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HP Nets $1.8M in 'Gray Market' Case

Hewlett-Packard Thursday said recovered more than $1.8 million as part of its civil lawsuit against S-Systems and its owner, Leroy Anthony Sallee.

Sallee recently pleaded guilty to federal charges for his participation in what prosecutors say was a scheme to fraudulently acquire computer equipment at substantial discounts and then resell the products on the "gray market."

While gray market items are not necessarily "illegal," often times those products are often outdated, faulty, and come with expired warranties, or warranties that are not valid in the U.S. Industry research shows that gray market activity accounts is estimated to be a $20 billion industry and growing.

According to court documents, Sallee unlawfully obtained computer equipment at substantial discounts from Compaq Computer, resold the equipment on the gray market, received payment for the equipment, and deposited the money into two bank accounts in Butler County, Ohio. Sallee then obtained more than $5.7 million in computer equipment for $3.1 million via a special educational discount. The plan was exposed after officials raided a warehouse in Tewksbury, Massachusetts.

Sallee, of Ashtabula, Ohio, plead guilty on July 22, 2003, in U.S. District Court, Boston, to 14 counts of mail and wire fraud and one count of interstate and foreign shipment of stolen goods. He faces a maximum sentence of five years in prison on each fraud count, a fine of $250,000, and restitution and forfeiture of any criminally derived proceeds. The interstate shipment count carries a maximum penalty of 10 years in prison.

Compaq filed the Ohio lawsuit in May 2002 to recover money and property damages against defendants S-Systems, Inc., Sallee and Robert Hill, Jr. Palo Alto, Calif.-based HP took stewardship of the suit after the computer and printer maker merged with Compaq.

"The recovery of funds represents another victory in the battle to fight gray market fraud. HP continues to closely monitor and pursue individuals and corporations that engage in fraudulent behavior to obtain equipment for resale in the gray market," said Nikolaj Sjoqvist, director, brand protection and pricing, HP Global Operations. "This case is an important reminder to customers to buy from authorized distribution channels to ensure the highest levels of product quality and brand integrity."

HP said recovery of the funds closes its civil case in Ohio against the defendants. The original civil complaint filed by Compaq against defendants in Middlesex County is still pending.

The Great Grey Threat
According to the Anti-Gray Market Alliance (AGMA), gray marketing threatens to undermine the integrity of legitimate sales channels, disrupt agreements manufacturers make with their distribution partners, and lead to decreased customer satisfaction.

"Customers look to leading technology vendors for assurance about many product attributes, including quality, service, fair price and value," AGMA Chairman Marie Myers told internetnews.com in a recent interview. "Now, they can go to those same trusted sources to report incidences of suspected fraud, gray marketing, or counterfeiting. By connecting with the end consumer, producers of the leading IT and other high-tech products continue to assure the highest level of customer satisfaction and preserve the user experience."

Launched in September, 2001, AGMA is an umbrella organization supported by some of the largest and most prominent technology companies in the world, including Cisco Systems , Hewlett-Packard, Nortel Networks , and Xerox Corp. . The organization's sole purpose is to put a stop to the flow of gray marketing and counterfeit products in the technology industry by using consumer education and awareness programs as its most powerful weapon.

HP's security team has also worked in conjunction with Chinese authorities to stop the flow of $1.2 million worth of counterfeit HP products into the gray market. A recent raid, which took place in the southern province of Guangdong, China, uncovered gray market HP parts that were allegedly being used to build fake Intel-based servers.

According to spokesperson for HP, Chinese officials also seized a delivery vehicle and material that enabled the group to illegally reproduce the Compaq trademark, labels, and packaging materials.

Editor's note: internetnews.com editor Gretchen Hyman contributed to this report.