Wine Fraud

A great deal in wine: friend or faux?

 


Published:

"Look not at the jar, but at what is within it; there may be a new jar that is full of old wine and an old one in which is not even new wine." (Pirke Avot 4:20)

There is nothing new about wine fraud. Thomas Jefferson knew the risk; he made sure his Bordeaux was bottled and sealed at the chateau. Pirates, Crusaders and traders mixed wine and treasure scams. The quote above—really a parable about wisdom—is from a Jewish text of the third century C.E. "Even in biblical times there were good and bad wines. Looking at the flask may be misleading," says Rabbi Aaron Panken of Hebrew Union College - Jewish Institute of Religion. So let's bring out more sage advice: if it seems too good to be true, it probably is. For some unknown reason, says Jim Budd of investdrinks. org, people who wouldn't fall for a "419" Nigeria scam in a million years will throw caution to the wind when a bargain or sight-unseen vintage Bordeaux is offered.

What is wine fraud? Obviously, it's when the juice in the bottle you purchase is not what's indicated on the label. It doesn't have to be expensive but it is probably a "deal." It may be through a broker, a retailer, online or at auction, or it may be a tip from an acquaintance. It may not even be actual wine but shares in a wine investment intended for resale. Most often involved are premium hard-to-get wines, rare wines and old vintages.You might be a newbie looking to resell a bottle for a tidy profit or a savvy wine investor who's been buying wine futures and rare wines by the case at auction for 20 years. Take comfort: even reputable auction houses are being defrauded. The Colorado indictment and conviction of Ronald Wallace of Rare LLC says it all when it comes to wine investment fraud. According to court documents, Wallace took in $11 million by "purporting to sell older bottled wines that he did not own, by purporting to sell wine futures he did not own, and by diverting and misusing money that his clients had entrusted to him." In all, he swindled 600 investors, including company owners, Hollywood stars and Seattle high tech geniuses who took their dotcom bonanzas and tried to do the same with wine. Wallace was ordered to pay restitution and sentenced to two years house arrest.

Nobody quite knows how big the wine fraud market is. Wine Enthusiast interviewed retailers, members of the wine trade and law enforcement, eBay merchants and government fraud trackers in several countries. Global figures can't be estimated with any authority. The United States Department of Justice doesn't keep statistics by product. Court cases and customs seizures only count for what is captured.

If you buy mid-range to top-end wines from a reputable fine wine dealer, it is highly likely that the wine is exactly what it says it is, though there are no actual U.S. figures for this. In the European Union, the estimate is that between 1% and 9% of bottles sold are counterfeit—for all alcoholic beverages. "If you're looking at Lafite, Latour and Margaux, you really need to do a lot of research. You are talking about alternative investment, not regular stock. Is it stored properly? There's a lot that could happen," says Samir Bhavnani who runs gottannins.com from San Diego.

Fraud experts say that whenever you buy wine and don't know the seller or the origin, you are taking a risk. It applies whether it is by-the-bottle online, at an auction house in New York, Chicago, London or Hong Kong, or if you succumb to pressure from a cold caller. Doctors are frequent targets because they generally have high incomes, they are easy to identify (their titles are included on databases) and they tend to overestimate their savvy in wine and investments.

It is often repeated: "If you lose money on wine," Money magazine pointed out in its sober March 2007 analysis of wine in an investment portfolio, "at least you can drink it."

What the story didn't mention is that to drink it, you have to have the bottle in your hand.

Investing in fraud
Are you a target for wine investment fraud? Answer these questions: Do you have an American phone number? Are you passionate about wine? Do you blog or post comments on wine forums? Are you a doctor If the answer is yes to at least two questions, then you could be a target, according to our investigation.

The sales pitch can be persuasive; the temptations for wine devotees can be strong. Here is a
sampling of recollections by people we spoke to who believe they were defrauded. Their names will not be used, and some comments were slightly changed to protect identities.
· "I was told they purchase wines for their clients directly from the chateaus, since their owner has a longstanding relationship with the Bordeaux chateaus."
· "I can buy Mouton or Margaux at first release price, he assured me."
· "She called me at the office and I wasn't able to find out how they got my name, but she said that someone had referred me. She wouldn't say who."
· "I was told I would receive 100% profit in three months."
· "I bought a 'position' and then asked him to sell and was told I owed around $10,000."
· "I received a document that stated that I owned a position on 12 cases. But instead of all first growths, there were only three."
· "I was told the value was $30,000 but when I checked the prices in London, I could have bought the same wine for $13,000 less."
· "If I don't make the installment payments, I lose the entire investment, I guess."

How typical is this? Very. The boiler room pitch and pressure will change depending on your interest, perceived wealth, and ability to hang up the phone. You may be told the company has "connections" with Bordeaux chateaux and will arrange private tours there. You will be told the wine is in bond, insured, and there is no tax on profits.

No tax on profits? Well, if no profits, no tax. And, in all likelihood, you, the investor, do not own those cases of Latour in a secret cellar in bond in London. If they were bought, the company owns them.

There are variations on these scenarios. Some can start as a genuine investment with a reputable dealer. Then, the dealer runs into trouble because someone didn't pay and the chain breaks down.

"If you have the option of investing through funds or actual wine itself, argue for the latter," says Steve Bachmann, a former investment banker who launched Vinfolio in 2003. "How do you determine if they are credible or not? I don't know how you do that." Bachmann strongly endorses transparency and knowing your retailer, whether on the street or online.

The Claret web
It wasn't wine but whisky that may have started the current drinks investment fraud cycle. The first widely reported whisky investment fraud, in 1993, netted some $90 million. By 1998 a raft of Bordeaux investment schemes were popping up, and changing names as fast as directors could drain one bank account and open another off-shore. Americans became targets and lost millions through 2003. The boiler-room frauds appeared to take a break, but wine collectors are reporting that a new round of wine investment schemes began again this year. Some in the wine trade predict this will continue into 2009.

Wine investment fraud is potentially a high-pay, low-risk business. As fraudsters know, cross-border lawsuits take forever, cost more than the wine investment lost and, even with a conviction, rarely result in restitution. Crafty investment scam artists tend to target wine lovers using the phone and mail—both methods are significantly less likely to result in a complaint, according to the 2007 analysis by the Federal Trade Commission.

How serious is it? If it's your money, very. An English High Court just sentenced two men to jail in a $152 million scam known by various names, including Hallmark Partnership, that followed the tried-and-true route: one case of wine at a good price that rolls over to shares that rolls over to equity that rolls over to…nothing. The company goes bankrupt or simply disappears. Most of those millions came from Americans. The time from the first calls in 1995 to conviction: 11 years. American doctors were sucked into another Cayman Island-UK investment debacle, known as Architects of Wine; they were left at least $20 million short and with no wine. (See investdrinks.org for other examples).

Directors and company names appear to move around regularly in what Budd calls the "Claret web." Of course, not all are based offshore or cross borders. In the last year, scams in Colorado and Hawaii were either shut down or the fraudster was convicted.

Label lawlessness
Fraud sometimes grabs headlines when a well-known connoisseur says a rare wine sold at auction is fake. But most bottle fraud is at a much lower level. A wine collector told Wine Enthusiast about the manager of a liquor store in Los Angeles who could satisfy any need. Need a Margaux? What vintage? We don't have it, but come back tomorrow and you will have it. What was produced the next day was a bottle of fresh new wine with a recently printed facsimile of an old label.

There are dozens of stories from around the world that involve the relabeling trick; it inspired the joke that there is more Château Pétrus in Las Vegas than was ever made. Château Lafite Rothschild is the Asian star in the Bordeaux first growth crown; both are constantly under counterfeit attack.

"The easiest bang for the buck is to counterfeit anything pre-1945 Bordeaux, no radioactive elements," says Kasey Carpenter, who writes the investment column, the Wine Mogul, for classicwines.com. He has been in the wine trade and brokered cellars for insurance companies. "There are sloppy examples and really good examples. Some stuff is clearly Mickey Mouse—Photoshop and color printer going to town. And sometimes something didn't seem right but I couldn't put my finger on it. There's lots of goofy stuff out there."

Buyers themselves are driving the counterfeit market. "Guys made millions and billions and they lose their heads when it comes to wine," says Carpenter.

The auction hammer
Serena Sutcliffe, head of Sotheby's international wine department, says the fraud problems at auctions are most prevalent in Asia and the United States. "So much of the wine that is fraudulent is turning up at auction in the States," she says "And now, the Europeans are getting involved because they've seen how much money can be got out of faking bottles."

"When we are selling wine, we do not always know where the bottles have come from," says Sotheby's Senior Director Stephen Mould. "Maybe the owner has died, the widow doesn't have all the original invoices. In these cases, one goes on gut instinct," But, he stresses, if you are buying to sell, provenance is critical. "It's pure naiveté for people who do buy wine and don't check."

Austrian Werner Feldner, who reports on the Wine and Auction Watchlist of wien-plus.de and runs winecollect. eu, says several auction scams seem to float around from one eBay website to another of a different language. One scam sold "1995 Mouton Rothschild-original box." After high and successful bids, it turned out the sale was just the box, no wine.

Feldner says that a common trick is for a bidder to be immediately contacted by the seller, outside normal eBay channels, with the same wine in larger quantities. The seller takes the credit card and the buyer never gets the wine and may find other charges on the card shortly thereafter. (If you see something fraudulent, contact eBay security; they do take action but often are not as fast as the fraudsters. A spokeswoman for eBay's corporate office said they did not have any figures but that the problem did not seem to be great.) Feldner says he has seen an increase in counterfeit single bottles in recent months. He monitors, investigates and reports potential eBay wine fraud daily.

Feldner advises potential bidders to watch out for accounts that are open for no more than three days. Another ploy by fraudsters is to sell small items on the account, get good feedback and then put something up like a 1990 Pétrus in a magnum. "Think about it. It would be like buying Pétrus in a drug store!" he says. Ebay itself advises participants not to transfer money if the eBay account owner and bank account owner are not identical.

A grand jury investigation involving auction wine sales has been ongoing for nearly two years, according to people have been subpoenaed and news reports. A Department of Justice spokeswoman would not confirm or deny the investigation.

Charity
So a person finds himself with a fraudulent case or bottles. Other than suing, how else can a newly minted unscrupulous character dump a fraudulent wine and still get a return?

A French couple who received bad wine with a fake label from an online purchase started their own online fraudulent wine sales. They were charged and convicted earlier this year but asked the judge to be lenient—they said they had used good wine in the fake Côtes du Rhone.

A small but worrisome outlet among those who have been stung, however, is the charity auctions. "Last year I was auctioning for a charity and was presented with photos of wines," says Sotheby's Mould. "I rejected the [wines for auction].Whether it was being done knowingly or not..." he muses. "A collector may know it's a fake or think it's a fake but may have an auctioneer who is not a wine expert and would never know."

Mike Haney agrees. He runs l'Été du Vin, Nashville's July charity auction, the premier international lot charity auction in the United States. He says that new auctions run by people with little experience can result in both charity and buyer getting burned. "I worry that 2009 will be the year it really hits. We haven't had problems so far," Haney continues, "but we get most of our wines directly from the wineries. Experts check others. And collectors we deal with would be horrified if they gave me a bad bottle."

Even with a charity, it is buyer beware.

Solutions and resolutions
What are your options if you come face-to-face with a fake in the cellar? Bill Koch, who bought four Thomas Jefferson bottles he now believes are bogus (the subject of Benjamin Wallace's The Billionaire's Vinegar), could afford to spend a lot more money. He hired experts, took bottles around the world for tests, chased the suspected fraudster and sued. Massachusetts collector Russell Frye, who disovered some of his rare bottles were fraudulent, also sued and settled, but took another route, too: he created wineauthentication. com, a subscription service through which buyers can check their wines. Frye has invited wineries to participate but so far none have.

Trying to crack the counterfeit wine circuit is like playing "Whac-A-Mole," says Joseph Potenza, an intellectual property lawyer with Banner & Witcoff in Washington D.C. "It pops up here and pops up there. Technology would be a way to turn off the game."

Technology is racing to keep up. Carpenter and Haney think it is not the buyer's responsibility, but the industry's. Until then, Haney believes it will just get worse.

Since 2000, the Bordelais have put on a full-court press against fraud. Most wineries now use engraved bottles and apply techniques on labels such as holograms and watermarks. The capsules are impregnable without total removal so no new cheap wine is siphoned into the bottle. First-growth cartons are now bound by metal strips and sealed.

However, Sylvie Cazes-Régimbeau, president of the Bordeaux Union des Grands Crus, admitted there is no way of guaranteeing old wine is what it is supposed to be since it has passed through so many hands after leaving the chateau.

While some wineries in Napa Valley use anti-counterfeit technology, fraud is not a big issue there, says Terry Hall of the Napa Valley Vintners Association.

Historically, fakes and forgeries have been part of the insurance black hole known as "moral hazard." But a tiny breakthrough may be on the horizon. Fireman's Fund has just created a "provenance" policy for for fine art, a first in the insurance world.

"If you become aware you might have a fake or forgery we provide funds to explore the authenticity and to do
provenance research, contact experts and do scientific testing," said Theresa Lawless, director of fine arts and collectibles for Fireman's Fund Insurance Co. Lawless said it may be extended to wine. It still
doesn't cover how you get the money back but does help create a case.

Experts and collectors recommend policies protecting against fire, theft, power outage as well as normal hazards of wine, like dropping the bottle. Warning: Lawless said adjustors would not look kindly on using breakage as a way to get rid of a counterfeit bottle.

Is there insurance for making a stupid purchase? "No," says Lawless.

And are there repercussions to the winery for repeated attempts at fraud? Of course, but….when Italy's Sassicaia and Tenuta San Guido were counterfeited in a notorious incident, a Saint-Emilion winemaker who hadn't yet had the experience wryly noted, "My wine must not be famous enough yet. I'd better raise my price."

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