Question: What does national electronics retailer Best Buy Co. Inc. have in common with luxury automobile dealers?
Answer: Russell and Abby Cole, a middle-age couple from Deerfield, Ill., who owned and operated a computer supply company called Chip Factory Inc.
Two federal judges in Minnesota have unsealed 47 documents outlining what federal investigators describe as "a large-scale, multi-year, multimillion-dollar online bid-rigging scheme" that the Coles allegedly used to exploit a flaw in Best Buy's system for buying computer parts.
Among the items seized were $2.9 million in cars: two Ferrari coupes, a Lamborghini Murcielago convertible, a Bentley convertible, a two-door Aston Martin, a Lexus convertible, a Mercedes-Benz S550 sedan, a couple of Porsches, a two-door Ford GT and a two-door Cobra. And that says nothing about their luxury trade-ins over the years.
Robert Bossany, a former Best Buy vendor-relations employee, told federal investigators that Cole referred to his $2 million custom home with its multicar garage as "the house that Best Buy built."
Bossany pleaded guilty Thursday to conspiracy and money-laundering charges related to the investigation. Afterward, prosecutors moved to unseal the documents.
The Coles have not been charged with any crimes. Russell Cole declined to comment for this report.
Federal investigators said in sworn statements filed with the court that Best Buy discovered in the summer of 2007 that it had been paying inflated prices for computer parts supplied since 2003 by Chip Factory. Best Buy hired outside counsel to oversee an internal investigation and hired a computer forensics firm to capture evidence such as invoices and e-mails.
Best Buy brought its findings to federal investigators in July. The company determined that it had paid Chip Factory $41.6 million more than the company originally bid to supply the retailer with the parts.
The alleged scheme was pretty simple. Best Buy needs large numbers of computer parts -- hard drives, memory chips, circuit boards, etc. -- to repair customers' computers. So it developed an online system that allowed nine approved vendors, including Chip Factory, to submit bids for the orders. Best Buy operated the process through an intermediary called National Parts Service.
Best Buy told investigators that it didn't realize that, after a vendor won an order, it could go back into the National Parts system and alter the bid price. Unaware that the price had changed, Best Buy would pay the inflated bills.
In one example, Chip Factory won an auction with a low bid of $42 a part; the next-lowest bid was $72.
But after Chip Factory got the contract, it allegedly jacked the unit price to $571 -- "more than 13 times higher than its original bid," Kelly Petricka, an agent with the IRS Criminal Investigative Division, wrote in an affidavit.
Some red flags
A number of Best Buy employees raised concerns about the high prices the company paid for Chip Factory's parts, and National Parts Service raised red flags when Chip Factory's invoice amounts exceeded the bid prices. But Bossany, Best Buy's go-between, covered for Chip Factory, Petricka said.
"Routinely, Bossany or Russell Cole would defend the variances by stating in responding e-mails that, among other excuses, it was the result of a 'fat-finger mistake.'"
Best Buy fired Bossany on Oct. 2. After federal agents raided his Prior Lake home that month, he confessed and agreed to record his conversations with Russell Cole as part of the investigation. At a plea hearing Thursday, Bossany said that the Coles paid him about $100,000 in kickbacks.
The newly unsealed court documents reveal that at least two former Chip Factory employees also have provided information to investigators, including a warehouse manager and a computer network and systems administrator. The latter said that Chip Factory shut down after Best Buy severed ties in October 2007.
Cole gave employees Chip Factory's computer equipment as gifts, the network administrator said. He got a server that contained Chip Factory's accounting system, which investigators recovered.
The Coles also sold refurbished computer equipment on eBay through a company called R Sales Coles. They reported income totaling $389,259 for that company in 2005 and 2006.
"This income is also believed to be fraudulent," another IRS agent wrote in an affidavit. She said the parts that the Coles sold on eBay had been paid for and returned by Best Buy, which was supposed to get credit for them. That didn't happen, she said.
Dan Browning • 612-673-4493