For Apple Suppliers, Pressure to Win

The Wall Street Journal

Indictment Alleging Employee Kickback Scheme Highlights the Value of Information in Race for Prestigious Contracts

Allegations of a kickback scheme orchestrated by an Apple Inc. employee underscore the pressures on companies that hope to serve as suppliers to the fast-growing Silicon Valley giant.

Paul Shin Devine, a global supply manager at Apple, was accused in a federal grand jury indictment with receiving more than $1 million in kickbacks from six Apple suppliers in Asia. Mr. Devine, who was arrested Friday, was charged with offenses that include wire fraud, money laundering and unlawful monetary transactions. The indictment also names Andrew Ang, an employee of one of Apple's suppliers, who is accused of wire fraud and conspiracy.

Apple also named Mr. Devine in a civil suit filed Friday in U.S. District Court in San Jose, Calif., that includes allegations of fraud and violations of racketeering laws. He is scheduled to make a court appearance on Monday.

"Apple is committed to the highest ethical standards in the way we do business," said an Apple spokesman, adding that it has "zero tolerance for dishonest behavior inside or outside of the company."

Mr. Devine, of Sunnyvale, Calif., couldn't be reached for comment. Arlette Lee, an agent for the Internal Revenue Service, confirmed that it conducted the investigation jointly with the FBI and Mr. Devine was being held in an undisclosed location by the U.S. Marshals Service.

Ms. Lee said Mr. Devine didn't yet have a defense attorney. She declined to comment on Mr. Ang's whereabouts. Mr. Ang, of Singapore, couldn't be reached for comment. The FBI and the U.S. Marshals Service didn't return calls seeking comment.

According to the indictment and the civil suit, Mr. Devine came up with an elaborate scheme in which he supplied companies such as Cresyn Co. in South Korea, Kaedar Electronics Co. in China and Jin Li Mould Manufacturing Pte. Ltd. in Singapore with confidential information that would let them negotiate favorable contracts with Apple. The companies provided goods such as mechanical parts, tooling and fixtures in connection with products that included Apple iPods and iPhones, according to the documents.

The allegations point to the high financial stakes for suppliers, which made regular payments to Mr. Devine in exchange for information that would help them in dealing with Apple—including Apple's sales volume forecasts, product specifications, competitors' target prices and bids, according to the indictment and Apple's complaint. In a correspondence with Jin Li Mould, for example, Mr. Devine recommended that it offer Apple a price of two U.S. cents for a part, in between the one cent that Apple desires and the four cents submitted by a competitor.

A spokesman for Cresyn, an earphone maker in South Korea, on Monday expressed regret about the situation but said that its contract with the Apple employee was "not illegal."

Jin Li and Cresyn couldn't be reached for comment. Calls to Kaedar Electronics' China office went unanswered Sunday. A spokesman for Pegatron Corp., the manufacturing subsidiary of Asustek Computer Inc. of Taiwan, said Pegatron acquired Kaedar in late 2008 or early 2009. The Pegatron spokesman, Charles Lin, said he wasn't aware of the indictment or lawsuit against Mr. Devine. The Wall Street Journal previously reported that Pegatron is working on an iPhone for a second mobile standard, CDMA, for Apple.

The indictment and the civil suit also suggest the effort Mr. Devine made to avoid detection at a company well known for its tight security. Mr. Devine corresponded with the suppliers through Hotmail and Gmail accounts that he created, even telling one contact that the "Apple IT team will randomly scan email for suspicious email communications for forecast, cost and new model information," according to the indictment.

Mr. Devine asked for payments in traveler's checks and opened as many as 14 bank accounts in the U.S. and overseas, some of which were in his wife's name and a corporation that he set up called CPK Engineering Inc., the indictment alleged. The document states he requested that payments be wired in amounts less than $10,000 to avoid detection and used code words such as "sample" instead of "payment" to further disguise the transactions. Mr. Devine shared part of the money with Mr. Ang, who was an employee of Jin Li, and helped broker deals with Jin Li as well as others, the document alleges.

Apple's lawsuit said Mr. Devine began working for Apple in July 2005 as a manager responsible for selecting and managing relationships with companies that supply Apple with parts and materials for iPods and iPod accessories. His profile on networking website LinkedIn said he graduated from the Sloan School of Management at the Massachusetts Institute of Technology in 2005 and worked at testing equipment maker Teradyne Inc. from 1998 to 2005.

Apple also stated, in its complaint, that the company began investigating Mr. Devine last April for a possible violation of its corporate policy and found a cache of suspicious e-mails from Hotmail and Gmail accounts in his company laptop that contained discussions with suppliers that included confidential corporate information and acknowledgments of payments received.

The Cupertino, Calif., company said these activities apparently took place from October 2006 until the present. The federal indictment said the alleged scheme took place no later than February 2007.