2 Students Allegedly Cheated Apple Out Of Nearly $900,000 In Fake iPhone Scheme

Enlarge this image toggle caption Mary Altaffer/AP Mary Altaffer/AP

Two men allegedly scammed Apple out of nearly $900,000 by essentially trading the company fake iPhones for legitimate devices.

According to federal prosecutors, it was an elaborate scheme that involved roping in friends and family, while using nonsensical pseudonyms and a slew of mailing addresses.

Court documents outline a scenario in which the two men imported thousands of counterfeit iPhones from China and then filed warranty complaints with Apple, claiming the smartphones were broken and wouldn't turn on. Apple would then replace the knockoffs with genuine models — in most cases, new phones — that the pair would ship back to China to be resold for a profit, of which they received a cut.

Yangyang Zhou and Quan Jiang, who were both engineering students in the U.S. on F-1 student visas at the time, attempted the switcheroo with 3,069 iPhones from April 2017 through March 2018, prosecutors said in a criminal complaint filed in Portland, Ore.

It turns out it was nearly a 50-50 gamble on whether Apple would be duped.

Apple told investigators that 1,493 warranty claims linked to Jiang and/or Zhou were processed and replacement devices were issued at loss of $600 per iPhone, according to a "brand protection specialist" who spoke with a Homeland Security special agent.

In all, the company estimates the scheme bilked Apple out of $895,800.

The remaining claims — 1,576 of them — were rejected for tampering and returned to the sender, along with a letter explaining why the warranty claim had been denied. None was identified as counterfeit, according to the documents.

That suggests that in order for the scam to work, Jiang and Zhou had to have access to authentic iPhone serial or International Mobile Equipment Identity numbers, also called IMEI numbers, that would indicate the devices were still covered by the repair warranty. (The IMEI includes information on the origin, model and serial number of the mobile device.)

The complaint does not specify how the men obtained the information, and Apple declined to clarify whether it required the numbers to process the claims or how the alleged fakes passed as the real thing.

Apple discontinued printing serial numbers on devices after the iPhone 6 Plus model.

According to court documents, Jiang laid out the entire operation in a December 2017 interview with Thomas Duffy, a special agent with Homeland Security Investigations. Jiang admitted he received the dummy phones from an "associate" in China, 20 to 30 at at time. He said he used friends, relatives and name variations to receive the packages from China, as well as the replacement phones from Apple.

It seems that at least in one instance, Jiang may have used the name "Apache Helicopter" to file a claim that resulted in a new phone, prosecutors say.

The complaint also says Jiang explained he deliberately coordinated the iPhone shipments to different addresses in the U.S. in order to avoid the packages being detained by Customs and Border Protection.

Jiang's mother allegedly collected his share of the profits in China and then deposited the money into an account he can access in the U.S.

In some cases, Jiang said he paid his friends for their help, according to court documents.

But, the affidavit says, Jiang and Zhou deny that they knew the iPhones that they were receiving and subsequently submitting to be repaired or exchanged were counterfeit or that they were notified that they were engaging in fraud.

Their claims contradict Apple's lawyers, according the filings. Apple's legal counsel said the company sent two letters in 2017 to Jiang at Zhou's address, placing him "on notice that he was importing counterfeit Apple products."

Duffy's testimony states Zhou and Jiang, now in their early 20s, came under investigation in 2017, after Customs and Border Protection seized more than five shipments of fake phones addressed to the pair. A search of Jiang's home in March 2018, produced more than 300 counterfeit devices, along with shipping and warranty submission records, Duffy said. Law enforcement also discovered multiple boxes associated with Zhou, one of which allegedly contained 25 fake iPhones.

Jiang is facing charges of trafficking in counterfeit goods and wire fraud. Zhou is being charged with "submitting false or misleading information on export declaration."

The fake-iPhone-laundering scam has been around for several years and has become so widespread in China that "Apple has already developed a more rigorous replacement plan to avoid" fraud.

In 2015, a Chinese-language online forum called Chinese In LA warned readers about a job posting seeking to recruit students to return inoperable iPhones from China to U.S. Apples stores. The ad targeted non-English speakers without a Social Security number, promising a "rebate" of $30 per replacement and suggested that 8 to 10 devices a day could be returned.

The original ad has been deleted, but the warning remains on the site.

Huo Jingnan contributed reporting.