Laying Down the Law Against Counterfeiters

Those involved in peddling counterfeit components have done their business with relative impunity. But the successful prosecution of a perpetrator in the US may mark the beginning of some law and order in the rampant illegal counterfeit trade.

In what could serve as a legal precedent, a Massachusetts man has pleaded guilty to charges of conspiracy to traffic in counterfeit military goods. He faces up to 46 months in prison when he will be sentenced to a federal penitentiary in August after confessing to selling counterfeit semiconductors to the US Naval Submarine Base in Connecticut.

Before pleading guilty, Peter Picone (40) faced up to 10 years in prison for trafficking in counterfeit goods and up to 20 years in prison for wire fraud and conspiracy to commit wire fraud charges. He faced an additional 20 years in prison on the charge of conspiracy to commit money laundering.

Picone’s modus operandi involved the all-too-familiar scheme of purchasing counterfeit semiconductors in China and then selling them in the US. He sold the counterfeit components to contractors from the US Department of Defense in Connecticut and Florida for use in nuclear submarines through two companies he owned called Tytronix Inc. and Epic International Electronics. When indicted, Picone was charged with traffic in counterfeit military goods, trafficking in counterfeit goods, conspiring to commit wire fraud, wire fraud, and conspiring to commit money laundering.

With obvious national security risks involved, federal prosecutors said they plan to make protecting the US’s defense-related electronics supply chain a priority. “The introduction of defective equipment into the military supply chain can result in product failure, property damage, and even serious bodily injury, including death,” Cheryl DiPrizio, a special agent for the Naval Criminal Investigative Service, said in a statement. “Some of these counterfeit devices can also be preprogrammed with malicious code and enable computer network intrusion.”

A new provision in the US penal code that involves a stiff sentence of up to 20 years of imprisonment for selling counterfeit military goods helped to further the prosecutors’ case against Picone. “[Those] selling counterfeit semiconductors, especially counterfeits intended for military use, are not simply facing a slap on the wrist, but a potentially very long jail sentence,” Dustin Todd, director, government affairs for the Semiconductor Industry Association (SIA), says in an email response.

The Picone case and the statutes prosecutors used to convict Picone remain tied to the military supply chain. But the case also serves as an example of what wronged parties can do who are victims of counterfeiting across the entire electronics component sector. Up until recently, legal recourse against counterfeiters has been limited. While plaintiffs have sought legal remedies in civil court in cases involving counterfeit electronic components, action taken by prosecutors on behalf of the people in criminal court serves as a way to crack down on counterfeiting in the industry. Other prosecutors will hopefully take note and bring to justice other counterfeiters who defraud customers and pose obvious threats to the industry.

“We believe, along with increased awareness of the problem, that investigators and prosecutors will pursue and prosecute more counterfeiters and will deter others,” Todd says. “SIA and our member companies will continue to work with investigators and prosecutors to ensure that those selling counterfeit parts are brought to justice.”

Successful prosecutions against counterfeiters in criminal court can also help to assure that perpetrators and the companies they represent compensate wronged parties in civil lawsuits. In a criminal case, prosecutors must convince a judge or jury that the accused broke the law beyond a reasonable doubt. The burden of proof is much lighter in civil court since the plaintiff only has to prove that it was more likely than not that the defendant did something illegal.

The ongoing litigation in the Xilinx v. EMS Flextronics lawsuit reflects the difficulty of seeking a remedy in civil court, which can drag on for years. (It has yet to be determined whether any wrongdoing has occurred in this case.) However, a guilty verdict in a criminal court would have made the plaintiff’s job in seeking monetary damages tremendously easier in the Xilinx case.

As mentioned above, the Picone case shows how prosecutors were able to leverage provisions in a law, which will hopefully serve as a precedent to help to thwart counterfeit electronics trade throughout the industry. A trade association such as the SIA could possibly be of help in convincing prosecutors to go after the bad guys in the future.

In the immediate future, the SIA says it is ready to assist the investigations leading to the enforcement of laws against the counterfeit semiconductor trade. “SIA is squarely focused on assisting investigators and prosecutors to pursue criminal charges,” Todd says.