L.A.'s capital for software counterfeits.

Los Angeles has emerged as the leading domestic center of illegal software duplication, according to Microsoft Corp. officials, who are releasing a study this week pegging software piracy losses in California at $1.5 billion annually.

Microsoft officials point to the huge presence here of small entrepreneurial businesses and the common practice of loading software onto multiple computers.

"Southern California is the mecca of entrepreneurs, and we have mostly small businesses here," said Chuck Davis, Microsoft's Southern California anti-piracy specialist. "They tend to be the ones that illegally load software on multiple drives."

But according to law enforcement officials, Los Angeles is also a major center for another kind of software piracy - the mass duplication of programs for worldwide distribution.

"New York is the home of soft goods counterfeiting, like Gucci products, and Los Angeles is the home of software counterfeiting," said Los Angeles Deputy District Attorney Lawrence Morrison. "We've traced counterfeit products from L.A. throughout Asia, Canada, Europe and even Russia. Piracy is rampant here."

Morrison and FBI officials say the presence here of two major port complexes and of organized crime families with links to Asia have contributed to L.A.'s emergence as a counterfeiting capital.

"The majority of counterfeiters have some ties to Asian organized crime, and those communities are largely based in the San Gabriel Valley," Morrison said. "These groups have an international distribution channel established, and can send out shipments through the ports or up through I-5."

Law enforcement officials do not have an estimate on the actual amount of piracy locally - since they acknowledge they can apprehend only a fraction of the perpetrators.

Microsoft's new study estimates that software piracy in California alone cost manufacturers $1.5 billion in lost revenue between May 1997 and June 1998.

The figure was calculated by comparing local computer sales vs. software sales. As a ratio, sales of computers far outpace the sale of software needed to make those computers operate - giving Microsoft a rough barometer with which to estimate illegal duplications.

Nationally, illegal software duplication was estimated at $2.7 billion in a 1997 study by the Business Software Alliance and the Software Publishers Association.

Microsoft is releasing the study to raise awareness of the problem and the economic damage to the state in lost sales-tax revenue and other costs.

"It is tremendously important for the software industry to learn how we can better manage our intellectual property," said Sam Jadallah, a Microsoft vice president who oversees the anti-piracy division. "Increasing people's awareness of piracy is the first step."

Software piracy is a broad term. It encompasses professional counterfeit operations that crank out large volumes of software - as well as casual counterfeiters who peddle software on a small scale and small businesses that install the same program on multiple computers without proper registration.

While the Business Software Alliance targets businesses that pirate software within their own companies, law enforcement agencies focus their efforts on counterfeiters.

"(Software) piracy has grown up here in Southern California." said Charles Neal. an FBI special agent in Los Angeles who oversees the local computer crimes squad. "There is no hard data regarding L.A. as the piracy capital, but all indications (when compared to other FBI bureaus) at the least show that we are very high up the list."

The FBI, the Los Angeles Police Department and the District Attorney's Office all have handled a relatively modest number of software counterfeit cases, but the number is growing rapidly.

Morrison recalled one local pirate who called himself "Captain Blood" and advertised cheap software "rentals" in newspaper classified ads.

In another case, a Baldwin Park man in his early 20s had used his home to set up a full professional operation - down to the industrial shrink-wrap machine - to stamp out $5.6 million worth of "Microsoft" software. Morrison said.

Neal said L.A's largest piracy activity is concentrated in Asian-American communities in the San Gabriel Valley, where the involvement of organized crime and tight ethnic connections makes it difficult for law enforcement officials to intervene.

The counterfeit operations in this area tend to be the professional outfits that have millions of dollars in sophisticated machinery and chum out thousands of fakes. Much of the counterfeit goods get shipped out through the ports to Asian countries.

According to the Business Software Alliance's July study on global piracy, 52 percent of software in the Asian Pacific region has been pirated.

Law enforcement officials say they haven't been able to pursue software pirates to the extent they would like because dealing with violent street crime and drags is a higher priority.

"We have to stack it against drugs, frauds and everything else in this jurisdiction," Neal said. "We have to prioritize, but it is a problem."

Due to the FBI's constrained resources, it only pursues software piracy cases that constitute over $500,000 in contraband. However, with pirates able to send out illegally copied software instantaneously over the Internet, the FBI is having an increasingly hard time determining the extent of the crime.

"We have a 16th century legal system trying to accommodate cyberspace," Neal added.

The LAPD similarly has trouble keeping pace with its copyright-infringement cases, said Detective Terry Willis, the sole member of the LAPD's computer crimes unit. Willis, who said he has been buried under the same software investigation for the last 10 months, expects at least one other officer to join his unit soon.

Another problem is that with overcrowded prisons, non-violent offenders like software pirates tend not to have the book thrown at them, Morrison said.

While law enforcement agencies struggle to keep pace with this growing category of white-collar crime, Microsoft - the world's biggest software company - is making its own efforts to curtail the damage.

Davis checks out classifieds online and in traditional media, hunting for people advertising Microsoft products at cut-rate prices.

He also cruises swap meets, apparently a popular place to sell bootleg software, in search of counterfeits.

"The bottom line for our customers to know is that if the price is too good to be true, it is," Davis said. "It is hard for anyone, even a trained eye, to tell if a product is a counterfeit or not when it is done well."

Microsoft also contracts teams of freelance test buyers who purchase software from a variety of channels, searching for counterfeits.

Microsoft's new study calculates that California has lost $171 million in sales-tax revenue and $815 million in lost wages for the software industry.

"The trickle-down effect is huge, and anyone violating copyright law is not just taking money from software companies but from the local economy," he said. "It's also not just lost taxes, but even the delivery-men and invoice printers who lose business. People don't realize that when they 'borrow' software from the office, they end up hurting their own neighborhood."

RELATED ARTICLE: Film Anti-Piracy Unit Chases Video Bootleggers

BY WADE DANIELS Staff Reporter

Amid piles of documents in his office, Kenneth Jacobsen has videocassette copies of "The Truman Show" and "Godzilla," complete with samples of the promotional ads and posters that accompanied their release this summer.

The movies, which have not yet been officially released on video, are just two of the 292,000 illegally made videocassettes that the Motion Picture Association's domestic anti-piracy forces have recovered in the United States during the first half of 1998.

It's never been easy to stem the $2.5 billion that's lost each year to movie bootleggers. Now the job is set to become more difficult, as the specter of digital piracy looms.

"This is what our future is becoming," said Jacobsen, vice president and director of U.S. anti-piracy operations for the Motion Picture Association of America, the MPA's domestic arm.

"It's a new era of mediums like DVD and the Internet, and fighting digital piracy could end up a main focus for us in a few years," he said.

Counterfeit DVDs can be duplicated at a higher rate of speed than videocassettes, and because they are smaller, they can be transported easily in large numbers.

"We are quite concerned about digital formats as they can be reproduced quickly, are smaller in size, and have the same quality whether it's the third copy or the thousandth copy," said Judy Denenholz, senior vice president of worldwide anti-piracy for Walt Disney Pictures and Television.

Jacobsen said the department is meeting with production companies, manufacturers of DVD equipment and Internet-industry officials to devise ways to head off digital bootlegging.

Jacobsen, who was with the FBI for 26 years before joining the MPAA in 1995, commands a 40-person anti-piracy team that works primarily in Los Angeles and New York, and contracts with private investigators in other cities when needed.

Another 150 international operatives report to Frederic Hirsch, director of worldwide anti-piracy for the MPA.

Hirsch said that while it's unrealistic to expect piracy to be stamped out completely, the unit aims to target its efforts in countries the industry considers most important.

In the United States, for example, the unit generally holds down piracy to five or 10 illegal videos for every 100 legal videos sold, he said.

Movie piracy starts in labs where numerous VCRs pump out copies of films that the studios might not release on video for mouths. The videos are often sold out of boxes on crowded city streets, at swap meets and even at video stores.

One of the largest residential pirating labs ever discovered was busted last month in the city of San Gabriel, where over 160 electronic duplicating machines were confiscated. Association officials, working with the county District Attorney's Major Crimes Unit, found over 1,000 unauthorized copies of unreleased movies.

Most of the busts stem from tips phoned in to the association hotline. In some cases, a competitor of a video store suspected to be selling or renting illegal movie copies will make the call.

The MPAA, along with law officials and studios, have seized more than 2.6 million illegal videotapes, 32,000 film prints and other goods that have led to over 1,000 criminal convictions.

While the MPAA has been located in the San Fernando Valley since it was founded, the MPA's international anti-piracy offices moved here from New York in 1993. The proximity is a plus for movie companies like Disney, Denenholz said.

"We're sort of like a team," said Denenholz said. "You have better communication and coordination when all the team members are in the same area."