Cisco Loses Over $10M in Two Cases of Channel FraudBy Paula Musich | Posted 2007-03-07 Email Print
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In two unrelated cases, service contractors were caught fencing Cisco products obtained through SMARTNet warranties and reselling them to VARs.
Two different individuals in the Northeast were arrested in the past week for allegedly defrauding Cisco Systems out of millions of dollars worth of replacement parts.
On March 6, Michael Daly, a 53-year-old businessman from Danvers, Mass., was arrested for wire fraud. On March 2, Michael Kyereme, an independent contractor working for the city of Newark, N.J. was arrested and charged with defrauding Cisco of over $10 million worth of replacement parts.
Both men allegedly exploited Cisco's SMARTnet warranty program to fraudulently obtain valuable Cisco replacement parts, which they sold to computer resellers or Cisco discount equipment dealers.
In both cases, the men made service requests of Cisco under SMARTnet contracts for replacement parts, claiming that the parts were inoperable. Although the SMARTnet program requires them to return the defective parts, the two men either failed to return any parts at all, or they returned other parts with little or no value.
A Cisco spokesman John Noh characterized the timing of the arrests as "coincidental." In a recent internal audit, Cisco Systems found that it received an average of 3,300 service requests per day between August 2006 and February of this year. "In that context these are very random cases," Noh said.
Kyereme, a 40-year-old Piscataway, N.J. IT support contractor, ordered some 280 parts from the Cisco SMARTnet program between August of 2002 and early 2007 on behalf of the City of Newark. In a search of his home on March 2, the FBI recovered $3 million worth of Cisco replacement parts.
Out of those 280 parts, Kyereme failed to return 148 of the supposed inoperable parts to Cisco. Although he returned 132 so-called inoperable parts, only 33 of those corresponded to the part originally sent.
According to an FBI criminal complaint against Kyereme, he suggested that he was working for an out-of-state computer reseller to fraudulently obtain the more expensive parts. He said that the reseller would give him a list of parts that they wanted him to obtain from Cisco under the SMARTnet program, and that once he obtained the parts, he would wait for several days before shipping them to the reseller.
The complaint quoted Kyereme as saying that, "I knew what I was doing was wrong and that it was stealing." But the money he was offered for his efforts was "overwhelming."
The FBI complaint against Michael Daly in Massachusetts accuses him of using "numerous" false identities and renting mailboxes at UPS or Mail Boxes Inc. stores in 39 states to receive Cisco replacement parts.
Between July of 2003 and Feb. 16, he made 700 service requests through 165 SMARTnet contracts that had been resold by several companies during that time period.
In the complaint the FBI said that Cisco sent out the appropriate replacement parts in response to those service requests, but only 11 times were failed/defective parts sent back, and only one of those was actually covered by the SMARTnet contract.
The other 10 instances had returned parts with little or no value and were not part of the SMARTnet contract.
Daly is accused of using the Cisco Connection Online customer support Web site through free AOL e-mail accounts using different names. The individuals making the requests said they were representatives of the different companies that had valid SMARTnet contract numbers.
But the complaint said that every one of those companies was fictitious, and that the addresses given for those companies were actually private mailboxes at a UPS or Mail Boxes Etc. store.
Similar language was used in all the service requests, and seemed intent on eliminating the possibility of troubleshooting or convincing the Cisco customer service representative to send the requested replacement part, the complaint said.
List price of the requested parts ranged from $995 to $25,000, although a majority of them were for a part that lists at $16,500.
Daly allegedly had the UPS or Mail Boxes Etc. store forward the parts to his business, called Data Resources Group in Salisbury, Mass. The FBI caught him by putting a tracking device in the shipment of one of the replacement parts that they believed he was requesting.
Noh would not comment further on the two arrests, except to say that Cisco is cooperating "fully with the authorities in these investigations."
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