US v. Modes, Inc.

• Decision Date: 25 June 1993
• Docket Number: Court No. 89-04-00206.
• Citation: 826 F. Supp. 504,17 CIT 627
• Parties: UNITED STATES of America, Plaintiff, v. MODES, INC. & Jaikishan C. Budhrani, Defendants.
• Court: U.S. Court of International Trade

826 F. Supp. 504

17 CIT 627

UNITED STATES of America, Plaintiff, v. MODES, INC. & Jaikishan C. Budhrani, Defendants.

Court No. 89-04-00206.

United States Court of International Trade.

June 24, 1993.

Judgment Amending Decision, June 25, 1993.

COPYRIGHT MATERIAL OMITTED

Stuart E. Schiffer, Acting Asst. Atty. Gen., David M. Cohen, Director, Commercial Litigation Branch, Civ. Div., U.S. Dept. of Justice; Velta A. Melnbrencis, Asst. Director, Michael S. Kane, Atty., Washington, DC, for plaintiff.

Wilson, White & Copeland, Claude R. Wilson, Jr., Dallas, TX, for defendants.

OPINION AND JUDGMENT

NEWMAN, Senior Judge:

The Government brings this action to collect a civil penalty from defendants pursuant to 19 U.S.C. § 1592 (1984). This court previously granted partial summary judgment in favor of the Government on the issue of liability for fraudulent violations of section 1592, which consisted of the intentional falsification of invoices in connection with defendants' importation of Taiwanese jewelry. 16 CIT ___, 804 F.Supp. 360 (1992). The issue currently before the court is the amount of the penalty, which was tried de novo by the writer under section 1592(e). In view of the mitigating evidence adduced by defendants at trial, the court imposes a penalty in the amount of $50,000.

The court has exclusive jurisdiction pursuant to 28 U.S.C. § 1582(1) (1988).

Background

The following was discussed in earlier stages of the instant litigation, but is summarized here for convenience. Familiarity with the earlier proceedings is presumed.¹

Defendant Jaikishan Budhrani is 52 years old. Budhrani was born in what is now Karachi, Pakistan. He emigrated to the United States in 1970 and opened a wholesale jewelry business. Early in the 1980's, Budhrani began to import jewelry through Modes Inc., the other defendant in this case, a closely held corporation headquartered in Dallas, Texas. From 1984 to 1985, Budhrani was either the vice president or the president of Modes.

During the period of January 1984 through November 1984, defendants imported costume jewelry from Taiwan, known as "twist beads," under TSUS item number 740.38. The jewelry, purchased from Taiwanese export companies operated by a Mr. Chester Chou, was entered free of duty under the Generalized System of Preferences ("GSP"). 19 U.S.C. § 2461, et seq., (1988).

In accordance with an agreement between Budhrani and Chou, purchases of jewelry from the Chou companies took place under a double invoicing system. A false invoice accompanied the merchandise as it entered Customs. This invoice, which typically stated prices at about half the actual value of the merchandise, was filed with Customs. Modes cut a check to Chou in the amount appearing at the bottom of the false invoice. Chou transmitted separately to Modes a second invoice for the same shipment, which latter invoice indicated the actual value of the merchandise. Modes paid the difference in a second check to Chou. The second invoice for each shipment was not disclosed to Customs.

In his deposition and at trial, Budhrani testified that he agreed to comply with Chou's double invoicing system because it was an accommodation to Chou's efforts to evade Taiwanese income taxes and because the goods were duty-free. Budhrani explained that the Taiwanese manufacturers required Chou to pay them in cash in order to evade Taiwanese income tax. Since Chou had no receipts from the manufacturers, he persuaded Budhrani to participate in the double invoicing system as a means of allowing Chou to cheat on his taxes as well. Chou convinced Budhrani that the undervaluation of the merchandise would not result in any adverse consequences inasmuch as the merchandise was duty-free.

Although the undervaluation of merchandise subject to the GSP cannot result in the underpayment of duty, i.e., as to the relevant entries, the price information appearing on Customs invoices is used in calculating the total value of imports of the particular merchandise in a given year.² Since GSP eligibility must be withdrawn when total annual sales exceed the competitive need limit, undervaluation would tend to extend GSP eligibility beyond the point where it would ordinarily obtain. See Trade Act of 1974, Pub.L. 93-618, Title V, § 504(c), Jan. 3, 1975, 88 Stat. 2070, codified as amended, 19 U.S.C. 2464(c) (1988); Florsheim Shoe Co. v. United States, 2 Fed.Cir. (T) 83, 92, 744 F.2d 787, 793 (Fed.Cir.1984). Thus, defendants' false invoicing had the potential to taint statistical calculation and deprive the Government of future revenues. In the instant case, however, defendants' false valuation of twist beads ultimately did not disrupt the administration of the GSP program because eligibility for duty-free treatment was in fact withdrawn in 1985 after Taiwan exceeded the competitive need limit for TSUS item no. 740.38 in 1984. See 50 Fed.Reg. 25,037, 25,060 (June 17, 1985).

In May 1984 Harvey McFadden, an Import Specialist with Customs, received a corrected invoice in connection with an entry of twist beads that had taken place on April 27, 1984. McFadden had requested the corrected invoice in order to verify freight and insurance charges reported in the original entry document. Pursuant to McFadden's ordinary practice, he set the corrected invoice aside until such time as other work would permit him to "associate" the invoice with the entry file to which it related. As it happened, McFadden did not match up the corrected invoice with its corresponding entry file until August 23, 1984, at which time he discovered a discrepancy in pricing information. Unlike the original document, the corrected invoice was an F.O.B. invoice that stated an F.O.B. price that was approximately twice the price stated in the original. At that time, McFadden referred the matter for further investigation.

Two months later, the case came to the attention of Dale Owens, a paralegal with Customs' commercial fraud unit. Subsequently, Owens went to visit Budhrani at his place of business on October 5, 1984, but did not find him there until two weeks later. Owens asked Budhrani to explain the discrepancy in pricing between a set of corrected invoices and the corresponding invoices that had been filed with Customs. Budhrani lied to Owens, offering the explanation that the shipper had demanded more money due to the high quality of the goods. At no point did either McFadden or Owens communicate to Budhrani that he was in violation of the law.

After Owens left, Budhrani consulted a certified public accountant and an attorney in El Paso, Texas. Upon being advised that his undervaluation of merchandise was illegal, even though the beads were duty-free, he discontinued importing.³ Concomitantly, however, the Government was pursuing an investigation of the matter.

In early 1985, Robert W. Wallace, a Senior Special Agent with Customs, began a civil and possible criminal investigation of defendants. Wallace served an administrative summons on Modes and defendants' counsel, Claude R. Wilson, Jr., seeking production of certain records required to be kept by Modes under 19 U.S.C. § 1508 (1988) in order to ensure compliance with Customs laws. At this point, the administrative summonses were directed to records ranging from the period of January 1983 through January 1985.

Wallace postponed the return date on the summonses to permit Wilson and an investigator to travel to Taiwan to question Chou and gather other relevant facts. On May 21, 1985 Wilson returned from Taiwan, carrying certain files that he used in connection with the litigation. The Customs Agent at Dallas/Fort Worth International Airport searched a briefcase containing those files, although the agent was repeatedly informed that the files were protected by the attorney-client privilege, the attorney work-product doctrine and the defendants' rights under the United States Constitution.

Customs conducted a proper routine inspection for contraband, but refused to return the files to Wilson at the end of the visual search of the briefcase. Instead, Wallace acquired the files from Customs and retained them for two days before finally returning them to Wilson. Thereupon, Wallace issued new subpoenas for the period of October 1983 through January 1985, presumably in conformance with information that he gleaned from his inspection of Wilson's files.

Defendants resisted the summonses, and Wallace filed a petition in the United States District Court for the Northern District of Texas to enforce the summonses pursuant to 19 U.S.C. § 1510 (1988). Following a magistrate's report and recommendations, the district court concluded that the summonses should be enforced. However, because the court applied an incorrect standard of review, a panel of the Fifth Circuit remanded for further proceedings, holding that the summonses could be enforced following the remand proceedings if the Government satisfied the standards enunciated in United States v. Powell, 379 U.S. 48, 85 S.Ct. 248, 13 L.Ed.2d 112 (1964).⁴ The panel further determined that defendants could not maintain a successful defense of abuse of process because the information tainted by the Government's misconduct was already the subject of the original summonses. However, the Fifth Circuit condemned in no uncertain terms the misconduct of the Customs officials involved:

Although we do not finally resolve the dispute in question, we think it appropriate, whatever the outcome on remand, to admonish Customs for what can only be described as outrageous and reprehensible behavior on the occasion in question. We trust that our warning today will suffice to deter any future similar conduct.

Wilson, 864 F.2d at 1223 (emphasis added).

Following the running of the statute of limitations for a criminal prosecution, the Government commenced the instant action to recover a civil penalty under section 1592. Defendants then produced the information required to be disclosed under the...