American Greed

Greed Report: Your quest for savings could land you in the ‘gray market’

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You consider yourself a smart shopper. Always on the lookout for the best possible price on everything you buy, you know a good deal when you spot one. But did you also know you might not be getting what you are paying for?

Experts say even some of the most legitimate sales outlets are awash in what are known as diverted products. In retail parlance, it's called the gray market — goods that are sold outside their normal channels. It could be a distributor unloading excess product through a discount chain, online, or through a traditional retailer. Generally, that part of the gray market is legal.

Dina Wein-Reis
Dina Wein-Reis

But in other cases, the gray market is home to black-and-white fraud.

In New York, Dina Wein Reis, profiled in this week's episode of CNBC's "American Greed," built a multimillion dollar business by conning manufacturers into selling her their products at cost on the promise that she would distribute them to boost the brand. Instead, she simply turned around and sold them to a New Jersey-based wholesaler and pocketed a huge profit.

Reis eventually pleaded guilty to a single fraud count and served a 19-month federal prison sentence in a scam that experts say is all too common in the shadowy, multibillion-dollar gray market.

"The problem with (product diversion) is twofold," said veteran investigator Michael Kessler, whose firm, Kessler International, helps manufacturers rein in the gray market. "One, the manufacturer is losing money. But more importantly, the consumer is put at risk."

A food product displaying the sell-by date.
Adam Jeffery | CNBC
A food product displaying the sell-by date.

That's because a gray market trafficker may not handle products as carefully as a traditional distributor. In some cases, the products might not even be genuine.

"We've seen diverted hair product, pharmaceutical products, food products, toys and alike, and [a] lot of these products if they're stored improperly can create a major problem as far as the composition of the product goes," Kessler told "American Greed."

He says it is common for diverted products to be sold well past their expiration date, rendering them ineffective or even poisonous. Often, fake or diluted products are mixed in with diverted shipments.

Among the most commonly diverted items are "salon only" hair care products. Redken, which says it sells only through salons, spas and salon-affiliated websites, has had so much trouble with diversion that it recently began issuing consumer alerts to educate the public.

Don't Buy
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"Don't risk it, don't buy it! And tell your friends about the danger of diverted products," the company advises, warning that Redken products found in drug stores, mass retailers and on unauthorized websites could be "contaminated or counterfeit," and could cause "irritation or even infection."

Other commonly diverted products include over-the-counter and prescription drugs. Even food products and contact lenses find their way into the gray market.

To root out scams, Kessler relies on techniques he honed through years of experience as a New York state tax enforcer.

"We take on a full-scale investigation," he said.

That includes reviewing manufacturers' contracts with their distributors to make sure they include adequate protections against illegal diversions. Sometimes it also means posing as a gray market buyer, then tracing the products' serial or lot numbers.

"Once we conduct the undercover buys, we kind of know, if there's lot codes on it, who was destined for this product," he said.

"We also do trash retrievals at locations where we believe that counterfeit products are being shipped, in order to see if we can get the manifest and other things. So there is an array of different tools that we use in order to identify and document product diversion."

But the most effective weapon against illegal products could be you.

Be sure to check the expiration date if the product has one, and verify that the product is coming from an authorized distributor. That can be especially tricky when shopping online.

Major online retailers such as Amazon,eBay and Google have been cracking down on unauthorized sellers in recent years, but ultimately it is up to you to make certain you are getting the genuine article.

Poison bottle
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"It's buyer beware," Kessler said.

If the product doesn't pass the smell test — literally or figuratively — send it back. Better yet, don't buy it in the first place. Your attempt to save a few pennies could enable the next Dina Wein Reis, putting yourself and others at risk — and making legitimate products more expensive.

"If you're buying something and it looks too good to be true, it's usually the case," Kessler said.

See how Dina Wein Reis sweet-talked her way into a gray market fortune, and find out who finally brought her down, on an ALL NEW "American Greed," Thursday, Sept. 8 at 10p ET/PT on CNBC Prime.