Retail Losses rise as Shoplifters go High Tech

Wednesday, October 25, 2006

By Ann Zimmerman, The Wall Street Journal

William Swanberg had a thing for Legos, but it was hardly child's play.

After he was arrested last November near Portland, Ore., police investigators determined he had stolen more than $600,000 of the Danish building toys over three years from dozens of stores in at least five Western states.

He pilfered the toys by creating counterfeit bar codes that allowed $100 Lego sets, for example, to be rung up for just $19. Then he resold them on a Web site for toy collectors.

"This case was fascinating to me," says Jeff Lesowski, a senior deputy district attorney in Washington County, Ore., who prosecuted Mr. Swanberg. "With these new methods, it can take a long time for a retailer to know he's suffered a large-scale theft, so it takes so much longer to catch up with thieves."

Just as technology has given a big boost to the retail industry, making it more efficient and productive, it has also transformed retail crime. Using sophisticated tactics such as bar-code forgery and fraudulent gift cards, criminals are stealing larger amounts, and it has gotten harder to catch them. Law-enforcement officers say many of the high-tech thieves belong to organized-crime rings that have turned retail theft into big business. And the Internet has made it easier for them to find buyers for the loot.

Retail crime rose to about $37 billion in 2005 from $31 billion in 2003, according to a study conducted by the University of Florida, increasing almost twice as fast as retail sales over that period. Store employees, who have access to merchandise and familiarity with antitheft systems, account for 48 percent of retail-crime losses, according to the 2005 study. But professional thieves, many of them using sophisticated new methods, also are responsible for a big part, says Joseph LaRocca, vice president of loss prevention at the National Retail Federation, a trade group.

The value of merchandise snatched in the average shoplifting incident has more than tripled to $855 in 2005, from $265 in 2003, the University of Florida survey reported. In cases of organized retail crime -- where the thieves intend to sell the stolen goods rather than keep them -- the average loss was $46,353 per case in 2005, the survey said. Over that same time period, the size of the average employee theft fell 40 percent to $1,053, from $1,762.

Organized theft rings have been around for years. In the late 1990s, there was a rise in cases of criminal groups paying thieves to shoplift baby formula, razor blades, teeth whiteners and other high-volume merchandise, according to retailers and law-enforcement officials. The crime rings typically sold the loot to other stores or moved it in flea markets or pawn shops. Some even set up their own convenience stores.

The sophisticated schemes cropping up today generally involve more expensive items: $300 Dyson vacuum cleaners, $400 power saws and $1,000 plasma televisions. Brad Brekke, vice president of assets protection at Target Corp., estimates that more than 50 percent of theft at the Target chain involves some high-tech twist -- either in how the goods are stolen or how they are unloaded.

Over six months in 2004, Thomas Westwood, his wife, Jennifer, and mother-in-law, Kathleen Dodson, worked the bar-code scam at Target stores. Using a computer, they scanned bar codes from relatively inexpensive Target items and printed out copies. Then they returned to the store and pasted the fakes onto expensive Dyson vacuum cleaners, DVD players and phones. Cashiers dutifully rang up the wrong prices.

All told, the trio stole more than $100,000 of merchandise, law-enforcement officials say. After a cashier in one store noticed a mispriced item, Target investigators got involved and discovered a pattern of such mispricings. Using video clips, they identified suspects, and the police moved in. Earlier this year, the trio pleaded guilty in a Missouri federal court to conspiracy to commit fraud.

Last December, a Target security guard nabbed a Colorado college student after he purchased a $150 iPod that carried a bar code for $4.99 headphones, according to Mr. Brekke. The thief had fashioned the fake label with a $25 software program called Barcode Magic, which he'd downloaded from the Internet, Mr. Brekke says.

Bar-code swindlers are hard to catch, says Mr. Brekke, a former agent with the Federal Bureau of Investigation. If an alert cashier points out that a bar code is ringing up the wrong price, the thief can either pay the difference or just say he doesn't want the item any more and walk out. "The risk level is very low," he says.

Mr. Brekke has been trying to persuade manufacturers to print prices on boxes or come up with bar codes in assorted sizes, which would be trickier to substitute. In the meantime, Target's loss investigators have begun to monitor sales reports for unusual patterns, trends and anomalies.
In the summer of 2005, they noticed spikes in sales of Legos. Expensive sets were being sold for a pittance. They studied hundreds of hours of surveillance tape, then devised an electronic system to alert in-store antitheft workers when big batches of Legos were rung up.

That's what happened last Nov. 17 at a Target in Hillsboro, Ore., but the security guard got the message too late. Mr. Swanberg had already made his fraudulent purchase and left, according to Mr. Lesowski, the prosecutor. The guard warned co-workers at nearby stores.

Later that day, an employee at a Beaverton, Ore., Target spotted Mr. Swanberg loading his cart with about 10 $100 Star Wars Millennium Falcon Lego sets. He slapped a phony bar code for a $19 Lego set on the top box and headed for the youngest looking cashier he could find, the prosecutor says. The cashier scanned the top box and multiplied it by the number in the stack.
Several burly Target employees surrounded Mr. Swanberg's cart, which he shoved at them in an effort to get away. They tackled him and summoned the police. In his van was a detailed daily itinerary for Target, Wal-Mart and Toys "R" Us stores he planned to hit, the prosecutor says.

Another vexing new problem, retail executives say, is gift-card fraud. Many retailers now issue gift cards in place of paper gift certificates and receipts from returned merchandise. The cards, which resemble credit cards, have been a boon to the retail industry, accounting for $60 billion in sales last year, almost one-third of it during the holiday season.
But they've also been a boon to thieves. In one scam, crooks copy numbers from gift cards hanging on store racks. After the cards are purchased and activated, buyers use them to shop online by entering the card numbers.

So do the thieves. To figure out which cards have been activated, they phone an 800 number to check on balances for card numbers they've copied. When they discover activated cards, they use the card numbers to buy merchandise on a store's Web site, explains Dan Doyle, vice president of loss prevention at Beall's Inc., a Southeastern department-store chain.

Another swindle involves stealing merchandise, then returning it for store credit in the form of gift cards. In 2003, Herion Karbunara, a Massachusetts man in his mid-20s, paid women $50 to $200 a day to shoplift merchandise from stores ranging from Pottery Barn to Victoria's Secret and then return it for gift cards, according to the Massachusetts attorney general's office. Some stores required receipts for returns, so the women first would buy one of each product they intended to steal, prosecutors say. Mr. Karbunara would scan the receipts into a computer and print counterfeits, they say.

The Internet has emerged as a preferred method for crooks like Mr. Karbunara to unload gift cards. After fraudulently obtaining about 600 such cards, Mr. Karbunara offered them for sale on eBay. The Massachusetts attorney general's office says online sales netted Mr. Karbunara $200,000 over 10 months. In late 2004, he pleaded guilty to three counts of larceny and one count of forgery, and was sentenced to two years in state prison.

Retailers responding to a National Retail Federation survey last year estimated that 70 percent of gift cards sold in eBay were fraudulently obtained, either through scams like Mr. Karbunara's or purchased with stolen credit cards. Mr. LaRocca, the federation's loss-prevention chief, says the group raised a "big stink" with eBay, which eventually changed its policy. EBay now limits sellers to posting one gift card per week, with a value of no more than $500.

When the National Retail Federation scrutinized gift cards sold on eBay on Sept. 14, says Mr. LaRocca, it identified more than a dozen auctions involving sellers who had violated eBay's policy by listing more than one gift card a week. "Although we have been talking with eBay, the conversations have clearly not been fruitful to date," says Mr. LaRocca.

Hani Durzy, an eBay spokesman, says the company changed its policy in an effort to thwart criminals. Listings are policed by eBay investigators, he says, and its 203 million users also alert the company to potential violations. With upward of 100 million items for sale on eBay at any given time, and seven million new items added every day, staying on top of every listing is difficult, he says.

The Internet has become so popular for moving stolen goods that a term has been coined for the practice -- "efencing." Thieves or fences who sell loot out of a truck or at a flea market typically get 20 to 30 cents per dollar of retail value, according to a 2005 report on organized retail crime commissioned by the National Retail Federation. On the Internet, where their wares are exposed to many more potential buyers, they bring in, on average, 70 cents on the dollar, the report says.

Law-enforcement officials say the Web allows thieves to unload merchandise quicker than in the past, and in greater volume. More thieves are taking orders for items to steal -- a felonious twist on just-in-time inventory, these officials say.

"Thieves know this sort of organized retail crime is low-risk and high-profit," says Eric Ives, unit chief the FBI's major theft unit, which oversees investigations of organized retail crime.
After Mr. Swanberg, the Lego thief, was arrested, federal authorities raided the Reno, Nev., home he shared with his elderly mother. He had sold the goods over the Internet, says Mr. Lesowski, who prosecuted him. Investigators found computer records of sales he had made on Bricklink.com, a Web site for Lego fans and collectors. Target's Mr. Brekke figures Mr. Swanberg stole about $200,000 of the sets from its stores alone.

"Our Web site cannot do anything to prevent (the sale of stolen merchandise) from happening because we don't have control over the seller's merchandise," a representative of Bricklink.com said in an email.

Bruce and Laura Wasz, a mother-and-son team, ran an 11-person theft ring in Illinois. They paid people to hit home-improvement chains such as Home Depot Inc. and Sears Holdings Corp.'s the Great Indoors. The thieves stole the old-fashioned way, simply sneaking things out the doors. Accomplices ripped off entire truckloads of products such as chain saws.

They stored the stuff in three shuttered pawn shops and unloaded it on eBay, using numerous different account names, according to Brian Hayes, an assistant U.S. attorney for the Northern District of Illinois. "They held themselves out as honest dealers," says Mr. Hayes. Investigators later determined that in 2003 they sold more than $2 million of sump pumps, Koehler faucets, mosquito exterminators, snow blowers and other merchandise.

They got caught after the manufacturer of the stolen chain saws noticed a bunch of them for sale on the Web, priced below wholesale. Mr. Wasz was sentenced to six years, nine months in federal prison. His mother got five years, eight months.

Shoplifting is usually prosecuted on the state level. In most states, only those caught stealing more than $1,000 face felony charges that require jail time.
"Organized retail-crime rings utilize the laws to their benefit," says Britt Wood, senior vice president of industry relations at the Retail Industry Leaders Association, a trade group for large mass merchants such as Wal-Mart and Best Buy. "They don't steal a lot from one store at one time. But it adds up, so by the end of the month, they've stolen $100,000."

Retailers are pushing states to stiffen penalties. In January, Congress allotted $5 million for the FBI to establish an organized retail-crime task force.

Increasingly, retailers are setting up investigative units to piece together cases big enough to interest law enforcement. Home Depot put together a unit several years ago that regularly searches the Internet for new merchandise offered at below wholesale prices that matches products stolen from its stores. Earlier this year, the two large retail trade groups created separate databases to track retail-crime activity, in an effort to help build bigger, stronger cases for prosecutors.

Mr. Swanberg, the Lego thief, pleaded guilty in June to three counts of felony theft and was sentenced to 13 months in prison. Federal authorities say they still are investigating Mr. Swanberg for possible mail fraud.

His name still comes up from time to time on Bricklink.com's online forum. Mr. Swanberg was a highly rated vendor on the site, garnering more than 6,000 favorable comments over three years. Two days before he was arrested, one participant noted: "A unique vendor with great inventory."
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