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Tuesday, October 19, 1999

Pirate disk companies are afloat on a sea of government cash

Pirated disks are big business here. And the main culprits are two of Israel's leading - and legal - disk manufacturers

By Michal Palti

The counterfeit disk market in Israel is thriving. More precisely, as Yohanan Banon, head of the enforcement division of the Disk and Cassette Federation, the counterfeit disk market in Israel is just overflowing.

The figures he has show that some 8 million counterfeit floppy disks and computer CDs are sold annually in Israel. For comparison: in the legal market, some 10 million music CDs and another 10 million software CDs for PCs are sold annually.

According to Banon, Israeli disk companies lose more than 40 percent of their profits annually due to the pirate market.

He claims that another year or two of such pirate market activity will finish off the Israel music industry for both local and imported recordings.

The quantity of counterfeit disks and a detailed investigation conducted by the Federation, with the assistance of the Israel Police's Northern Investigation division, led to the filing of two claims against two Israeli manufacturers of counterfeit disks.

The Federation charges that these enterprises are responsible for a large share of the counterfeit market in Israel. Tens of thousands of counterfeit disks were discovered at the companies in raids by the Federation.

DCD in Tefen and OMI in Karmiel are two of the five manufacturers of diskettes and CDs in Israel. Both are state-financed, having received large aid grants (covering over 20 percent of the cost of the factory's equipment). A civil claim for NIS 13 million has been filed against DCD and a criminal claim has been filed against OMI, and in another week, a civil claim for the same amount will also be filed. A third manufacturer which has been investigated in the past for counterfeiting disks, reached a compromise with the Federation - the owners did not admit to the counterfeiting charges, but agreed to a "supervisory program" which enables a Federation representative to conduct surprise checks of the plant at any time.

Another important entity in the pirate market is a CD plant in western Hebron, owned by the Dayis family. The Federation's data indicates that the plant is capable of manufacturing 15,000 counterfeit disks daily.

Banon believes the Federation has a fairly accurate picture of the manufacturers involved in the counterfeit market in Israel. His problem is the authorities' ineffective enforcement and the ridiculous punishments, he says, that are given to counterfeiters. In his Ramat Gan office, he maps out the counterfeit disk market in Israel. According to his information, a total of 630 people are involved in the field. The distributors can be divided into four groups: "the Ashdod gang," "the Be'er Sheva gang, "the Tel Aviv gang" and "the Northern gang."

Each gang controls sales outlets: market stalls, open car boots along roadsides and sometimes a specially designated section of a regular shop with a "close-out" sign (to justify the low price - NIS 15). Most of the disks are manufactured industrially or cut on home machines. The disk labels are usually pasted on amateurishly and the glue sometimes melts from the heat of the laser in the home stereo system and ruins the disk.

According to Banon, the Federation last year seized 800,000 counterfeit disks. The disk confiscation, monitoring of counterfeiters and operation of informers is financed by the legal disk manufacturers. The confiscation is carried out by hired policemen whose salaries are paid by the Federation. In the last year, disk companies spent $6 million on catching counterfeiters. Disk company managers, led by Federation chairman Mickey Tunis, charge that Israeli law deals too lightly with counterfeiting.

Pictures publicized here for the first time were taken from a video made by Federation detectives while watching Pinchas Ezra, one of the owners of OMI. They show Ezra loading cartons of disks from his factory into his car (4,000 disks, according to the Federation's claims), placing them in storage in his home in Kfar Vradim and supplying them to a man the Federation claims is a key merchant in the counterfeit disk market. The Federation claims that OMI counterfeited assorted collections of hits from 631 songs.

The two manufacturers have worked and still work with the Hed Arzi and NMC record companies. Banon says the two companies were careful not to illegally copy disks which were given to them for legal production.

The investigation started in 1997. Following a dramatic drop in disk manufacturers' profits and the coincidental seizure of counterfeit disks in the market, the Disk and Cassette Federation, a body uniting all of the disk companies in Israel, decided to thoroughly investigate the counterfeit disk industry.

Banon:"Until then, the Israeli disk companies believed that most of the counterfeit goods were smuggled in from abroad, from eastern European countries, primarily Bulgaria and Russia. But the large discrepancy between the amount of counterfeit disks available and the few thousands seized by Customs authorities was a warning light for us. I realized that only a really bad Customs authority would let such quantities pass through. Something didn't add up."

In November 1998, 3,000 disks were found in one of the markets in the center of the country. Based on the code on the disks - SID (similar identification code), a unique code allocated to each disk manufacturing plant in the world - the Federation's enforcement division discovered that the disk cases were manufactured in Italy, by the Optimus factory. Executives there, Banon says, referred the Federation's investigators to the DCD plant in Tefen, which they said had ordered the cases.

"We monitored the plant and found that its owners, Shimshon Karlitz and Nir Oved, were meeting counterfeit disk salesmen over the weekend and giving them disks manufactured in their plant," Banon relates.

Federation agents raided the plant, "but when we got there, we found very little merchandise there. It turned out that there had been a leak, and 50,000 disks were moved elsewhere, to a warehouse in Moshav Hemed, where 29,000 new cases - 'stampers' in professional language - were also found. Since then, we maintain total secrecy around raids," Banon says.

Following that and other raids, the Federation filed a suit against DCD in Tefen and a preliminary hearing will take place in two weeks in the Nazareth District court. According to Banon, DCD manufactures 60 percent of the counterfeit disks available in Israel from the international repertoire. The Federation even wrote to the Ministry of Trade and Industry's legal adviser, asking that his office notify the ministry's investment center of the crimes, so that government support for the factory would cease. The legal adviser's office rejected the Federation's request, saying it could not accept until the legal process was concluded. The ministry's reply, dated June 30, stated: "In principle, it is inconceivable that the state would provide aid to someone seeking to profit at the expense of others' efforts against their will and illegally." However, later on the letter claims that "the matter of violation of sales' rights is not the only consideration."

Shimshon Karlitz, one of the owners of DCD, claims he did not know about the counterfeits, which he says were made on the orders of others. "If there are claims against nearly all of the factories manufacturing disks in Israel, then it's a sign that there's something wrong with the system," he says. "The question is, to what level of checking copyrights does a factory have to go. I produce blank disks and I don't have the means to check everyone who comes to cut a disk here. There were cases where people approached me, showed me a document confirming their right to use the copyright, and then later on the document turns out to have been forged. I can't check everyone in detail.

"I can tell you that we don't advertise ourselves on the street and we require our customers to sign a commitment when they cut disks with us," Karlitz says.

Simcha Fishman, manager of OMI, responds: "OMI was not notified of the events detailed in this article and therefore the company cannot respond to them directly. However, due to the suspicions attributed to Pinchas Ezra, he has been temporarily suspended from all his positions at the company. At the time this response was made, legal processes are underway with regard to his continued tenure as director and manager of the company and therefore so long as these matters are in the process of being reviewed by the court, the company cannot comment on them for a newspaper article."

The Federation is also having trouble halting production at the disk plant in Hebron. In early March, representatives of the Federation and Acum (the musicians and composers union) met with the Palestinian trade minister, Maher al Masri, in his Ramallah office and with the brothers Bassem and Adal Dayis, the owners of the Laser company, which owns the Hebron disk plant. Also at the meeting were representatives of the American embassy. Acum and the Federation called for an end to the illegal manufacture of disks at the Hebron plant, and for the destruction of the disks seized thus far by the Palestinian police from the plant. In return, the Laser company was promised a legal SID code that would enable it to be an authorized distributor. It was also promised that all legal proceedings against it would be suspended for one year.

The plant's managers initially accepted the compromise. However, the Federation claims that in the last month, it has resumed manufacturing counterfeit disks. According to senior executives of the Israeli music industry, the company is demanding a price twice as high as that asked by local plants manufacturing legal disks, and as a result it received no orders and violated the agreement. "They received a legal SID code and did not meet any of the conditions we required of them. So the Americans will have to be involved again," Banon says.

Now the Federation is seeking to organize a meeting between singers and Justice Minister Yossi Beilin to demand increased enforcement of the law and stiffer punishments for counterfeiters.

(c) copyright 1999 Ha'aretz. All Rights Reserved

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