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Chip Supplier Pleads Diminished Capacity to Avoid Imprisonment after Selling Counterfeit Parts to the U.S. Navy and Others

Kristal Snider
ERAI, Inc.

On July 17, 2013, Peter Picone was arrested following the return of an eight-count indictment charging him with conspiracy to traffic in counterfeit goods and the substantive crime of trafficking in counterfeit goods, conspiracy to traffic in counterfeit military goods, wire fraud and wire fraud conspiracy and conspiracy to commit international money laundering.

On June 3, 2014, Picone pleaded guilty to Count Two of the indictment charging him with conspiracy to intentionally traffic in counterfeit military goods in violation of Title 18, United States Code, Section 2320(a)(1). To be guilty of trafficking in counterfeit military goods, the following essential elements must be satisfied:

  1. that the defendant intentionally trafficked in goods;
  2. that the defendant knew such goods were counterfeit military goods;
  3. that the defendant knew the use, malfunction, or failure of the counterfeit military goods was likely to cause serious bodily injury or death, the disclosure of classified information, impairment of combat operations, or other significant harm to combat operation, a member of the Armed Forces, or to national security.i

Picone, an independent distributor, owned and operated two companies: Epic International Inc. and TyTronix Inc. He used these businesses to import integrated circuits from China and Hong Kong for resale to other independent distributors, U.S. government contractors and others. Despite receiving orders from customers that specifically stated they did not want or would not accept parts procured from China, Picone did just that and repeatedly and deliberately covered up the true origin of the goods. He also provided “materially false and fraudulent test reports”.ii

The ramifications of the integration of counterfeit ICs into finished products far exceeds mere monetary losses derived from premature failures or replacement costs. These parts can contain malicious code or hidden back doors that may enable remote systems disablement, communication interception and computer network intrusion.iii The integrated circuits Picone sold were intended for various applications such as for use in a radio-transmitting test set, an alarm panel and for the repair of a secondary propulsion system aboard an active-duty nuclear submarine.

According to the U.S. States Attorney’s Office, Picone acknowledged his criminal conduct spanned from at least February 2007 through April 2012. After reviewing and organizing thousands of documents, it was revealed that on at least 743 occasions Picone sold 587 different part numbers (506,008 parts in total) to 237 unique buyers which generated $2,588,919.29 in sales and, in each of those instances, the origin of the goods had been misrepresented.iv To be clear, the aforementioned transactions only represent orders in which the Buyer stated specifically, in writing, they did not want parts from China.

The total number of parts sold throughout Picone’s supply chain tenure is unknown. When his house was searched, 12,960 counterfeit ICs were seizedv and investigators estimated 70% of Picone’s inventory was counterfeit.

Despite acknowledging his participation in the conspiracy was inexcusable and an apology, Picone is now asking for a non-incarceration sentence of house arrest and probation and a downward departure based upon “Diminished Capacity”. It is Picone’s claim he suffers from a severe panic/anxiety disorder, deep depression and Post Traumatic Stress Disorder (PTSD) which made it virtually impossible for him to effectively process information or differentiate between reality and fiction.vi Picone’s attorney now argues that Picone is deeply shamed by “the realization that his conduct might have adversely affected his military comrades in arms – something that his impaired, challenged cognition prevented him from earlier comprehending.”vii The government argues that Picone clearly understood the wrongfulness of his actions because he took extensive efforts to conceal his behavior. To demonstrate his mental awareness, U.S. Attorney Deirdre Daly cited purchases made by undercover agents during which Picone produced fraudulent test reports that he signed with the name of a fictional testing operator purporting to document the authenticity of the ICs. Picone knew these parts were destined for nuclear submarines deployed by the US Navy and none-the-less went on to make the following written statement to the undercover agents:

"Though there is no complete guarantee, we come pretty close with testing and internal trace routing. We take the best steps possible to avoid junk getting into the market, especially military."viii

U.S. Attorney Daly also contends Picone’s reasoning for changing his company name from Tytronix to Epic was likely due to the fact Picone was having difficulty getting parts into the country. Between February 2007 and June 27, 2008, eleven (11) shipments from Shenzhen, Guangdong, Shantou and Hong Kong, China were stopped by Customs and Border Protection (CBP) in transit to TyTronics Inc., the first of Picone’s two companies. After changing the company name to Epic, shipments once again appeared to flow freely until 2009 when Picone found himself once more on CBP’s radar.

We may never know the full impact of Peter Picone’s actions. The government is concerned that thousands of the parts he sold may already be installed on critical equipment, including the military, or warehoused as spares or replacement parts. To mitigate this risk, the U.S. States Attorney’s office has released a list of companies that purchased parts from Picone. All of the customers named in this report placed orders which specifically prohibited parts from China. Releasing this report allows Picone’s customers and any of their customers to check their inventories for counterfeit ICs.

Attachment B: http://www.erai.com/customuploads/Attachment_B.pdf


Sentencing is scheduled for June 9, 2015.

The government is seeking a prison term of 37 to 46 months, the forfeiture of the 12,960 ICs seized from Picone’s inventory, $70,050 paid to Picone by a third party customer and to federal undercover agents that were tested and confirmed counterfeit and restitution totaling $2,360,622.80 to the (31) thirty-one identified victims (OCMs).

___________________________________________

  1. Plea Agreement: 6-3-2014 – United States v. Peter Picone, http://www.erai.com/customuploads/GuiltyPlea.pdf
  2. Government’s Memorandum In Aid Of Sentencing (United States of America v. Peter Picone): 05-14-2015, http://www.erai.com/customuploads/Gov_Mem_in_aid_of_Sentencing.pdf
  3. Indictment: 6-25-2013 – United States v. Peter Picone, http://www.efcog.org/wg/ism_qa_scqtt/docs/minutes/Indictment.pdf
  4. http://www.erai.com/customuploads/Attachment_B.pdf
  5. Press Release: 7-15-2013 – Department of Justice Press Release - "Massachusetts Man Charged with Selling Counterfeit Semiconductors Intended for Use on Nuclear Submarines", http://www.justice.gov/opa/pr/2014/June/14-crm-595.html
  6. Defendant’s Memorandum In Aid Of Sentencing (United States of America v. Peter Picone): 04-30-2015, http://www.erai.com/customuploads/4166104-0--2851.pdf
  7. Government’s Memorandum In Aid Of Sentencing (United States of America v. Peter Picone): 05-14-2015, http://www.erai.com/customuploads/Gov_Mem_in_aid_of_Sentencing.pdf
  8. Government’s Memorandum In Aid Of Sentencing (United States of America v. Peter Picone): 05-14-2015, http://www.erai.com/customuploads/Gov_Mem_in_aid_of_Sentencing.pdf

___________________________________________


Resources

Indictment: 6-25-2013 – United States v. Peter Picone http://www.efcog.org/wg/ism_qa_scqtt/docs/minutes/Indictment.pdf

Press Release: 7-15-2013 – Department of Justice Press Release - "Massachusetts Man Charged with Selling Counterfeit Semiconductors Intended for Use on Nuclear Submarines" http://www.justice.gov/opa/pr/2014/June/14-crm-595.html

Plea Agreement: 6-3-2014 – United States v. Peter Picone http://www.erai.com/customuploads/GuiltyPlea.pdf

Government’s Memorandum In Aid Of Sentencing (United States of America v. Peter Picone):05-14-2015
http://www.erai.com/customuploads/Gov_Mem_in_aid_of_Sentencing.pdf

Defendant’s Memorandum In Aid Of Sentencing (United States of America v. Peter Picone): 04-30-2015
http://www.erai.com/customuploads/4166104-0--2851.pdf

Title 18 – § 2320. Trafficking in counterfeit goods or services:
http://www.gpo.gov/fdsys/pkg/USCODE-2011-title18/pdf/USCODE-2011-title18-partI-chap113-sec2320.pdf

Prosecuting Peter Picone - What resellers NEED to know
http://www.erai.com/ERAI_Blog/3014/Prosecuting_Peter_Picone_What_resellers_NEED_to_know

Fake semiconductors imported from Hong Kong sold for use in US nuclear subs
http://www.scmp.com/news/world/article/1525350/fake-semiconductors-imported-hong-kong-sold-use-us-nuclear-subs

Federal agents search Methuen home office
http://www.eagletribune.com/news/federal-agents-search-methuen-home-office/article_fecd588c-6dde-5b7b-8512-a9c663650084.html

Feds: Counterfeit submarine parts shipped to Groton base http://www.theday.com/article/20130716/NWS09/130719772



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