Silicon Valley Shakedown

On Oct. 28, 1998, a middle-aged man named Lawrence Jou walked into the Raley's Superstore on Paseo Padre Parkway in Fremont, disappearing into the catacombs of food and household wares that fill the mammoth store to its desert-pink stucco walls.

A bit nervous, Jou made his way from the automatic sliding doors, down aisles decorated for Halloween, toward the rear of the store. At the back wall, Jou turned into a small hallway separating prescription drugs from dental hygiene, and entered the men's bathroom.

There, Jou gave an envelope containing $25,000 in cash to a man he knew only as “Alan.” Jou asked if there would be any more trouble. Alan said their business was settled. Jou left the store as anonymously as he'd arrived.

A Chinese immigrant with a moderately prosperous computer parts business, Jou thought he was making a simple payoff. A rumor had been circulating through Jou's circles that federal agents were compiling a list of targets in the computer business to investigate for possible violations of software licensing laws. Jou's cash outlay would supposedly keep him out of trouble. It was the price of doing business in Silicon Valley, he figured.

But in truth, Jou was on his way to being conned out of $90,000 in a scam apparently aimed at immigrants in computer-related businesses who may be naive to the ways of the United States Justice Department.

With a handful of business contacts and the promise of prosperity, Lawrence Jou moved his family from their native Taiwan to Silicon Valley a decade ago. He settled in Fremont, a blue-collar manufacturing hub along the Interstate 880 corridor, where a great portion of the computer industry is tucked into high-tech office parks and small warehouses with storefronts.

Jou built a small business called Powtex International Corp., specializing in the little cooling fans that keep the guts of personal computers from burning up. Early on, Jou also dabbled in other parts and software, things he could buy wholesale and resell to manufacturers who built and sold personal computers.

Two years ago, Jou decided to restructure his company and concentrate exclusively on the cooling fan business. Now called Ampower International, the company manufactures the fans in Taiwan and ships them to the United States for sale.

By all accounts, Jou is a classic success story: He owns his own home, and a little piece of the Silicon Valley economy. Most of Jou's friends and acquaintances also are in the business of buying, selling, or making something to do with computers.

All was going well until the fall of 1998, when Jou heard some unnerving news from a business acquaintance. The word was that Microsoft and the FBI had formed a “task force” to hunt down and prosecute companies that were illegally selling the industry giant's software.

Supposedly, federal agents were compiling a list of those who might have run afoul of Microsoft's licensing agreements, and there would be hell to pay for those whose names wound up on it.

But there was a way out. Jou's friend told him about a man named “Alan” who had the connections necessary to keep people out of trouble. Alan, the friend said, used to be in the business of selling illegal goods himself, but had since turned around, and was now working as a liaison between Microsoft and the federal government.

Most important, the friend told Jou, “everyone” was settling with Alan. For a fee, Alan could keep people off the dreaded list. But those who didn't pay Alan would be harassed by the FBI, and have their business files turned over to the Internal Revenue Service, which would hound them forever.

Jou knew he did not want to end up on the supposed list.

About the same time Lawrence Jou moved to Silicon Valley, a young man named Degar Yen entered Los Angeles County's court system. Yen, who is now 34, was arrested a handful of times for petty crimes in the early 1990s, like driving with a suspended license and then failing to show up for court, until he finally landed in jail with increasing frequency.

Yen moved around the neighborhoods of Alhambra and Monterey Park in Southern California before heading north. Meanwhile, his criminal résumé grew to include things like concealing stolen property. It's unclear how or why Yen came to the Bay Area, but by 1998 he was living in San Francisco, according to the FBI.

And, he obviously had a plan.

Using the name “Alan,” Yen managed to spread his story through a small network of immigrant-owned businesses that sell computer accessories and software. Yen cast himself as a go-to guy, someone who could funnel payments to federal investigators to keep them away from certain businesses.

No one seems to know how many people Yen talked to, or how many fell for his line.

But parts of Yen's story rang true. Microsoft and the FBI did regularly beat the bushes for software pirates all over Silicon Valley, and for good reason. Software piracy costs manufacturers more than $11 billion a year, according to the Software Business Alliance, a trade organization of software manufacturers that includes Microsoft.

Software brokers and middlemen, who sell down the software food chain from manufacturer to consumer, operate in a world where illegal products are nearly as prevalent as the real thing. More than half of the software put on systems built by small retailers (often called “white box” sellers) is counterfeit or pirated. Typically, a system builder will use one copy of a popular program, like Microsoft Works, to load several machines, which is illegal. A reseller might also load or sell counterfeit software, or software that's been “unbundled” from an original package sold at a discount with specific hardware or given away to schools or libraries, or some other special category of consumer.

From there, it only gets more complicated. Counterfeiters are masters of their craft, and go so far as to seal counterfeit software inside genuine packaging, and other equally clever tricks. [page]

That's not to say that there aren't some pretty big clues when software is illegal. The allure of a good deal is usually an indicator that the products are not legit. Manufacturers control the price of their software by selling to a handful of authorized distributors, who sell to authorized retailers. If the price is lower, sadly, it generally means something is wrong.

Further, there are specific checks to ensure authenticity — Microsoft holograms on its licenses, for instance — and whether or not the seller is authorized by the manufacturer.

“In the case of distributors, they ought to know,” says Richard Power of the Computer Security Institute in San Francisco. “They have very little reason not to know at this point.”

But even those who don't knowingly peddle illegal software can easily find themselves caught up in the climate of suspicion and paranoia that pervades the industry.

Before concentrating on selling cooling fans, Jou's company sold, among other things, Microsoft software. Jou was in the distribution chain between Microsoft and resellers, including those who sell the software packaged with hardware (the so-called “secondary market”).

According to Jou's attorney, Shawn Leuthold, Jou has never been in trouble for selling pirated or counterfeit software. But while he has never knowingly sold illegal goods, Jou could not be sure that he hadn't inadvertently done something wrong, Leuthold says. Plus, Jou had been burned in the past.

Some time ago, another business associate of Jou's, who was on the hot seat in a lawsuit brought by Microsoft, alleged that Jou had sold him illegal software. The lawsuit was dropped, but Jou certainly didn't forget the event, which is part of why he stopped selling software altogether.

“There are shady characters who are constantly running, dodging, hiding, and behaving illegally,” says Leuthold. “And then there are legitimate people who have real structures, doing real business, and get stuck. They've done everything they're supposed to do and are still not sure that they didn't buy counterfeit goods.”

Given that Microsoft is the big dog in an industry fraught with theft, it's not surprising that the company is aggressive about chasing lawbreakers. By late 1998, the company was threatening lawsuits against six Bay Area “white box” resellers for allegedly distributing counterfeit versions of Microsoft software. (Depending on which side of the fence you sit, the company was either trying to recover its losses, or intimidating people out of the secondary market). In any event, Bill Gates' army of lawyers was out in force.

At the same time, Silicon Valley is ground zero for the FBI's high-tech crime division, which operates out of the bureau's San Jose office. Jou knew, or at least knew of, people who'd been questioned by FBI agents about various business activities.

The fear of a costly investigation, or lawsuit, was well established in the Silicon Valley landscape.

A few weeks after he first heard about Alan, Jou met the mysterious fixer.

In late October, Degar Yen, posing as Alan, came to Lawrence Jou's office, a distribution warehouse tucked inside a maze of high-tech office parks surrounding Sun Microsystems in Fremont. Alan told Jou that Jou's company was on a list of companies that Microsoft wanted the government to investigate.

Alan said he could have Jou's name removed from the list. But it would cost $40,000.

Jou didn't know what to think, according to his lawyer. He began to worry that he might have inadvertently done something wrong, maybe buying or selling illegal software. Maybe someone had fingered him, like before. Or, maybe this was just the price of staying out of trouble.

In phone calls that followed Yen's visit, Jou told Yen that he could not afford the full $40,000, and tried to negotiate a smaller fee. Finally, Yen told Jou that it would cost at least $25,000 to keep the FBI from taking some kind of action against the company. Yen told Jou to bring the money to the bathroom at the Raley's Superstore in Fremont.

Through his lawyer, Jou declined to be interviewed for this story. However, federal court records chronicle the events that followed Jou's first payment.

About a week later, Yen called Jou and told him that the “FBI boss” wanted another $30,000, or the agency would take action against him. Again, Jou told Yen that he could not afford such a high price. Yen said he would accept a payment of $15,000.

On Nov. 6, in the same men's bath- room at the same Raley's, Jou gave Yen another $15,000. But the nightmare had only begun.

While handing over large sums of cash in a public bathroom would likely arouse suspicion in the average citizen, it was less than odd to Jou, a middle-aged man from Taiwan, who doesn't speak fluent English and is unfamiliar with the particulars of, say, the Constitution.

“Lawrence comes from a culture where police do cooperate with companies and where the best way to resolve things is to cooperate with being shaken down for money,” says Leuthold. “It is not alien to his mind that there are people who are taking advantage of their authority to shake down companies.”

Besides, Jou had been told, and believed, that other people were paying too.

Within weeks, Yen called again, this time telling Jou that his file would be sent to the IRS unless Jou coughed up another $40,000. If he did not pay, Yen said, the IRS would audit Jou's business and personal accounts, and make his life miserable. At this point, Jou was already miserable, frankly, but he felt he had no other choice.

On Dec. 2, Jou walked out of his office to the parking lot, where Yen was waiting in a red Honda Civic, and handed over another $30,000. [page]

Barely two weeks later, the phone rang again. This time Yen said that an “IRS boss” in Oakland had found Jou's file, and wanted $15,000 or Jou would be audited. Jou said he would not pay. Yen promised that if Jou paid, the IRS boss would give him a certificate attesting that Jou was “clear” with the agency. A week before Christmas, Jou handed another $15,000 to Yen in the parking lot. But there was no certificate.

Jou grew increasingly frustrated with his situation. Was Yen, whom he still knew only as “Alan,” really using the money to pay off the feds? Did Yen even know any government agents? At some point, Yen produced the business card of a federal investigator. Jou called the number on the card, and found it matched the name and agency printed on the card. (Apparently, Yen had picked up the card from a legitimate investigation somewhere.)

Jou was scared. He'd drained his business accounts to pay Yen, and was juggling money to pay his employees. His personal accounts were diminishing, and he didn't know where to turn. Jou was too proud to tell anyone what was going on. And, he wasn't sure where this was all headed. Certainly, as the demands for money continued to drag on, Jou became more suspicious of Yen. But he felt trapped.

When January 1999 came and went without word from Yen, Jou began to think that maybe the situation had finally come to a close. But the phone rang again in early February. This time, Yen's story was that “Internal Affairs” had collected all of the files from the FBI and the IRS and taken them to its San Francisco office. Yen said that the Internal Affairs office wanted a total of $400,000 from all the companies under investigation. Jou's portion of the payoff was supposedly set at $10,000, and if Jou didn't pay, Yen threatened, agents in San Francisco would take action against his business.

In mid-February, Jou handed Alan another $10,000 outside the leasing office of the complex where Jou's office is located. He didn't know what else to do. But by now, Jou had borrowed money from his sister, and was running out of options.

Lawrence Jou met Shawn Leuthold in the mid-1990s when he needed a lawyer for a business transaction. A former Silicon Valley marketing executive, Leuthold now practices several areas of law, primarily in the Chinese community around San Jose.

In March 1999, after Yen had come to him with yet another demand for money, Jou finally decided to confide in Leuthold. By this time, an embarrassed Jou had paid Yen about $90,000. He'd drained both his personal and business accounts and borrowed from relatives. He was tapped out, and no longer knew what, or who, to believe. Jou didn't know whether the scam stopped at Yen, or whether Yen was in fact working for one or more corrupt federal agents.

“By this time, it's clear that this is either a fraud or a very serious problem within the IRS/FBI system,” remembers Leuthold. “[In other cases], I've seen frauds practiced within the Chinese community, and have previously taken matters to the FBI. My inclination was to do the same here.”

Still, Jou was wary of federal agents. Finally, through a series of negotiations designed to reassure Jou that Yen was not working with federal agents, Leuthold spoke with the U.S. Attorney's Office, which, in turn, cleared a path into the FBI. Degar Yen was working alone. And the tables were about to turn.

When Yen called Jou on March 19, FBI agents were recording Jou's phone calls. With some coaching from the feds, Jou negotiated with Yen to deliver a small payment the following week, and agreed that Yen was to call again soon. (Complicating matters slightly, the conversations between Yen and Jou took place in Mandarin, and had to be translated.)

Yen called back on March 23, and again was recorded. Yen asked Jou for a payment of $5,000, supposedly for IRS agents in San Francisco. Yen also promised to bring Jou his “file” from the government. In a third phone conversation, Yen reluctantly agreed to come to Jou's office park to pick up the money. The trap was set.

On the drizzly afternoon of March 25, Jou prepared to meet with the criminal he knew as “Alan” in the parking lot of the industrial office park where Jou's business is located. FBI agents outfitted Jou with a hidden microphone, and took their places to watch the event. Yen arrived early, and sat in his red Honda, eating lunch.

After a last review, Jou was on. He was about to put his life in the hands of government officials he had never before trusted and once thought corrupt.

Jou walked over to Yen's car and asked him for the promised “file” or “certificate” that would supposedly end Jou's payments. Yen said he'd been unable to get it, but that if Jou turned over the $5,000 they'd discussed, he'd return in two hours with this paperwork. Yen also scolded Jou for being slow to pay. All the other companies involved, he said, paid immediately. Jou argued that he had no more money and handed over only $1,000. Yen counted the money and asked when Jou would have the rest.

A car drove up behind the men, and one occupant called over to Jou, pretending to ask for directions. Methodically, Jou walked toward the new car on the scene. In a few quick moves, FBI undercover agents hid Jou behind their car, and swooped in to arrest Degar Yen.

It was over.

In U.S. District Court in Oakland in August, Degar Yen pleaded guilty to extorting money from Lawrence Jou. He is scheduled for sentencing next month, and could face as much as 20 years in prison.

Meanwhile, most people involved in the case speculate that Jou was probably not Yen's only victim, but rather the only one who came forward. Following Yen's arrest, the FBI even placed advertisements in publications including the Chinese World Journal, notifying other possible victims. [page]

But no others have come forward.

“There is no shortage of fraud out there, and there was no particular reason to target [only] Lawrence,” says Leuthold, explaining why he thinks there are other victims. Seeking help from law enforcement agencies is counter to the culture of many immigrant business owners, he adds.

“It's a learning curve for foreign business people,” he says. “I constantly tell my clients in business about the [justice] system — badge and search warrant, if someone says they're the police, get their badge number, call your attorney, that kind of thing.”

Meanwhile, Jou has found peace, Leuthold says, rebuilding his business, and having gained a swift education in federal law and the justice system.

 

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