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Corporate Fraud Handbook

Case Study: Chipping Away at High-Tech Theft


Nineteen-year-old Larry Gunter1 didn’t know much about computers, but he worked
as a shipping clerk in a computer manufacturer’s warehouse. Like many other com-
panies in Silicon Valley, Gunter’s employer produced thousands of miniature elec-
tronic 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 com-
ponents, next door to the warehouse for processing and inventory. At the time,
one of these computer chips, which comprised hundreds of millions of transis-
tors packed into a space no bigger than a fingernail, was worth about $40 on the
open market. More than 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, who he knew operated some type of computer salvage 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 $5,000 by Grant Thurman 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 ware-
house 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.

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Inventory and Other Noncash Assets

By this time, however, the company had detected the second loss and contacted
private investigator and fraud examiner Lee Roberts. Roberts, head of Roberts Pro-
tection & 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
documentation 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 order 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 30 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 16 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 inter-
building 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 aisles 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.

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Corporate Fraud Handbook

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 con-
fronted them with the evidence. They quickly admitted their guilt and identified
Thurman as the receiver of the stolen equipment. When police interviewed Thur-
man at his home, he denied knowing that the computer chips were stolen, but he
admitted to reselling the chips to an acquaintance named Marty for $180,000.
Interviews with Marty, along with bank records, 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 with-
drawal 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 fur-
lough 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 phys-
ical security, which included a new chain-link fence between the two buildings.
“I think this fraud was difficult to detect because the 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 controls—they set up physical security; they install
alarms and security cameras—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.’”

OVERVIEW: NONCASH MISAPPROPRIATION DATA FROM THE ACFE


2015 GLOBAL FRAUD SURVEY
Frequency and Cost
Noncash schemes were not nearly as common as cash schemes in our survey, accounting
for only 23 percent of asset misappropriations. Additionally, noncash schemes had a
lower median cost than frauds that targeted cash. (See Exhibit 9.1.)

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