Federal Jury Convicts Illinois Couple of Defrauding Best Buy
|U.S. Attorney’s Office June 03, 2010|
Earlier today a federal trial jury convicted an Illinois couple in connection with a scheme to defraud Richfield-based Best Buy Co., Inc. Following a 17-day trial in Minneapolis, Russell Adam Cole, age 50, and his wife, Abby Rae Cole, age 53, both of Deerfield, Illinois, were found guilty of conspiring with co-defendant Robert Paul Bossany to defraud Best Buy through a scheme that involved over billing the company for computer parts.
Specifically, Russell Cole was convicted of one count of conspiracy to commit mail fraud and wire fraud, 12 counts of mail fraud, five counts of wire fraud, four counts of tax evasion, one count of conspiracy to commit money laundering, and one count of conspiracy to defraud the United States. Abby Cole was convicted of one count of conspiracy to commit mail fraud and wire fraud, one count of conspiracy to defraud the United States and four counts of tax evasion. The couple was originally indicted on July 20, 2009. Both defendants were released with various conditions.
Following the jury’s decision, U.S. Attorney B. Todd Jones said, “Minnesota is home to a number of Fortune 500 companies. We value these companies for the jobs and revenue they bring to the state. We will vigorously pursue individuals who target our corporate citizens for illicit personal gain. Contrary to the mistaken belief of some, greed is not a business virtue we value in Minnesota.”
Julio La Rosa, Special Agent in Charge of the St. Paul Field Office of the IRS-Criminal Investigation Division, which led the investigation in this case, added, “People who create elaborate schemes to mislead others and defraud the IRS run the very high risk of prosecution and, in this case, a trial conviction. Fraud schemes like this one can flourish for a time, but inevitably the scheme is exposed. The day of reckoning is now a reality for Russell and Abby Cole.”
Best Buy offers repair services on products, including personal computers. Beginning in the early 2000s, it devised an automated, online, reverse auction system, called the Parts Procurement Network (“PPN”), in an effort to obtain computer repair parts quickly and at the lowest possible prices. Through the PPN, vendors received access to a “needs” file, which listed the computer parts Best Buy wanted. Those vendors then submitted bids on the parts they wished to supply, quoting both availability and price. After each bidding period, Best Buy determined which vendors won the orders. Those vendors then had to invoice Best Buy, through a third party, at the prices quoted in their bids.
Because of the PPN, Best Buy became the primary customer of Chip Factory, Inc., a computer parts distribution company owned and operated by the defendants. In fact, from June of 2003 through August of 2007, Best Buy accounted for the vast majority of Chip Factory sales. Trial evidence proved, however, that in an attempt to win orders to supply parts to Best Buy, the Coles routinely caused Chip Factory to quote fraudulently low prices in its PPN bids. After winning bids, the Coles regularly caused Chip Factory to invoice Best Buy, through the assigned third party, at prices in excess of those quoted during the bidding process. As a result, the defendants caused Chip Factory to invoice Best Buy for in excess of $41 million more than Chip Factory actually bid through the PPN program.
Co-defendant Robert Paul Bossany, age 39, of Prior Lake, and an employee of Best Buy during the course of the scheme, pleaded guilty in January of 2009 to one count of conspiracy to commit honest services mail fraud and one count of money laundering. In his plea agreement, Bossany agreed that he had accepted bribes from Chip Factory and had conspired with the company to defraud Best Buy. While employed at Best Buy, Bossany was responsible for managing the purchase of computer parts from outside vendors that participated in the PPN program. In that capacity, he was Best Buy’s primary contact with Chip Factory.
To further the fraud scheme, Bossany provided the Coles with internal Best Buy information, including communication concerning the PPN as well as other vendors. Bossany also hid Chip Factory’s pricing practices and deflected issues and suppressed concerns raised about Chip Factory at Best Buy. Trial evidence showed that Chip Factory often shipped Best Buy used, damaged, or defective parts instead of new ones. And when Best Buy returned damaged, defective, or unneeded parts, Chip Factory failed to provide proper credit.
In return for assisting the Coles in furthering the scheme, Bossany received from them large amounts of cash, checks, and property, including gift cards, a Harley-Davidson motorcycle, and an all-terrain vehicle. In addition, they sent Bossany magazines, compact discs and DVDs in which cash, checks, or gift cards were hidden. These items were sent to Bossany’s home address rather than to his office to conceal the fraudulent scheme and its proceeds. On a number of occasions, Chip Factory employees assisted the defendants in preparing the packages for Bossany.
Following today’s verdict, Antonio Gomez, Postal Inspector in Charge of the Denver Division for the U.S. Postal Inspection Service, which includes the Twin Cities, spoke about the case, which was investigated by local postal inspectors. He said, “Postal inspectors will continue to protect the integrity of the U.S. Postal Service and aggressively investigate those cases where the U.S. mail and commercial interstate carriers, such as FedEx, are used to defraud individuals or businesses of money and property. By finding the Coles guilty today of mail fraud in addition to other charges, the jury reaffirmed the importance of the U.S. mail and how critical it is for the U.S. Postal Inspection Service to remain vigilant and on-guard to protect the nation’s mail system from criminal misuse.”
In addition to defrauding Best Buy, the Coles also evaded their taxes for the years 2004 through 2007 and depriving the Internal Revenue Service (“IRS”) of its function to collect taxes. They did so by understating the company’s gross receipts in a number of ways. In one aspect of their tax fraud scheme, they resold to their suppliers the computer parts that Best Buy had returned. They then instructed the suppliers to make payments for the parts to Russell Cole personally instead of to Chip Factory. Upon receipt of the payments, the Coles deposited the checks into an account separate from the company. Between 2004 and 2007, for example, one Chip Factory vendor made checks out to Russell Cole personally that totaled more than $900,000. The Coles then omitted that income as well as similar income from their corporate or individual tax returns.
Furthermore, Russell Cole misrepresented on individual and Chip Factory tax returns the sales and profit from an eBay business he ran. Through that business, he sold computer parts, including parts purchased by Chip Factory specifically for Best Buy. After the parts were sold via the Internet, he directed Chip Factory employees to send other products to Best Buy service centers, including parts that were used, damaged, or defective. From 2005 to 2007, Russell Cole understated his net income from the Internet business by more than $1.8 million.
In addition to understating Chip Factory gross receipts in general over a four-year period, the Coles understated the company’s gross receipts by more than $3 million for 2006 alone. To accomplish that, the Coles represented to their outside accountant that the value of parts returned by Best Buy during the year had not been noted in the company’s books. However, those returns had indeed been recorded. Nonetheless, in late 2007, the Coles filed amended federal individual and corporate returns for 2006, citing the false information. The Coles were motivated to lower their tax liability at that time because Best Buy had recently discovered the bidding fraud and terminated its relationship with Chip Factory.
In another aspect of their tax fraud scheme that covered each of the tax years charged, the Coles overstated on Chip Factory tax returns the cost of goods it sold. To that end, they directed company employees to inflate the cost of parts purchased from suppliers and to enter false purchase orders into the company’s books and records. Abby Cole personally participated in inflating the cost of Chip Factory purchases. The Coles also paid for a large amount of personal expenses, including credit card debt and a number of luxury purchases, such as high-end jewelry and month-long stays at the Bellagio hotel in Las Vegas, with Chip Factory funds, and then classified those expenditures as business expenses on the company’s tax returns.
The Federal Bureau of Investigation was also involved in the investigation of this case, and after the verdict, Special Agent in Charge Ralph S. Boelter said, “This case further reinforces the point that federal law enforcement and regulatory authorities, as well as our corporate community, will be vigilant in combating economic fraud in all of its forms. The pernicious effects of this type of unchecked criminal activity includes not only the diminished financial health of our businesses but also the reduced buying power and financial security of all our citizens.”
The defendants face a potential maximum penalty of five years in prison for conspiring to defraud the U.S., five years in prison for each of the four counts of tax evasion, and 20 years on the conspiracy to commit mail fraud and wire fraud count. In addition, Russell Cole faces a potential maximum penalty of 20 years on each mail fraud and wire fraud count as well as on the conspiracy to commit money laundering count. U.S. District Court Chief Judge Michael J. Davis will determine their sentences at a future hearing, yet to be scheduled.
This case is the result of an investigation by the IRS-Criminal Investigation Division, the U.S. Postal Inspection Service, and the FBI. It is being prosecuted by Assistant U.S. Attorneys Nicole A. Engisch and William J. Otteson.