High Tech Theft and Low Tech Method

Read the case study on high tech theft. What key controls were not in place in this case? What industries are susceptible to this type of fraud?

CASE STUDY: CHIPPING AWAY AT HIGH-TECH THEFT 1
Nineteen-year-old Larry Gunter didn't know much about computers, but he worked as a shipping clerk in a computer manufacturer's warehouse. Like many other companies in Silicon Valley, this company produced thousands of miniature electronic circuits—microprocessor chips—the building block of personal computers.

Gunter didn't work in the plant's "clean room" building, where the chips were manufactured. The company moved the chips, along with other computer components, next door to the warehouse for processing and inventory.

On the open market, one of these computer chips, which is comprised of hundreds of millions of transistors packed into a space no bigger than a fingernail, is worth about $40. Over 1,000 chips were packaged in plastic storage tubes inside a company-marked cardboard box.

Gunter knew they were worth something, but he didn't know how much. One day, he took a chip from a barrel in the warehouse and gave it to his girlfriend's father, Grant Thurman, whom he knew operated some type of computer 211
212salvage business. He told Thurman that the company had discarded the chip as "scrap."

"I asked him if he knew anyone who would buy scrap chips," Gunter said, and Thurman said he did. "So after about another week or two I stole three boxes of computer chips and brought them to Grant to sell them to his computer guy. Around a week later I got paid by Grant Thurman in the amount of $5,000 in a personal check."

Gunter knew the chips were not scrap, since the boxes, each about the size of a shoebox, bore the marking "SIMMS," signifying that the chips were sound. In fact, the manufacturer maintained a standard procedure for scrap chips, taking them to another warehouse on the company's grounds and sealing the components for shipment to another plant for destruction.

Gunter concealed the boxes from the security guards by placing them on the bottom of his work cart, with empty boxes on top. He pushed the cart out of the warehouse as if he were just taking empty boxes to the trash. Once in the parking lot, where there were no security guards, he loaded the three boxes of chips into his truck.

Shortly after the theft, an inventory manager filling an order noticed that many company chips were missing and immediately went to his supervisor, the warehouse manager. The manager verified that they were missing about ten cartons of chips, worth over $30,000. They contacted the company's director of operations, who accelerated the product inventory process at the plant. Instead of taking product inventory once a month, he began taking it once a week.

Gunter still found it easy to steal, he said, because the security guards didn't pay much attention and because it was easy to evade the stationary surveillance cameras in the warehouse. About two weeks after his first theft, he stole four boxes of new chips, for which Thurman paid him $10,000. Excited about his new conquest, Gunter told his young friend and coworker, Larry Spelber, about the easy profit to be made. The two could split $50,000 from a theft of six boxes of chips, he told Spelber—enough to quit work and finance their schooling.

By this time, however, the company had detected the second loss and contacted private investigator and fraud examiner Lee Roberts. Roberts, head of Roberts Protection & Investigations, had worked with the company's attorney before.

"They knew exactly how much of their product they were missing," Roberts said, "because no product was supposed to leave the building unless they had the paper for loading it on the truck to fill a specific order. However, there was a flaw in the system. The company's operation was separated in two buildings, about 300 feet apart... They would receive an extremely valuable product, and it would go from one building to the other simply by being pushed by employees with carts through this 300-foot parking lot. Consequently, they would end up with an overstock of product that needed to leave the warehouse and be returned to Building One. Of course, that generated no internal paperwork; someone would simply say 'I'm taking this product to Building Two' or vice versa, and that was such a common occurrence that the security guards started to think nothing about it."

"My immediate concern was," Roberts said, "if we've got something leaving the building in the ordered process, then we must have supervisors involved, drivers involved, and the like. It would be a fairly massive operation, and maybe that was their concern."

Roberts suspected the thefts occurred between these interbuilding transfers. Since the employees who did these transfers were the thirty or so warehouse floor workers, he had many potential suspects.

To catch the thieves, however, a new video surveillance system would need to be set up at the warehouse. "We looked at their video surveillance system and found their cameras were improperly positioned, and they were not saving their tapes in the library long enough to go back and look at them." Roberts's firm, which partly specializes in alarms and security protection, set up an additional sixteen hidden video cameras inside the warehouse, as well as additional cameras in the parking lots.

"We agreed to pretend that nothing had happened," Roberts said of the thefts, "which would give the suspects a false sense of security, and the company agreed to restock the computer chips."

The warehouse manager and his assistant began to surreptitiously track interbuilding transfers on a daily basis. With access to the paperwork and new video, "we were able to freeze-frame images" in order to look at all sides of an employee's cart. This time, the warehouse manager knew exactly how many boxes an employee was supposed to be taking to the other building.

Unbeknownst to Gunter and Spelber, the video cameras recorded them talking in the aisleways and other areas of the warehouse. Coupled with the daily inventory check, the record showed that the two employees frequently had more than the number of boxes they were supposed to be moving.

About 3:30 one afternoon, Gunter and Spelber removed six boxes from the shelves, placed them on a cart with empty boxes on top, and moved the cart outside. In the parking lot, Spelber loaded the boxes into his truck and returned to work. After work, they drove their own vehicles down the street and transferred the boxes to Gunter's car.

At home, Gunter removed the company labels from the chips and drove to Thurman's house. Thurman promised to pay him $50,000 for this stock.

Gunter and Spelber never saw that money. The next day, company security confronted them with the evidence. They quickly admitted their guilt and identified Thurman as the receiver of the stolen equipment. When police interviewed Thurman at his home, he denied knowing that the computer chips were stolen, but he admitted to reselling the chips to 212
213an acquaintance named Marty for $180,000, paid for with cashier's checks.

Interviews with Marty, along with check receipts, revealed that the amount was actually much greater—Marty had paid approximately $697,000 to Thurman for the chips (a profit of about 50 cents on the dollar, as compared to the 10 cents on the dollar Gunter received). Although investigators could not uncover any stolen equipment, they believed that Marty had sold the goods to the aerospace industry, and possibly to federal agencies.

The next day, police arrested Thurman after he attempted to make a large withdrawal from his credit union. Thurman and Gunter both served over a year in the state pen for grand theft and embezzlement; Spelber got nine months in a work furlough program. The police were never able to tag anything on Marty, who made the most money in the open market for the chips. Since none of the product could be found in his store, and since investigators could not prove he knew the property was stolen, they could not criminally prosecute him.

Roberts said the case was unique in that, at the time, it represented the largest internal theft in the history of this California county. The company, though unable to recover most of the stolen property, learned a valuable lesson from the fraud. Afterward, managers conducted tighter controls on transfers of property between buildings, produced more frequent inventory audits, and established enhanced physical security, which included a new chain-link fence between the two buildings.

"I think this fraud was difficult to detect because the audit controls that they set up, and the manner in which they had set them up, were improper," Roberts said. "That's a common thing that we see as fraud examiners or investigators. Often people spend a great deal of money to set up audit controls—they set up physical security; they install alarms—and we often say to them: Simply buying that piece of equipment or putting those procedures into place is not enough. You need a trained, experienced professional to tell you how to do it and how to use them. If you don't do it the right way, it's worthless."

1 Several names and details have been changed to preserve anonymity.

CHAPTER 9: NONCASH ASSETS Next Page
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OVERVIEW
Up to this point in the book, our discussion of asset misappropriations has focused on cash schemes. While the vast majority of asset misappropriation schemes involve cash, it should be remembered that other assets can be stolen as well. Although schemes involving the misappropriation of noncash assets are not as common as cash schemes, they are nevertheless potentially disastrous. As Larry Gunter's scheme illustrates, thefts of inventory can run into the millions of dollars. In this chapter we will discuss the ways in which employees misappropriate noncash assets, such as inventory, supplies, equipment, and information.

Noncash Misappropriation Data from the ACFE 2009 Global Fraud Survey
Frequency and Cost
Noncash schemes were not nearly as common as cash schemes in the ACFE survey, accounting for only 20 percent of asset misappropriations (see Exhibit 9-2). Additionally, as indicated in Exhibit 9-3, noncash schemes had a lower median cost than frauds that targeted cash.

Types of Noncash Assets Stolen
By far, physical assets, including inventory and equipment, were the most commonly misappropriated noncash asset in the ACFE study. Fraudsters embezzled physical assets in 75 percent of the cases involving noncash misappropriations (see Exhibit 9-4).

Although securities were the least likely asset to be misappropriated (15 cases), the median loss in cases involving securities theft was significantly higher than in any other category, at $10,000,000 (see Exhibit 9-5).