The names are as American as apple pie — J.C. Penney’s, Belk’s, Nordstrom’s and Lord & Taylor. The clothes sold in these stores that were manufactured by Dana Kay and Danny & Nicole and its affiliate companies, however, were made overseas and imported to the U.S. under false pretenses. Now Dana Kay and affiliates have agreed to pay the federal government $10,000,000 to settle a False Claims Act case in which they are alleged to have fraudulently valued their imports in order to avoid millions of dollars in tariffs. This is the largest Customs Fraud case ever settled in New York.
The fraud, although not terribly complex, was well hidden. Dana Kay and its affiliates produced an invoice for U.S. Customs that undervalued the price of a garment by, on average, $2.50 a unit. With an average custom duty of 22 percent, that meant Dana Kay was ripping off Uncle Sam by 55 cents per garment. That might not sound like much until you realize Dana Kay was importing millions of skirts, dresses and blouses every year which were sold under a variety of labels, including Studio 1, Taylor Dresses, Julian Taylor, DN Design, Just Taylor, Zarr Collection, LeBos and Gabby Skye, as well as private label clothing produced for Chico’s, Cache, Ann Taylor, and Dress Barn.
“This was simple custom fraud,” said Michael D. Fitzgerald, the Brielle, N.J. lawyer who represented the whistleblower that initiated this case under the federal False Claims Act.
“The case would never have been made, however, without information provided by a brave whistleblower who risked a great deal to come forward. In this instance, the documents needed to prove the fraud were available to only a few employees in the company, and most of the decision-makers are related to each other by blood or marriage.” Michael Krigstein, the relator, came forward over four years ago to report the fraud.
Fitzgerald notes that the custom fraud uncovered in the Dana Kay case may be only the tip of the iceberg, and that such fraud, if being done by other importers, could be costing America scores of thousands of jobs. Dana Kay asserted in its defense that lying about the true value of imported goods was an “industry practice.” Fitzgerald notes that the actual value of customs underpayments remains a mystery, but is likely to be in the hundreds of millions of dollars a year.
The Dana Kay fraud was prosecuted under the False Claims Act, more commonly known as the Whistleblowers Act. The False Claims Act provides for a financial reward to an individual who exposes fraud against the United States Government that is not otherwise known. Under the False Claims Act, single damages can be trebled and the financial reward to the whistleblower can range from fifteen to thirty percent of the amount recovered. In this case, Mr. Krigstein will receive a relator’s share of 23% of a large portion of the amount recovered. Twenty-nine states have similar laws designed to incentivize whistleblowers to come forward to expose fraud against state government.
Based on the uptick in enforcement against garment manufacturers, Fitzgerald advises miscreants to “run, not walk, to the U.S. Attorney’s Office to resolve their violations.”
The Dana Kay custom fraud case was successfully prosecuted by Jaimie Nawaday of the United States Attorney’s Office for the Southern District of New York, with assistance from Jeff Zappulla of the Department of Homeland Security, Immigration and Customs Enforcement. Mr. Fitzgerald specializes in representing whistleblowers and is a member of the Taxpayers Against Fraud Education Fund.