Fake chips from China sold to U.S. defense contractors

WASHINGTON Tue Oct 26, 2010 12:22pm EDT

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WASHINGTON (Reuters) - Shannon Wren ran what appeared to be a low-key computer business in Florida but had a love for fast and fancy cars, spending hundreds of thousands of dollars on a Rolls Royce, a Ferrari Spider, a Bentley Arnage and motorcyles.

He even had a side business featuring couture clothing. However, his real moneymaker was allegedly selling fake integrated circuits he imported from China and Hong Kong to defense contractors and transportation firms, chips used in virtually every piece of electronics equipment.

Federal agents swooped in last month on Wren's VisionTech Components' offices in Clearwater, Florida, arresting him and his associate, Shannon McCloskey, and seizing his cars as well as his companies' bank accounts.

The pair face 10 counts of trafficking in counterfeit goods, conspiracy, and fraud from generating almost $16 million in revenue over three years, supplying chips to companies such as BAE Systems and Alstom.

While Wren and McCloskey pleaded not guilty to the charges in a U.S. court in Washington last month, the case highlights the growing sophistication of counterfeiters.

The Justice Department launched an intellectual property task force in February to focus on counterfeiting, trade secret theft and piracy. They have begun hiring 51 new FBI agents and 15 additional prosecutors to focus solely on those cases.

There's big money in counterfeiting as well as stealing corporate trade secrets, which can save competitors millions of research and development dollars by providing them with shortcuts.

MALICIOUS CODE

In August a Chinese man with permanent resident status in the United States was arrested and charged with stealing trade secrets worth $300 million from a Dow Chemical Co unit related to insecticides to benefit the Chinese government.

Another couple in Michigan was accused in June of a scheme to steal secrets about General Motors' motor control system for hybrid vehicles and sell them to a Chinese automaker. GM put the value of the stolen documents at more than $40 million.

The concern with counterfeit chips is that they could be inferior, which could lead to the device failing or have malicious code embedded that would allow someone to hack into it or intercept communications.

"Counterfeiting of computer components generally is of significant concern to the government, even more so when those counterfeit components are sold to the military or other government agencies," Mike Dubose, chief of the Justice Department's Computer Crime and Intellectual Property Section, told Reuters.

In the Florida case, the arrests of Wren and McCloskey were particularly worrisome because they were selling circuits to the defense industry that they passed off as being from firms such as Texas Instruments Inc, National Semiconductor Corp and Intel Corp.

Military-grade circuits are designed to work despite extreme hot or cold temperatures, including in space, and to withstand extreme vibrations like in a missile or aircraft. As a result, they cost more than commercial-grade chips.

While the indictment did not say that the fake chips made it into weapons systems, they were allegedly sold for use in missiles and handheld radiation detectors as well as for controlling high-speed trains.

When the supplier for the trains complained that most of the 2,000 circuits they bought did not work, Wren pleaded for understanding.

"Please don't over analyze these parts, anybody can find something wrong with a brand new Ferrari if we look hard enough. Come on guys." he said according to the indictment.

(Editing by Bill Tarrant.)

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