Turlock residents Karen Jean Freyling, 48, and Steven Walter Butts, 62, were sentenced on Tuesday for their convictions stemming from the operation of a major Internet-based DVD importation and distribution business as well as fraudulent receipt of government benefits.
Freyling was sentenced to 10 years and one month in prison, to be followed by three years of supervised release, a special assessment of $1,500, and restitution of more than $137,000 to the Social Security Administration. Butts was sentenced to seven years and 10 months, to be followed by three years of supervised release, a special assessment of $1,500 and restitution of more than $15,000 to the California Employment Development Department.
A jury found Freyling and Butts guilty on Jan. 28 after a 10-day trial. The offenses of conviction included conspiracy, wire fraud, mail fraud, importing goods into the United States by means of false statements, smuggling, trafficking in counterfeit labels, documentation or packaging, Social Security fraud and making false statements.
The case was a result of a joint investigation by the United States Postal Inspection Service, the Federal Bureau of Investigation, the California Employment Development Department, the United States Social Security Administration Office of Inspector General and the United States Customs and Border Protection. Assistance was provided by the Motion Picture Association of America.
According to the U.S. District Attorney’s Office, the pair made around $700,000 during the two years that they sold counterfeit DVDs online.
“We are grateful to the U.S. Attorney’s Office and law enforcement for pursuing this case,” said Elizabeth Kaltman, spokesperson for the Motion Picture Association of America. “Counterfeiting is very damaging and has a far-reaching impact on the community that creates these films and television shows. It’s not just Hollywood that gets hurt from these kinds of operations. It’s also the legitimate mom-and-pop dealers who lose business.”
The prosecution presented evidence that Freyling and Butts started importing counterfeit DVDs in bulk from suppliers in the Philippines by using false Customs documents. The DVDs were repackaged for individual sells online. They sold through Amazon and Ebay until the two companies suspended their accounts for suspected copyright infringement. After that, they set up three Web sites — www.familydvdwholesale.com, www.dvds2gowholesale.com and www.movieareus.com — to sell the DVDs.
Assistant U.S. Attorney David Gappa, who prosecuted the case, said Freyling and Butts made several claims online to bolster their reputation as reputable dealers. Among their false claims published on their Web sites were that Butts alternately was an employee of the Department of Justice and the Turlock Police Department and that they were running the business to benefit disadvantaged children. They also made claims that they were licensed by Disney and that all the DVDs were legitimate because they had cleared Customs. In fact, several of their shipments had been detained by the U.S. Customs and Border Protection on the basis of infringement violations, Gappa said.
The pair even made statements in 2006 that they had been online retailers for 17 years, which would have been in 1989, before the invention of Netscape Navigator or Internet Explorer, and long before most of the public had even heard of the Internet.
The Turlock-based operation came to the attention of the Federal Bureau of Investigations and the U.S. Postal Inspection Service after numerous customers made complaints to the Better Business Bureau, the Motion Picture Association of America and the online site Ripoff Report. Most of the complaints stated that the movies had errors, played foreign sound tracks, and in at least one case, had the wrong dialogue overlaid on the movie.
“One Wisconsin man purchased a couple hundred DVDs to use as the base inventory for the rental store he was opening, only to find out many were pirated copies of films that hadn’t even been distributed on DVD yet,” Gappa said.
Freyling and Butts had three employees they paid $100 cash daily to break down each bulk shipment and package each individual DVD and its matching cover art into a DVD box and shrink wrap each box. The DVD boxes were purchased in the United States from a company called U-Line. U-Line invoices indicate that between September 2006 and September 2008, the defendants purchased 128,000 individual DVD boxes.
Almost immediately after setting up shop in their garage, the pair started receiving complaints that their DVDs were inferior and obvious pirated copies. In 2006, their accounts with Amazon and Ebay were suspended. In 2007, one complaining customer sent the defendants a link to a Web page that explained how to recognize and avoid counterfeit Disney DVDs. The page accurately listed a number of indicators of counterfeit DVDs, including inventory that was manufactured in Asia; bearing “DVD 9” labels; containing Asian subtitles and/or soundtrack; offering one disc for sale for movies that were released as two-disc sets in the United States; containing Chinese writing on the cover art; and lacking a DVD case.
Butts read the e-mail and replied that it was “bogus” according to court documents.
In the summer of 2008, the pair’s Web host, Homestead, temporarily locked them out of their sites on the suspicion of copyright infringement. Homestead unlocked the sites and warned the defendants that they were still under investigation.
That same summer Freyling and Butts received notices from the U.S. Customs and Border Protection stating their inbound DVDs shipment had been seized on the grounds that it was infringing on copyrights. The seizure notices stated they would get their inventory back if they could prove it was non-infringement. Court documents showed the pair never answered the letters and instead arranged with the suppliers to change the markings on the boxes and Custom declarations and to break future shipments into smaller containers.
In addition to the investigation related to the DVD business, Freyling was under investigation for receiving Social Security income under false pretenses and Butts was suspected of wrongly receiving unemployment benefits. Freyling received more than $100,000 in SSI payments between the early 1990s to 2008. She claimed she was blind, but the prosecution had evidence that she could see well enough to read, write and drive. A witness from Social Security testified that even if Freyling was blind she would not have qualified for SSI based on her full wealth, income from the DVD business and her living arrangements with Butts.
Butts admitted that he received unemployment benefits fraudulently by not disclosing the DVD business in his unemployment application. He also admitted to never paying any taxes off the DVD business income.
Freyling and Butts were arrested on Oct. 8, 2008, and indicted on Oct. 30, 2008.
After his arrest, Butts told investigators he knew the DVDs were “DVD 9s” but said he believed they were legitimate because they cleared Customs. However, when questioned about the notices they received from Customs about the seized shipments, Butts had no answer.
He told the agents that they sold the DVDs for $3.99 to $4.99 apiece plus shipping and handling and that they made between $20,000 to $30,000 a month.
Butts told the investigators that Freyling was his common law wife and that she was responsible for the Web sites appearance, finding the suppliers in the Philippines, taking care of the bookkeeping and sending out the money orders to pay for the DVDs. He also said she had vision problems, but could see well enough to do work around the house and help with the DVD business.
When first questioned after her arrest, Freyling denied having any knowledge about the workings of the DVD business, according to court documents.
She initially denied knowing where the DVDs were supplied from, but then knew the names of the Philippines suppliers. Freyling initially claimed that she did not even know the names of the Web sites, but then identified them. She also said Butts was her gay roommate. When agents confronted her with Butts’ statements, she said he was lying.
The three employees that worked for Freyling and Butts, Earl Edward Riedel, 49, Raymond Paul Mott, 47, and Steven Alan Lobue, 49, all of Turlock, separately pleaded guilty on Dec. 21, 2009, to a misdemeanor charge of criminal infringement of copyright.