Whistleblower calls out 'encrypted' promotional products cartel

07 September 2017 00:00

A cartel in the promotional products industry was disclosed to prosecutors by a whistleblower who flagged seemingly illicit price-fixing discussions, MLex has learned.

In the past month, the Department of Justice announced guilty pleas from two online suppliers of promotional products and their owners, touting the case as the agency's first foray into encrypted communications used to establish price-fixing agreements.

In the initial announcement, prosecutors highlighted the online communications, saying "conspirators used social media platforms and encrypted messaging applications, such as Facebook, Skype and WhatsApp, to reach and implement their illegal agreements."

While agreements were reached in part through discussions in a private WhatsApp group, prosecutors first learned of the case when the whistleblower contacted them following entreaties from cartel members to participate in the price-fixing, according to an industry source familiar with the probe and documents viewed by MLex.

After initially drawing attention to the cartel, the whistleblower agreed to wear a wire for federal investigators during conversations with three potential cartel members, it is understood.

Houston-based Zaappaaz and its owner, Akim Makanojiya, agreed to plead guilty Aug. 7, with the company paying a $1.9 million fine. Zaappaaz operates websites including wrist-band.com, and customlanyard.com. Two weeks later Southern California-based Custom Wristband and its owner, Christopher Angeles, agreed to plead guilty, with the company paying a $409,342 fine.

The companies sell promotional products such as silicone wristbands and rubber bracelets, as well as lanyards for items such as conference badges.

Brent Snyder, the former head of criminal enforcement at the DOJ's antitrust division, said in a conference on Feb. 3 in Miami that for the first time, prosecutors had uncovered a cartel using encrypted communications. Snyder didn't specify the industry or companies involved, but said the alleged cartel was first discovered a little less than a year prior to the conference.

The government was notified of potential cartel activity in late February 2016, according to the documents viewed by MLex. A DOJ spokesperson declined to discuss the matter.

In January 2016, a Houston-based wristband seller discovered that several of its local competitors had been meeting online and in person to set prices, according to the documents.

At that time, the company's owner was approached by owners of two competitors, the industry participant said. Mashnoon Ahmed and Akil Kurji — former business partners in a costume lingerie company called Spurst, and now competing wristband purveyors — reached out in January 2016 through text and Facebook messages to bring it into the fold.

In those messages, Kurji was not discreet, saying that he, Ahmed and Makanojiya had all agree to match each other's prices rather than compete, according to the documents. Ahmed added that wristbandcreations.com was also involved. The latter site is operated by Custom Wristband and Angeles in Southern California.

Victor Rey, owner of a Houston-area company called Wristband Connection, told MLex he was approached by Ahmed in March 2016 to agree on pricing. He said he met with Ahmed but never agreed to fix prices.

Ahmed runs a company called Netbrands Media, with websites including 24hourwristband.com and imprint.com. Kurji runs companies called Brandnex and Promotional Manufacturing Group of America.

According to a Facebook page for Kurji, he sold Spurst to Netbrands in 2012. A LinkedIn page for Ahmed lists him as a co-founder of Spurst.

Ahmed, Kurji and their companies haven't been charged with any crime, and have not responded to multiple requests for comment.

Zaappaaz and Netbrands also have a shared history. Netbrands sued Zaappaaz and its executives in 2010, alleging they copied its website and redirected web traffic. The lawsuit was settled out of court the following year.

According to a civil class-action lawsuit filed Aug. 30, shortly after the settlement, Netbrands and Zaappaaz began pricing in "lockstep".

Following the early 2016 conversations with Ahmed and Kurji, through an attorney the whistleblower contacted antitrust prosecutors in Washington, DC, it is understood. The whistleblower agreed to wear a wire in conversations with Ahmed, Kurji and Makanojiya, it is understood.

Within just a few weeks of the recorded conversations, Federal Bureau of Investigation agents conducted searches at facilities owned by all three, the industry participant said. Offices of 24 Hour Wristbands and other companies were searched by federal agents on June 28, 2016, according to a local Houston news report from that day.

During the recorded conversations, the men were not shy about their intentions, discussing specific pricing arrangements, as well as their private WhatsApp group and specific restaurants where they met to agree on prices, according to the industry participant.

It's not known how the government accessed encrypted communications, but both Makanojiya and Angeles are cooperating with authorities as part of their plea deals.

Following the Houston raids, the investigation soon branched out. Based on information gathered from the Houston companies, prosecutors and investigators determined that companies around the country were involved, according to the industry participant.

Ohio-based Totally Promotional was searched by federal agents in July.

The investigation is ongoing.

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