LexShares Case #321: The Counterfeit Equipment Nightmare
A small reseller bought “genuine” equipment from a Fortune 50 company. It was counterfeit. Their employees went to Chinese prison. The lawsuit went nowhere.
The Numbers
| Invested | $47,500 |
| Returned | $0 |
| Net Profit | ($47,500) |
| MOIC | 0.00x |
| IRR | -100% |
| Holding Period | 1,648 days |
The Case
In 2011, a small East Coast computer reseller — let’s call them “the Reseller” — purchased used IT equipment from the financial services arm of a Fortune 50 tech giant. The equipment was supposedly manufactured by the tech giant’s Chinese affiliate.
The Reseller’s business: remarketing excess and end-of-life computer parts. They’d been doing it since 1993. Buying from a Fortune 50 company seemed safe.
It wasn’t.
The equipment was counterfeit. The Reseller didn’t know this — the tech giant’s subsidiary had represented it as genuine. Throughout 2012, the Reseller’s Chinese office resold the equipment, believing it was legitimate based on their supplier’s contractual representations.
Then came the raid.
In December 2012, the tech giant’s Chinese affiliate — the same company whose equipment the Reseller thought they were selling — reported the Reseller to Chinese authorities. Police raided the Reseller’s Chinese offices, seized the equipment, and arrested three sales associates.
The charges: marketing counterfeit equipment. The same equipment the parent company’s subsidiary had sold them.
Seven Months in Chinese Prison
The three sales associates spent seven months in Chinese prison under horrific conditions:
- A 300 square foot cell shared with 40 inmates
- No family visits allowed
- Released on bail in July 2013, but remained in legal jeopardy
- Finally received “no criminal record” letters in late 2015-early 2016
Meanwhile, the tech giant’s subsidiary admitted in a 2013 submission to Chinese authorities that “the counterfeit equipment seized in China is the same equipment sold by [us] to [the Reseller].”
They further admitted that the Reseller “was entitled to assume that it was buying genuine equipment.”
But they didn’t secure the release of the imprisoned employees.
The Lawsuit
In December 2015, the Reseller and its sales associates sued, alleging:
- Negligent misrepresentation
- Fraud
- Breach of contract
- Deceptive business practices
- False arrest and imprisonment
- Civil conspiracy
The damages:
- $250,000 paid for worthless counterfeit equipment
- Lost profits from anticipated resales
- Forced closure of Chinese operations
- Reputational damage
- Legal fees to clear employees’ names
- Physical and mental suffering of imprisoned employees
Timeline: From Hope to Disaster to False Hope to Death
| Date | Event |
|---|---|
| 2011 | Reseller purchases equipment from Fortune 50 subsidiary |
| Dec 2012 | Chinese offices raided; 3 employees arrested |
| Jul 2013 | Employees released on bail after 7 months |
| Dec 2015 | Lawsuit filed in state court |
| Aug 2016 | First LexShares funding ($175K) |
| Sep 2017 | My investment — $47,500 |
| Aug 2018 | Mediation — no resolution |
| Mar 2020 | Defendant files motion for summary judgment |
| Aug 2020 | Spoliation sanctions granted — case looked dead |
| Nov 2020 | Defendants file misconduct motion against plaintiff’s attorney |
| Late 2020 | Third round of funding raised |
| Dec 2020 | Original attorney fired; elite litigation firm takes over |
| Jan 2021 | Court refers old attorney for potential misconduct |
| Nov 2021 | Summary judgment granted against plaintiffs on all counts |
| Mar 2022 | Walk-away settlement — $0 recovery |
The Lawyer Who Destroyed the Case
The original plaintiff’s attorney was a disaster.
How bad? Bad enough that the defendants filed a motion asking the court to refer him for attorney misconduct. The court granted it.
By the time he was finally fired in December 2020, the damage was irreversible:
- Spoliation sanctions — evidence was destroyed or lost on his watch (August 2020)
- Blown discovery — years of disputes had poisoned the record
- Summary judgment looming — the defense had built their case against weak opposition
- Credibility destroyed — the court literally referred him for misconduct
A solo practitioner against a Fortune 50 company’s legal department was already an uphill battle. But this wasn’t just being outmatched — this was malpractice-level incompetence.
The Failed Rescue
By late 2020, I thought this case was dead.
Spoliation sanctions in August. Summary judgment motion looming. The attorney being referred for misconduct. The case was a train wreck.
Then I saw the email: additional funding raised.
I was confused. Why would anyone put more money into this disaster?
Then came the next update: new lawyers. Not just any lawyers — a top-tier litigation firm. The kind of firm that charges $1,500/hour and wins impossible cases.
Suddenly I had hope. Maybe they could save it.
The new lawyers tried. They fought motions for reconsideration. They battled over remote depositions for witnesses stuck in China. They prepared for trial.
But you can’t un-ring the spoliation bell. You can’t rebuild credibility that someone else destroyed.
November 2021: Summary judgment granted against plaintiffs on all counts.
March 2022: Walk-away settlement. Zero recovery.
The new lawyers couldn’t save a case the old lawyer had already killed.
Why the Case Failed
The incompetent lawyer. This was the root cause. Spoliation sanctions. Misconduct referral. Years of bungled discovery. By the time competent counsel arrived, the case was beyond saving.
Witness access problems. Key witnesses were in China. Getting them to testify — even remotely — required court battles. The judge eventually allowed remote depositions but required physical appearance at trial. COVID-era travel restrictions made this impossible.
Compelling story, weak legal claims. The facts were sympathetic — employees imprisoned for selling equipment their employer sold them as genuine. But moral outrage doesn’t survive summary judgment. The legal theories apparently didn’t hold up under scrutiny.
Deep-pocket defendant. A Fortune 50 company’s legal department has unlimited resources to fight. Four and a half years of litigation. Motion after motion. They weren’t going to settle a case they could win.
Warning Signs I Missed
| Red Flag | What It Meant |
|---|---|
| Solo practitioner counsel | Outmatched and — as it turned out — incompetent |
| Key witnesses in China | Logistical nightmare for depositions and trial |
| Complex international facts | Multiple jurisdictions, affiliates, and legal theories |
| Undisclosed damages amount | Made it hard to model recovery scenarios |
| Deep-pocket defendant | Would fight rather than settle nuisance claims |
| Failed 2018 mediation | Defendant wasn’t interested in settling |
What I Learned
A bad lawyer can kill a good case. The original attorney was so bad the court referred him for misconduct. By the time they fired him and brought in a top-tier firm, it was too late. Spoliation sanctions were already on the record. The credibility was already shot. No amount of legal firepower can undo that kind of damage.
Sympathetic facts don’t guarantee legal success. Employees wrongfully imprisoned after their employer sold them counterfeit goods is outrageous. But outrage doesn’t survive summary judgment. The legal claims need to be airtight.
Sometimes a rescue mission is just throwing more money into a grave. The late 2020 funding was meant to save the case — hire real lawyers, fight back. For a moment I had hope. But even the best lawyers couldn’t undo what the first one had destroyed.
Spoliation sanctions are case-killers. When a court sanctions you for destroying or losing evidence, your credibility is shot. Even partial sanctions signal problems that make settlement or trial victory harder.
International elements add risk. Witnesses in China, events in China, Chinese legal proceedings — all of this creates logistical and evidentiary challenges that drain resources and complicate litigation.
Follow-on funding isn’t always validation. I invested in the second round ($47,500). Following an existing investment isn’t the same as independent due diligence. The first funders can be wrong.
4.5 years is a long time to lose. From September 2017 to March 2022, I watched this case go through discovery, motions, sanctions, lawyer drama, a brief moment of hope, and ultimately a walk-away settlement. Every quarterly update was another reminder that litigation is unpredictable.
This was my 9th LexShares investment and my second total loss. The facts were compelling — a Fortune 50 company sold counterfeit goods, then let the buyer’s employees rot in Chinese prison. But the original lawyer destroyed the case. By the time they raised more money and brought in a top firm, it was too late. For a brief moment in late 2020, I had hope. Then I watched that hope die. $47,500 gone.
