Apple claims 'huge' loss over iPhone leak

Company knew who sold prototype to Gizmodo same day story broke

Apple officials told police investigators that the publication of photos of an iPhone prototype was "immensely damaging" to the company and represented a "huge" loss, recently released court documents show.

Those documents, released Friday by a San Mateo, Calif., county judge, reveal details of a meeting between police and Apple officials that ultimately led to the seizure of several computers from the home of Gizmodo editor Jason Chen.

Gizmodo published photographs and analysis of the iPhone prototype -- widely believed to be similar to the smartphone Apple will launch next month -- on April 19. Gawker Media, the company that operates Gizmodo, has admitted it paid $5,000 for the phone after it was left at a Redwood City, Calif., bar by an Apple software engineer.

The next day, April 20, Detective Matthew Brand of the San Mateo County Sheriff's Office met with Bruce Sewell, Apple's chief counsel, Rick Orloff, the company's director of information security, and George Riley, a lawyer from the Los Angeles law firm of O'Melveny and Myers, which represents Apple. During the meeting, Riley told Brand that the premature disclosure of iPhone details had been "immensely damaging" to Apple.

"By publishing details about the phone and its features, sales of current Apple products are hurt wherein people that [sic] would have otherwise purchased a currently existing Apple product would wait for the next item to be released, thereby hurting overall sales and negatively effecting [sic] Apple's earnings," Riley said, according to the affidavit Brand swore out for a search warrant of Chen's residence.

When Brand asked Riley to put a dollar amount on the loss, Riley said he could not estimate it, but believed it was "huge."

The affidavit also revealed that Apple knew the identify of the man who sold the prototype iPhone to Gizmodo on the same day that the blog published its story.

By Brand's affidavit, Katherine Martinson, who identified herself as a roommate of Brian Hogan, said Hogan had been in possession of the iPhone and had sold it to Gizmodo. Martinson had provided Orloff a photograph of a sticker bearing identifying markings that had been attached to the iPhone. Orloff told Brand that the markings matched those of the missing iPhone.

On April 29, Hogan, a 21-year-old college student from Redwood City, was named by his attorney as the person who took the iPhone from the bar and sold it to Gizmodo. Hogan has not been arrested or charged with a crime.

According to Brand's affidavit, Martinson told Apple of Hogan's involvement because she was afraid she would be dragged into any criminal charges. "Orloff said that Witness Martinson contacted him due to the fact that Suspect Hogan connected the stolen iPhone to her computer and she believed that Apple would eventually trace the iPhone back to her IP address," the document stated.

Martinson and others also allegedly tried to talk Hogan out of selling the prototype because its disclosure would damage the career of the Apple software engineer who had left the iPhone at the Redwood City bar. Hogan's response to Martinson's pleas was, "Sucks to be him. He lost his phone. Shouldn't have lost his phone," the affidavit read.

California police, led by the REACT (Rapid Enforcement Allied Computer Team), a multi-county task force that investigates high-tech crimes in the Silicon Valley area, served the search warrant April 23, just four days after Gizmodo published its story. During the search, REACT removed at least six computers from Chen's Fremont, Calif. home.

Those computers are in legal limbo at the moment. According to the latest statements by the San Mateo County district attorney's office, which would prosecute if it decides a crime has been committed, the computers have not been examined. Gizmodo's attorney has argued that the machines were illegally seized, citing both federal and California journalist shield laws. "We continue to discuss the matter with Mr. Chen's attorney and attorney's for Gawker [Media]," said Stephen Wagstaffe, chief deputy district attorney for San Mateo County, on April 30.

The Gizmodo prototype is just one of at least two early versions of the iPhone that have leaked to the public. Last week, a Vietnamese Web forum posted photographs of what one hardware expert said was probably a production or near-production unit.

Most expect Apple to repeat its pattern of the last two years by announcing the next iPhone on June 7, the first day of the company's annual developers conference, and beginning sales two to four weeks later.

Brand's affidavit was released after lawyers representing several print and online media companies, including the Associated Press, Bloomberg, CNET, the Los Angeles Times and Wired.com, argued that it be unsealed.

The affidavit can be downloaded from several locations on the Internet, including CNET's site (download PDF)

Gregg Keizer covers Microsoft, security issues, Apple, Web browsers and general technology breaking news for Computerworld. Follow Gregg on Twitter at @gkeizer or subscribe to Gregg's RSS feed . His e-mail address is gkeizer@ix.netcom.com.

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