Guilty: Couple scammed Best Buy out of $41.6M

In one of the biggest corporate fraud cases in Minnesota history, an Illinois couple was found guilty in federal court Thursday of defrauding Best Buy out of $41.6 million and failing to pay taxes on their ill-gotten gains.

Russell and Abby Cole, who owned and operated a company that sold computer repair parts to Best Buy, systematically overbilled the Richfield-based retailer from June 2003 to August 2007 by manipulating an online auction program. Their company, Chip Factory, paid cash and gifts to former Best Buy insider Robert Bossany to conceal the fraud, the jury found.

Although both Coles were accused of sending money to Bossany and trying to cover up for it, only Russell Cole, 50, was found guilty of that charge.

Abby Cole, 53, started Chip Factory out of her home in 1988 as a divorced single mother, and remained its CEO. She was portrayed in court as less involved in daily operations because she was busy raising the couple's two young children.

But the jury of 10 women and two men, who deliberated for five days, believed she worked closely with her husband to create "fluff sheets" and "padding" to avoid paying taxes on money the company made overbilling Best Buy, which was Chip Factory's main source of revenue. The IRS estimated the Coles owed $3.3 million in federal income taxes from 2004 to 2007.

As verdicts were read on each of the 26 charges, the Coles appeared increasingly distressed. Abby Cole, whose mother watched from the front bench, shook her head and sighed. Russell Cole covered his eyes, and occasionally put an arm on his wife's shoulder. By the end, both laid their heads on the table.

Investigators from the IRS, FBI and U.S. Postal Inspection Service spent two years investigating the case after Richfield-based Best Buy brought it to them.

A Best Buy operations manager discovered the billing discrepancies with Chip Factory in July 2007. The company's asset protection team worked with investigators from Robins, Kaplan, Miller & Ciresi, and found a trail leading back to Bossany. Bossany was the liaison between vendors such as Chip Factory and Best Buy repair centers across the country.

Huge scam went on for years

For four years, Bossany received more than $100,000 in weekly and biweekly checks from Chip Factory, as well as a Harley Davidson motorcycle and Yamaha ATV. Bossany, who was fired in October 2008, pleaded guilty last year of one count of mail fraud conspiracy and one count of money laundering. He has not been sentenced.

"While we are grateful that we can put this trial behind us, we remain dismayed that a few individuals were able to perpetrate such a significant fraud against us," Best Buy spokeswoman Susan Bush said Thursday.

Best Buy, the nation's largest consumer electronics company, set up the online reverse auction in 2003 to help it get parts to repair laptops, appliances and other consumer electronics sold in its stores. Vendors bid through a third-party intermediary, National Parts.

Chip Factory routinely won orders with bids as low as $1 but sent Best Buy bills hundreds of dollars higher. When repair centers complained about prices, Bossany and Chip Factory dismissed it as a "fat-finger mistake" in typing or "system glitches." In all, Chip Factory's bids totaled $24 million, while charging Best Buy $66 million.

Lies from the start

In recordings played during the 17-day trial, Russell Cole and occasionally Abby Cole concocted stories about the secret payments to Bossany, calling them loans, payments for work done around the house, and payments to buy back the motorcycle. In several cases they swore the truth on their "children's lives."

The government showed Chip Factory lied to Best Buy from the start, getting invited into the auction system by overstating revenues and putting friends and family on the organization chart. Russell Cole took Best Buy and National Parts managers on a tour of a warehouse that was made to look as if it belonged to Chip Factory -- employees wore Chip Factory T-shirts and Cole high-fived a worker -- but the warehouse actually belonged to one of Chip Factory's suppliers.

The Coles lived a life of luxury, which the government argued was funded by profits from the Best Buy scheme. They had several homes, and the government confiscated 11 cars from Russell Cole's collection, including an Aston-Martin, a Lamborghini convertible, Ferraris and Porsches.

The case was a victory for Minnesota U.S. Attorney B. Todd Jones, who co-chairs a nationwide, interagency task force created last year by President Obama to investigate and prosecute financial crimes. Assistant U.S. Attorneys Nicole Engisch and William Otteson prosecuted the case in Minneapolis before Chief U.S. District Judge Michael Davis.

Jones was in court for the verdict and said in a statement that his office "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."

The Coles face a maximum of 20 years in prison for the Best Buy scheme. They also face up to five years for conspiring to defraud the U.S. government, and up to five years each on four counts of income tax evasion. Additionally, Russell Cole faces a maximum penalty of 20 years on each of the 17 counts of mail and wire fraud as well as for conspiracy to commit money laundering.

The judge agreed to let the Coles await sentencing from their home in Deerfield, Ill., where they have two school-age children. Russell Cole will wear a monitoring device, and neither can leave that state.

Jackie Crosby • 612-673-7335