Civil Fraud Lawsuit Against Clothing Companies Over Custom Duty Avoidance Settled

Defendants to Pay $6 Million and Admit to Engaging in Fraudulent Schemes Involving Use of False and Inaccurate Invoices

Audrey Strauss, the United States Attorney for the Southern District of New York, Peter C. Fitzhugh, the Special Agent in Charge of the New York Office of Homeland Security Investigations (“HSI”), and Marty Raybon, Acting Director, Field Operations, New York, U.S. Customs and Border Protection (“CBP”), announced today that the United States has settled civil fraud claims brought under the False Claims Act against STARGATE APPAREL, INC. (now named EXCEL APPAREL CORP.) (“STARGATE”), RIVSTAR APPAREL, INC. (“RIVSTAR”), and JOSEPH BAILEY.  STARGATE and RIVSTAR are apparel companies headquartered in New York, New York, and BAILEY is the companies’ former CEO and owner.

As alleged in the Government’s lawsuit, filed in 2019, BAILEY, STARGATE, and RIVSTAR employed a variety of schemes to defraud the United States by submitting invoices to CBP that falsely understated the true value of the clothing that they imported into the United States in order to avoid paying millions of dollars in customs duties.  RIVSTAR is no longer operating.

Under the civil settlement approved today by U.S. District Judge J. Paul Oetken, BAILEY will pay $3.2 million to the United States, and STARGATE, RIVSTAR, and the employee stock ownership plan that currently owns the companies will together pay a total of $2.8 million to the United States.  BAILEY, STARGATE, and RIVSTAR admitted and accepted responsibility for their conduct as further described below.  As part of the settlement, STARGATE and RIVSTAR (to the extent that it resumes operations) will also implement a written compliance policy that will include measures designed to ensure that they pay duties on the full, actual value of all future imports and otherwise comply with applicable customs laws and regulations.  Last year, BAILEY pled guilty and was sentenced to six months in prison for engaging in certain of the conduct related to STARGATE imports that is at issue in the Government’s civil complaint.  This civil settlement is in addition to the $1,661,617 forfeiture amount that BAILEY was ordered to pay in the criminal proceedings.

U.S. Attorney Audrey Strauss said: “Stargate, Rivstar, and their former president engaged in a variety of fraudulent schemes to short-change the Government of customs duties owed for imported clothing by falsely under-reporting its value.  This settlement, along with the separate criminal action against Bailey, demonstrate that our Office will hold companies, as well as their executives, accountable when they try to evade paying the legally required custom duties on imported goods.”

HSI Special Agent in Charge Peter C. Fitzhugh said: “For over a decade these clothing companies used ‘double-invoice’ schemes to underpay customs duties that were owed to the U.S. for garments being imported into the country, resulting in millions of dollars in customs duties lost.  HSI worked closely with U.S. Customs and Border Protection and the U.S. Attorney’s Office for the Southern District of New York to achieve this settlement, requiring the defendants not just to accept responsibility, but also to pay the Government $6 million and enhance their compliance policies.”

CBP Acting Director of New York Field Operations Marty Raybon said: “The settlement reached today is a testament to the dedication of our partners in the United States Attorney’s Office, Homeland Security Investigations, and the men and women of CBP in enforcing our nation’s trade laws and punishing those perpetrating this type of fraud.”

The Government’s complaint alleges that in order to avoid customs duties, from 2004 through 2015 (the “Covered Period”), STARGATE, RIVSTAR, and BAILEY engaged in two types of “double invoicing” schemes to fraudulently underpay customs duties owed to the United States in connection with the garments that they brought into the country.  Under the first scheme, the exporter would provide one invoice that reflected the amount Defendants actually paid the exporter for the goods, and a second invoice that fraudulently reflected a fabricated lower amount that was submitted to CBP.  These two invoices were virtually identical (e.g., same invoice number, description of goods, quantity of goods), except that they included different prices for the same shipments of goods.  Under the second scheme, the exporter also would provide two invoices, which together reflected the actual price paid for the shipment.  However, Defendants would only submit one of the invoices to CBP.  The other invoice, which purported to be for “samples,” “accessories,” “commissions,” or “testing costs,” reflected an additional payment made by Defendants for the same goods described in the first invoice and was not submitted to CBP.  The purpose of each of these two schemes was the same – to fraudulently under-report the value of the goods in order to pay less duties.

As part of the settlement, BAILEY, STARGATE, and RIVSTAR admit, acknowledge, and accept responsibility for the following conduct:

STARGATE Conduct:

  • During the Covered Period, STARGATE’S primary supplier was Taizhou Jiali Garments Co. Ltd. and its affiliated manufacturers (collectively, “Taizhou”), which are all located in China.  At the direction of BAILEY, STARGATE engaged in two different fraudulent schemes that involved the preparation and use of false and inaccurate invoices to underreport the actual value of goods imported from Taizhou in order to avoid paying the customs duties due.  BAILEY knew that this conduct was wrong and in violation of customs laws.
  • As part of the first scheme, from 2007 through 2010, at BAILEY’S direction, Taizhou provided STARGATE with two sets of invoices for each shipment of goods.  One invoice, referred to in email communications as the “pay by” invoice, reflected the actual price paid by STARGATE for the goods.  The second invoice reflected a fake, lower price for the goods and was the invoice that STARGATE presented to CBP through its customs broker.  Stargate, at the direction of Bailey, routinely declared this false, lower value on CBP entry forms in order to pay lower customs duties on goods imported from Taizhou.
  • Beginning around 2010 and continuing through at least 2015, BAILEY and STARGATE engaged in a second scheme.  At BAILEY’S direction, Taizhou provided two separate sets of invoices for a given shipment that together reflected the true price Stargate actually paid for the goods.  The first invoice, typically entitled the “commercial invoice,” described the goods purchased, and was submitted to CBP by STARGATE’s customs broker.  The second invoice purported to reflect amounts paid by Stargate for “sample” goods and was not submitted to CBP.  The “sample” invoice was not, in fact, for samples actually purchased by STARGATE.  Rather, STARGATE used the “sample” invoice to make an additional payment to Taizhou for the goods purchased by STARGATE that were described in the “commercial invoice,” while hiding the full value of those goods from CBP.  STARGATE, at the direction of BAILEY, routinely declared only the values recorded on the “commercial invoices,” which were less than the full price paid for the goods, on CBP entry forms in order to pay lower customs duties on goods imported from Taizhou.
  • During the Covered Period, STARGATE also imported goods that it purchased from Tex-Prime International, Ltd., and its affiliated manufacturers (collectively “Tex-Prime”), which are located in China.  Beginning in at least 2004 and continuing through 2014, STARGATE, at the direction of BAILEY, also engaged in two different fraudulent schemes that involved the preparation and use of false and inaccurate invoices to underreport the actual value of goods imported from Tex-Prime in order to avoid paying the customs duties due.
  • The first scheme involved Tex-Prime providing two nearly identical invoices for each shipment that differed only in the stated price.  The first invoice reflected the amount that STARGATE actually paid for the imported goods.  The second invoice (frequently identified by a “C” suffix following the invoice number, or the term “Custom” following the invoice number in the file name), reflected a false and inaccurate lower price and was the invoice that STARGATE submitted to CBP through STARGATE’s customs broker.  STARGATE, at the direction of BAILEY, routinely declared the values recorded on this second, false invoice on CBP entry forms in order to pay lower customs duties on goods imported from Tex-Prime.
  • The second scheme also involved Tex-Prime providing two invoices.  In this scheme, the two invoices together reflected the actual price paid by STARGATE for the shipment.  The first invoice, entitled a “commercial invoice,” described the goods purchased and was submitted to CBP by STARGATE’s customs broker.  The second invoice, entitled a “statement,” purported to be an invoice for accessories charges, commissions, testing charges, or samples.  This second invoice was not submitted to CBP and in reality reflected an additional payment made by STARGATE to Tex-Prime for the same shipment.  STARGATE, at the direction of BAILEY, routinely declared only the values recorded on the “commercial invoices,” which were less than the full price paid for the goods, on CBP entry forms in order to pay lower customs duties on goods imported from Tex-Prime.
  • Through the practices described above, STARGATE misrepresented the value of the goods it purchased and imported into the United States.  STARGATE and BAILEY were aware at all times that the reported information was incorrect and grossly understated the actual value of the imported goods, but continued to make the incorrect entries in order to reduce the amount of duties owed.  As a result of their conduct, STARGATE and BAILEY underpaid customs duties that were due and owing to the United States.

RIVSTAR Conduct:

  • During the Covered Period, RIVSTAR imported goods purchased from Pacific Potential Trading Co., Ltd., and its affiliated entities (together, “Pacific Potential”), as well as from Dongguan Bestsign and Trading Co., Ltd., and its affiliated entities (together, “Bestsign”), all of which are located in China.
  • During the Covered Period, at RIVSTAR’s request and BAILEY’s direction, Pacific Potential and Bestsign provided two sets of invoices for each shipment imported into the United States by RIVSTAR.  The first invoice described the goods imported and was submitted to CBP by RIVSTAR’s customs broker.  The price reflected on the invoices declared to Customs did not reflect the full price RIVSTAR paid for the merchandise.  The second invoice purported to be for “testing costs” relating to the imported goods and was not submitted to CBP.  Together, the two invoices reflected the true total price that RIVSTAR paid for the goods; RIVSTAR, however, did not declare the amount reflected on the invoice for “testing costs” to CBP.  For the most part, the amounts reflected on the invoice for “testing costs” were not for actual testing, but instead reflected an additional payment made by RIVSTAR to Pacific Potential and Bestsign for the same shipment that was not declared to CBP.  To the extent that any such payments actually related to testing costs, such charges were still dutiable and should have been declared to CBP.
  • Through these practices, RIVSTAR at BAILEY’s direction misrepresented the value of the goods it purchased and imported into the United States.  RIVSTAR and BAILEY were aware at all times that the reported information was incorrect and grossly understated the actual value of the imported goods, but continued to make the incorrect entries in order to reduce the amount of duties owed.  As a result of their conduct, RIVSTAR and BAILEY underpaid customs duties that were due and owing to the United States.

The conduct in this matter was first brought to the attention of federal law enforcement by a whistleblower who filed a lawsuit under the False Claims Act.

Ms. Strauss thanked U.S. Customs and Border Protection and Homeland Security Investigations for their assistance with the case.

The civil case is being handled by the Office’s Civil Frauds Unit, and Assistant U.S. Attorney Dominika Tarczynska is in charge of the matter.

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