Sale of Defectives : Western Digital Says O.C. Workers Ran Chip Scheme

Western Digital on Thursday filed civil charges against three former employees and two other persons, alleging that they took part in a fraudulent scheme to sell defective Western Digital computer chips.

The complaint, filed in Superior Court in Santa Ana, alleges that the defendants intercepted faulty chips headed for the scrap yard and sold them as good products to computer parts companies and manufacturers.

It is the third reported theft of computer chips and circuit boards at the Irvine firm this year. In early January, two armed bandits broke into a Western Digital facility, bound a security guard and made off with $105,000 worth of DRAMs, a common computer memory chip. And in May, about $400,000 worth of circuit boards were stolen from an Irvine warehouse.

Memory Chip Thefts

During the past year, at least a half-dozen other Orange County high-tech firms were targets of thefts. Most of the heists involved computer memory chips, which had been in short supply until earlier this year.

“This is really an industrywide problem,” said Robert Erickson, Western Digital’s vice president of law and administration. “Everyone in the electronics industry is facing these kind of difficulties. There is a ready market for this kind of material.”

As computer chips have become increasingly sophisticated, packing more capacity in less space, they also have become more valuable, experts say. And because the chips are small in size--about the size of a fingernail--they are easy to steal.

The Western Digital suit names as defendants Clayton Smith, Christian Parker and Isabelle Galvan, all of Orange County; and Melvin Greenberg and Gerald Carl Raub, both of Los Angeles County. It also names Mel’s Metal Co., a San Fernando Valley business headed by Melvin Greenberg.

Smith and Parker were supervisors at a Western Digital warehouse in Irvine, according to the complaint, while Galvan worked there as a technician. The suit alleges that the trio arranged to deliver the defective chips to Mel’s Metal Co., which instead of destroying them, resold them to computer manufacturers and other computer companies.

No criminal charges have yet been filed in the case, said David Williams, an Irvine Police Department investigator. He said the case has been turned over to the Orange County district attorney’s office for review.

‘Gray Market’ Sales

Western Digital said it was alerted to the theft when the chips--a type used in computer graphics applications--began selling in the “gray market,” a term used for products sold by dealers not authorized by a manufacturer. Some Western Digital customers began asking the company why its chips were being sold by certain distributors at prices well below what they had paid for them, Orban said.

“The products were being sold at prices substantially below what we offer to our authorized dealers,” said Lynda Orban, a Western Digital spokeswoman.

The civil complaint alleges that the defendants stole about 1 million chips, as well as an undetermined quantity of printed circuit boards. If not defective, the chips would have had a value of about $5 million, Orban said.

As a result of the incident, Western Digital said, it has adopted tougher inventory control procedures for scrap goods. “We’ve set up a sort of cradle-to-grave procedure to ensure that no scrap product gets into the marketplace again,” Western Digital’s Erickson said.