The extravaganza was staged last spring at the Sydney showrooms of Australia's largest pearl producer, Paspaley, and the A-list guests nibbling on pearl-meat canapés and sipping Veuve Clicquot champagne could certainly afford the odd sports car. The inevitable Skye Leckie, wife of the former Channel Seven supremo David, was there, along with Carla Zampatti fashion house boss Allegra Spender, TV presenters Kath Robinson and Sophie Falkiner, clothing designer Pip Edwards, Louise Olsen and Stephen Ormandy of Dinosaur Designs. And so on. It was a gossip columnist's wet dream.

But sadly for Paspaley - represented by a contingent of third- and fourth-generation members of the family - there was no collective flourishing of cheque books or flashing of no-limit Centurion credit cards from the gathered crowd that October night. Six months later, those unique centrepieces of what was called the Odyssey collection were still unsold, locked away in glass-and-walnut cabinets at the company's prestigious address, No 2 Martin Place, the century-old Australasia Bank building that Paspaley spent millions restoring.

Business, admits manager Simon Hulbert, has been quiet. In fact, on a cloudy midweek morning, the store is empty apart from two assistants practising their appraisal skills and a pair of middle-aged tourists who've popped in to take photos. He unlocks a display case and pulls on a pair of black cotton gloves to fondle the most expensive piece in the store: named The Vivienne, after the wife of the company's founder Nicholas Paspaley, it's a choker made up of 26 lustrous, perfectly graduated pearls up to the size of a quail's egg. Yours for $1,128,000, says Hulbert, and no haggling. The cheapest thing in the shop is a polished oyster-shell - and even that has a $100 price tag.

This is the image the pearl trade would like you to hold in your mind. They are selling the romance, not the rock. Why else would anyone pay these jaw-dropping prices for what is, essentially, a string of calcium-coated beads? The advertising and promotion in high-end fashion magazines are dripping with glamorous historical references, from finds in the tombs of Babylonian princesses to Cleopatra astounding Mark Antony by quaffing a priceless pearl dissolved in vinegar, and Christopher Columbus showering Spain's Queen Isabella with his booty from the New World. We are reminded of the rich and famous women who loved theirs: Marilyn Monroe, Elizabeth Taylor, Jacqueline Kennedy, Nicole Kidman and Julia Gillard, who wore pearls on the 2010 election night, declaring it was "dress like a Tory day".

The reality is rather different. Backstage, behind the glittering tableaux, the Australian pearling industry is a brutal, buccaneering business worth something like $100 million a year which one family, descendants of a poor Greek migrant named Theodosis Paspalis, has come to dominate. In the process, it has become the richest and one of the most powerful families in the Northern Territory, major donors to political parties and with assets nearing $1 billion. It owns more than 100 parcels of real estate in and around Darwin, including a shopping mall and the site of what will be the tallest office block in town and home to half the NT's government departments. It has more ships than the Australian Navy and its aviation arm has government contracts across the continent. In recent years, the family has diversified into extensive agricultural properties, a chain of resorts and a vineyard. It even - ironically, considering the family's origins - co-owns the country's largest immigration detention centre.

But it has not come without a cost. Pearling in Australia - still internationally acknowledged as the world leader for quality, if no longer for quantity - is an industry littered with broken dreams and bankrupt corporations. The Paspaley group itself is struggling to keep its head above water: it lost about $4 million last year on top of a similar loss in 2011. And last year, one of Paspaley's workers joined the hundreds who have drowned or died of "the bends" or other causes since diving for pearls in Australia began a century and a half ago.

Now, just as it has seized control of more than 80 per cent of the industry - there is only one rival pearling partnership left standing out of 16 two decades ago - Paspaley faces the gravest threat since Theodosis's son, Nicholas, first set to sea as skipper of his own pearling lugger 81 years ago. Pearls by the thousands of tonnes from China, Indonesia and the Philippines have inundated the market, turning what was once a precious gem into a cheap commodity. Prices for all but the largest and most perfect of pearls have fallen by at least 90 per cent since the boom times of the 1980s, concedes the company's executive director, James Paspaley. Websites such as pearlparadise.com offer pearl necklaces for as little as $US101. Paspaley has shut down several of its farms, shed more than 150 staff, written down its assets by nearly $100 million and mothballed some of its fleet in a desperate attempt to rebalance its books. If there was a "major event" - a cyclone, an outbreak of oyster disease - the company would have to consider exiting the industry altogether, says James.

Three Filipino workers, garbed in wellington boots, full-length rubber aprons, gloves and shower-caps, are labouring away on a tiny aluminium skiff bobbing in the middle of the turquoise Timor Sea. There's a constant chug and clatter as a winch hauls up cages of oysters suspended from ropes in the depths of the sea. Jets of high-pressure seawater blast away the seaweed, and the workers chip away at barnacles with chisels before lowering the cages back into the ocean. They remove one of the oysters - a shell the size of a man's hand - which has died. From its reeking, mucky black insides, they retrieve a small, misshapen pearl. In the warm, nutrient-rich waters around here, more than a million Paspaley oysters are silently incubating the pearls that will adorn Japanese socialites, Dubai sheikhas and European royals.

We have splashed down near a remote and uninhabited speckle of land called the Osborne Islands, mid-way between Perth and Broome, on one of the company planes. Not a flash executive jet but a 13-seater Grumman Mallard seaplane decorated with the ubiquitous Paspaley logo of a blue pearl-shell. With us has come a relief crew of working-holiday guys - some more Filipinos, an Estonian, an Irishman and a couple of Australians.

For the next two weeks, the casual workers will labour from dawn till late for $220 a day, cleaning oysters on one of a flotilla of "tinnies" operating from a mother-ship, a white-painted 35-metre steel-hulled vessel named The Roslynne after one of James Paspaley's aunts. The hull is rusty, but the interior is spick and span and the cook will be rustling up pizzas for the crew when they return to eat, watch sport on satellite TV and drink their regulation four cans of mid-strength beer.

Life out here is tough, particularly if you are one of the elite divers Paspaley employs to catch their wild shell, towed along in teams of eight behind a mother ship, clinging to a lifeline of compressed air and stooping to scoop hundreds of oysters a day from the seabed. Last year the company sailed into a blizzard of criticism in social media after an ABC Four Corners investigation into the death of one of Paspaley's divers, a 22-year-old Melbourne man named Jarrod Hampton, on his second day on the job. The program raised questions about the company's training, about whether there should have been a "rescue diver" on standby, and whether cost-cutting had played a part in his death. A number of experienced Paspaley divers had resigned after the company cut the price it pays per shell from $4.50 to $3.50, an effective pay cut of $20,000 a season for a good diver.

Worksafe WA says it is still investigating the death but if it does come up with an unfavourable finding, it will not be the first time that Paspaley has been accused of failing to keep its workers safe. In June last year, the company was fined $10,000 in the Darwin Magistrates Court after pleading guilty to breaching workplace health and safety laws when a cook, Brooke Wells, broke an arm and suffered internal injuries falling off an unguarded gangplank. The company also has a long-running case before the courts involving a former employee who claims he was denied proper workers' compensation after injuring his back opening oysters.

The Australian pearling industry has come a long way since Theodosis Paspalis and his family fled Greece during World War I and settled at Cossack in the Pilbara, then a thriving port and the centre of Australia's pearling industry until it later moved to Broome. After the pearl-shell industry collapsed in the 1950s, Theodosis's son, Nicholas, attempted to start a cultured pearl-farm, using Japanese technology, but his attempts to grow pearls were largely unsuccessful, and it wasn't until Theodosis's grandson, Nicholas jnr, took over the business in 1984 that the company really hit the big time.

The biggest and most profitable pearl farm in the country had been established in the 1950s at Kuri Bay, north of Broome. There, oysters caught by divers off Broome's Eighty Mile Beach were injected with "seeds" of Mississippi clam shell and left for two years to allow a coating of lustrous nacre to form - the same process that is used today. The young Nick Paspaley's coup was in persuading the heirs of the farm's owner, an eccentric American commodities dealer named Allan Gerdau, to sell the business to him in 1987 for a song ahead of a scramble of rivals when Gerdau died. It is widely rumoured that Nick more than recouped the $15 million he paid for the business with pearls it had already grown - other assets of the estate, including an office building on Wall Street that Paspaley still owns, were a bonus.

"Nick revolutionised the industry," says David Norman, a Sydney pearl trader who has worked for both Paspaley and rival company Kailis. "In the '80s when I was with Kailis, we'd look at Paspaley with envy. Nick was a genius at creating pearls that no one else could. They were making amazing amounts of money - one necklace brought $2.2 million at Sotheby's. He brought down the same technicians from Japan every year, he knew how to site the farms, the husbandry. I went on one of their [seeding] vessels once and it was amazing - like going to the Rolex factory - all these technicians sitting there in sealed, air-conditioned rooms with not a speck of dust to be seen."

But it wasn't just his technical innovation that built the Paspaley fortune. In the 1980s, when the WA government, as a "temporary" measure to protect stocks, licensed pearl farms and restricted both the number of wild-caught oysters that could be taken and - more controversially - the number of hatchery-bred oysters that could be seeded, it delivered a monopoly to the existing players. There were just 17 licences issued in WA (and a handful more in the NT) and new entrants in the industry were banned - unless they could buy or lease quota from an existing farmer. Over the years, using its huge commercial clout, Paspaley entered into co-venture deals with most of its rivals in which it provided either the oysters, the seeding or the marketing. In almost every case, it finished buying out the competitor.

Some fascinating details emerged in a WA trial three years ago investigating the degree of control Paspaley exercised over the industry - revealing, as well, the desperation of its competitors to get the rules changed. The case involved notorious former WA Labor premier Brian Burke and one of his former ministers, Julian Grill. The WA Supreme Court was told that the pair, who were working as lobbyists, had been hired by a small pearl producer named Kevin Waldron-Brown of Nor'West Pearls to try to influence the-then Labor government to relax pearling quotas to allow smaller companies to grow and compete.

By 2006, Paspaley had formed an alliance with the Kailis company because, in the words of one witness, "once-fat margins have been squeezed by rising costs and by a chronic downturn in the international market led by Japan, the biggest pearl-buyer". Paspaley also had commercial arrangements with five other growers that gave them control of 87 per cent of the industry - the company had lobbied successfully to prevent the issuing of more licences and pearl quota restrictions through the Pearl Producers Association, which advised the WA government and which Paspaley dominated.

The effect of maintaining the status quo was, the witness testified, to "keep the small small and allow Paspaley to pick them off and buy them". As it turned out, the court threw out the charges and although a new trial was ordered on appeal, the WA Director of Public Prosecutions announced in February that it would not proceed. The newly elected Liberal government of Colin Barnett has been handed the hot potato of whether to deregulate the industry.

James Brown is the owner/manager of Cygnet Bay Pearls, which was established by his father, Bruce, in the 1970s and operates a pearl farm on the Dampier peninsula north of Broome. He and his partner, the Sydney-based pearl-dealer, Rosario Autore - they co-own a second farm, Clipper Pearls - are the only viable competitors that Paspaley has left. Like most other pearl farmers, the Browns once had a contract with Paspaley. "For the first few years, it was wonderful - you didn't have to bugger around sending a lugger down to Eighty Mile Beach," says Brown. Then the contracts grew "more onerous", he says. Paspaley didn't want to merely catch the oysters, seed and deliver them: it wanted control of the valuation, sales and marketing. "History shows," says Brown, "that no other company except Cygnet Bay survived a Paspaley contract."

Nick Paspaley took over his rivals one after the other: Hamaguchi Pearls, Natural Pearls, Pearls Pty Ltd, Roebuck Pearl Producers, the Australian South Sea Pearl Company, Morgan and Co. The most recent was Kailis, a company owned by a wealthy fishing and shipping family, which, by extraordinary coincidence, also hailed from the Paspaleys' home island, Kastellorizo. Kailis had been farming pearls on its lease, at Roebuck Bay near Broome, since 1975 and brought in Paspaley as a partner in 2006. Struggling with a huge debt, the company was hit with an epidemic of the dreaded oyster oedema disease (OOD) that killed hundreds of thousands of oysters in its hatchery and, in 2009, it bit the bullet and sold out its pearling interests to the only buyer in a buyers' market.

"It was a very emotional decision for the family," says current managing director Alex Kailis. "Pearl farming is in our bones, in our heritage. But this was a knockover event. We had to make the hard call on whether to reinvest millions of dollars in the pearl industry, or concentrate on other branches of our business - fishing and marine engineering. In the end, you just couldn't justify it." The Roebuck Bay lease has now been closed down, as have dozens of once-profitable pearl farms dotted around the 2500-kilometre coastline from Broome to Darwin.

The collapse of the international pearl market is driving this destruction. Andy Müller, a Swiss-born pearl trader based in the Japanese "pearl capital" Kobe who is also an author and an authority on the industry, has documented the huge increase in pearl production in recent years - particularly in China, which now produces an estimated 4000 tonnes of pearls a year, grown in freshwater mussels in flooded rice-paddies. These pearls, scorned by high-end retailers, can be polished, coated, irradiated and dyed to any colour and make up the necklaces on sale for as little as $200 at Walmart in the US.

Müller has also documented the boom in production of "Australian-style" pearls, the so-called South Sea pearl, in Indonesia, where one producer, the Nusantara Pearl Group, has about 4 million oysters under management - more than double the entire Australian crop. In the decade to 2009, says Müller, global South Sea pearl production increased five-fold, but the price per kilo of the once-prized pearls fell from $US91,000 to $US13,000. Since then, the situation has worsened.

The cultured pearl industry, says Müller, is in "dire straits", particularly in Australia, where a quota was once "a licence to print money". The value of production has fallen from $200 million a year to $100 million, and the consequences for the country's biggest producer have been catastrophic. Although it is notoriously secretive about its business, the bare-bones figures supplied by Paspaley to the corporate regulator show that its flagship company, Pearl Corporation of Australia, is in trouble. The company made a loss in the year to June 2011, and James Paspaley expects the 2012 results to be equally dismal. In the past five years the worth of the company's assets (ships, planes, property, oyster leases) has withered from $438 to $369 million. BRW magazine ranks the Paspaleys as Australia's 12th richest family, with a combined wealth of $915 million.

After weeks of negotiating with me for this story, Paspaley's public relations guard-dogs decided the family spokesman would be James Paspaley, the company's executive director. His father Nick jnr, who turned 65 this year and has been the driving force of the company, "doesn't talk to the press," I was told. In fact, it was even hard to find out where he and his second wife and young family live - perhaps because he has property in Darwin, a farm at Wagga Wagga, and has had a serious dispute with the NSW Office of State Revenue over $1.5 million in land tax the commissioner says he owed on his waterfront mansion, Ramona, in Sydney's Elizabeth Bay. (Nick Paspaley told the NSW Supreme Court he lived there and shouldn't have to pay it.)

The other three members of the family who own a piece of Pearl Corporation are Nick's sisters Roslynne Bracher, 68, and Marilynne Paspaley, 61, along with her son Nicholas Hanigan, 39. Roslynne doesn't talk to the media, either, I was told. However, I was granted a telephone audience with Marilynne, a former actor best known for her role as Dr Tessa Korkidas in the ABC TV series, GP. She was keen to spruik the attractions of her Pinctada resort in Broome, and blame the government for the fact it is losing money. The decision to allow budget airlines to fly between Perth and Bali had siphoned off hundreds of thousands of holidaymakers who otherwise would consider travelling to the Kimberley, she said.

So it is James who fronts up for an interview in the company's temporary Darwin offices - the company HQ is being bulldozed to make way for the 20-storey office-block that the NT government has underwritten by leasing half the floor space. Around the walls are historic photographs of pearling luggers, samurai swords, a scale model of Lord Nelson's flagship, the Victory, and a large Sidney Nolan oil painting of a dead trooper from his Ned Kelly series. Down the road in the show-room sits the finest pearl Paspaley has ever grown, a perfect sphere the size of a Jaffa and insured, optimistically, for $1 million.

James Paspaley is a fit-looking 35, dressed in an open-neck lilac shirt, jeans and boots. After university, where he did an economics degree, he took two years off to travel and finished up teaching skiing at a resort near ritzy St Moritz in Switzerland where he met his wife, Sonia, who was a snowboarding instructor. He persuaded her to marry and move to Darwin, where he was joining the family business, by telling her, "It's just like Switzerland without the mountains," but she forgave his lie and now they have a baby. A bit of a larrikin in his youth, he still likes going to his shack at weekends to fish for barramundi, and drives not only a signature Territory Toyota Land Cruiser, but also a fancy Aston Martin sports car. He has an unnerving habit of flicking open and shut a wicked-looking pocket knife during our interview.

James is quick to acknowledge the trouble the industry - and the company - is in, though he won't confirm chatter that Paspaley will only be taking up less than half of its allocated quota this year, perhaps seeding only 200,000 oysters. Some of his boats have been put up for sale, and one of Paspaley's huge motherships has been on the slips for two years. "You close down farm sites," he says. "You lay people off. You have redundancies ... we've had to refit some of our vessels to change the way we operate. We're not in a state where I'd want to go out encouraging people to come and invest in our industry. We're line-ball."

Which is why the company has diversified into farming, property, its air-charter business and shipyards - pearls today represent only half the Paspaley business. In 2011, a company with links to Paspaley signed a highly lucrative contract with the Gillard government to build Australia's largest immigration centre at Wickham Point, 35 kilometres south of Darwin. The company responsible, Trepang Services, is a co-venture between Nick Paspaley and a Darwin developer, John "Foxy" Robinson. Controversy rose when the local paper, the NT News, discovered that the 94-hectare site had been leased in perpetuity from the NT government for a flat $510,000. After constructing some basic accommodation to house 1500 refugees, the pair will be paid $197 million over three years by the Commonwealth. James tried to explain that it was a private project by his father - not the Paspaley company - but that got short shrift in Darwin.

"When Dad and Foxy won that contract - read the press on it," says James. "It runs along the lines of 'Migrant Family Investing in Detaining Poor Migrants.' We copped a flogging ... [but] do I sit home and lose sleep over it? No. It's just one of those things."

So what does the future hold for Paspaley and the pearl industry? "We can continue now, as the industry is, indefinitely, but what you don't have is any capacity to deal with shocks [like] cyclones or OOD [oyster oedema disease]. If the price went from where it is today and halved again, yeah, we'd exit. We would have no choice."

Would his father allow that after a lifetime building up the business? "You've got two choices - you either have a sensible controlled exit, or you put a bag over your head and pretend everything's okay. I think you'd find Dad would actually be the first bloke sitting at the table saying, 'This doesn't make sense.' "

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