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A court handed out suspended jail terms and hefty fines to 12 people for selling 18 million bottles (135,334 hectolitres) of wine they said was Pinot Noir but which was in fact made from far cheaper grape varieties.
The convicted included executives from wine estates, cooperatives, a broker, wine merchant Ducasse and the conglomerate Sieur d'Arques.
"The scale of the fraud caused severe damage for the wines of the Languedoc for which the United States is an important outlet," the judge told a packed courtroom in Carcassonne in southwestern France.
He said that the accused made seven million euros in profits from the scam, with Ducasse raking in 3.7 million euros and Sieur d'Arques pulling in 1.3 million euros.
The fines he imposed ranged from 1,500 to 180,000 euros, while the suspended jail sentences went from one to six months.
The wine was sold in the United States under Gallo's popular "Red Bicyclette" Pinot Noir label, which in 2006 was marketed as having "aromas of dark fruit flavours" and whose palate was said to be like "black cherry and ripe plum."
It is not yet clear whether Gallo purchased the wine at a lower price than the market rate for Pinot Noir.
If so, they would have substantially increased their margins on a wine that sells for 11.99 dollars a bottle. Gallo was neither a defendant nor a plaintiff in the case in Carcassonne.
The giant wine firm has not yet said whether it plans to launch a lawsuit against the French producers in the wake of Wednesday's judgement and did not immediately respond when contacted for its reaction.
Meanwhile, US authorities are investigating potential infractions.
The Alcohol, Tobacco, Tax and Trade Bureau has been in discussions with the French authorities about the wine scam over the past year, a spokesman said, and will now review the court documents to decide whether to take any action.
The scandal broke in March 2008 when France's fraud squad, the DGCCRF, became suspicious during an audit at the wine merchant Ducasse.
Ducasse had been buying Pinot Noir at 58 euros per hectolitre when the official market price was 97 euros, and generic local grape varieties were selling for 45 euros.
Meanwhile, the volume of wine from the renowned Pinot Noir grape being sold to Gallo far exceeded the possible supply from the region.
Ducasse's own suppliers could have only filled two million bottles of Pinot Noir a year, and some of the boldest perpetrators of the scam do not even grow Pinot Noir.
After a year-long judicial investigation, the defendants were accused of substituting wine made from less expensive local grape varieties for the Pinot Noir, which is hugely popular on the American market.
Jean-Marie Bourland, a lawyer for Sieur d'Arques, did not rule out an appeal. "There is no prejudice. Not a single American consumer complained," he argued.
Pierre Dounac, lawyer for three defendants including Ducasse's director Claude Courset, argued that his clients had done no harm as they had delivered a wine with the characteristics of Pinot Noir.
The industry fears that the swindle, which began in 2006 and ended in 2008, could undermine the credibility of fellow French winegrowers.
"What worries me the most for my country are the economic consequences," prosecutor Francis Battut told AFP during the trial.
"If Americans lose confidence in French wine production, particularly the Languedoc region, which is already going through a serious crisis, the consequences could be terrible."
Business association Ubifrance said on Wednesday that French wine exports plunged by almost a fifth in 2009 to 5.5 billion euros (7.5 billion dollars), back to the same level as a decade ago.
The wine trade is not new to fraud.
In 2007, French Beaujolais producers were caught dosing their wine with sugar, while in 2005, South African Sauvignon Blanc was doctored with fake aromas.
A 1985 case revealed that Austrians had spiced up their cru with a substance also found in antifreeze.
