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Analyst: Apple Manager Arrest Could Be 'Canary in Coal Mine'

Analyst: Apple Manager Arrest Could Be 'Canary in Coal Mine'

An Apple manager charged in a kickback scheme may have been undone by the company's well-known tight corporate controls. However, a lack of resources has increasingly plagued internal audit operations in large enterprises, noted technology analyst Rob Enderle, and "in many other companies, this behavior is likely going on and has, as yet, been undiscovered."

By Katherine Noyes MacNewsWorld ECT News Network
08/16/10 11:47 AM PT

An operations manager at Apple was arrested on Friday for allegedly accepting more than US$1 million in kickbacks from Asian suppliers of iPod and iPhone accessories.

Paul Shin Devine, a senior operations manager for iPod, was named in a 23-count federal grand jury indictment for wire fraud, money laundering and kickbacks, according to a report in the San Jose Mercury News. Also named in the indictment, which was unsealed Friday, was Andrew Ang of Singapore.

Devine was scheduled to appear Monday afternoon at the U.S. Northern District Court in San Jose, Calif.

Three Suppliers Named

Devine allegedly used his position at Apple to obtain confidential information and then convey it to Apple suppliers including Ang, enabling them to negotiate more lucrative contracts with Apple than they otherwise would have been able to, according to reports.

Those suppliers then allegedly paid Devine kickbacks, which he shared with Ang.

The suppliers involved included Kaedar Electronics of China, Cresyn of South Korea and Singapore's Jin Li Mould Manufacturing, which was Ang's former employer, according to a report in The Wall Street Journal.

Cresyn has reportedly issued a statement indicating that it did sign a consulting agreement with an unnamed Apple employee, but purely for the acquisition of information on U.S. market trends, according to a Bloomberg report.

'Zero Tolerance'

Apple has reportedly also filed its own civil suit against Devine, but it did not respond by press time to MacNewsWorld's request for confirmation and comment.

"Apple is committed to the highest ethical standards in the way we do business," an Apple spokesperson said in a widely circulated statement. "We have zero tolerance for dishonest behavior inside or outside the company."

Devine allegedly used U.S. and foreign bank accounts along with a front company called "CPK Engineering" to receive payments, according to the San Jose Mercury News. Code words like "sample" were reportedly often used to avoid suspicion as to the reason for the payments.

The investigation was performed by the Internal Revenue Service and the FBI. Ang's current location has not been disclosed.

'The Number of Leaks Is About to Drop Off'

"Assuming the leaked confidential information was limited to Apple parts suppliers seems a little naive, regardless of whether or not Mr. Devine intended to give product details to only a handful of people," Jeff Gamet, managing editor of The Mac Observer, told MacNewsWorld. "It's a pretty safe bet that at least some of the information he sold eventually made its way to other mobile phone and media player makers, too."

Apple is usually relatively quiet about pending litigation, Gamet pointed out.

"In this case, top executives may have felt that they needed to make a statement, because there wasn't any way to keep the story out of the media," he suggested. "Still, the decision to issue a statement about the incident sent a message to other potential moles that the company doesn't take lightly to selling company secrets."

Now that Devine is in custody, "I think the number of leaks about unannounced Apple products that have come out of Asia over the past couple of years is about to drop off dramatically," Gamet predicted.

Apple May Be Hurt Unfairly

Apple is known for its strong financial controls, "driven by a CEO with an eye for the numbers," Rob Enderle, president and principal analyst with the Enderle Group, told MacNewsWorld.

"However, in most large firms, internal audit -- the organization typically missioned with discovering crimes like this -- has been systematically underfunded and understaffed," Enderle noted. "This has been done even as the reliance on companies that exist in geographies known for using bribery actively has increased."

Apple is likely still one of the best-controlled companies in the market, and "that is likely why this crime was discovered and caught," Enderle asserted. "In many other companies, this behavior is likely going on and has, as yet, been undiscovered."

In fact, because of its control structure, Apple could serve as the proverbial canary in the coal mine, Enderle opined -- providing an early warning, in other words, of "similar problems that I expect are broadly spread across a number of industries waiting to be discovered."

Apple will likely "be hurt unfairly as a result," he predicted, "but the bigger problem is that this reaction may slow other firms' efforts to discover similar problems."

'Greed Is a Powerful Motive'

In any case, "with the various shenanigans of the banking crises of late, it is no surprise that others would take advantage of their position and violate the law," Washington technology attorney Raymond Van Dyke told MacNewsWorld. "Greed is a powerful motive for some, and loyalty to the employer often takes a back seat."

Looking ahead, though, it's unlikely that the situation will affect Apple to any significant degree, Van Dyke asserted.

"Here, the employee's actions appear entirely his fault, as also reflected in Apple's suit against him, and all Apple needs to do is shore up their supplier relationships," he concluded.


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