, but it was marketed to bedifferent,” said Howard Shernoff, who is repre-senting Vargas in a lawsuit against the insurer.

Progressive, which declined comment onthe case, is fighting the allegations in court, butVargas’ case illustrates the lack of standardiza-tion in an insurance market struggling to keeppace with the booming food truck business.

Food trucks can range in value from$25,000 for a bare-bones model to $250,000for a mobile kitchen tricked out inside and out.Insurance companies, too, offer widely differ-ent policies, some specifically tailored to theneeds of food truck owners, others as reconfig-ured small-business or auto policies. Manytruck owners are unaware of how to navigatewhat coverage is available or needed.

“It’s an industry in its infancy I’m not sure theinsurance companies have kept up with,” saidJerry Prendergast, a Culver City restaurantconsultant. “Things are constantly changing.”

Indeed, insurance underwriters and theiragents are more aggressively selling policies tothe growing food truck industry, drawn tonewer and more expensive gourmet trucks thatcan command higher premiums.

Several agencies specializing in food truckinsurance have cropped up in Los Angeles, andsome out-of-town agencies make trips here tosecure clients. They paper food truck lots withfliers and use the same social networking tac-tics that have been so successful in the market-ing of the trucks themselves.

Gaining tractionTichard Gomez, who handles leasing at

L.A. food truck company AA Cater TruckInc., said calls from insurance companies andagents picked up last year.

“Food trucks are getting a lot more visibili-ty and becoming nationwide and differentinsurance companies are trying to tap that mar-ket,” he said.

Though food trucks are commonly per-ceived as a shortcut around the costs of run-ning a brick-and-mortar restaurant, their insur-ance costs tend to add up quickly.

Trucks are required by law to have autoinsurance. On top of that, many truck ownersbuy general liability coverage that can be usedto cover other problems, such as customersgetting sick from food poisoning or food aller-gies. There is also property insurance to coverequipment as well as workers compensation.

Truck owners can pay between $100 and$400 a month. Rates can vary based on anowner’s driving record, business experienceand volume of business.

A few hundred dollars a month might notsound like a lot, but it can add up for manytrucks that are lucky to break even during thefall and winter when business slows down, saidAsh Ube, chef at the No. 1 CurrywurstTruck of Los Angeles.

Some food truck leasing companies, suchas AA, require that clients buy their own insur-ance, while others buy the policy themselvesand include it in the cost of the lease.

Food truck insurance usually is higher thanfor fixed-location restaurants. While a standardrestaurant can expect to pay premiums equal to

1 percent to 1.5 percent of sales, a food truckcan pay between 2 percent and 3 percent, saidGreg Kniss, a partner at Pasadena’s KrostBaumgarten Kniss & Guerrero, an account-ing firm for both restaurants and food trucks.

“Even then, it should probably be a littlehigher,” he said. “It’s such a unique businessmodel that many of them are underinsured.”

Changing market, problemsThe growing opportunity has attracted

insurance agents and underwriters. Cal-Society Insurance Services Inc., a Koreatowninsurance brokerage, has been selling insur-ance to mobile food vendors for many years,but has ramped up marketing recently and nowcounts gourmet food truck owners as abouthalf of its mobile vending clients.

“The excitement has changed the industry,and the risks they face,” said Olu Adesuyan,Cal-Society’s chief executive. His companysells insurance from a range of providers, withProgressive the most popular underwriter.

Denny Christner started a food truckinsurance agency, Insure My Food Truck, inAlameda in 2010. He only focuses on gourmetfood trucks because the trucks tend to be moreexpensive and to drive around less than taco

trucks or catering trucks. He makes two trips toLos Angeles a year to recruit potential clients,and has about 20 clients in the L.A. area.

He said he worked with HanoverInsurance Group Inc. and AmTrustFinancial Services Inc. to craft policies spe-cific to food trucks, including coverage fortheft or fire regardless of location, which notall policies offer.

“The (insurance) carriers don’t reallyunderstand the business too much,” he said.“And the food truck owners don’t know whatthey don’t know. A lot of them don’t under-stand they’re going to need general liability,going to need higher auto limits, going to needcoverage for (kitchen) gear always in motion.”

Indeed, some policies sold to food truckowners aren’t as tailored.

Some Allstate Corp. agents, for instance,have been marketing and selling policies tofood truck owners in the L.A. area. ButAllstate doesn’t have a specific plan for foodtruck owners – the policies are general small-business insurance policies that have beenrepackaged, and not all food truck owners canqualify for them, according to a companyspokesman.

But in a case such as Vargas’, critics sayinsurance companies are taking advantage ofthe confusion.

Chris Grivakes, attorney at CenturyCity’s Affeld Grivakes Zucker LLP whoreviewed Vargas’ case for the BusinessJournal, said it appeared Progressive wascharging higher premiums based on a statedamount of coverage, but paying out a loweramount in the case of the loss.

“I know it’s marketed as this specialty pro-gram for food trucks,” he said, “but it’s a formof coverage that’s almost illusory in my opin-ion.”

Cal-Society, which sold Vargas’ policy, saidthat it rarely gets complaints about Progressivefrom truck owners.

As for Vargas, he was able to get an offerfor the full amount of $90,000 after he filed alawsuit, but is still fighting in court over thelarger issue of what he claims is deceptivebusiness practices. He doesn’t know if he’llstart another food truck business.

“I liked the food business and I wanted tostart my own,” he said. “But I’m not sure yet.”

Ready, Set: Patrick McClenahan of LA2015 at his downtown L.A. office.RINGO H.W. CHIU/LABJ

Insurance: Food Truck Coverage Not Up to SpeedContinued from page 1

Driving Concern: Customers check out food trucks parked along Miracle Mile.RINGO H.W. CHIU/LABJ

Continued from page 1

Please see NON-PROFIT page 57

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In order to raise the $90 million needed tomeet the organization’s budget, he and his teamhave reached out to corporate sponsors andwealthy individuals for donations. In total, theorganization expects to raise 75 percent of itsbudget from cash donations and the balancefrom in-kind gifts.

So far, they have received five contributionsof $1 million in cash from Mattel Inc.; AEG;Kaiser Permanente; Steven Spielberg and

his wife, Kate Capshaw; and David Geffen.The companies and people who commit to

a $1 million gift are recognized as foundingchampions. McClenahan expects 12 to 15companies to sign up at that level. For thatlevel of contribution, companies will receive25 seats at the opening and closing ceremoniesat Coliseum, access to VIP lounges and otherperks. Lower-level sponsorships are availablestarting at $25,000. The organization alsoexpects to receive small donations from indi-viduals who support its mission.

In addition to corporations and individuals,

several local foundations have made contribu-tions, including California CommunityFoundation, $200,000; California Endowment,$200,000; Weingart Foundation, $100,000; andRose Hills Foundation, $100,000.

Some companies are contributing in-kinddonations as well. Kaiser Permanente pledged$1.5 million in-kind by lending its medicalexpertise. Local agency Davis ElenAdvertising Inc. has taken on the organizationas a pro bono account. It has provided $2.5million in services that includes logo develop-ment, video production, branding strategy and

other advertising work. The local office of Deloitte has provided $3

million in-kind that includes office space forLA2015, business plan development and afinancial officer who serves as controller forthe organization.

“We have a cash budget that we provide forcharities, but the talent of our people is a valu-able resource,” said Michelle Kerrick, manag-ing partner of Deloitte’s L.A. office. “As afirm, we have a commitment to provide $60million in pro bono work and we’ve set aside$3 million for the Special Olympics.”

Non-Profit: Companies Pledge In-Kind Donations

APRIL 29, 2013 LOS ANGELES BUSINESS JOURNAL 57

industry has lacked. Now, you can see priceson our website, and we create liquidity. Youhave the ability to sell your diamond positionback to us.”

In short, Schellhas and Duffield are tryingto become market makers, but for a productthat’s only been regarded as a potential invest-ment for less than a decade.

Until just nine years ago, South Africandiamond giant DeBeers controlled most ofthe market, allowing the company to influ-ence prices – and keep investors out, saidEdahn Golan, editor in chief of diamond priceindex Idex Online in Tel Aviv.

“It made no sense creating any sort offinancial vehicle based on polished diamondsas long as one company could manipulateprices,” Golan said.

But that monopoly was broken up in 2004when the company pleaded guilty to price fix-ing. Other big firms now have more marketshare, leading to increased competition.Diamonds have been appreciating about 4percent annually and investors have started totake an interest. IDX and other companies seeopportunity as a result.

IndexIQ, a manger of exchange-tradedfunds based in Rye Brook, N.Y., last yearfiled a request with the Securities andExchange Commission to create a fundbacked by diamonds. GemShares LLC ofChicago earlier this month filed a request foranother exchange traded fund, GemSharesPhysical Diamond Trust.

“This is the first time the industry is seeingthis much interest from the investment side,”said Paul Zimnisky, chief executive ofMadison, N.J., firm PureFunds, which man-ages an ETF that’s invested in diamond min-ing and retailing companies. “There’s a real,fundamental investment story behind dia-monds. Demand is forecast to increase andthere’s limited new supply.”

Murky marketDiamonds are valuable, portable and

essentially indestructible, and their value isnot correlated to that of other commodities orbroader markets. That makes them a potentialsafe haven for investors, said Paul Miller,managing director in the Westwood office ofIrvine wealth management firm FirstFoundation Inc.

“People are always looking for noncorre-lated asset classes,” he said. “In order todiversify, you want something that’s going upwhen other things are going down.Gemstones are another way to do that.”

But Miller and others note that investingin diamonds isn’t easy. The first step is tobuy diamonds at a fair price. But most dia-mond exchanges are private, open only todiamond traders and jewelers, leavinginvestors to buy at retail prices that can betwice as high as wholesale.

Diamond price indices such as Idex Onlinelist only the asking price for specific stones, not

the sale price, making it difficult for investors toknow if they’re getting a fair deal.

What’s more, unlike a piece of gold, anindividual diamond’s price depends not onlyon its size, but on its shape, the quality of itscut, color, clarity and other factors.

And once investors have the diamonds,they have to be able to sell them. That’s diffi-cult to do without taking a loss, said JohnHekman, an economist and managing partnerin the L.A. office of FTI Consulting, a WestPalm Beach, Fla., financial advisory firm.

“There’s never been much of a secondarymarket for diamonds,” Hekman said. “If youbuy a diamond for $5,000 then try to sell itback, you’re going to get very little.”

Nuts and boltsIDX aims to get around the diamond-pric-

ing problem by listing prices on its website,InvestmentDiamondExchange.com.

Cutting and polishing factories providediamonds to IDX on consignment. (The fac-tories process raw diamonds into the stonesused in engagement rings and other jewelry.)

Prices are set by cutting factories and IDXtacks on 5 percent. Even with that markup,diamonds listed by IDX are between 15 per-cent and 50 percent cheaper than stones ofsimilar quality for sale by major diamondretailers, according to a comparison of IDXand Zales.com prices. For instance, IDXrecently listed a top-quality1.05-carat diamondfor $23,899. A similar diamond listed onZales.com costs 42 percent more, or $33,968.

Duffield said IDX can charge a smallermarkup because it doesn’t have brick-and-mortar stores or jewelers on staff. And by get-ting consignments from many factories – hewouldn’t say how many – IDX creates com-

petition and drives down prices.IDX isn’t the only diamond exchange where

investors can buy actual diamonds, but it isunusual in that others, such as SingaporeDiamond Exchange Private Ltd., typicallyrequire minimum investments of hundreds ofthousands of dollars. IDX has no such mini-mum. Schellhas said the company has even soldto noninvestors who want diamonds for jewelry.

For each diamond listed on IDX’s site –there is about $25 million worth at anygiven time – the company notes the size,color, clarity and other factors, as well astwo prices: a sale price, which includesIDX’s 5 percent margin, and a buy-backprice, the price the company would pay aninvestor selling a similar diamond.

By promising to repurchase diamondsfrom IDX customers, and by listing buy-backprices, IDX allows customers to track thevalue of their diamonds and lets them knowthey’ll be able to cash out if they want.

When an investor calls IDX, a sales repre-sentative helps them build a package of dia-monds based on a budget and investmentgoals. An investor might want many smallerdiamonds that can later be sold off piecemeal,or fewer large diamonds that are expected toappreciate more. IDX sells only top-qualitydiamonds between 1 and 5 carats in size – thetypes most in demand.

Once an investor’s diamonds are selected,IDX has them sent to the GemalogicalInstituteof America Inc., a non-profit dia-mond examination company in Carlsbad.There, they are inspected and individuallysealed into plastic packages. The investorwires money to IDX and diamonds are deliv-ered the following day by armored truck orguaranteed shipment, depending on the value

of the order, arriving in a leather casedesigned to fit in a safety deposit box.

Schellhas and Duffield said they expectinvestors to hold on to their diamonds for atleast five to 10 years. When investors areready to sell, they call IDX to lock in a price,the company arranges for pickup and moneyis wired to the investor.

Ten years outWhile IDX’s prices are significantly lower

than those of mainstream diamond retailers,they’re often only slightly lower than those ofonline diamond seller Blue Nile Inc., forexample.

And IDX’s prices are often significantlyhigher than diamond prices listed on privatediamond indices. However, those indicesdon’t provide detailed information about thequality of the diamonds, making price com-parison challenging.

“I think they’re taking a step in the rightdirection,” said Zimnisky at PureFunds. “Butat the moment, I don’t think there’s any vehi-cle or index that makes the price of diamondstransparent enough.”

What’s more, IDX is just one companyand a startup at that. FTI’s Hekman cautionedthat if the company goes bust, an investmentin diamonds could suddenly become muchharder to unload.

“If they’re not around 10 years from now,who is willing to buy these diamonds?”Hekman asked. “I respect their attempt to cre-ate a market here, but it sounds pretty risky.”

Schellhas and Duffield said diamond buy-ers can sell to whomever they choose – otherinvestors, a local jeweler – but they acknowl-edge that other potential buyers likely won’toffer as much as IDX will. That meansinvestors could take a big haircut if IDX fails.

“A jeweler would buy them back fromyou. Are you going to get what you want orwhat you’d get from us? No,” Schellhas said.

But he and Duffield said they have strongcash reserves – which they’ll need if investorsstart wanting to sell – and strong financialbacking. They say they’re in the process of amultimillion-dollar fundraising round butdeclined to offer more specifics.

IDX had its first sales last year and isalready profitable, Schellhas said. Just lastweek, the company was in the process ofclosing a sale of $15 million worth of dia-monds to an investor. That sale alone wouldrepresent revenue of $750,000 for the 10-employee company.

One customer, Manhattan Beach residentJon Kubler, said he’s not concerned aboutwhether IDX will be around a decade fromnow. He bought diamonds valued in the sixfigures – he declined to be more specific –and said he plans on holding them for theforeseeable future.

“The benefit to me is risk mitigation – it’sa hedge,” he said. “It’s something I can ownthat, based on demand, should increase invalue. Unless we’re in an overall catastrophiceconomic state globally, I think this is some-thing that will be passed on.”

Investment: Will Investors Take Shine to Diamonds?Continued from page 1

In Exchange: Co-founders Chris Duffield, left, and Kristopher Schellhas atInvestment Diamond Exchange’s headquarters in Santa Monica.

RINGO H.W. CHIU/LABJ

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