Wine Fraud Case Settled

A San Francisco wine consultant has been appointed receiver for a cache of 165,000 cases of wine left in limbo last month when a Westlake Village telemarketing company settled fraud charges filed against it by the Federal Trade Commission.

The wine was the centerpiece of the FTC’s charges against the Wine Exchange Inc., which sold about $25 million in wine futures to some 2,300 investors, about half of them in Southern California. TWE, formerly known as the Wine Futures Exchange Inc., sold investors about 170,000 cases of premium California wine prior to release, promising to resell it at a substantial profit. However, FTC attorney Ben Aliza said neither TWE’s telemarketers nor the literature produced by the company mentioned risks associated with such investments. And no more than 5,000 cases of wine ever were sold, very little of it at a profit, said Aliza.

It was the FTC’s first investigation into deceptive practices in investment-wine sales, Aliza said, and the FTC was taking the rare step of helping investors sell their wine to recoup some of their losses.

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“This is a very unusual consumer fraud case for the Federal Trade Commission because of the unusual nature of wine,” said Aliza. “In most cases of consumer fraud we deal in things like gemstones, precious metals and oil wells. In cases like these we never do anything to help the consumer get something from the goods they get stuck with; they have to do something with it on their own.”

However, he said, “wine is a living commodity, so we’ve arranged with a receiver who will help them liquidate the wine.”

Aliza said investors could take title to the wine they bought, but would be liable for sales taxes if they did. What’s more, laws in several states restrict the private disposal of such wines.

A judge appointed Ed Everett of New World Wines to represent owners of the wines. Everett said he expected most investors would opt to liquidate their wines through him. If they did, he said, he expected most to recoup between 40% and 50% of their original investment, but some investors would lose substantially all of their investment and others would get back more than 50%. Very few stood to make a profit, he said.

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The average investor had more than $12,000 in the scheme. A source said some investors bought nearly $100,000 in wine under the program.

To settle the charges, the Wine Exchange agreed to halt the marketing idea, pay $600,000 in refunds to investors, and give up claims to $2.5 milion in unpaid fees and charges, about half of it for storage and insurance of the wine, the rest in fees completing sale of the wine.

Everett said he will contact each winery involved in the program to see if they would like to buy their wines back. Many of the wine companies in the program, including such prestigious winery names as Robert Mondavi, Chateau St. Jean, Guenoc, Franciscan and Sterling, might not want to see their wines closed out at rock-bottom prices and may try to buy the wine back.

TWE’s telemarketers told potential investors that “investment-grade” California wine was available at least 10% below its wholesale price. The plan called for investors to pay 95% of the price of the wine; TWE retained 5% and thus title to it. Investors were told the wine would appreciate in value over time, and that TWE would sell the wine. TWE said it had contacts with fine hotels, restaurants and cruise lines, the FTC said.

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In fact, the FTC said, many wines were sold to investors at more than the wholesale price, and many of the wines, including almost all of the white wines, decreased in value over time.

No more than 5,000 cases of the investors’ wine ever was sold, only a small percentage of it at a profit, said Aliza.

In signing the FTC consent order, which was approved by a Los Angeles federal court judge a week ago, TWE’s chairman and CEO Benton E. Lane did not admit wrongdoing. Aliza emphasized that “a final order for settlement does not constitute an admission of a law violation.”

Robert Lawrence Balzer, who writes on wine for The Los Angeles Times Magazine, was the wine expert who helped select wines for the program. Aliza said that in a deposition Balzer said he was not compensated for his activities, that he selected the wines out of his friendship for Lane. Balzer was not mentioned in the FTC order.