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Hewlett-Packard
says
it
was
bilked The Sacramento Valley Hi-Tech Crimes Task Force is close to finishing a seven-month criminal investigation of allegedly widespread fraud in the sale of used computer equipment over the past six years, the Business Journal has learned. The fraud allegedly has hit hard at Hewlett-Packard Co., through its Roseville operation, and at other large high-tech equipment manufacturers. The fraud allegedly uncovered in extensive probes of 10 refurbished computer sellers -- eight in California, one in Dallas, and one in Bellevue, Wash. -- has cost the manufacturers an estimated half-billion dollars in lost revenue over half a dozen years, said police Sgt. Mike Tsuchida, supervisor of the task force. Documents filed in a pair of federal lawsuits by Hewlett-Packard last week indicate the company's losses have been in the "tens of millions of dollars." "Truly, this has a global impact to all kinds of companies," Tsuchida said. In addition to Hewlett-Packard, he said, companies such as Sun Microsystems, IBM, Motorola and others were stung. Indictments will be announced in the coming weeks against up to 12 suspects in the probe, Tsuchida said. The task force investigated nine companies and was aided in the investigation of a 10th company by an FBI agent and an investigator from the U.S. Department of Justice, Tsuchida said. "This is Newsweek stuff," he added. Until the indictments are handed down, Tsuchida can't give any details. But, the two federal lawsuits filed by Hewlett-Packard last week in Sacramento include civil charges of racketeering, copyright infringement, conspiracy, unfair competition, fraud, misappropriation of trade secrets and breach of company policies. Hewlett-Packard's lawsuits name two of its own ex-employees and two computer refurbishing companies, Dallas-based Hardwarehouse, and Abtech Systems Inc., a company in the northern San Diego County town of Carlsbad. "That's just a little itty-bitty part sticking above the surface," Tsuchida said. "There's a big giant beast under that. It looks like an octopus." H-P chases the case: The technology titan's two federal lawsuits accuse two ex-employees of taking bribe money. Also accused in the suits are three companies that were allegedly involved in selling pirated software, and illegally upgraded H-P computer file servers. The file servers in question -- HP 3000 series and 9000 series computers -- are manufactured by Hewlett-Packard in Roseville. According to the suit, H-P employees in Roseville unwittingly authorized improper ownership transfer requests for used H-P software. The company wants the court to freeze the assets and records of the defendants to prevent them from hiding any ill-gotten gains. That way, Hewlett-Packard has a better chance of recovering funds it claims it was cheated out of. Don Heller, the attorney for Abtech Systems, the 187-employee Carlsbad computer refurbisher and reseller named in one of the suits, said Wednesday he is in negotiation with Hewlett-Packard attorneys regarding conditions of a possible asset freeze. But the case is complex, he added, and he's calling in copyright attorneys for their opinions. "We're evaluating the case," Heller said. "It's very complicated. It requires some special skills in copyright law." Three years ago H-P hired Tim O'Neill, a high-tech fraud investigator formerly with the Roseville Police Department. He outlines in one lawsuit the details of his two-year investigation of the alleged fraud. O'Neill estimates the fraud by resellers cost the company "tens of millions of dollars." One case names two companies: Dallas-based Hardwarehouse, a broker and reseller of used Hewlett-Packard file servers, along with the company's owners, John and Richard Adamson; and Diablo Equipment Technology Inc. and its owner, Derrick Eisenbeis, based in Discovery Bay. It also names two 10-year Hewlett-Packard employees who were recently fired, an engaged couple identified as Saratoga residents Deborah Balon and French national Marc Loriau. The Adamsons, owners of Hardwarehouse, did not return calls. Neither Eisenbeis' home or nor his business is listed in Discovery Bay. A message was left on Loriau's message machine at his Saratoga home, but the call wasn't returned. Deals on the side: Hewlett-Packard requires that its used file servers be auctioned off to the highest bidder. But the company alleges that Loriau and Balon funneled all of them to Hardwarehouse at cut-rate prices. To further help Hardwarehouse, they allegedly pushed through bogus corporate authorizations for official Hewlett-Packard upgrades. In return, Loriau and Balon allegedly were paid more than $100,000 in bribe money by Hardwarehouse. O'Neill's investigation turned up more allegations against the couple, contained in the court filing: - They allegedly set up a company called Baytech to deposit kickbacks from Hardwarehouse. In exchange, they are accused of funneling the company underpriced, used Hewlett-Packard equipment. That arrangement, Hardwarehouse owners Richard and John Adamson purportedly told O'Neill, began in 1996. Eventually, Hardwarehouse was instructed to send FedEx payments to Loriau, who allegedly got "scared" and "funneled (the payments) out to France." - Hardwarehouse admitted making weekly cash payments of $1,500 to the couple from February 1998 through November of last year, the suit says. - Cash paid to the couple allegedly was used for trips to Paris, Tahiti, Italy, St. Barts, Hawaii, Aspen, Dallas, Florida, Catalina Island, Lake Tahoe and the Napa Valley. It also went into home furnishings including "oriental rugs, furniture, a furnace, a home alarm system, and ... personal items including a fur coat and jewelry," the suit claims. Getting cut-rate used servers was only part of the racket for Hardwarehouse, the suit says. The company obtained a pirated copy of a Hewlett-Packard software program, dubbed SS_Config, a valuable proprietary piece of technology that investigators found has been widely pirated. It is used to upgrade Hewlett-Packard servers by making them accessible to a higher number of simultaneous users, while adding little or no hardware. It is not for sale and is available legally only to authorized employees and engineers. The company fee for making such an upgrade can total hundreds of thousands of dollars. Pirated copies of SS_Config allegedly were found in an August police search of an unnamed company in Bellevue, Wash., during November searches of Diablo Equipment Technology in Discovery Bay, and at Hardwarehouse's business in Dallas. Eisenbeis of Diablo Equipment Technology told investigator O'Neill that he sold a pirated copy of SS_Config to Hardwarehouse for $10,000, and that he'd reconfigured Hewlett-Packard servers in Dallas for Hardwarehouse more than 30 times before selling his pirated copy of the software, which Hardwarehouse then used to do the upgrades itself. A second upgrade technique: Additionally, former H-P employee Balon allegedly helped Hardwarehouse get fraudulent ownership rights to used servers bought through her at cut rates. Balon allegedly OK'd the prohibited cut-rate used-server purchases made by Hardwarehouse, claiming they were legitimate. Such phony "confirmations" were then sent by Hardwarehouse to Hewlett-Packard in Roseville. "Unsuspecting employees in HP's Roseville office would then send an official License Transfer Authorization" back to Hardwarehouse, the suit said. Hardwarehouse, upon selling a used server, would give the authorization to the buying customer. The customer then would be told to present the authorization to a Hewlett Packard customer engineer, "who would then install the software on the system." High-tech chop shops: The second suit Hewlett-Packard filed is against Abtech Systems. Named are its president, Robert M. Russell, and engineering manager Steve Boas. The suit calls the Carlsbad company a high-tech "chop shop" where used H-P equipment is illegally upgraded with pirated SS_Config software and sold. A three-day search of Abtech's headquarters last month by Tsuchida's team and Hewlett-Packard engineers allegedly turned up the pirated SS_Config software, and: - A document in Russell's briefcase with a list of "action items," he needed to do, including "interview experienced criminal attorney (fed. experience)," and "delete SS_Config stuff from systems and trash tapes." - Logs indicating Abtech employees used pirated copies of SS_Config on used Hewlett-Packard equipment for resale. - More than 70 pieces of used Hewlett-Packard equipment with the serial numbers removed "to facilitate fraudulent reconfiguration and resale activity." The suit alleges Abtech repackaged illegally upgraded Hewlett-Packard hardware in "new computer cases bearing fake HP labels" and sold them. Abtech has sister companies in the United Kingdom and France. Its year-end revenue for 1998 totaled $46.08 million with pre-tax net earnings of $4.4 million, the suit says. Attorney Heller said he believed the firm is still in operation. But that couldn't be confirmed. Tsuchida said he's angered by the likelihood that legitimate workers for the company could be put out of a job because of the wrongdoing of higher-ups. "There's nothing I can do about it, but I don't have to like it," he said. "These guys are making huge profits and living the good life, all at the expense of commoners."
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