Pirates of the High-Tech Age

Southern California is becoming the national base for counterfeiters who make bogus software that looks so good even computer experts can’t tell the difference.

Once a problem confined to Asia and Latin America, high-quality fake CD-ROMs made here are showing up for sale in other countries, on Internet sites and even in some retail stores like Fry’s Electronics. Authorities have seized nearly $200 million in counterfeit software in dozens of cases in Southern California over the past three years.

The disks are manufactured by a new breed of multicultural gangs that operate somewhat like legitimate software companies. Lured by high profits and low penalties, these criminals work cooperatively with each other, often “outsourcing” different aspects of the operation to business partners in order to save time and money.

“The irony of all this is the counterfeiters are mimicking us,” said Chris Chapin, manager of intellectual property enforcement for video game publisher Electronic Arts Inc. in Redwood City. “They are our worst business rivals.”

Feeding off the nation’s growing number of PC owners, the counterfeiters are supplying consumers with hot new products such as video games, tax programs and business tools. Software pirates can replicate, for as little as 50 cents, disks holding programs that computer companies price at hundreds of dollars.

“Look, I can make more money off this than my lawyer can defending me,” said one self-described pirate, nicknamed “hax3rz,” who was selling illegal copies of top-selling video games on the Internet. “If they want it, I’ll sell it.”

Southern California “is the capital for pirated [software] products in North America,” said Nancy Anderson, senior attorney for Microsoft Corp.’s anti-piracy group. “Not Silicon Valley. Not New York. Not Texas. Not Washington. Here.”

High-tech piracy flourishes amid the anonymous industrial parks in the San Gabriel Valley cities of Walnut, Diamond Bar, City of Industry and Rowland Heights. Investigators have raided one business park in Walnut so many times that police have dubbed it “Pirates Cove.” But operations are also found elsewhere in the region.

Earlier this year, in what industry experts describe as the nation’s largest-ever software counterfeiting bust, Westminster police and the FBI arrested a dozen people and shut down an alleged piracy scheme with $60 million worth of fake Microsoft software sitting on a warehouse floor in the city of Paramount.

Atul Sowmitra Dhurandhar, a 51-year-old native of India, and his wife were accused of money laundering and running the operation that for four years allegedly churned out counterfeit CD-ROMs from plants in three Southern California counties. They pleaded not guilty, and their trial begins in Los Angeles federal court this week.

Like computer executives tapping personal contacts for deals, Atul Dhurandhar allegedly used friends to create a business network: a convicted Chinese counterfeiter, who obtained a commercial CD-ROM replicator to copy the disks; a Mexican national, who is allegedly a Mexicali state judicial police officer, to smuggle product across the border; and another Mexican to hire illegal immigrants to run the CD replicator.

Citing an urgent need to crack down on high-tech crime, the Justice Department, FBI and U.S. Customs announced Friday a joint effort to fight software piracy and the counterfeiting of computer products. Dubbed the Intellectual Property Rights Initiative, the three agencies said they will boost enforcement nationwide, but focus on California, New York, south Florida and Boston.

As police break up the operations, the software industry cannot get the public to support its plight.

There is little widespread sympathy when a corporation such as Microsoft--which is worth more than $500 billion--complains that it loses hundreds of millions of dollars a year to piracy.

The wealthy upper class traditionally is seen by the masses as the enemy, said Robert Kelly, professor of society and criminal justice at the City University of New York. In the past, it was oil barons and railroad tycoons. Today, notes Kelly, Microsoft head Bill Gates is the bad guy.

“Fake software is not seen as a threat to the public good,” said Alfred Blumstein, a public policy professor at Carnegie Mellon University.

Despite software companies aggressively lobbying politicians and spending millions of dollars on anti-piracy advertising campaigns, the laws remain relatively soft on counterfeiters. The result: people who pirate millions of dollars worth of software often receive only probation.

“It’s cheap, it’s easy and there’s almost no risk,” said Sgt. Marcus Frank of the Westminster Police Department, who lead the Dhurandhar investigation. “If you were a criminal, wouldn’t you do it?”

Frank said the Dhurandhar investigation peaked last fall when undercover officers staked out warehouses in Paramount, watching as a stream of truck drivers loaded pallets stacked high with fake Microsoft goods.

The ringleaders had allegedly been shipping an estimated 15,000 fake Microsoft disks a month nationwide and overseas. By early February, police and the FBI had enough evidence to get a search warrant and raid the operation.

Officers burst inside a warehouse one rainy afternoon and surprised six workers, who were busy printing counterfeit Microsoft user manuals. Here and at nearby facilities, investigators found top-of-the-line CD-ROM duplication equipment, high-speed printing presses and rows of bookbinding and shrink-wrapping machines.

Piles of phony warranty cards spilled out of nearby crates. Sixty million dollars worth of boxed, shiny silver compact disks, all sporting the Microsoft logo, towered over the officers.

And tucked off in a corner, police say, was the investigative mother lode: files stuffed with Dhurandhar’s business documents and checkbooks. The paperwork mapped out an elaborate counterfeiting network, according to police, and gave investigators leads on the scheme’s money trail.

Dhurandhar, his wife, Mamta--who faces the same charges as her husband--and their attorneys have declined to discuss the case. Ten other suspects will join them at trial this week.

The Key to Success: Networking

Prosecutors say the Dhurandhar case is a textbook example of a modern software counterfeiting operation, where professional networking is the key to success. Someone knows someone with the machinery to copy the disks. Someone else knows of a print shop owner willing to churn out bogus user manuals.

Police say the players in the Southland’s growing software piracy industry range from legitimate shop owners to street thugs to U.S.-based Asian gangs, such as the Wah Ching and Black Dragons, to savvy businessmen of all nationalities willing to run a wide-scale operation.

Instead of a crime “family” with workers of one ethnicity answering to a boss, these software gangs operate as independent agents with no specific loyalties. Where traditional crime outfits work to improve the power and dominance of their family, these alliances of counterfeiters end when the job is done.

“If you’re a Crip, you’re always a Crip,” said Det. Jess Bembry, an expert in Asian organized crime with the Los Angeles Police Department. These cases are different because “if it benefits them [financially], warring groups will stop fighting to make money together.”

Like computer executives sealing million-dollar agreements with a handshake, the ancient Chinese rite of guanxi (pronounced gwan-shee) is the unspoken social glue that defines interactions in some Asian societies. For legitimate businessmen throughout the world, guanxi means a person’s social rapport is his key currency in the corporate world.

It also is a philosophy that, say police, allows accused software counterfeiters such as the Dhurandhars to build a large manufacturing enterprise.

Dhurandhar allegedly used several of his businesses, including a Long Beach print shop called Digital Colors, as fronts for the secret operation. Heavily tinted windows shielded the workers and gave no clue as to what was being manufactured inside. By day, the firm was a legitimate printing business, according to court documents. By night, it allegedly was a full-scale counterfeiting and assembly plant.

Digital Colors, according to police investigators and the documents they seized, was one hub in a manufacturing labyrinth. Companies in the San Gabriel Valley handled the assembly work. Distributors in Los Angeles and Westminster hawked the goods, which included French, Portuguese and English versions of such bestsellers as Windows 95 and Windows 98, Microsoft’s computer operating systems.

In Long Beach, Digital Colors made the boxes, which were stored in Paramount warehouses, one of which housed a $1.5-million CD-ROM replicator that is as big as a high school classroom.

Finished products allegedly were boxed, shrink-wrapped and sold to mid-level distributors. They, in turn, sold the fakes to other software distributors. Some products were loaded on trucks and hauled across the country, police say. Other goods were taken to Los Angeles International Airport, flown to Northern California and shipped overseas.

Ultimately, the disks allegedly were hawked at swap meets, over the Internet and at small retail shops in the United States, Canada, Europe and South America.

How much money the counterfeiters made is unclear, said Assistant U.S. Atty. Stephen Larson, who is prosecuting the case.

Court documents allege that the Dhurandhars used an elderly relative’s bank account, and other accounts with Bank of America and Bank of Orange County, to launder at least $3.5 million in cash from the sales of the fake software products.

Profits allegedly were funneled into nearly $5 million worth of residential and commercial properties across Southern California, including a $2.7-million, Spanish-style home in Palos Verdes Estates perched above Lunada Bay, according to state property records and court documents. The Dhurandhars could step through their French doors and enjoy an expansive view of the ocean and Catalina Island.

Federal and state authorities seized the properties and arrested the Dhurandhars in June at their home. Police say that Atul Dhurandhar was watering his lawn and had $20,000 cash in his pocket when they arrested him.

A neighbor, when asked about the Dhurandhars, responded: “We never see them. They keep to themselves.”

Asian Economic Woes Intensify Piracy

The piracy of intellectual property--whether software or music, film or pharmaceuticals--has flourished worldwide for decades. The rise of Southern California as a counterfeiting center is a more recent phenomenon.

The other hotbed of software counterfeiting is Asia, where the threat of punishment is relatively low. In legitimate retail shops in Thailand last year, more than 80% of all computer software sold to consumers was pirated, according to the U.S. Trade Representative’s office.

Last year’s Asian economic collapse intensified piracy. Asian police and U.S. investigators say formerly legitimate optical disc producers--the companies that manufacture CD-ROMs for software firms in Asia--are now moonlighting as software counterfeiters.

Among the offerings in Asian black markets: Microsoft’s business software package, Office 2000 Premium, which retails for nearly $8,700 in the United States. A week before Office 2000 debuted last month, shoppers who visited open-air markets in Hong Kong and Singapore picked up pirated versions for $20.

Like their counterparts in the drug trade, software counterfeiters are well financed and mobile. When Hong Kong officials began cracking down on piracy in 1995, pirates relocated their manufacturing facilities to mainland China and nearby Macau, where there are fewer police agencies tracking copyright violators.

Piracy also increased in Southern California. The U.S. Customs Department has tracked a steady increase in the value--and number--of high-tech counterfeit goods it seized this decade leaving the country. Although pirated movies and music get the media attention, they made up only 2% of all compact disks that customs seized in the United States last year.

Kathlene Karg, director of anti-piracy operations for the Interactive Digital Software Assn., said pirates are attracted to the U.S. market because they can charge more.

“That’s why they’re starting to make and distribute their stuff in the U.S. The risk might be greater, but so are the potential profits,” she said.

The fakes made here are harder to detect. For one thing, say manufacturers, they look great. Counterfeits sold overseas rarely come in anything more elaborate than a plastic sleeve.

Americans, however, prefer to buy nicely packaged goods, and pirates can charge more if consumers are convinced they’re buying authentic--though drastically discounted--software. Fake versions of Office 2000, similar to those selling for $20 in Singapore, can be found on at least one Internet site for $175. The difference? A user’s manual, a warranty card and a shrink-wrapped box. All fake, of course.

“Nearly everything [counterfeit] of ours that we’re seeing being made in Southern California is retail-ready,” said Anne Murphy, an attorney with Microsoft’s anti-counterfeiting team. “That’s a big threat to our business because people think they’re buying the real thing.”

In fact, high-grade counterfeits are starting to show up in mainstream stores such as Fry’s Electronics, industry sources say. The San Jose Police Department’s high-tech crime unit in the past year has investigated several such cases.

Police officers said that small batches of bogus goods, sold to the chain through independent distributors, had been discovered in inventory at various Fry’s stores. Officials at San Jose-based Fry’s declined to comment.

Investigators won’t say whether some consumers had bought fakes. Noting that investigations are ongoing, police also refused to identify the stores that carried the goods, or to disclose what kind of software was counterfeited.

Even if the people who made the bogus products are caught, the consequences could be minor. But the downside for consumers could be serious.

Counterfeit software could be a copy of an early--and flawed--version of the real thing. It could include viruses that could destroy a person’s computer data. And manufacturers refuse to fix fake goods.

Federal penalties for counterfeiting are relatively low. If convicted, a person can be sent to prison for up to five years for software counterfeiting. But most software pirates avoid serious punishment and usually serve less than three years, according to officials at the U.S. attorney’s office.

Though a federal statute--the Digital Millennium Copyright Act--enacted last year allows for more serious financial penalties and jail terms, the law remains relatively untested.

To date, federal and local prosecutors have focused largely on those accused of running major counterfeiting operations and laundering money, such as the Dhurandhars. Federal money laundering charges have a much stronger legal bite--a minimum of 10 years in prison--than counterfeiting, said Assistant U.S. Attorney Larson, who is chief of the department’s organized crime strike force in Los Angeles.

“It takes me longer to build a case than the time they end up spending in jail,” grumbled Det. Jess Bembry, an expert in Asian crime with the Los Angeles County Sheriff’s Department. “It’s ridiculous.”

Few consumers sympathize when Microsoft or other large software firms complain about counterfeiters. The Redmond, Wash.-based behemoth is the world’s most valuable corporation and has continually exceeded Wall Street’s profit expectations. Last week, Microsoft said its fiscal fourth-quarter profits jumped 62%, with earnings for the period climbing to a record $2.2 billion.

Microsoft has fought piracy since 1976, when Bill Gates wrote his now-famous “Homebrew” open letter to computer hobbyists. The missive chastised computer users and called them “thieves” for not paying to use the operating software, known as BASIC.

Some critics say that software firms fuel piracy by charging too much for their products, but the companies argue that the prices are set to recoup the costs of developing and marketing new programs and make a profit.

“Counterfeiting is stealing. We don’t benefit by it. We don’t cause it,” said Murphy, the corporate attorney for Microsoft.

There are three categories of software piracy. “Warez” is the Internet underground community where users gather at little-known online trading posts to swap files. In license infringement piracy, an individual or organization loads a software program onto multiple computers and doesn’t pay the manufacturer for each installation. Finally, there is counterfeiting--the practice of taking a program, burning a copy of it onto a disk and selling the CD-ROM for a profit.

American willingness to buy counterfeit disks terrifies software firms, which have not convinced the public that downloading a $300 business program is as unethical as stealing a $300 leather coat.

In fact, the lack of public outrage has so emboldened the criminal sector that consumers sometimes shop for counterfeit brands.

Take, for example, the Players, a Malaysian crime syndicate known for making fake console video games. Their products, which are sold throughout Asia and on the Internet, sport a small “Players” logo on the jewel case. This logo also is burned on the game disk itself--often in place of the icon for Sony Corp., the legitimate game publisher.

“When it comes to money, morality gets put aside,” said Frank of the Westminster Police Department. “Welcome to the new age of international relations.”

*

Times staff writer Rone Tempest in Hong Kong contributed to this report.

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Spotting Pirated CDs

Security features on software programs differ for each manufacturer and each product. Think you got a fake? Here are a few things to check.

1. Prices that are too good to be true: Office 2000 for $75, when it normally retails for more than $400

2. Missing key elements: Make sure there is a user manual, a certificate of authenticity, end-user license agreements, product identification.

3. Poor quality packaging: The product typically is fake if the ink on the box is smeared, the backup disks have handwritten labels, the program doesn’t come in a plastic jewel box, or the margins in the user’s manual aren’t even.

4. Microsoft products: Check the small Windows logo on the side of the box. The colors in the Windows should be red, green, blue and yellow. Company officials have found that some counterfeiters substitute black for blue, or use shades of red and green that are lighter than the real thing.

5. Counterfeit video games for PlayStation: When you hold a Microsoft certificate of authenticity up to the light, you should be able to see a continuous metallic strip woven into the paper. Feel the paper and see if the border, text and Microsoft logo have raised print, like a dollar bill. Make sure the watermark is true and not just printed on the surface of the paper. Hidden in the Microsoft logo is the word “OK,” so tilt the certificate until you can see the letters.

Source: Microsoft Corp., IDSA, BSA

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Southland Busts

Court records from dozens of counterfeiting cases throughout the region show that counterfeiters spend very little time in jail--even when they are convicted of making millions of dollars on stolen software. The strongest punishment, say legal experts, is usually a prison sentence between 18 months and three years. Here is a sample of the bigger cases in the region, based on the value of the products seized.

* 1999 Long Beach, Paramount, San Gabriel Valley: A federal grand jury indicted 12 people on suspicion of money laundering and running the nation’s largest Microsoft counterfeiting scheme. Authorities seized several Los Angeles County homes valued at more than $4 million, and confiscated $60 million worth of pirated Microsoft software and a $1.5-million optical replicator, among other things. Police say alleged ringleader Atul Dhurandhar, 51, of the Palos Verdes Penisula, ran an operation that produced an estimated 15,000 bogus Microsoft programs a month.

OUTCOME: All 12 people have pleaded not guilty and are scheduled for trial in federal court Tuesday.

* 1999 Los Angeles: L.A. County sheriff’s deputies seized $11 million worth of counterfeit Microsoft software stored in warehouses in East Valinda and the City of Industry. Four men allegedly affiliated with the Chinese gang Wah Ching--Vincent Chinlo Lam, 19, of Baldwin Park, Paul Karsing Tam, 23, of Rowland Heights, Chun Hung Yau, 24, of Valinda, and Robert S.G. Ting, 26, of Alhambra--were arrested.

OUTCOME: The four men, who posted bail, were charged with felony counterfeiting. The case is pending.

* 1997 San Gabriel Valley, Riverside County, Westminster: Taiwanese immigrants Chia Shang ‘Bob” Wu, 42, and his wife, Mei Lan Hsu ‘Annie” Wu, 37, both of Rowland Heights, were charged with heading a 14-member software piracy ring that operated in three counties. The Wus allegedly assembled a multiethnic crime gang that included Chinese nationals, Vietnamese print shop owners and Laotian assembly workers. Westminster police and federal agents seized $8 million worth of counterfeit Microsoft labels, disks and holograms from a warehouse in Walnut. OUTCOME: The Wus are scheduled for trial this month on charges of software trafficking and money laundering. Ten were prosecuted; two got jail time--less than a year each--and the others were fined. Two others fled the country.

Graphics reporting by TINI TRAN/Los Angeles Times

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Digital Pirates

Southern California--where the Pacific Rim, an entertainment culture and counterfeit manufacturing intersect--has become a hotbed of high-tech piracy. Music, game, movie and computer software CD-ROMs are all fair game.

SOUTHERN CALIFORNIA PRODUCTION NETWORK

Some illicit production facilities run legal businesses by day, but do pirating at night. San Gabriel Valley is considered the region’s “pirates cove,” but manufacturing and printing facilities have cropped up in Long Beach, Paramount and Westminster’s Little Saigon.

Graphics reporting by P.J. HUFFSTUTTER / Los Angeles Times