Fry’s Electronics Inc., known as a nerd nirvana for its quirky stores and vast gadget selection, has fired a top executive accused of taking more than $65 million in kickbacks from vendors to finance his high-rolling lifestyle and pay gambling debts.
In a criminal complaint unsealed in federal court in San Jose this week, the Internal Revenue Service said Ausaf Umar Siddiqui, 42, set up a shell company to conceal the payments from five Fry’s vendors from January 2005 to November 2008. The IRS alleges that Siddiqui cut side deals with suppliers to buy their goods at higher prices and in larger quantities than the retail chain normally would have.
An employee of the privately held chain tipped off the IRS in October after stumbling on spreadsheets detailing the kickbacks in Siddiqui’s office, the IRS said.
Siddiqui, who goes by Omar, was vice president of merchandising and operations at Fry’s and oversaw the team responsible for buying the goods sold in 34 stores in nine states. He was arrested at the company’s headquarters in San Jose on Friday and appeared in court Monday, said Arlette Lee, spokeswoman for the IRS’ Criminal Investigation division. His attorney, Sam Polverino, declined to comment.
Siddiqui’s money troubles came to light in a San Jose federal courtroom as defense lawyers argued for lower bail because of liens against his Ferrari and $1-million Palo Alto condominium. Siddiqui was released on a $300,000 bond and was ordered to wear an electronic ankle bracelet.
The source of his troubles appears to be gambling. Siddiqui paid $122 million in three years to entities related to Las Vegas Sands Corp., owner of the Venetian Casino Resort, and the MGM Grand casino, according to bank statements cited in the complaint. The casinos declined to comment.
Siddiqui’s arrest stunned management and employees at Fry’s, company spokesman Manuel Valerio said. But the alleged kickback scheme did not cause “irreparable harm” to the company’s finances and did not result in customers paying more for products, he said without further explanation.
Fry’s is cooperating in the investigation “to expose any others involved in this illegal activity,” Valerio said. It will continue to do business with the vendors who allegedly paid kickbacks unless it learns something “troubling or improper,” he said.
The vendors were not named as defendants and could not be reached for comment. The IRS plans to interview them, Lee said.
According to Forbes magazine, in 2007 Fry’s had 14,000 employees and revenue of $2.35 billion. The retailer was founded in 1985 in Sunnyvale, Calif., by three Fry brothers, John, Randy and Dave, and family friend Kathy Kolder, as a one-stop shopping destination for discerning techies, taking high-tech gadgetry to a new plane.
Fry’s sells more than 50,000 electronics items in stores that range in size from 50,000 square feet to more than 180,000 square feet and have different themes such as outer space or the Wild West. The company established itself as a major player in the increasingly rough-and-tumble electronics and computer-parts market in large part thanks to the sales acumen of John Fry. Fry’s shelf space is of great value to vendors because of the famously heavy foot traffic.
Siddiqui, who was hired in 1988 as a computer salesman, worked his way up to becoming vice president of merchandising and operations in 2003. In that capacity, he supervised a staff of 120 and earned an annual salary of $225,000, according to the complaint.
His employment contract prohibited him from receiving kickbacks from vendors, and Fry’s was unaware of the backroom deals Siddiqui struck, the IRS said. Siddiqui persuaded Fry’s executives to allow him to act as the middleman between vendors and Fry’s, a task usually performed by independent sales representatives, the complaint said.
Independent contractors are typically used so that neither vendor nor retailer receives favorable treatment; they usually receive commissions from 3% to 8%.
Siddiqui guaranteed that he would keep vendors’ products on shelves at Fry’s in exchange for commissions of as much as 31% paid to a shell company he set up called PC International, the IRS alleged.
The documents found on Siddiqui’s desk detailed 70 wire transfers from five suppliers, the complaint said. The IRS said it also uncovered evidence from Siddiqui’s trash.
A criminal complaint is the first step in securing an indictment. Lee said the government had 20 days to file formal charges.
Siddiqui is expected to be charged next month on counts of money laundering and wire fraud. A spokesman for the U.S. attorney’s office declined to comment.