Geoffrey S. Berman, the United States Attorney for the Southern District of New York, Angel M. Melendez, the Special Agent in Charge of the New York Office of the U.S. Department of Homeland Security, Homeland Security Investigations (“HSI”), and Troy Miller, Director, Field Operations, New York, U.S. Customs and Border Protection (“CBP”), announced today the filing of criminal and civil charges against JOSEPH BAILEY, the CEO of a children’s apparel company headquartered in Manhattan. BAILEY was charged, in an indictment unsealed today, with participating in a years-long scheme to defraud U.S. Customs and Border Protection (“CBP”) by submitting invoices to CBP that falsely understated the true value of the goods his company imported into the United States. BAILEY’s scheme resulted in the loss of over $1 million in duty revenue to the United States.

BAILEY was arrested today, and will be presented before Chief U.S. Magistrate Judge Gabriel W. Gorenstein in Manhattan federal court later today. The criminal case has been assigned to U.S. District Judge William H. Pauley III. In addition, a civil fraud lawsuit against BAILEY and his companies, Stargate Apparel, Inc. (“STARGATE”) and Rivstar Apparel, Inc. (“RIVSTAR”), which is assigned to U.S. District Judge J. Paul Oetken, was unsealed in Manhattan federal court earlier today. The civil complaint, which was filed on April 19, 2019, under seal, asserts that BAILEY, STARGATE, and RIVSTAR violated the False Claims Act by submitting invoices to CBP that falsely understated the true value of the goods they imported into 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.

U.S. Attorney Geoffrey S. Berman said: “As alleged, Joseph Bailey defrauded the United States by several schemes with one theme – misrepresenting the value of imported goods to avoid payment of customs duties. Bailey now faces criminal charges for his alleged fraud, and the government’s civil suit seeks treble damages and penalties against Bailey and his companies.”

HSI Special Agent in Charge Angel M. Melendez said: “Bailey is alleged to have undervalued imported goods, leading to a loss to the government of more than a million dollars in duty revenue. It is important to remember that customs fraud is not a victimless crime, as it affects legitimate trade and business. Trade enforcement is a priority for HSI, and we will continue to partner with CBP as we investigate those fraudsters and bring them to justice.”

CBP Director of New York Field Operations Troy Miller said: “U.S. Customs and Border Protection provided a critical link in an ongoing investigation that resulted in the takedown of an elaborate criminal enterprise. It is through our interagency partnerships, and collaborative approaches like the one leading to today’s arrests, that law enforcement successfully combats modern criminal organizations.”

According to the allegations in the Government’s indictment and civil complaint[1]:

From in or about 2007 to in or about 2015, BAILEY and other employees of STARGATE engaged in a scheme fraudulently to understate the value of goods imported into the United States. During the charged time period, STARGATE purchased much of its merchandise from a manufacturer located in China (“Manufacturer-1”). Starting shortly after STARGATE began doing business with Manufacturer-1 in 2007, through approximately 2010, BAILEY and others at STARGATE engaged in a double-invoicing scheme by which STARGATE would receive two sets of invoices from Manufacturer-1 for the same shipment of goods. One invoice, referred to as the “pay by” invoice, was significantly higher and reflected the actual price paid by STARGATE for the goods. The second invoice reflected a significantly lower price for the goods and was presented to CBP. This allowed STARGATE to pay a fraudulently lower amount of customs duties.

In approximately 2010, BAILEY and other employees of Stargate began a new variation of the customs fraud scheme, involving invoices for “sample” goods, by which Manufacturer-1 would send two separate sets of invoices for a given shipment that together reflected the true price STARGATE actually paid to Manufacturer-1 for a particular shipment of clothing. The first invoice, typically entitled the “commercial invoice,” described the goods purchased and was submitted to CBP. The second invoice purportedly reflected amounts paid by STARGATE for “sample” goods and was not submitted to CBP. Sample goods are not subject to customs duties.

The “samples” invoice was not, in fact, for samples actually purchased by STARGATE. Rather, it was a means to make an additional payment to Manufacturer-1 for actual goods purchased by Stargate without disclosing that payment to CBP. Typically, the “samples” invoices reflected a unit price for sample goods that was significantly greater than the unit price for the non-sample goods reflected on the invoice submitted to CBP (for example, $70-$90 per unit on the “samples” invoice versus a $4 per unit price on the “commercial invoice”). In addition, the “samples” invoice reflected the purchase of unusually large quantities of sample goods. For example, the “samples” invoice reflected quantities as large as 24 or 48 pieces of a single color in a single style.

This multi-year fraud scheme resulted in the loss of over $1 million in duty revenue to the United States.

In addition to these allegations, the Government’s civil fraud complaint also alleges that BAILEY, STARGATE, and RIVSTAR engaged in similar schemes involving additional manufacturers. Similar to the schemes involving Manufacturer-1, these schemes involved a second invoice, which purported to be for “samples,” “accessories,” “commissions,” or “testing costs,” but in reality reflected an additional payment made by the defendants for the same goods described in first invoice, but that was not submitted to CBP. Through these schemes the defendants undervalued the goods that entered into the United States by tens of millions of dollars.

* * *

BAILEY is charged with one count of conspiracy to commit wire fraud, which carries a maximum sentence of 20 years in prison, one count of wire fraud, which carries a maximum sentence of 20 years in prison, and one count of falsely effecting the entry of goods into the United States, which carries a maximum sentence of two years. The maximum potential sentences in this case are prescribed by Congress and are provided here for informational purposes only, as any sentencing of the defendant will be determined by the judge. BAILEY, STARGATE, and RIVSTAR are also charged with civil claims under the False Claims Act, through which the Government may recover treble damages and civil penalties arising from his conduct.

Mr. Berman thanked HSI and U.S. Customs and Border Protection for their efforts and ongoing support and assistance with the case.

The criminal case is being handled by the Office’s Complex Frauds Unit, and Assistant U.S. Attorneys Dina McLeod and Dominika Tarczynska are in charge of the prosecution.

The civil case is being handled by the Office’s Civil Frauds Unit, and Assistant U.S. Attorneys Dominika Tarczynska and Jean-David Barnea are in charge of the matter.

The charges contained in the indictment are merely accusations and the defendant is presumed innocent unless and until proven guilty.