FBI busts two Cisco parts scams

TechWorld.com - Two men have been arrested in the U.S. for allegedly defrauding Cisco Systems Inc. of millions of dollars by obtaining valuable replacement parts on false pretenses.

The two men, working independently, allegedly obtained more than $10 million in Cisco parts through the company's SMARTnet warranty program.

The arrests demonstrate the intense and growing illegal activity around valuable Cisco parts. Besides fraud, Cisco and its customers also have to worry about counterfeits -- Cisco is the most counterfeited IT brand, with fakes now routinely making their way into legitimate sales channels. According to a white paper by the American Gear Manufacturers Association and consulting company KPMG International, counterfeit products account for nearly 10% of the overall IT products market.

Michael Kyereme, an independent contractor working for the city of Newark, N.J., was arrested on March 2 and charged with illegally obtaining more than $10 million worth of Cisco replacement parts, the FBI said. On March 6, Massachusetts businessman Michael Daly was arrested and charged with wire fraud.

Daly's alleged fraud operation was the more complex of the two, the FBI said. He was charged with using a large number of false identities, and rented mailboxes in 39 states to receive the replacement parts, which were then forwarded to his business.

Between July 2003 and Feb. 16, 2007, Daly made 700 service requests through 165 legitimate SMARTnet contracts, which had been resold during that period. Daly made the requests in the names of companies that turned out to be fictitious.

SMARTnet requires Cisco to immediately replace faulty parts but requires customers to return the defective parts. Daly returned only 11 parts, only one of which was actually covered by warranty. Most of the parts Daly allegedly obtained were worth between $995 and $25,000.

Kyereme, an IT support contractor, ordered 280 parts through Cisco's warranty program between 2002 and 2007 on behalf of the city of Newark. Of the supposedly defective parts, Kyereme returned 132, of which all but 33 were of a lower value than the replacements.

Kyereme told the FBI an out-of-state computer reseller had offered him "overwhelming" sums of money to obtain the parts, according to the FBI's charges.