One June morning in 2010, nearly two dozen sheriff’s detectives stormed into a warehouse in Vernon, guns drawn. There, they discovered what they believed to be the biggest retail theft case of their careers. Stacked floor to ceiling were allegedly stolen razors, batteries, over-the-counter drugs and other merchandise worth more than $4 million, ready to be resold. It took three days and 50 trucks for authorities to haul it all away.
“It’s the biggest operation I’ve ever seen,” Sgt. Jim Anderson, who led the raid, said at the time.
But a year and a half later, no charges have been filed; the merchandise has been returned by a judge’s order; and the business, XYZ Distributors Inc., a seller of secondhand goods, is still operating – barely.
Fred Partiyeli, who co-founded XYZ with his brother in 1992, said that what happened to him is a reminder that any company is one law enforcement seizure away from ruin.
“My ability to do business was destroyed,” Partiyeli said.
With law enforcement budgets shrinking, asset seizures are on the rise across the country, including Los Angeles County, since law enforcement agencies can raise money by auctioning the seized goods. And even if criminal charges are never filed, authorities can auction the property under civil asset forfeiture laws which have a lower burden of proof that the property was connected with some sort of criminal activity.
In fact, critics charge there’s an increasing bias by law enforcement toward seizing property, which can cripple a business before guilt is ever proved.
In XYZ’s case, investigators have yet to show the company traded in stolen goods, but Partiyeli said the raid in itself was enough to destroy the company’s reputation and credit, and his business is likely to go under before investigators ever present a case to prosecutors.
He has sued for millions in damages and in November put his warehouse up for sale.
Authorities, meanwhile, maintain they had good reason for the raid, which was the result of months of investigation that began with the arrest of shoplifters in the Santa Clarita Valley who fenced their goods in downtown Los Angeles. Ultimately, they said, bait “stolen” goods from a sting operation were purchased by XYZ, which led to the search warrant.
Steve Whitmore, a spokesman for the Los Angeles County Sheriff’s Department, said that the investigation into XYZ is ongoing and that charges could still be sought.
“Anything’s possible and we’ll go wherever the evidence leads us,” Whitmore said. “We look forward to telling the whole story.”
Secondhand industry
XYZ is one of several companies in industrial areas of Los Angeles that sell merchandise secondhand. They include Los Angeles Center Closeout Corp. and Bargain Bank, also both in Vernon.
XYZ buys discounted goods from manufacturers, retailers and other sources. Some of the items have been pulled off shelves by manufacturers that are changing out packaging, while others might be overstock or returns. A big part of its supply chain are jobbers, middlemen who connect the company with these goods suppliers.
XYZ then sells the goods to retail businesses as well as to other wholesalers and distributors. One big client was Dallas-based 7-Eleven Inc., which took daily deliveries at 150 of its L.A.-area stores.
XYZ got itself into trouble when sheriff’s investigators set up a sting, prompted by the arrest of a group of alleged narcotics users stealing personal care items and other retail products in the Santa Clarita Valley.
The shoplifters admitted to selling their stolen goods to a fence on Sixth Street in downtown Los Angeles. Undercover police then sold boxes of razors and batteries made to look as if they were stolen from Target stores to the suspected fence. Unbeknown to the fence, the boxes contained GPS monitors to track their movement.
Sheriff’s investigators say boxes of the bait razors ended up in XYZ’s warehouse, prompting the raid. But Partiyeli maintains he never bought from the fence, and that the goods must have been sold to the jobber, who sold them to XYZ.
Partiyeli said he had known the jobber for years, and that he did not suspect the goods were stolen, since the prices weren’t particularly low – and while he did buy the razors, he didn’t buy the batteries because he thought they were overpriced.
“I trusted him,” he said of the middleman.
Partiyeli added that he does not knowingly buy stolen products and it would be difficult to run a business his size on them. His annual revenue prior to the raid was between $12 million to $16 million. “I have 80,000 pieces of mascara in stock. You’re telling me they’re stolen off the shelf?” he said.
Indeed, one competitor, Jacques Stambouli of Lynwood’s Via Trading Corp., said that while distributors can’t know the origin of all supplies, he doesn’t believe stolen goods are a huge problem in his industry.
“You can shoplift a pack of toothpaste, but we deal in full truckloads,” he said.
However, Stambouli said that unlike Partiyeli he tries not to deal with jobbers, but instead works directly with the original sellers of secondhand goods, such as retailers who funnel him overstock and returns.
“We only deal with reputable sources, directly with retail stores, and we avoid middlemen as much as possible,” he said.
Damage done
After the June 2010 raid, XYZ’s business was effectively shut down. Law enforcement took 90 percent of the company’s merchandise, Partiyeli said, in addition to seizing computers, cell phones, flash drives and cash, and held on to it all for three months.
Finally, Partiyeli went to court in September 2010 and obtained a judge’s order to return the merchandise. Los Angeles Superior Court Judge Graciela Freixes ruled the seizures were not within the scope of the original search warrant.
The order, a copy of which was obtained by the Business Journal, demands the department return $48,000 in cash, the seized office supplies and “50 truckloads of merchandise removed from XYZ Distributors warehouse on 6/25/10 and thereafter by Los Angeles Sheriff’s Department.”
Despite that, the damage was done. In the months after the raid, XYZ was unable to fill orders or restock, and lost several clients, including its deal with 7-Eleven. With cash flow halted, it was unable to pay creditors and started selling the returned merchandise at a discount just to pay off loans.
In 2010, sales were down to $10 million, and Partiyeli expects last year’s revenue to drop to as low as $7 million once it’s all tallied up. The company also sustained a net loss of $2.5 million in 2010, down from annual profits that averaged $1.9 million a year over the last five years, he said.
Partiyeli laid off more than half of his employees, and today has about 10 left. With many of his business relationships destroyed, his warehouse sits more than half-empty. Partiyeli has put the property on the market, and wants to move to a smaller Vernon warehouse. But he fears there’s a real chance his business could go under in the next two to three months.
‘Judge and jury’
It would be an unceremonious end to the company that the 46-year-old Partiyeli founded with his older brother, David, nearly 20 years ago. The brothers, Persian Jews who immigrated to the United States from Iran in 1979, worked with their father in the electronics merchandise business before striking out on their own in 1992.
At first, it was a two-man operation, but the company soon grew, branching away from electronics and toward health and beauty products and appliances. With the rise of eBay, the company began doing millions of dollars in wholesale business online.
Now, the brothers are suing the county in Los Angeles federal court, claiming civil rights violations and seeking millions of dollars in damages. And there’s no sign of the litigation ending anytime soon. Raymond Fuentes, the attorney representing the county, said the process of discovery in which both sides exchange relevant documents has just begun.
Partiyeli’s attorney, John Burton, said law enforcement went too far.
“It was judge, jury and executioner all at once,” Burton said. “For them to decide with no understanding of the business to haul away $4 million in inventory contradicts everything the Constitution guarantees.”
Meanwhile, sheriff’s investigators still have not presented a case against either of the Partiyeli brothers to prosecutors, according to a spokeswoman with the Los Angeles County District Attorney’s Office.
Eric Honig, an attorney in Marina del Rey who represents defendants in asset seizure and forfeiture cases, said that’s not unusual. In 90 percent of the asset seizure cases he handles, charges are never filed by investigators.
In recent years, Honig said that he has represented several local companies, including a jewelry store, audio stereo business, car dealer and tobacco company, whose assets were taken by investigators. No criminal charges were filed in any of the cases and many of his clients went out of business.
Across the country, laws have been passed that make seizures easier. In 2010, federal investigators seized forfeited property worth $2.5 billion, more than double that from five years ago, according to the government’s own statistics. Asset forfeitures by L.A. County sheriff deputies rose to $6.1 million in 2010, more than double that from 2007.
William McSweeney, head of the sheriff’s detective division, said profit is not a motive, and he noted that each forfeiture asset sale goes through due process in court and requires a judge’s order.
“I think that the profiteering in asset forfeiture, particularly in a business situation, is not an issue much at all,” he said. “I think the cops’ instincts are to grab anything that looks like it might be evidence because you can’t go back. It’s not because we might get to keep it.”
Still, Tim Lynch, a director at the Cato Institute, a libertarian think tank in Washington, D.C., said there’s a growing bias toward seizing property first and asking questions later.
“These things are becoming more and more common,” Lynch said. “The legal dynamic is that it’s relatively easy to seize on the part of the government but difficult for the property owner to get it back. At a minimum, property owners should not be presumed guilty.”
And though the business is crippled, Honig says that XYZ is fortunate to have gotten back its merchandise so soon.
“They’re one of the lucky ones,” he said. “Sometimes it takes longer than a year, if ever. It’s a really good business for the government.”
