California man convicted for brewing a coffee scam

FDA Consumer, Nov-Dec, 2001 by Michelle Meadows

Michael Norton of Berkeley, Calif., knew the value of coffee from the Kona district of Hawaii. Grown on the slopes of the active volcano Mauna Loa, Kona coffee beans are hand picked and sorted--a traditional method that has made Kona coffee among the most expensive in the world.

Through companies called Kona Kai Coffee and Kona Kai Farms, Norton bought large amounts of cheaper coffee grown in Central America, mainly in Panama and Costa Rica. Then he mixed it with Kona coffee and resold it to coffee companies as 100 percent or pure Kona coffee, which costs about one-third more than Central American coffee.

Distributors then bought and roasted the coffee and unknowingly sold it as pure Kona coffee or part of a Kona blend to consumers, who paid higher prices. According to the U.S. Department of Justice, evidence showed that Norton earned more than $15 million from his fraudulent scheme.

Court papers filed in the U.S. District Court in the Northern District of California state that Norton bought about 3.6 million pounds of coffee from a woman in Costa Rica from 1993 to 1996. About 1 million pounds of that was genuine Kona coffee. Norton arranged for another woman to act as the coffee buyer through The Nagoya Company, which Norton funded.

Norton had another associate cut open bags that were identified as coffee from Central America, and transfer that coffee to other bags labeled "Kona Kai Farms-Kealakekua, Hawaii--pure Kona coffee--product of the USA."

During 1995, Norton sold coffee on several occasions to a business called Hawaiian Kona Coffee Company. The proceeds of those sales totaled about $1 million. At Norton's request, the money was forwarded to bank accounts of two other Hong Kong businesses, which then sent the $1 million to a Swiss bank account in Geneva. Norton knew the money was taxable, but failed to report his profits.

The charges against Norton were based on evidence gathered from 1993 to 1996. The case surfaced in 1995, when an informant for the United States Customs Service (USCS) learned about Norton's fraudulent activities. The discovery launched a lengthy investigation by the USCS, the Internal Revenue Service, FDA's Office of Criminal Investigations (OCI) in San Francisco, and the Contra Costa County Sheriff's Office.

Norton's activities violated the Federal Food, Drug, and Cosmetic Act. By fraudulently labeling the coffee, Norton and one of his sales representatives, Tracey Quigley, had introduced a misbranded food into interstate commerce. In exchange for cooperating in this investigation, Quigley was sentenced to a period of probation for the misbranding charge.

The United States Attorney's Office for the Northern District of California announced in March 2001 that Norton was sentenced to two and a half years in federal prison in connection with his conviction for wire fraud and tax evasion. The sentence followed Norton's earlier guilty plea to one count of wire fraud and one count of tax evasion in July 2000.

In addition to serving prison time, Norton will have three years of supervised release, and was ordered to pay $440,000 in back taxes. About $5 million was seized and forfeited to the government, and about $500,000 went to the 21 coffee companies that bought coffee from Norton.