Beware the Gatekeepers in Wine and Other Investments

Posted on July 23rd, 2012 by K2 New York Office

On May 12, 2012, Rudy Kurniawan, a very well-known wine expert and collector, was charged with five counts of fraud primarily related to his selling of counterfeit wine and his defrauding of a California wine collector and the New York auction house Acker Merrall & Condit. The scope of his criminal enterprise was further illuminated as the FBI searched his home, uncovering thousands of wine labels for high-end wines, corks, sealing wax with vintage markings and instructions for fabricating labels. Kurniawan is estimated to have sold over $35 million in wine since approximately 2005 and the extent of his counterfeit sales is unknown.

Benjamin Wallace, in his May 2012 New York article “Chateau Sucker,” that profiles Kurniawan and his fraudulent activities, begins with a description of wine world’s distaste for inquiry:

…in the rare-wine world, doubts are endemic; murkiness is built into a product that is concealed by tinted glass and banded wooden cases and opaque provenance and the fog of history. At the same time, the whole apparatus of the rare-wine market is about converting doubt into mystique. Most wealthy collectors want to spend big and drink famous labels, not necessarily ask questions or hear the answers. Guests at tastings don’t want to bite the hand that quenches them. Auctioneers may not want to risk losing consignments by nitpicking ambiguous bottles. Winemakers don’t like to talk about counterfeiting, for fear of the taint.

While the Kurniawan case is interesting due to the scope and this allure of rare wine, the lessons an investor, collector or family might learn are far-reaching and universally applicable to business investment. “Gatekeepers” exist, no matter what the asset class, and it is necessary to evaluate their character and capabilities to protect any potential investment. The tools necessary for this analysis can be applied to a spectrum of cases, whether a stake is being sought in a public company, a mining operation or a lot of Bordeaux.

In this instance, associates, interested purchasers and significantly John Kapon, president and auction director of Acker, failed to ask direct questions into Kurniawan’s background and the legitimacy of his product. This vetting process would have involved at least two stages, including background research and provenance work. Armed with comprehensive due diligence, buyers might have avoided much of the havoc Kurniawan brought to the rare and investable wine market.

Chateau Sucker (New York Magazine)