By Vicki M. Young

NEW YORK — The offense was counterfeiting and the take was $1,042,510.

That’s the profit garnered from just two shipments of fake watches, just 9,048 units bearing luxury brand names such as Cartier, Baume & Mercier, Piaget, Vacheron & Constantin and Jaeger. The average selling price for each watch is $115 and the cost to produce each a mere $1.34.

Those are the numbers gleaned from a federal court action progressing in Manhattan involving Cartier International Inc. and Richemont International Inc. against a list of defendants that has blossomed into no less than 17.

Richemont owns several trademarks that are the subject of alleged infringement in the lawsuit. In addition to its name brand, Cartier, and the others listed above, Richemont is the U.S. arm of Compagnie Financière Richemont AG, which owns the trademarked names, IWC International Watch Co. and Montblanc.

Among the named individual defendants are: Sam Liu, Tom Liu, Jian Liu, Kenny Liu, Thanh Nam Huynh, Charlie Pham and Kim Pham. Some of the business entities named as defendants include three shipping firms: J.A.C. Services, Billion Fortune Corp. and Speedy Shipping Services. The matter is still in litigation and a few of the defendants, such as Speedy, were added months after the original October 2002 complaint was filed.

The legal papers in the Cartier/Richemont case were not immediately available. Because of ongoing investigations in the case, many documents were filed under seal and some of the documents obtained by WWD were unsealed just two weeks ago.

At first glance, the lawsuit appears to be a routine trademark infringement and counterfeiting case against a group of 12 profiteers operating in Chinatown.

But guess again.

U.S. District Court Judge Thomas Griesa in April held some of the listed defendants, including Thanh Nam Huynh and Billion Fortune Corp., in civil contempt for violating a temporary restraining order and preliminary injunction. Damages were assessed at $4.8 million. According to court records, the contempt citation was based on a “counterfeiting operation” that involved the “purchase of blank watches from Asia and the assembling of the watches…and the counterfeit faces, and that [the] assembling occurred at 383 Broadway.”Joseph Milano of Schwartz, Levin & Milano, who represents Billion Fortune and Thanh Nam Hyunh, did not return calls requesting comment.

A number of the other defendants cited by Judge Griesa did not appear in the case.

By the end of last month, additional names, such as Speedy Shipping Services Inc., had been added to the list of known defendants. Perhaps more importantly has been the investigative work surrounding separate, yet related, actions around the country that all lead back to the New York case, which remains at the heart of the counterfeiting focus by the Cartier/Richemont team.

Harley Lewin of Greenberg Traurig, the lead litigator in the Cartier/Richemont case, said in an interview that, in his opinion, the efforts and strategies implemented by the legal and investigative teams have exposed at least “two counterfeiting rings.”

While at least one contempt citation has been issued, and Richemont expects several more to follow, the case is nowhere near completion. Judge Griesa still has to rule on the core of the lawsuit, the trademark infringement and counterfeiting allegations.

The investigative work, headed by George Arnold of the detective agency that bears his name, is ongoing, and the team is pursuing entities that it believes constitute a third counterfeiting ring. In addition, there are also separate court actions or ongoing investigations across the U.S. stretching from New York, New Jersey and Connecticut to as far away as Texas and California.

Marc Frisanco, deputy intellectual property counsel for the Richemont Group, in a telephone interview said the extensive investigative efforts by its lawyers and detectives have helped the firm garner much support from federal agencies such as customs and the Federal Bureau of Investigation.

According to Frisanco: “The FBI is working with the information we have compiled and I’m looking forward to federal law enforcement action shortly. The information also enables the FBI to continue with their own investigation and to dig even further.”

No one doubts that counterfeiting is a profitable business, as well as a troublesome one for the apparel and accessories industries. Past figures center on dollars lost by trademark owners and retailers, mostly compiled by estimates of retail values based on the number of goods seized.But as for profits, quantifying the “big bucks” netted by the profiteers has always involved a bit of guesswork — until now. Court papers in the Cartier/Richemont case indicate just how profitable the counterfeit watch industry can be for at least one group of defendants. One can only guess what the margins are for fake handbags and other easily counterfeited fashion merchandise.

Richemont isn’t the only fashion firm hot on the heels of alleged counterfeiting activity.

As reported last month, the Louis Vuitton Malletier division of LVMH Moët Hennessy Louis Vuitton successfully obtained a temporary restraining order barring Fashion Express Inc. and Canada’s Aldo Group from selling unauthorized LVMH monogram bags. The lawsuit alleged trademark infringement and counterfeiting of LVMH’s new Louis Vuitton Murakami Toile Monogram marks. The marks are featured on new styles of handbags and accessories designs involving multicolored patterns on a white background.

As for dollars, the lawsuit said that so far, more than 23,000 Louis Vuitton Murakami handbags have been sold in the U.S., with a retail value at nearly $12 million, since their introduction in 90 Louis Vuitton stores and in-store boutiques at stores such as Neiman Marcus, Macy’s, Bloomingdale’s and Saks Fifth Avenue.

As reported, Canal Street counterfeiters in the spring were asking anywhere from $75 for the smaller bags featuring multicolored logos on a white background to $200 for the larger ones. In contrast, the authentic Murakami Vuittons range between $360 and $3,950. Because of lengthy wait lists for the real thing, the Murakami styles have become a hot commodity on the black market.

Certainly, no popular fashion house is immune to counterfeiters. If anything, the higher the prestige factor is for a brand, the greater the likelihood is that counterfeiters have already targeted the product for illegal gain.

For Cartier and Richemont, the successes so far — one contempt judgment for $4.8 million, one individual getting ready to start a prison term and seizures of bank accounts — have been based on a radical strategy that departs from past search and seizure raids.

According to Lewin, “What we’ve been doing for the two years is putting together a plan where our focus is dramatically different than it was 15 years ago. In the past, a lot of emphasis was put on chasing after Canal Street vendors, with large amounts of product being captured. What we have found is that two hours later, these vendors have been resupplied.“George Arnold and I wanted to try a different approach and focus on the middle man to get to the really big guys, such as the importers and the manufacturers. Our strategy is that everything we do is designed to get us to that place.”

Bharat Dube, counsel for The Richemont Group, in a telephone interview said firms need to be more resourceful and creative in their fight against counterfeiters. The supposed anonymity of the Internet is no excuse to let the illegal activity continue.

He explained, “In the old days, it was like a slave trade. The big counterfeit gangs on Canal Street would have people take the rap whenever there was a counterfeiting sweep. The impact of the raids was limited. Once someone heard that a raid was being conducted, a quick cellular phone call would be made and the vendors would close their shops. Whatever was seized and the token damages assessed [were considered] the costs of doing business.”

Usually, the culprits were “illegal immigrants who were being exploited by the counterfeiting gangs. They took the rap and refused to speak about whom they worked for, those that are further up on the chain.”

Because of the Internet, however, one can forget about any honor in the practice of nondisclosure. Those days are gone. The new breed of players, at least those on the low tiers of the totem pole, are not “hardened” bit participants, according to Dube. Many, he noted, are the so-called “techies who think that they can hide behind the complex architecture of the Internet and not get caught. They’re the ones who drop their guard down in many ways.”

In fact, it was the increased reliance on the Internet by wrongdoers that allowed his firm to step up its work in catching perpetrators. The starting point, Dube said, involved a case first reported by WWD in January 2001 involving two residents of Lancaster, S.C., who were arrested on charges of trafficking in luxury goods that bore counterfeit trademarks, such as Rolex and Cartier watches, over a Web site.

One of the individuals was Mark DiPadova, who operated a Web site called Fakegifts.com. A “replica” watch available at the time, a Cartier with a stainless steel band, had a list price of $650.As reported, DiPadova may have partly been done in by his own arrogance. He posted a message on his site when it was still accessible, which read: “I’m my own Internet-service provider. They [brand owners] can’t serve me if they can’t find me. And even if they do shut down one site, I’ll put up another. I’m very much aware of what I’m doing, but the money is so good, I’m going to keep doing it.”

In March 2001, he pled guilty to conspiracy to traffic in counterfeit Rolex, Cartier and Tag Heuer watches, Montblanc pens and Oakley sunglasses. DiPadova was shipped to a federal prison in Marianna, Fla., for his incarceration. Even from jail, the Richemont folks weren’t far from his mind.

In a letter dated Aug. 1, 2002, obtained from Richemont, DiPadova wrote that the luxury goods conglomerate “made a huge mistake having me wrongfully incarcerated.”

In the four-page letter, he also wrote: “Now for the fun part! Payback. I realized your biggest fear, and that’s the Internet and the uncontrollable threat it must represent to your clients. I mean the shipping of this product worldwide. You will have no more control. Your harassing techniques in Chinatown and other places are barely working. I can imagine what the Internet will do to you.”

DiPadova said he would set up a new Web site telling others how to evade the law, and even acknowledged, “I by trade am a computer integration consultant….In my field I earn on the average of $150K a year. However, this field of endeavor got rather boring and tedious. I thrive on challenges….I am a member of Mensa with a test IQ of 165.”

For every DiPadova, there are many more like him who operate their own Web sites selling replica goods.

According to Lewin, many are teenagers. He said one out-of-state investigation he worked on involved a 17-year-old who was living in his mother’s house.

“When we did our search, all that he was worried about was that we [finish] doing whatever we were going to do before his mom got home. The kid had $80,000 in cash in his name,” the attorney said.In March 2001, John Lawler of Natick, Mass., caught the attention of the FBI Computer Squad in Boston because of a Web site he operated that sold counterfeit watches, including those bearing unauthorized trademarks such as Cartier.

According to U.S. Attorney Tom Colanuono in Concord, N.H., the FBI, as part of its investigation, established an undercover operation in New Hampshire to purchase several fake watches. The U.S Attorney’s office said the watches were mailed from California in packaging that falsely identified the point of shipment as Phoenix.

According to the U.S. Attorney, Lawler admitted in court when he pled guilty to conspiracy charges this July that the Phoenix address was used to hide the true location of the business and that during a one-year period, “he deposited over $1.6 million in sales proceeds into just one of his bank accounts used for the conspiracy.” He is scheduled to be sentenced on Sept. 30.

For Lewin and Arnold and the others working on the core Cartier/Richemont case in Manhattan, the investigations and seizures that they conduct around the country are centered on just one point: plowing through all the information seized, whether paper or electronic files from a computer, to see if there are any common links that could point toward a key player in the counterfeiting hub.

According to Lewin, one name did come up repeatedly: Sam Liu, a defendant in the Manhattan case. Court documents indicate that the Richemont team dug even further and determined that the choke points in the system were the shipping companies that act as facilitators.

Judge Griesa in another April opinion related to the case involving defendant J.A.C., but separate from the contempt issue, explained how the shippers operate: “It was usual for shipments to be made by the counterfeiters via UPS on a C.O.D. basis. The records show that the payments were collected by J.A.C., which would then issue checks made out to ‘Cash.’ These checks would be delivered to the counterfeiters at 383 Broadway. They would be deposited in one or more bank accounts belonging to the counterfeiters. The canceled checks show endorsements by one or another of the front companies used by the counterfeiters. The check stubs and other records of J.A.C. show that the checks made out to ‘Cash’ were actually for payment to ‘Sam’ or some other alias, obviously referring to the counterfeiters.”In that decision, Judge Griesa ruled there was sufficient evidence of J.A.C.’s “contributory liability to justify both the injunctive relief and freeze of [its] assets,” and concluded there was no basis for vacating or dissolving that restraint.

Lawrence Spirn, the attorney for J.A.C., declined comment.

Lewin said documentation through the course of his investigations indicated that the profitability of a counterfeiting operation is “mind-boggling, over $100,000 a day, seven days a week, 365 days a year.”

According to Dube, “We know for a fact that the main production center is in China. The people behind it vary, but Taiwan and Vietnam [frequently] are the links in terms of financing.”

The case in Manhattan, he said, is particularly promising because Richemont believes that the defendants include the top “two or three major suppliers to the Canal Street/Chinatown area vendors and to the West Coast cities.”

For Frisanco, fighting the good fight is a necessity when one is in the luxury business.

“This is a business where all of our efforts are symbolized in our trademarks and in our brands,” he said. “Each brand has different attributes to our customers. When you see your image blurred like we did on the Internet, and even when it is not on the Internet, of course we will do what is necessary to defend our image and our name.

“We are not suing the people selling the product on the streets, but hitting at the hub further up, those who supply to the ones who sell on the street,” Frisanco asserted. “We will make their life more miserable and we have shown them that we have the intelligence to hit them. It is a problem that they will have to cope with.”

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