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Inside The Massive Global Black Market For Smartphones

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IPHONE TRAFFICKERS
Surveillance photos of people at Ace Wholesale in Taylor, Mich., taken by Sprint's private investigator as part of a lawsuit against Ace. | Sprint

This article is part of a Huffington Post series exploring the global underground trade in stolen smartphones. Previous stories in the series can be found here.

Before a federal SWAT team descended last summer, one storefront in a Detroit suburb attracted so many people bearing shopping bags stuffed with iPhones and iPads that managers installed a port-a-potty on the sidewalk.

Once inside, people deposited their electronic wares into a rotating drawer below a bulletproof glass window and waited for the cashier to deliver stacks of cash.

So much money changed hands in this fashion at the Ace Wholesale storefront in Taylor, Mich., that an armored truck arrived each morning to deliver fresh bundles of cash, according to an undercover investigator for the wireless company Sprint and an employee at the Mattress World outlet next door.

"It was like Fort Knox over there," said the Mattress World employee, who asked not to be named for fear of making enemies inside what police say was a locus of criminal activity.

Many of the mobile devices swapped for cash at Ace Wholesale had been stolen at gunpoint in an escalating wave of gadget-related robberies, police say. Ace Wholesale had become a key broker in the underground trade of stolen phones, a global enterprise that often connects violent street thieves in American cities with buyers as far away as Hong Kong, according to law enforcement and the wireless industry.

"These companies fence the stolen phones for them, no questions asked," said Jerry Deaven, an agent with the Department of Homeland Security, which is tasked with preventing the trafficking of stolen goods. "You can walk right into one of these storefronts and sell all the phones at once and walk out with $20,000."

Deaven told The Huffington Post that such traffickers are responsible for "a tremendous amount of phones being shipped out of the country," adding that "some organizations are shipping a couple million dollars worth of phones per month."

ace wholesale
Ace Wholesale's storefront in Taylor, Mich.

Deaven declined to comment specifically about Ace Wholesale, which he said is now under federal investigation. Last August, federal agents armed with search warrants raided the company's locations in suburban Detroit, Atlanta and Chicago, and the owner's home in Taylor, Mich., according to a DHS spokesman.

Ace Wholesale's owner, Jason Floarea, has not been charged with a crime. He did not respond to requests for comment. His attorney, Jim Thomas, who has represented high-profile clients including former Detroit Mayor Kwame Kilpatrick, declined to comment.

The case against Ace Wholesale sheds light on what law enforcement and wireless providers portray as a shadowy world of smartphone trafficking. At the center of this trade is a crucial layer of middlemen: bulk purchasers who buy devices from thieves and con artists before exporting them to customers around the world.

In 2009, federal agents charged Hezbollah operatives in Philadelphia with attempting to buy thousands of stolen cell phones and ship them to Hong Kong and the United Arab Emirates to finance the Shiite militant organization, which the United States considers a terrorist group.

Earlier this year, a woman's iPhone stolen at a bar in San Francisco turned up a few days later in Lima, Peru, according to San Francisco police.

Last fall, American and Mexican wireless carriers began collaborating to address the cross-border trade in stolen phones after learning that Mexican drug cartels were using them to communicate with kidnapping victims' relatives without being traced. But American wireless companies lack similar arrangements with other countries, allowing international phone trafficking to flourish.

Phones stolen in the United States have been located "on all continents except Antarctica," said Marci Carris, vice president of customer finance services at Sprint.

The global nature of the trade stems in part from measures that law enforcement and wireless carriers have imposed to make it harder to resell stolen phones in the United States, prompting criminals to forge new markets abroad.

"Once it gets overseas, it's virtually impossible to track a phone back here to the person who committed the crime," Deaven said.

But phone trafficking is driven largely by the massive profits made by exploiting the price difference between smartphones sold in the U.S. and overseas. Americans who agree to two-year service contracts with their cell phone company can buy the latest iPhones for about $200 -- a price subsidized by the carrier. In Hong Kong, an iPhone can be sold for as much as $2,000.

This equation helps explain why more than 1.6 million Americans were victims of smartphone theft last year and why thefts of mobile devices now make up 40 percent of all robberies in major American cities. The rising street crime is exacting a heavy toll on consumers who spend an estimated $30 billion each year replacing lost and stolen devices, according to Lookout, a San Francisco-based mobile security firm.

Smartphone-related crime has also turned increasingly violent. Last month, a 24-year-old man was shot in Philadelphia after police say he would not give up his cell phone to a thief. Last year, 26-year-old Hwangbum Yang of New York City and 23-year-old Megan Boken of suburban Chicago were shot and killed during separate iPhone robberies, police say.

In response to the crime wave, state and city law enforcement officials are investigating smartphone makers for their failure to adopt measures that would render their devices inoperable when stolen. New York Attorney General Eric Schneiderman pressed smartphone manufacturers in May to create "kill switch" technology to undercut the black market, noting that "foreign trafficking of stolen devices has proliferated."

Phone trafficking also costs the wireless industry "hundreds of millions of dollars a year," said James Baldinger, an attorney for Sprint. One alleged phone trafficker, Hassan Essayli, admitted in 2008 that his company, Platform Enterprises, shipped 30,000 phones from California to other countries in just two months, according to his testimony in a lawsuit filed by TracFone Wireless.

"I'm seeing thousands and thousands of phones being resold overseas," Baldinger said. "The numbers are so big, but a lot of time it flies under the radar."

Over the last eight years, wireless companies have filed more than 200 lawsuits against alleged phone traffickers, but no case has bigger stakes than the federal lawsuit Sprint filed last summer against Ace Wholesale, Baldinger said. Sprint has accused Ace of buying thousands of Sprint phones and reselling them overseas, thereby depriving the wireless company of revenue from monthly phone bills.

"As far as we know," Baldinger said, "Ace is the biggest phone trafficker in the country."

Founded four years ago, Ace Wholesale was the brainchild of Jason Floarea, a Detroit area entrepreneur who opened his first wireless retail outlet when he was only 16, according to the company's website. He says on the site that he started the company to help consumers purchase top quality smartphones at discount prices.

Now 27, Floarea is a married father of three and an ordained minister. He aims to open his own church focused on outreach to convicts, alcoholics and the homeless, the site says.

Local law enforcement, however, accuse him of less savory activities: acting as a well-known buyer of smartphones and tablets stolen in burglaries and armed robberies.

In January 2010, Dearborn, Mich., police pulled over Floarea in his wife's silver Lexus and found two handguns, more than 30 cell phones, marijuana, a bottle of prescription drugs and more than $40,000 in cash, according to a local police report obtained by The Huffington Post through the Freedom of Information Act. He was arrested on charges of possession of marijuana, possession with intent to distribute narcotics and possession of a firearm in commission of a crime, the report says. Police later returned the phones and all but $4,200 in cash to Floarea per a court judgment.

A search of court records found no evidence of the case and both prosecutors and Floarea's attorney declined to comment on it. In Michigan, some defendants have been sentenced under statutes that prevent their cases from being disclosed publicly, according to a Michigan Department of Corrections spokesman.

While it remains unclear how profitable Floarea's business has become, he appears to be making a comfortable living. Early last year, he purchased a five-bedroom house in West Bloomfield, Mich., for $1.4 million, according to the town assessor's office. Even Ace Wholesale's low-level associates say they are well-compensated. One person who buys and sells phones for the company told Sprint's investigator that he makes $3,000 per week, court documents show.

Deaven said he recently interviewed a man who claimed to supply phones to traffickers and boasted about how his work supported his lavish lifestyle.

"He said, ‘I drink nothing but top-shelf liquor and get all the girls,'" Deaven recalled. "‘I make more money than the dope man, but have none of the risk.'"

‘A VERY LUCRATIVE CRIME'

The underground market transporting iPhones and other gadgets around the world began with a different form of theft.

For years, traffickers have hired teams of so-called "runners" or "credit mules" to buy discounted phones in bulk from retailers by agreeing to long-term service contracts. These runners simply stop paying the bills and sell the devices to traffickers who export them overseas.

In March, the California Attorney General charged two people -- Shoulin Wen, 38, and Yuting Tan, 27 -- with recruiting runners from homeless shelters to buy iPhones and Samsung Galaxy phones. The pair shipped the phones to Hong Kong -- a scheme that the attorney general says netted them nearly $4 million in less than a year.

But recently, thefts have become bolder and more violent: Traffickers have been acquiring phones through a growing number of cell phone store robberies, according to local and federal law enforcement officials.

"A guy can go into a cell phone store and steal 30 or 40 phones and get a lot more than if he hit a bank," said Deaven, the Homeland Security agent. "It's just a very lucrative crime."

In Houston's Harris County last year, thieves robbed at least a dozen cell phone stores -- sometimes at gunpoint -- during a two-month period, prompting the police department to establish a special task force to investigate the burglaries.

At one store in Houston, three men crashed a truck through the front window and stole dozens of cell phones before speeding away. At another store last year, a thief lowered himself through the ceiling, grabbed as many handsets as he could, then climbed back through the ceiling to escape.

Last July, Anthony Riopelle, 22, was working at a Meijer department store in Taylor, Mich., when two men approached and started asking about iPads. Suddenly, one man punched Riopelle in the face, knocking him to the ground, while the other grabbed more than a dozen tablets and fled the store, according to police.

"They said, ‘If you move, we're going to kill you,'" Riopelle told HuffPost.

Police said they later found the stolen iPads behind the bulletproof glass window at Ace Wholesale. The two thieves were never caught.

It was not the only time police tracked stolen mobile devices to Ace Wholesale. In August, Taylor police arrested a man in the company's parking lot shortly after he had stolen iPhones from several victims at gunpoint in Detroit.

"Ace Wholesale made it very easy for people who were obtaining phones through robberies and retail fraud to go there and sell them," Taylor police Chief Mary Sclabassi told HuffPost. "It brought a large crime element to the city."

Dozens of other companies around the country have played a similar role, Sprint says.

Sprint's investigators discovered hundreds of stolen iPhones stored in a suburban Baltimore warehouse owned by a company called Wireless Buybacks, according to a lawsuit Sprint filed against the company in February. Wireless Buybacks says it buys used phones and resells them to large retailers, which in turn issue them to customers who have insurance policies and need a replacement phone.

In its lawsuit, Sprint claims that a company associated with Wireless Buybacks tried to sell 800 iPhones to its undercover investigator for more than $400,000. A sample of serial numbers revealed that "the vast majority" of phones were stolen or obtained through fraud, the suit says.

In February, agents from the FBI, the Secret Service and the Bureau of Alcohol, Tobacco and Firearms raided Wireless Buybacks' warehouse in Elkridge, Md., and found the facility was being used to store stolen phones, according to Sprint. Law enforcement declined to comment about the raid, citing an ongoing investigation.

In court documents, Wireless Buybacks said it "does not knowingly transact business with anyone involved in burglaries or armed robberies" and conducts "a rigorous screening process" to ensure it doesn't buy stolen phones.

Kevin Lowe, co-founder of Wireless Buybacks, has said that his company supplies phones to "some of the largest retailers in the country." The company generates most of its revenue from a contract to supply cell phones to Best Buy worth about $45 million each year, the company said in court documents.

Best Buy has no plans to cut ties with Wireless Buybacks. "At this point, these are accusations that haven't been substantiated," a company spokesman said.

But Baldinger, Sprint's attorney, said the lawsuit reveals how many U.S. consumers are unwittingly buying stolen phones.

"There are lots of consumers walking around with phones they think they got legitimately from a national retailer," he said, "when in fact the phones were stolen during armed robberies."

‘TONY BUY iPHONE'

The middlemen at the center of the global trade in stolen smartphones organize themselves into distinct roles.

Many hire hackers who use special software to "unlock" the devices, enabling them to connect with wireless networks around the world, according to Lt. Ed Santos of the San Francisco Police Department, which has created a special task force focused on combating smartphone thefts. Then, they erase the data on the handsets, often within an hour after the device is stolen.

"They completely erase them so the phones can't be identified by who they belong to," Santos told HuffPost. "They want to sell a clean phone that can't be traced."

Traffickers later repackage phones in boxes with the manufacturer's logo, power chargers and instruction manuals in the native language of their destinations, according to Sprint.

Finally, they ship them overseas, mostly to Hong Kong, where they are distributed across Southeast Asia, said Baldinger, Sprint's attorney. Many phones are also shipped to Dubai, Israel and Latin America.

In 2011, Ace Wholesale shipped dozens of iPhones and Samsung Nexus phones to Go Telecom HK and Mobile Planet HK, according to invoices obtained by Sprint. These two companies listed addresses in Kowloon, a district of Hong Kong that is thick with electronics merchants.

Most traffickers ship phones in large cardboard boxes via FedEx and UPS, according to Deaven, the Homeland Security agent. The destination of stolen phones often depends on the provenance of the traffickers.

"Here in San Francisco, a lot of people have ties to Mexico," San Francisco police Sgt. Josh Kumli said. "A lot of phones are going to Mexico because that is where they have contacts."

Until December of last year, two brothers, Henry and Victor Gamboa, drove thousands of stolen phones and other electronics by truck from the Bay Area to Mexico every two weeks, Santos said. The two brothers are now in jail after being convicted of running a massive stolen electronics fencing ring.

Thuc Ngo told Sprint's lawyers that he smuggled iPhones from California to his native Vietnam, where his siblings helped him find buyers, according to a deposition from a Sprint lawsuit against him.

Ngo said he obtained phones through his business, which he called "Tony Buy iPhone." He drove a white Dodge Ram 3500 van emblazoned with an advertisement -- "We Buy Used Iphone" -- listing his phone number and website, the lawsuit claims. He met customers at Starbucks coffee shops around the Bay Area and paid between $220 and $330 for each iPhone. Some of the iPhones had been reported stolen, he confessed, according to his deposition.

He regularly flew to Vietnam to sell his inventory, stuffing the phones in his pockets and strapping them to his waist beneath his clothing with plastic wrap -- a technique he used to bypass Vietnamese customs at the airport and avoid paying taxes, the deposition says. In this way, he carried 11 iPhones at a time.

"That's the most I can hide on my body," he said, the deposition notes.

And yet it was never enough.

"Every time I was there, people would tell me, ‘Oh, next time, I want such and such phone and if you come back, you know, sell it to me,'" he said.

Earlier this year, a judge in San Francisco barred Ngo from buying and selling phones manufactured for use on Sprint's network. Ngo could not be reached for comment.

tonybuyiphone
Thuc Ngo drove this van to meet people and buy iPhones that he smuggled to Vietnam, according to Sprint.

A 'SECRETIVE' STOREFRONT

Ace Wholesale acquired phones by advertising on Craigslist and websites like thewirelessbuzz.com and wirelessdealers.com. One ad read: "Buying Apple iPhone 4S!! Must Be Brand New!!..Will Buy any Quantity!!" Another read: "Ace Will Buy Your Smartphone For Top Dollar!!!!!!!"

The company listed the price it paid for each model on the walls of its stores. The latest iPhones still sealed in their original packaging commanded the highest prices. One employee told Sprint's undercover investigator that he was buying the iPhone 4S for $430.

At the Ace storefront in Taylor, Mich., the Mattress World employee next door said he saw "the same people every day" arriving with bags full of iPhones and other high-end phones and tablets. Mirrored windows prevented passersby from seeing inside. The company hired a security guard to sit in a car in the parking lot. Sometimes, people bought phones from others in the parking lot, then resold them inside Ace.

At another Ace Wholesale location in Troy, Mich., the company replaced the glass front door with a metal door featuring a peephole and buzzer, according to Scott Zochowski, an attorney who works in the building.

"They were very secretive and kept very strange hours," Zochowski told HuffPost. "I've always been very suspicious about what the heck was going on in there."

With so much valuable inventory moving through its operation, Ace Wholesale itself became a target for robberies, police say. In February 2011, Floarea, the store's owner, told police that four masked men broke into his store and stole 258 cell phones worth about $140,000. One month later, police say six men wearing masks broke into Ace Wholesale again and stole smartphones and tablets worth $173,000.

Last July, a man reported to police that he was robbed at gunpoint in the parking lot of Ace Wholesale after he sold 25 iPads for $15,000. The gunman grabbed the cash, which was in a black duffel bag, and ran away, according to a police report.

Some Ace Wholesale associates have criminal records. At the Atlanta location, the company paid $800 to Barney Gunn for two iPhones, Sprint says. Gunn, 46, who goes by the streetname "Spook," has served multiple prison sentences since the early 1990s for drug and weapons charges, Georgia court records show.

One morning last August, a SWAT team and agents from the Department of Homeland Security busted through the front window at Ace Wholesale's location in Taylor, leaving behind piles of shattered glass. The storefront is now occupied by a company that sells outdoor pools and jacuzzis. Federal agents spent six hours removing boxes and surveillance cameras from inside Ace Wholesale's location in Troy, Zochowski said.

In court documents, Ace Wholesale said the raids forced the company to shut down its business. Its website says its inventory is now "entirely online" and being carried by its sister company, Electronics Direct, which is also owned by Floarea.

Baldinger, of Sprint, said the raid against Ace Wholesale caused "a short-lived drop" in the number of phones being shipped overseas.

But in the increasingly competitive underground smartphone trade, shutting down one operation -- even a major one -- left plenty of others waiting in the wings, Baldinger added.

"There are so many other players out there," he said. "The raid provided an opportunity for a lot of other traffickers to step up and fill the void."

This story appears in Issue 59 of our weekly iPad magazine, Huffington, in the iTunes App store, available Friday, July 26.

Watch the video below to see federal agents raiding Ace Wholesale in Taylor, Mich.

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