mercurynews.com | 12/24/08 | $65 million | suspect: Ausaf Umar Siddiqui | victim: Fry's Electronics
Fry's Electronics is famously known for its obsessive attention to store security, carefully checking departing customers at the door and taking other stringent steps to prevent the pilferage rampant in the retail industry. So how was former executive and Palo Alto resident Ausaf Umar Siddiqui, according to federal charges, able to defraud the retailer and some of its vendors out of $65 million in a years-long kickback scheme?
More details emerged Tuesday -- from a complaint filed in federal court and interviews with employees and ex-employees of Fry's -- that paint a picture of a once-trusted executive whose rise to the highest levels of the company apparently put him above suspicion.
Among the new revelations: One of the vendors complained to Siddiqui that his demands for money left the company dangerously short of cash, even as it expressed worries that the large payments would attract the attention of the Taiwanese Securities and Exchange Commission. The same company also said the global financial crisis was affecting its ability to make the payments Siddiqui is accused of demanding.
Siddiqui, fired by Fry's on Monday and now out on bail awaiting a court hearing in mid-January, is accused of putting together a straightforward kickback scheme that demanded exorbitant commissions from a handful of companies in exchange for prominent placement at Fry's stores. Prosecutors say he used the money to pay off massive gambling
In a statement late Tuesday, Fry's said it is cooperating with the federal government on the case and was demanding "prosecution to the fullest extent of the law."
A friend described the small family group that runs privately held Fry's as being "in shock" over the apparent betrayal by a man whom they promoted through the ranks, from his start as a computer salesman in 1988 to vice president of merchandising and operations in 2003.
For years, Siddiqui sat in meetings with the family that ran the iconic high-tech Silicon Valley chain and controlled what was purchased to stock the company's 34 stores, according to former employees and the government complaint.
For store managers, Siddiqui was at the top of the chain of command, said Ben Harvey, who worked for the company for nine years and said he was a former department manager at two Southern California Fry's stores. "If it needed to go as high up as it could go, it always went to Omar," said Harvey, using the name Siddiqui was known by at the company.
As described in the federal complaint, Siddiqui's alleged kickback scheme involved his independent company, PC International, which received prepayments and commissions from vendors with whom he had arrangements. The company's headquarters were at his Palo Alto condo.
He bought the vendors' products for Fry's at inflated prices, and the vendors then used the additional income to pay Siddiqui's separate company large commissions, according to the federal complaint.
In one strange twist, some companies first "prepaid" Siddiqui's side company or made it loans, which he repaid with the commissions he later received from them after Fry's bought their products. It was not clear from the complaint why that circular arrangement was used.
But much of the money went to satisfy Las Vegas gambling debts, according to the complaint.
The "commissions" were so large that one company, Lead Data International, complained that the huge payments were creating cash-flow problems.
An LDI executive wrote to Siddiqui in November, in a letter that an IRS agent recovered from his trash, that "due to huge prepay, our cash flow is in big trouble now. I need your help to get Fry's checks and PCI short-term loan returned on time."
In another letter, the LDI executive worried that, "Without new arrangement, I am afraid high amount of commission will bring unnecessary attention from CPA and SEC-Taiwan," that is, the Taiwanese Securities and Exchange Commission.
In another instance, Fry's paid Phoebe Micro of Fremont more than $76 million from 2003 to 2008, according to the complaint, overpaying by 31.67 percent, or $24 million, which was then "kicked back" to Siddiqui.
An IRS analysis of PC International's business checking account showed $65.5 million deposited by five known Fry's vendors. But there was clearly other income. The analysis also showed that from January 2005 to November of this year, Siddiqui withdrew $162 million from the account, three-quarters of which was used to pay three Las Vegas casinos.
A Fry's employee, who asked not to be identified, told the San Jose Mercury News that Siddiqui had other businesses which sold products to Fry's, including a generic personal computer, which were resold as "house brands." This employee said the products were overpriced and eventually had to be sold at deep discounts. The personal computer venture was discontinued a year ago, the employee said.
The complaint makes clear that this pattern occurred with other product lines Siddiqui was involved with purchasing. Former employee Harvey said the slow-moving products were the source of controversy among supervisors, because the sales at deep discounts cut into their commissions.
In the criminal complaint filed to support Siddiqui's arrest, federal agents cite wire-fraud and money-laundering crimes implicated in the scheme, two of the most commonly used methods of charging fraud cases in the nation's federal courts. Wire fraud, like mail fraud, is the sweeping charge almost always employed by federal prosecutors because it captures any criminal attempt to steal money or property involving use of a communication device, from a phone to the Internet.
Among other things, the complaint alleges vendors wired money to a business account controlled by Siddiqui, which would expose him to wire fraud if prosecutors prove his dealings were intended to carry out a fraud on Fry's.
"Wire and mail fraud are so broad, you can get almost anything," said Rory Little, a former federal prosecutor and Hastings College of the Law professor.
Money laundering, likewise, is a staple of a federal criminal fraud case, both because it is a sweeping statute and because any fraud ordinarily involves a scheme to hide the money sifted from an illegal venture. In Siddiqui's case, federal investigators allege he set up a straw company to funnel the kickbacks received from Fry's vendors into business checking accounts he controlled.
