VisionTech administrator sentenced to prison for role in sales of counterfeit circuits destined to US military

WASHINGTON – A Clearwater, Fla., woman was sentenced Tuesday to 38 months in prison for her role in a scheme in which she and others imported counterfeit integrated circuits from China and Hong Kong and sold hundreds of thousands of them to the U.S. Navy, defense contractors and others, marketing some of these products as "military-grade."

The investigation was conducted by U.S. Immigration and Customs Enforcement's (ICE) Homeland Security Investigations (HSI) and the Naval Criminal Investigative Service (NCIS), with assistance from a number of agencies including the Washington Division of the U.S. Postal Inspection Service and the Office of the Inspector General for the U.S. Department of Transportation.

Stephanie A. McCloskey, 39, pleaded guilty in November 2010 to a federal charge of conspiracy to traffic in counterfeit goods and to commit mail fraud, and she subsequently cooperated with authorities.

McCloskey was sentenced in the U.S. District Court for the District of Columbia. As part of her plea agreement, she agreed to forfeit to the government the benefit she received from the scheme, a total of approximately $166,141 in salary she earned as an administrator for VisionTech Components, LLC. The judge reserved ruling on an order of restitution, which is to be issued within 90 days, and could be as much as $578,062.

This is the first federal prosecution in a case involving the trafficking of counterfeit integrated circuits.

According to information presented in court, McCloskey conspired between 2006 and 2010 with the late Shannon L. Wren, owner of VisionTech Components, LLC, to traffic in counterfeit goods and to commit mail fraud.

Wren, McCloskey and others ran the integrated circuits counterfeiting operation from the VisionTech Components address in Clearwater. The defendants advertised name-brand, trademark-protected integrated circuits as "available" on the website www.visiontechcomponents.com. In fact, they acquired the devices from China and Hong Kong and imported them into the United States through various ports of entry.

From about Jan. 1, 2007, through Dec. 31, 2009, Wren, McCloskey, and others generated approximately $15.8 million in gross receipts through VisionTech Components from the sales of counterfeit integrated circuits.

An integrated circuit is a high-tech device, incorporated into a computer board, which acts as a switch. Integrated circuits control the flow of electricity in the goods or systems into which they are incorporated. They are used in a variety of applications, including industrial, consumer electronics, transportation, infrastructure, medical devices and systems, spacecraft, and military.

This case laid the foundation for the National Intellectual Property Rights Coordination (IPR Center)-led Operation Chain Reaction. Operation Chain Reaction is a comprehensive initiative targeting counterfeit items entering the supply chains of the Department of Defense and other U.S. government agencies. Ten of the 19 IPR Center task force members are participating in Operation Chain Reaction, including ICE HSI; U.S. Customs and Border Protection; Federal Bureau of Investigation; Naval Criminal Investigative Service; Defense Criminal Investigative Service; U.S. Army Criminal Investigative Command, Major Procurement Fraud Unit; General Services Administration, Office of Inspector General; Defense Logistics Agency, Office of Inspector General; U.S. Air Force, Office of Special Investigations; and National Aeronautics and Space Administration, Office of Inspector General.

Counterfeit integrated circuits can result in product or system failure or malfunction, and can lead to costly system repairs, property damage, and serious bodily injury, including death. They also raise national security concerns because their history is unknown, including who has handled them and what has been done to them. In addition, the devices can be altered and certain devices can be preprogrammed. Counterfeits can contain malicious code or hidden "back doors" enabling systems disablement, communications interception, and computer network intrusion.

"Today marks the first time that anyone has ever been sentenced in a federal courtroom for trafficking counterfeit integrated circuits," said U.S. Attorney Ronald C. Machen Jr., District of Columbia. "This prosecution is a warning to people who would even consider selling phony hardware to our military and defense contractors. They not only put health, safety and our national security at risk, but also expose themselves to serious criminal consequences."

"Ms. McCloskey and VisionTech put the safety and security of our nation and the members of our armed forces at risk for self-serving, economic gains," said John P. Torres, special agent in charge of ICE HSI in Washington. "Together with our law enforcement partners, ICE HSI will continue to engage in an unrelenting pursuit of those companies and individuals who attempt to profit from the illegal trafficking of counterfeit products."

"Counterfeit components represent a real threat from within the supply system," said John F. Wagner, special agent in charge of the NCIS office in Washington. "Whether used in household appliances or weapons systems, integrated circuits must work as designed. As this case demonstrates, those responsible for such fraud will be held accountable."

"This investigation was an excellent example of a partnership of multiple federal law enforcement agencies across the country, working together to shut down a counterfeit fraud conspiracy that affected national security," said Daniel S. Cortez, inspector in charge of the U.S. Postal Inspection Service, Washington Division. "I fully commend the hard work and countless hours put forth by all of the law enforcement agencies involved, which resulted in bringing these individuals to justice."

"The sentencing today reflects the strong commitment of the Department of Transportation and its Office of Inspector General to ensuring the safety of the nation's transportation system," said Special Agent in Charge Kathryn Jones, U.S. Department of Transportation, Office of Inspector General, Washington Regional Office. "Together with our prosecutorial partners, we will continue to vigorously pursue those who violate criminal laws, defraud the government, and undercut the integrity of DOT's safety programs."

According to the government's evidence, between Dec. 6, 2006, and Aug. 18, 2010, Wren, McCloskey and others imported from China and Hong Kong, on 35 separate occasions, approximately 59,540 integrated circuits bearing counterfeit marks, including military-grade markings, valued at approximately $425,293. "Military-grade" integrated circuits are sold at a higher price than those of commercial or industrial-grade because of the special temperature and vibration-tolerance testing required by legitimate manufacturers. Such devices are tested to function at extreme temperatures (hot and cold) and/or withstand extreme vibration.

There were numerous customer complaints regarding the counterfeit integrated circuits that were sold through VisionTech by Wren, McCloskey, and others. McCloskey was aware of these complaints, in which the customers represented that the devices were counterfeit. McCloskey also was aware of complaints in which the customers reported that the integrated circuits they had purchased from VisionTech did not function.

In the statement of offense, filed in connection with McCloskey's guilty plea, she claimed to have engaged in "willful blindness" to the truth of what took place in that she deliberately closed her eyes to what otherwise would have been obvious to her.

McCloskey and Wren, formerly of Treasure Island, Fla., were arrested in Florida in September 2010 on bench warrants issued by the U.S. District Court for the District of Columbia. Government agents executed search warrants for two locations and numerous seizure warrants for certain proceeds of criminal activity, including a Showhauler Motor home, a Ferrari Spider, a Bentley Arnage, a Mercedes Benz, motorcycles, and funds in several bank accounts.

Wren, who pleaded not guilty to charges in this case, died in May of 2011. The property that was seized in connection with the case against Wren is the subject of a civil lawsuit filed in the U.S. District Court for the District of Columbia.

The Semiconductor Industry Association (SIA), and a number of companies assisted with this case, including STMicroelectronics, Inc., Texas Instruments, Inc., Analog Devices, Inc., Intel Corporation, National Semiconductor, Inc., ON Semiconductor, Freescale Semiconductor, Inc., BAE Systems Electronic Solutions, and Raytheon Company.

To report IP theft or to learn more about the IPR Center, visit www.IPRCenter.gov.