MCA Uncovers Evidence of Counterfeit Tape Operation

Executives of Los Angeles-based entertainment giant MCA Inc. on Thursday turned over to the FBI evidence of a large-scale illegal tape duplicating operation that has distributed suspected counterfeit audio cassettes to major record chains around the country, including Tower Records and Licorice Pizza outlets in Los Angeles.

Major U.S. record companies have been complaining for years that counterfeiting costs them and the recording artists millions of dollars annually in lost revenues. Despite the industry’s much-heralded anti-counterfeiting efforts, however, there have been few cases involving major distributors or retailers.

The current counterfeiting operation is centered in the New York area and apparently targets records by artists on the MCA and Motown record labels. It is believed to be different from others uncovered in recent years because it focuses not on a few current hit albums but rather on the record companies’ older releases, the so-called “mid-line” products that are usually sold at reduced prices.

The suspected counterfeit cassettes discovered by MCA are of albums by such well-known performers as Neil Diamond, Elton John, the Who, Tom Petty, Olivia Newton-John, Jimmy Buffett, Steely Dan, Stevie Wonder and Diana Ross.

MCA’s evidence includes suspected counterfeit cassettes bought last week by MCA’s internal audit manager and a Times reporter at record stores in New York, New Jersey, Connecticut and Los Angeles. The reporter had previously uncovered apparently counterfeit MCA cassettes during an investigation of the budget record business.

“We have reason to believe that this organization is counterfeiting most of our big mid-line titles, and the number of units already sold could reach hundreds of thousands to millions, with losses (of potential revenue) in the millions of dollars,” MCA Records President Irving Azoff said.

Los Angeles-based MCA Inc., parent of the giant Universal Studios complex, reported 1984 profits of $8.8 million for its MCA Records Group, which distributes MCA and Motown records in the United States. The sixth-largest U.S. record distributor, MCA Records “depends heavily on our mid-line catalogue for sales, so something like this is really a threat to our existence,” MCA Senior Vice President Charles Morgan said.

Morgan met with the FBI in Newark, N.J., Thursday morning and turned over cassettes gathered during the company’s investigation. Larry Playford, an FBI agent in the Newark office, said the agency will look into the matter.

Easily Identifiable

MCA executives say that many of the cassettes given to the FBI are easily identifiable as counterfeits because of their poorly reproduced artwork, incorrect labeling information and in some instances almost comical misspellings. For example, one Neil Diamond cassette bought at a New York store lists MCA Records’ address as Universal City “Clifornia.”

“They are amazingly bad, not even close to the real thing,” said Jeff Adamoff, MCA Records’ director of creative services. “Even on our worst day, blindfolded, we do better than this.”

An angry Azoff said: “In all my years in the music business, I’ve never seen more blatantly obvious counterfeit product, and I’m shocked to find it in so many (record retailers) in such large numbers.”

Times sources say the operation has been going on for at least six months. “My distributors told me they had sold 6 million units of the MCA stuff,” one manufacturer of budget cassettes said. “There are very legitimate distributors spreading it around.”

‘Cutout’ Records

Many of the distributors and stores may be selling the suspected counterfeits unwittingly. Sources said the cassettes are being offered to distributors and record chains with the explanation that they are part of an MCA sale last summer of nearly 5 million discontinued or “cutout” records.

It is a common, although controversial, industry practice for record companies to sell huge amounts of cutouts to a network of budget record distributors, often for as little at 10 cents apiece. One controversial aspect of the practice is that artists receive no royalty on records sold as cutouts, on the theory that they are virtually worthless.

Cutouts are usually marked in various ways by the record company, either by having a corner cut off an album jacket or having a burn mark or a hole drilled in a cassette case. The budget distributors then sell the records and tapes to retailers at prices ranging from 50 cents to $3 each, and the retailers in turn sell them from specially marked bins at prices ranging from 99 cents to $4.99.

MCA officials contend that none of the albums it believes have been counterfeited were part of that cutout sale. But The Times has obtained catalogues of several budget record distributors around the country offering cassettes of the albums at prices ranging from $1.50 to $2.50.

Price Called Higher

“Our lowest wholesale price is substantially higher than that on those titles,” said Terry Reagan, director of MCA’s corporate internal audit department.

Some sources speculated that at least a few legitimate copies of the albums that MCA believes have been illegally duplicated somehow were included in last summer’s cutout sale, thus giving the counterfeiters a “cover” to produce great quantities of those titles.

One distributor of the suspected counterfeits is a company called Golden Circle Inc., based in Stamford, Conn. Golden Circle is part of Tapecom Inc., which bills itself in Billboard magazine’s international buyer’s guide as “New England’s largest cassette duplicator.”

Accompanied by a Times reporter, MCA’s internal audit manager Allen Clement last week bought suspected counterfeits of MCA and Motown artists from specially marked Golden Circle racks in New York-area record stores. Clement and the reporter also went to the Tapecom-Golden Circle plant and, through an intermediary, bought 49 cassettes for a total of $87.19 cents.

‘Imported Products’

A spokesman for Tapecom-Golden Circle told The Times on Thursday that the company sells “some of our own product that we produce here, some imports, some cutouts or surplus amounts from the major companies.”

When asked where Tapecom had obtained the MCA cassettes, the spokesman said: “I can’t tell you that offhand” and referred the reporter to the company’s owner, Gene Tornatore, who said they were “imported products” that he had bought from a company called Recording Specialists in Kingston, Jamaica.

“I have seen the documents from the so-called licensee. They sent me a copy of their contract with the record company in California,” Tornatore said. There was no answer at the Recording Specialists number Thursday.

MCA confirmed that at one time Recording Specialists was a sublicensee authorized to produce some MCA titles in Jamaica, but its contract expired in 1983.

New York Chains

MCA officials said they were surprised to find suspected counterfeits in such big New York-area record chains as Crazy Eddie’s, Record World, Disc-O-Mat and King Karol. In the Los Angeles area, similar cassettes were bought at two Licorice Pizza locations, on Wilshire Boulevard and in the Sherman Oaks Galleria, and four Tower Records locations, including its flagship outlet on the Sunset Strip, one of the country’s largest and most visible record stores.

“We certainly don’t want to have anything to do with anything like that,” Tower Records owner Russ Solomon said in a phone interview. “We buy all our cutouts from a single legitimate source out here in California.”

Solomon refused to identify Tower’s cutout supplier, saying: “I’m sure that he bought the stuff in good faith. When we see these things offered in cutout catalogues, we assume it’s surplus product that the major companies dumped into the system.”

“It’s really frightening that something like this could happen,” Solomon said, adding that he was going to conduct his own investigation into where the suspected counterfeits came from and “pull them out of stock instantly.”

Ben Karol, owner of King Karol, said: “I can assure you right now that we were not aware of it (the suspected counterfeits).”

‘Questionable Product’

He added: “You can’t be sure of anything in this business. The record companies have so many deals with so many people that you couldn’t go to one store in America and not find some questionable product, and only one time out of 10 does it turn out to be anything really illegal.”

Azoff said MCA Records would immediately begin placing an inaudible tone on all of its tapes so that future counterfeits will be easily detectable. In addition, he has instructed MCA’s sales representatives to check all accounts for the counterfeit products.

MCA executives say the company sent some similar suspected counterfeit tapes to the Recording Industry Assn. of America last November and asked the trade group to look into the matter. However, the executives said, the association wrote back, saying that the problem appeared to be one of imports rather than of counterfeits, and because it involved only one company, the association suggested that MCA pursue the matter itself.

One of the association’s principal duties as the record industry’s trade group is to investigate counterfeiting and record piracy for its members, which include the nation’s biggest record labels.

Widespread Effect

In a telephone interview Thursday, the trade association’s anti-piracy director, Joel Schoenfeld, said that “our resources are supposed to be devoted to problems impacting more than a single company” and that, if the association cannot find evidence of a more widespread effect on the industry, then “the company is supposed to handle the problem itself.”

Rick Kaufman, a former association investigator, said counterfeiting cutout records is nothing new. “Any time a record company sells a cutout, to some people it’s a license to steal. They use their invoice as a cover to manufacture more product. It’s called ‘buy one, make five,’ ” he said.

MCA’s Azoff said: “All cutout sales have been put on hold, and the entire process is under review.”