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December 17, 2015Kansas City, MO, United StatesIntellectual Property Rights and Commercial Fraud

6 defendants plead guilty in Missouri to $100 million software-piracy scheme

KANSAS CITY, Mo. — A Seattle, Washington, man on Wednesday became the sixth defendant convicted in federal court for his role in one of the largest software-piracy schemes ever prosecuted by the U.S. Department of Justice.

This conviction resulted from an investigation titled “Operation Software Slashers” led by U.S. Immigration and Customs Enforcement’s (ICE) Homeland Security Investigations (HSI).

Rex Yang, 37, of Seattle, waived his right to a grand jury and pleaded guilty before U.S. Chief District Judge Greg Kays Dec. 16 to a federal information that charged him with participating in a criminal conspiracy from Jan. 1, 2009 to Dec. 10, 2014.

“An investigation that began in Kansas City, Mo., uncovered one of the largest software piracy schemes ever prosecuted by the U.S. Department of Justice, with tentacles reaching into cities across the United States and overseas,” Dickinson said. “Investigators seized more than $20 million in assets from conspirators who are estimated to have sold in excess of $100 million worth of illicit, unauthorized and counterfeit software products to thousands of online customers.

“Pirating software, particularly on this massive scale, damages the American economy, hurts private businesses and harms the unsuspecting buyer,” said acting Special Agent in Charge James Gibbons of HSI Chicago. “These plea agreements mark a historic day for our HSI special agents and our law enforcement partners in the fight to stop the theft of intellectual property.”

Yang, who owned and operated Digisoft LLC, and Premiere Software Inc., is the sixth and final defendant to plead guilty — in separate, but related, cases — in this stage of an ongoing criminal investigation that originated with a Kansas City, Missouri, company. Many of these defendants, and their related entities, had been sued civilly for willful trademark and copyright infringement by Microsoft and other software developers.

The multi-million dollar scheme, with co-conspirators operating overseas in the People’s Republic of China, Singapore and Germany and across the United States, illegally sold Microsoft Corporation and Adobe Systems Inc. software product key codes worth millions of dollars through a charitable organization and several online businesses. (Product key codes are used to obtain full access to unlock licensed versions of various copyrighted software programs.) Over 170,000 product-activation key codes were distributed by conspirators; and many of these key codes were used and activated numerous times each.  

Through federal forfeitures, investigators seized more than $20.6 million in assets, including $10,188,777 seized from bank and investment accounts, 10 luxury automobiles and 27 parcels of real estate with a total market valuation of $9,739,399. Affidavits filed in those forfeiture complaints estimate that conspirators reaped about $30 million in profits from customers who paid more than $100 million for the software.

In the course of this investigation, search warrants have been executed at 13 separate residential and business locations in five different states.

“Software piracy is a significant economic crime that victimizes not only software developers and manufacturers, but unwitting consumers,” Dickinson said. “Today’s announcement is part of an ongoing investigation. We can’t provide additional information about the investigation at this time, but we expect that more offenders soon will be brought to justice.”

Kansas City, Missouri: US v. Ross

Casey Lee Ross, 29, of Kansas City, pleaded guilty June 11 to his role in this conspiracy. The investigation began when federal agents in Kansas City learned in 2013 that Ross, the owner of Software Slashers, had purchased (and redistributed) tens of thousands of illegitimate and unauthorized Microsoft product key codes and counterfeit product key cards from sources in China.

Ross admitted that he purchased 30,159 product key codes and counterfeit product key cards. Ross purchased these product key codes at prices well below the estimated retail price. In many cases, they were distributed on counterfeit card stock intended to make it appear as if they were genuine Microsoft products.

Ross distributed large quantities of these product key codes and counterfeit Microsoft product key cards to co-conspirators in the United States, who in turn sold the product key codes and counterfeit product key cards through their respective websites, as well as on e-commerce sites such as eBay or Amazon. Ross admitted that he received $1,387,595 from Rex Yang Jr. of Seattle; $1,127,190 from Matthew Lockwood, 38, of Denver, Colorado; $875,630 from Reza Davachi, 41, of Damascus, Maryland; and payment for 2,569 unauthorized product key codes from Arunachalam Annamalai, 48, a citizen of India residing in Las Vegas, Nevada.

Seattle, Washington: US v. Yang

Yang admitted that he possessed 10,205 Microsoft certificates of authenticity. In addition to his purchase from Ross, Yang paid $402,929 to Davachi to acquire various software and software components. Yang also admitted that he sold various software items to Lockwood for $1,574,054.

Denver, Colorado: US v. Lockwood

Lockwood pleaded guilty June 11 to his role in this conspiracy. In addition to his purchases from Ross and Yang, Lockwood (doing business as Discount Mountain Inc.) paid Davachi $1,243,570 for counterfeit, illicit and/or unauthorized software and software components.

Lockwood admitted that he obtained 6,165 certificates of authenticity, 4,996 “Lenovo” product key cards and about 11,000 unauthorized product key codes.

Baltimore, Maryland: US v. Davachi

Davachi pleaded guilty Oct. 20, 2015 to his role in this conspiracy. Davachi admitted that, in addition to his purchases from Ross, he paid $672,300 to a counterfeiter within the People’s Republic of China as payment for unauthorized product key codes and counterfeit product key cards.

Federal agents seized about 5,040 Microsoft operating system certificates of authenticity — valued at $1.26 million — while executing search warrants at Davachi’s residence and business. Davachi also admitted that he used Project Contact Africa, a charitable organization, as a way of operating his for-profit Rez Candles Inc. business, which sold a host of items online, including illicit, unauthorized and counterfeit software. Davachi was aware that the stated purpose of the charity was to “support a medical clinic in Africa for needy families and children,” and children suffering from HIV.

Davachi’s role was managing and maintaining the on-line presence of the Project Contact Africa eBay/PayPal charity since January 2004. Over this time, Davachi actively used the Project Contact Africa charity’s eBay/PayPal account to sell unauthorized, illicit and counterfeit software and software components through eBay, and used the charity’s PayPal account to facilitate payments for these software components.

Davachi managed and maintained the online presence for the Project Contact Africa charity by a person identified in court documents as INDIVIDUAL F, in exchange for a payment to INDIVIDUAL F of about $2,000 per month beginning in early 2012. By using the charity’s account to sell his items through the eBay charity store, Davachi saved thousands of dollars per month that he would have otherwise had to pay eBay in the form of various fees. During this time, the Project Contact Africa eBay/PayPal account took in about $12 million in revenue, and eBay/PayPal sustained losses of $908,231 due to the waived fees that were intended to go to this charitable organization.

Customers of the Project Contact Africa eBay charity store were under the impression that “100 percent” of the proceeds of sales were intended to go to the charity when, in fact, Davachi and INDIVIDUAL F agreed that only a portion of the proceeds would go to the charity; the remainder went to Davachi and Rez Candles Inc., which, in turn, used these proceeds to purchase new inventory. Davachi and INDIVIDUAL F intended to repeat this cycle for their benefit. Davachi also admitted that he allowed numerous other individuals, including Ross, to use the Project Contact Africa eBay/PayPal charity store to sell their own items at a significantly reduced amount as compared to other for-profit sales methods on eBay, with the understanding that Ross, and others, would pay back to Davachi a portion of their savings.

Las Vegas, Nevada: US v. Annamalai

Annamalai pleaded guilty July 29, 2015 to his role in this software piracy conspiracy. Annamalai is the owner and operator of Vegascart LLC. Annamalai admitted that he purchased 2,569 Microsoft software product key codes from Ross between March and December 2013. These software key codes are calculated at a loss amount of $250 each.  Therefore, the relevant loss amount in this matter is estimated at $642,250.

Seattle, Washington: US v. Schwartz

Jake Schwartz, 28, of Seattle, owner of JHS Enterprises Inc., pleaded guilty Oct. 27, 2015 to misprision of a felony. Schwartz admitted that he knew about Yang’s involvement in the conspiracy and helped conceal it. After Digisoft was sued for willful copyright and trademark infringement by Adobe Systems, Schwartz agreed to form a new corporation with Yang, Soft Deals LLC.