It is difficult to imagine looking for a woman’s dress and NOT shopping at JC Penney’s, Belk’s, Sears, Nordstrom’s, Lord and Taylor or online at “overstock.com”. Yet, to avoid purchasing clothes that were manufactured overseas, and imported to the United States under false pretenses, one would have to find somewhere else to shop to be completely sure. Motives, Motives Far East, Richard Stotter, and Barry Blikstein have all agreed to pay the federal government $13,375,000 to settle a False Claims Act case. The various defendants are alleged to have “undervalued” their imports to avoid paying millions of dollars in tariffs. The recent settlement is the largest customs fraud case ever resolved in New York. Interestingly, the settlement follows a similar settlement in 2014 by Dana Kay and Danny & Nicole, also importers of women’s dresses, in the amount of $10 million. Thus, in less than two years, dress producers have paid over $23 million to the federal government to settle False Claims Act cases involving the underpayment of applicable duties.
The fraudulent scheme was well hidden in these closely held corporations. The scheme was fairly simplistic in that Motives would supply a commercial invoice to US Customs officials declaring the value of the imported clothing items without disclosing that a separate payment was made to the factory for the same items. This fraudulent procedure, referred to as “undervaluing”, went on for over 10 years. In the case of Motives, the procedure involved preparing a “cost sheet” pricing out the cost of a particular garment and then deducting as much as $2.50 per garment BEFORE calculating the customs duty owed (generally around 24%) and then adding the $2.50 back into the amount to be paid for the garment. This scheme would result in ripping off Uncle Sam by between $.55 and $.75 per garment; however, since Motives was importing millions of dresses, skirts and other men’s and women’s garments, the fraud amounted to a significant loss to United States taxpayers.
“Customs fraud is a somewhat intricate area as there are many ways for an importer to “value” the imported product; however, this was a fairly straightforward fraud”, said Michael D Fitzgerald, a lawyer in Eatontown representing the whistleblower who initiated this case under the federal False Claims Act.
“The relator in this case, as it is in every case, risked a great deal in coming forward to report fraud. In fact, the relator was terminated after his employer learned of the reporting of the fraudulent scheme to the United States government”, Fitzgerald added. The documents proving the fraud were available to only a few employees within the company and had this relator not come forward, it is possible that the information may never have seen the light of day.
The customs fraud uncovered in the Motives case appears to show a pervasive practice in the clothes importing industry. In fact, in the 2014 case, Dana Kay asserted that they failed to advise the United States government of the true value of the imported goods due to the fact that this was an “industry practice”. Motives denied the allegations contained in the complaint; however, did ultimately settle for in excess of $13 million rather than have the facts decided in a trial. It would not take a major logical leap to believe that other importers are costing the United States millions of dollars and scores of jobs based upon the “industry practice” alluded to in 2014, coupled with the recent settlement by Motives.
The Motives fraud was prosecuted under the False Claims Act, or commonly known as the “Whistleblowers Law”. The False Claims Act provides for a financial reward to an individual who exposes fraud against the United States government that is not previously known. Under the False Claims Act, the single damages caused to the United States can be tripled and the financial reward to the whistleblower can range from 15% to 30% of the amount recovered by the government. Although all of the numbers have not been finalized, the relator will receive at least $2 million as a “reward” for exposing the fraud. Twenty nine states have similar laws designed to incentivize whistleblowers to come forward to expose fraud against state governments.
The Dana Kay case in 2014 and the Motives case in 2016 both resulted from the United States government’s investigation and ultimate decision to intervene to prosecute the case against the entities ripping off the federal government. “Savvy importers who have cheated the government in the last decade should quickly attend to traveling to the US Attorney’s office in the Southern District of New York with their “hat in hand” to avoid more severe punishment in the future”, Fitzgerald advised, based on the pattern of successful enforcement actions against garment manufacturers over the last two years.
The Motives customs fraud case was successfully prosecuted by Kirti Reddy 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 throughout the United States and is a member of the Taxpayers Against Fraud Education Fund.