Wine Counterfeiting, Rudy Kurniawan, and Maureen Downey

This post touches on the wine counterfeiting topic raised by Peter (below), the ongoing theme of Chinese wine consumption growth, the difficulty that some consumers have telling the difference between wines at very different price points, and a look at alternate business models in the industry.

I met Maureen Downey a few years ago in Boston. A wealthy friend of mine had invited me to accompany her to a lecture given by Downey, who works with my friend’s father, the owner of a collection vast enough that he owns a large warehouse purely to store wine. 

Downey has made a name for herself as a wine authenticator and "wine detective", assisting authorities in pursuing wine counterfeiters. It sounds ridiculous, but wine counterfeiting is actually a major force in the modern market. The process is easy: make a blend of modern, cheaper wines that resemble the rare ancient variety, print a close reproduction of the original vineyard’s label, and then faux-age it (with dirt, staining, ripping and fraying the paper, etc.). When a bottle sells for tens or hundreds of thousands of dollars, the margin on that transaction can be high. As a result, one French mine producer estimated that 80% of pre-1980 Burgundies sold at auctions are fake (link)! Others paint a far less pessimistic picture.

The drivers for counterfeiting are essentially the same as those that drive price. For one, income and wealth have become more concentrated at the top of the economic ladder, shifting consumer behavior for all goods towards discount and luxury, away from middle-tier. Second, volatility in mainstream financial assets has increased the pull of art and items such as rare wines and whiskies as objects of investment (link). Third, Chinese demand is burgeoning, especially for certain brands (Margaux, Lafite, etc.) – and that consumer is often unsophisticated. Finally, whereas it is well-known to most people that paintings and money can be counterfeited (think The Thomas Crown Affair), that awareness is not as widespread in the wine world.

As a result of that growth in counterfeiting, demand has emerged for authentication services and “wine detectives” by investors spending thousands of dollars on acquisitions. Downey performs these services. Most famously, she worked closely with the FBI and DOJ on the Rudy Kurniawan case.

I’ve pasted some links below that I heartily recommend, because the Kurniawan case is highly entertaining. Before he started mixing wines and faking corks in his home, Kurniawan was a Chinese-Indonesian immigrant of means. Apparently, he tasted a 1996 Opus One in the early 2000s and was enthralled. In the years afterwards, he started buying rare wines like crazy, becoming an expert in Burgundies and single-handedly driving up the price for older vintages by driving bidding in the big auctions. He apparently had a great sense of taste, with the ability to identify wines “double-blind”. At some point, he realized that there was an opportunity.

Kurniawan sold expensive wines for over 5 years before getting caught. He was aided in his activities by the characteristics of old wine, such as:

• It is common for old wines to be recorked; thus it raised few flags when some bottles had young-looking corks
• Older vintages often had variable labeling (not as corporatized and standardized as modern production), so inconsistencies were expected
• Some Burgundies were only produced in such small vintages that very few people really know how many there are and how they look
• Going back to the value of context, even experts couldn’t be sure of tastes; people that tasted wines pre-auction and thought they were amazing then thought the fakes tasted horrible afterwards

Some fakes are expected, but it started happening too often to bottles sold by Kurniawan. Victims like billionaire William Kock (as in the politically-active Koch brothers) had gotten suspicious and launched lawsuits. The final straw was his attempt to auction off bottles dating back several decades before the first vintage from that vineyard was ever produced. A raid on his Arcadia home that turned up thousands of empty bottles, corks, fake labels, and sealing wax. Even worse, it turned out that Kurniawan had overstayed his visa for 10 years ago and was in the country illegally.

Downey’d been tracking him for years, and had counseled auction houses not to take his wine. She’d come across faked bottles in her previous life as a restaurant manager and sommelier, and then some of Kurniawan’s bottles as an auctioneer.

Downey is making money with wine in yet another way besides the various parts of the value chain we've already reviewed in class. Her consulting firm, Chai Consulting, provides authentication and wine collection management services. The latter consists of essentially acting as a wine librarian, cataloging and organizing thousands of bottles that are often simply piled in every extra square foot of space in a wine cellar. Chai Consulting also runs the website WineFraud.com, which acts as a sort of club continually updating its members on counterfeiting-related developments, as well as tips on how to check certain wines for fraud. 

Reading about Downey, I also got a sense of the vast marketplace that exists for wine that you would expect for any high-value, rare product -- there are appraisers, auctioneers, insurers, etc. If someone else wants to take the ball and research these, it might make for a good next blog post!

Links

·        http://www.decanter.com/interviews/the-decanter-interview-maureen-downey-13417/

·        http://www.latimes.com/nation/nationnow/la-na-nn-wine-sentencing-20140807-story.html

·        http://nymag.com/news/features/rudy-kurniawan-wine-fraud-2012-5/

·        http://www.sfweekly.com/sanfrancisco/the-wine-detective-maureen-downey-reveals-forged-bottles/Content?oid=2186203&showFullText=true

·        https://en.wikipedia.org/wiki/Rudy_Kurniawan