Overview
Cohen Milstein represents investors of Compass Diversified Holdings in a securities fraud class action against Compass, Compass’s officers, and Compass’s independent auditor, Grant Thornton. The case concerns false and misleading representations the defendants made regarding Compass’s most important subsidiary, Lugano Diamonds.
Acquired by Compass in 2021, Lugano quickly became the highest-performing subsidiary in Compass’s portfolio, making up nearly 26.5% of its reported assets by 2024. Compass represented to investors that it had performed “rigorous due diligence” into the acquisition of Lugano and that Lugano was a rapidly growing and innovative brand. Similarly, Grant Thornton signed off on Compass’s financial statements and their representations concerning Lugano’s financial performance, providing “clean” audit reports that accompanied each of Compass’s 10-K filings between 2022 and 2024. Unbeknownst to investors, however, Lugano was a hotbed of financial and accounting irregularities whose apparent financial success rested on a Ponzi-like fraudulent “investment diamond” scheme.
Lugano’s financial irregularities led Compass to misstate its net income by more than $750 million between 2022 and 2024. Moreover, Compass’s financial statements during this period failed to disclose at least 10 material weaknesses in Compass’s internal controls over financial reporting.
Important Rulings
- On July 21, 2025, Judge Alvin W. Thompson of the U.S. District Court for the District of Connecticut appointed Eastern Atlantic States Carpenters Pension Fund and Eastern Atlantic States Carpenters Annuity Fund as Lead Plaintiff and Cohen Milstein as Lead Counsel for the proposed class of investors.
Case Background
Based in Westport, Connecticut, Compass operates similarly to a private equity company, acquiring middle-market businesses that it grows and then aims to sell for a profit.
In September 2021, Compass announced its acquisition of Lugano, a California-based jewelry company founded by Mordechai “Moti” Ferder. With Moti continuing on as Lugano’s CEO under Compass’s management, Lugano reported massive, apparently organic growth and quickly became Compass’s most profitable subsidiary, accounting for approximately 26.5% of Compass’s total assets by 2024.
Compass’s financial statements during the class period conveyed to investors that Compass was outperforming expectations because of Lugano’s ostensible growth. Compass’s senior management depicted Lugano as a rapidly growing and innovative brand. Moreover, Compass told investors that it performed “rigorous due diligence” into the businesses it acquired, including Lugano.
Investors relied on Compass’s financial statements because they were endorsed by the company’s independent auditor, Grant Thornton. Compass’s Forms 10-K for the years 2022, 2023, and 2024 were each accompanied by “clean” audit reports prepared by Grant Thornton.
Unbeknownst to investors, however, Lugano was not the fast-growing success depicted in Compass’s representations. As Compass subsequently acknowledged in its restated 2022, 2023, and 2024 financial statements filed with the SEC on December 8, 2025, Lugano was a hotbed of financial irregularities, where Moti and other employees manipulated or outright disregarded accounting principles and standards to create the appearance of rapid, continuing growth combined with remarkable profitability. Because of these financial irregularities, Compass and Lugano now face multiple lawsuits brought by Lugano’s disgruntled suppliers and customers, as well as investigations by the FBI, the SEC, and FINRA.
At the heart of Lugano’s culture of financial irregularities was its reliance on so-called “investment diamond transactions”: that is, transactions wherein an investor would contribute funds for Lugano to purchase a diamond, in exchange for a share in Lugano’s profits from the diamond’s eventual sale. Crucially, the terms of Lugano’s investment diamond transactions allowed Lugano’s investors to demand the return of their investments, with interest, without any significant preconditions. According to former Lugano employees, Lugano recorded the funds received in these transactions as pure revenue without acknowledging Lugano’s obligation to repay the investor, thereby inflating Lugano’s apparent revenues and operating income as well as obscuring the extent of Lugano’s debts.
As disclosed in Compass’s restatement, Lugano’s improper recording of investment diamond transactions as revenue without corresponding liabilities led Compass to omit at least $318 million in unrecorded debt from its financial statements during the Class Period. The Restatement further disclosed that Compass had misstated the company’s net income by more than $750 million between 2022 and 2024.
Compass’s Restatement also acknowledged that the company’s internal controls over internal reporting had been compromised by at least 10 previously undisclosed material weaknesses, including “inadequate monitoring controls” and an inappropriate “deference” to Moti that “allowed Lugano to operate with elevated autonomy.”
Lugano’s financial irregularities, as well as their corresponding inflationary effect on Compass’s Class Period financial statements, came to light over a series of three disclosures between May 7, 2025 and December 5, 2025, whereby the price of Compass’s common stock dropped from $17.25 per share at close of trading on May 7 to $5.73 per share on Dec. 5. Compass’s preferred shares experienced similar price drops over this period.
Investors claim that Compass and its senior management were not unwitting victims to Lugano’s financial irregularities; rather, Compass’s executive management knew or recklessly disregarded that Lugano’s contribution to Compass’s overall financial performance was drastically less than what investors believed. Most directly, Compass received at least two whistleblower reports from Lugano employees laying bare Lugano’s financial irregularities. Compass received the earliest whistleblower report in June 2024, almost a year before Compass disclosed Lugano’s financial irregularities to investors.
Additionally, Compass’s executives had a direct and concrete motive to ignore red flags concerning Lugano’s financial irregularities. Because Compass’s executives were compensated by management fees calculated based on Compass’s adjusted net assets, Compass’s executive management benefited from Lugano’s apparent financial performance. As disclosed in Compass’s restatement, Lugano’s fiscal irregularities resulted in Compass’s executives receiving $43 million in management fees in excess of what was actually justified by Compass’s financial performance. Moreover, Compass’s executive management stood to receive allocation payments based on Lugano’s apparent contribution to Compass’s profits if Compass sold Lugano or retained Lugano as a subsidiary until 2026.
Similarly, investors claim that Grant Thornton overlooked ample signs of financial irregularities at Lugano that would have been visible had the auditor adhered to PCAOB Auditing Standards. Compass’s violations of generally accepted accounting principles (“GAAP”) were of a significant magnitude and concerned basic, straightforward, and longstanding accounting principles. Indeed, during the class period, Grant Thornton was the subject of a Public Company Accounting Oversight Board investigation finding numerous “significant” instances of deficient auditing practices resembling the deficient practices that Grant Thornton employed in its audits of Compass.
As a result of defendants’ wrongful acts and omissions, and the significant decline in the market value of Compass’s securities pursuant to the revelation of the fraud, investors have suffered significant damages.
Impacted investors include persons and entities that purchased or otherwise acquired Compass securities during the class period (February 24, 2022 through December 4, 2025). Investors’ claims are brought under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder.
In re Compass Diversified Holdings Securities Litigation, Case No. 3:25-cv-00758-AWT, U.S. District Court, District of Connecticut