Chip Thefts a Silicon Gold Rush

It looked like any small computer store. Facing a busy commercial street, it had a big sign out front and its own delivery vans. Yet, somehow, it never seemed to attract many customers.

As it turned out, authorities say, it didn’t need them.

In reality, Prestige Computers was the center of one of the biggest computer chip theft rings in the Silicon Valley, law enforcement officials say. From there, they allege, its operators planned armed robberies and laundered stolen computer components.

The thieves’ undoing came in May when they tried to rob what they thought was an Intel Corp. warehouse, officials said. In fact, it was part of an elaborate FBI sting. The building was empty and its workers were federal agents in bulletproof vests. Ultimately, 17 people connected with Prestige Computers were arrested.

“It sends a message: Hey, the next warehouse you hit, the police and the FBI may be waiting for you,” said FBI supervisor Richard J. Bernes, who oversaw the nine-month operation.

But the San Jose sting was a rare success story in law enforcement’s running war with thieves who operate in one of the world’s most lucrative black markets: stolen computer chips.

Over the last five years, as the high-tech industry has boomed, thefts around the globe have soared more than 100-fold by some estimates.

In the Silicon Valley alone, computer companies lose $1 million a week. Industry analysts estimate that thefts last year cost U.S. companies $8 billion worth of components, based on retail value.

“Technology is the lifeblood of the United States and we are seeing theft steal the competitive edge of this industry,” said MaryLu Korkuch, marketing manager for New Jersey-based Chubb & Sons, one of the biggest insurers of high-tech companies.

Ounce for ounce, top-of-the-line computer chips are more valuable than gold and safer to sell than cocaine. The tiny pieces of silicon--such as central processing units that power personal computers and memory chips that store information--are lightweight and easy to transport.

These facts plus the industry’s often lax security and the growing demand for components have helped fuel a rise in thefts ranging from small-scale employee pilferage to huge armed robberies--including a record $9.9-million heist in Irvine in May.

One study estimated that 57% of all thefts, big and small, are committed by company insiders--up to 70% when contractors and suppliers are included.

“Employees may be making a little more than minimum wage,” said San Jose Police Officer Bruce Toney, who specializes in high-tech crime. “A central processing unit is about the size of two matchbooks. Put that in your pocket and you can double your income for the week.”

Crime has become increasingly violent in what used to be considered a safe industry: In the last year, computer company employees here and abroad have been shot, knifed, pistol-whipped, bludgeoned and Maced in chip robberies.

So great is the hunger for computer parts that purloined chips are easily laundered through a sophisticated network of distributors, changing hands as many as 18 times in 72 hours as they make their way back onto the legitimate market, officials say. Because most chips have no serial numbers, they cannot be traced.

Asian gangs in the United States are heavily involved in the illicit trade, the FBI says. Many components stolen here are shipped to Asia, where they are installed in personal computers and sent back to the U.S. market, undercutting legitimate companies. Other hot components remain in the United States where they end up in the hands of small-scale computer assemblers. Still others are sold in Russia’s growing black market.

Traditional law enforcement has been largely unsuccessful in halting thefts and most high-tech thieves are never apprehended.

Frustrated by the surge in armed holdups in the Silicon Valley, the FBI last year staged the kind of sting usually reserved for corrupt politicians and mobsters.

An earlier investigation had led agents to suspect that the store was the center of a crime ring. A young Vietnamese American police officer from the city of Santa Clara posed as an Intel Corp. worker. He was planted at a health club, where members of the suspected ring were known to work out. In the locker room, another operative and the agent talked about the agent’s “work” for Intel.

Soon, officials said, he was approached by ring members and began selling them “stolen” Pentium and memory chips, receiving $60,000 in cash for hundreds of chips over a four-month period, court records show.

When the group indicated it wanted more, the officer mentioned a loosely guarded warehouse in nearby Milpitas. He gave them sketches of the floor plan and told them when a big shipment of Pentium chips would arrive, the court records show. At their request, he left a warehouse door unlocked on the appointed day.

When two carloads of armed men drove up, right on schedule, the FBI and local police arrested them. Prestige owner Lawrence Wong and 16 others are scheduled to go on trial next month on theft, mail fraud, gambling and weapons charges. All have pleaded not guilty. Prestige, meanwhile, has quietly closed its doors.

Until recently, most computer companies have been easy targets, with protective measures so lax that they all but invited thieves to walk in. Even with a surge of well-publicized thefts, some smaller companies still are unwilling to spend the money to protect themselves.

“Some of these companies are in denial,” said Korkuch of Chubb. “It’s a very competitive industry. Some are willing to take the risk to keep pushing the product out the door.”

Bigger companies, however, are tightening security, prompting thieves to become more daring. In the past two months in the Silicon Valley, three executives have been kidnapped by robbers seeking entry to businesses.

One executive and her two small children were in her car outside their house when gunmen seized them and drove them across town. After leaving them tied up in the car, they used the woman’s keys and alarm access code to enter her office. They were interrupted by another employee and later were arrested.

Last week in Torrance, Los Angeles County sheriff’s deputies arrested 11 people suspected of plotting to kidnap the owners of a computer chip company and steal up to $7 million in inventory. Taken into custody at a motel, the suspects had guns and hand-drawn maps of the offices and homes of the intended victims. The arrests occurred after a seven-month statewide investigation of Asian gang members.

Weeks earlier, the owner of a small Fremont company refused to surrender to would-be kidnappers. The executive was nearing his house when a car blocked his path. Two gunmen jumped out and began pounding on his windows, cracking one. He drove off as the men opened fire, hitting the car’s radiator with a .45-caliber bullet.

“They follow you home and they try to kill you,” said the terrified man, asking not to be identified. “The next step is they are going to kidnap you from your own home. I don’t know where this is going to stop. We feel very vulnerable. They know who we are and we don’t know them.”

He said he fears that law enforcement is ill-equipped to cope with the surge in computer crime--a complaint echoed by industry leaders.

The FBI has its San Jose-based high-tech unit, which conducted the Prestige sting. But most police departments assign computer crimes to detectives who are burdened with countless other duties. With a sergeant and four deputies, San Jose’s high-tech squad is the nation’s largest police computer crimes unit. It is overwhelmed.

“Because [the unit] is not large enough to maintain tracking on all of the high-tech crimes, a lot of them go uninvestigated,” said San Jose’s Toney. “It is not unusual for a company to report a half a million dollar loss, and not receive the manpower [needed to investigate].”

Elsewhere, most officers receive no training in handling high-tech thefts and would probably be unable to identify stolen components.

“Many police officers don’t know the difference between a computer chip and a potato chip,” said Korkuch, who spends much of her time attempting to educate law enforcement--and industry executives--about computer crimes.

The lack of training among police has been equaled by the naivete of many chip manufacturers who operated for years without even minimal security precautions such as locking warehouse doors and screening employees.

The American Electronic Assn. has urged members to adopt stricter precautions but with limited success, said association Vice President Michael McQuade.

“They don’t think of obvious things like cutting the bushes outside the building so thieves can’t hide in them,” he said, “or storing chips in high-security vaults so the stuff just doesn’t sit out in the open.”

Only chip giant Intel has begun putting serial numbers on its products--and then only on its Pentium chips, which, priced at up to $600, are the most costly and coveted computer component. Even so, the serial numbers have little value because a database to track the chips as they are sold and resold has yet to be developed.

“When you tell a manufacturing guy that he has to serialize and track, you’re talking a lot of money being added to the cost of production,” said John O’Loughlin, corporate security director for Sun Microsystems, maker of computer workstations. “He just sees it as a competitive disadvantage.”

Nearly $155 billion in chips were sold worldwide last year--about half destined for computers and the rest for everything from microwaves to cars.

The demand has become so great that most factories are operating at or near capacity and still have trouble filling their orders. With the popularity of multimedia personal computers, memory chips are the most coveted--by legitimate and black market dealers alike.

For a small company, replacing stolen chips can take precious weeks or months and it may never fully recover from the loss.

“I’ve heard there are companies that have knowingly or unknowingly bought back their own products because they are so desperate for the ability to produce,” Korkuch said.

With hot chips so marketable, thieves have become not only more brazen but also more creative.

Some have set up fictitious businesses, paid for components with bad checks, then moved out before they could be traced. Others have taken defective chips from the trash and sold them, leaving the manufacturers liable for bad products that reach the market.

Still others have followed trucks from manufacturing plants. When a driver stops for a break, thieves rip open the tailgate.

Last month in Irvine--a frequent target because of its high volume of high-tech businesses--two Federal Express truckloads of laptops worth $2.7 million were stolen from a storage facility. Most were recovered, and four men were arrested, including a Federal Express driver.

In another twist, some burglars have begun breaking into all kinds of businesses and stealing memory chips from computers. One ad agency recently suffered $800,000 in losses from such a theft.

“These people came in one morning and 96 workstations had been dismantled or taken away,” Korkuch said. “Universities are getting hit, law firms, architectural firms, even Chubb has been hit.”

The theft of chips from its own computers may be the least of Chubb’s worries. The electronics industry once was an insurer’s dream, but the company’s payout in claims has soared with the rise in chip thefts. In 1993, Chubb paid less than $3 million in claims to electronics firms. Last year, it paid $20 million.

“This is an ugly crime,” Korkuch said, “and it is getting uglier.”

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High-Tech Robberies

Fueled by growing demand for computer components, high-tech robberies have soared dramatically in recent years. Shown below are some of the largest computer component robberies:

May 1995: Centon Electronics, Irvine. A dozen well-dressed armed men stole computer chips in the biggest high-tech heist ever. Estimated loss: $9.9 million.

March 1994: Haven Products, Greenock, Scotland. Three masked men brandishing knives took chips from a computer assembly plant. A guard was kidnapped and released by a roadside. Estimated loss: $3.7 million.

January 1996: Federal Express, Costa Mesa. Two delivery trucks full of laptop computers were hijacked from a warehouse. Three men, including a Federal Express driver, were later arrested. Estimated loss: $2.7 million.

November 1993: Oki Semiconductor, Tualatin, Ore. Armed bandits in Halloween costumes shattered the window of a manufacturing plant, handcuffed and gagged 13 employees and stole memory chips. Estimated loss: $2 million.

March 1995: Touche Ross accounting firm, London. Robbers posing as air-conditioning repairmen stripped the firm’s computers of memory chips. Estimated loss: $1.9 million.

January 1994: Synnex Information Technology. Fremont, Calif. Burglars silenced a security system and stole chips and other computer equipment from a warehouse. Estimated loss: $1.8 million.

November 1995: Modulink, Irvine. Several armed robbers forced owner was into the building where they stole a cache of memory chips. Estimated loss: $1.4 million.

May 1995: New Technologies, Santa Fe Springs, Calif. Armed robbers tied up three employees and made off with chips and disk drives from a warehouse. Estimated loss: $1 million.

Sources: Insurance and electronics industry reports; Times files