Secret Atari DRAM Resale Operation Revealed by FBI

[jmccorm]

I mean, its interesting reading stuff for sure but the story is still thin.....and lacks proof.

 

Be aware that the message you are replying to is designed to help people put the FBI case file into context, but it isn't the FBI case file itself, and that is where the proof is. The AtariLeak sites links to it as an "opinion piece". Actually, I should probably go back and better label that message in this forum. (EDIT: Done.)

 

So, we're pulling in additional outside resources, such as the legal case of Atari vs Federated, and Atari's own Annual Reports to Shareholders (one of which I had to pay a library to digitize from microfilm because no source existed online). It is my best effort at a narration of more broader events, with the purpose of helping people understand the situation at Atari when AtariLeaks happened. A great deal of that context is based on specific references from documents which have been gathered, but yes, it is more loose than what you'd find on the AtariLeaks where every single line is backed up by a reference (if shown or not) and interpretation is kept to a minimum.

 

Regarding the DRAM shipments themselves, there is an incredible amount of proof in the FBI case files. They subpoenaed bank records, interviewed informants, intercepted shipments from overseas, and so much more. In the end, the FBI had an extremely compelling case. You can examine it directly at any time.

 

Uhhmmm......so Jack did a little bit of grey-import on the side......wow..... and this is all brought as if it is some major crime

 

You're close to the truth, and your perspective is really close to what an Atari executive is said to have told one employee. I really want to do justice in responding to what you've said, so I'll focus the rest of this entire message on that one statement. I'll address your remaining points in a subsequent message at a later time. Fair?

 

I'd directly reference the FBI case file, but it is a complete mess on first read. A second read. And third read, and... I had to create a page-by-page guide to reading the document just to wrap my brain around a very confusing series of events which were totally out of order. From there, I created the timeline of events, which is heavily referenced, and puts things into a chronological order. I added some additional outside events to the timeline for context. In the timeline, we see that the FBI comes into play in May of 1988.

 

The initial source to the FBI (whom the FBI does not ever disclose due to privacy reasons) appears to be an Atari employee or contractor (because of the enormous amount of inside information). Did they have an axe to grind against Jack? Who knows. But what we see throughout the case are high level employees who are asking low level employees to conceal information, and so those low level employees are worried about being involved in criminal activity, and they seriously wanted to cover their own hide. A quote from later in the story...

 

He contacted the FBI and told them Atari was "doing something like shipping [redacted] to the Russians." The employee also stated that he was told to remove all personal and Atari identification and to deliver [redacted] to Sun Microsystems, and was told to do this by Atari's Chief Financial Officer. This employee felt that Atari was doing something illegal.

 

There are a lot of crazy stories like this, but actually, let's stop here. You raise a really good point about legality, but the situation is different than what you might expect. Let me pull in something else from the case file...

 

Source heard [redacted] who formerly worked at National Semiconductor and who began working at Atari in June and appears to be in [redacted] the [redacted] DRAMS, state that "[redacted] said not to tell you guys what's going on." [redacted] further stated that Atari was paying their taxes on the incoming shipments, and that they were not violating any laws, and it was only a question of business ethics.

 

So, while Atari subsequently gave us reason (in Atari vs Federated) to question to quality of their legal advice, this may have been true. It really could have been just an issue of business ethics. Although using Taiwan to circumvent a trade agreement between the US Department of Commerce and the Japanese Ministry International Trade and Industry wasn't actually illegal, according to the case file, "the company's supply of ICs would be totally shut off by the Japanese if it were known that a company were smuggling in circuits." So that's part of why we see the cloak-and-dagger, and it was that concealment activity which made a lot of Atari employees nervous that an illegal operation was in the works.

 

There were more reasons for concealment, too. It wasn't just the Japanese DRAM manufacturers which would have been pissed at Atari. You can read the exact reasons [in the SIGNIFICANCE section] why each of the following groups would be pissed at Atari:

• Atari's own customers (and I also seem to recall Atari also blaming product shortage(s) on DRAM availability)
• The Japanese government (absolutely livid for the reasons listed)
• US based computer manufacturers (which you hit on the head in your reply)
• Atari's shareholders (they should also question the company's annual report - where are DRAM profits listed?)
• US based semiconductor manufacturers (again, absolutely livid at Atari)
• US Department of Commerce (embarrassed and livid at Atari)

Now, if that was all there was, the government's case would have fizzled away. So, government interest to the side, had this been known at the time, Atari would have upset a large and diverse number of interests. My belief (which matches the view of the US government) was that if this scheme was revealed, it would have a major impact on the company.

 

But Atari wasn't just concealing knowledge of what it was doing from employees and from the public.

 

According to the documents, Atari was also concealing the nature of shipments from the US Government itself, so that is when it turned into criminal activity. From the government's perspective, documenting a large shipments of integrated circuits as "software" was smuggling. They government also determined that Atari was actually importing 150,000 or more DRAMs a week. "None were declared through U.S. Customs." Also "it appears telexes and telephone were used to order specific quantities and in furtherance of this scheme."

 

At this point, you have to look at the totality of the picture.

 

Although no taxes were circumvented, they determined that Atari was concealing shipments from the government with false documentation (smuggling), which turns it into criminal activity (Falsification of Import Documents, and it shipments were arranged by means of Wire Fraud). They might have cut Atari a break, but we have to remember that Atari was enriching itself at the expense of many others, some of which the US was trying to protect, and contrary to agreements made by Department of Commerce. That enough was motivation for US law enforcement to take action. Externally, the Japanese Ministry of Industry and Trade would have also expected the Department of Commerce or US Customs to enforce their agreement on the US side.

 

So, this could have just been a story about the business ethics of an Atari that was sticking it to just about everyone in the industry. But Atari drew attention to itself by trying to cover up what, technically, could have been a legal activity. On the ethics side, they may have been vulnerable to civil action (lawsuits for money), not to mention the wrath of an entire industry.

 

So, in answering the question about this being a little grey import and not any major crime, let me start with this series of events:

• Atari is believed to be reselling 150,000 DRAMs a week (let's call it $1.5M/week in profit, probably more).
• Smoke is generated when Atari conceals a very visible operation from employees and public.
• Employees report a secret operation to the government. Some to cover their own hide, and some with an axe to grind.
• Government investigates.
• Government determines that Atari is concealing shipments from US Customs, which is actually criminal.
• Government determines that Atari is working against US interests, which is motivation for them to take action.
• Government knows that public knowledge of events can destroy the company, which is motivation not to go public.

TL;DNR summary: It wasn't the DRAM reselling in the US (perhaps lawful but with dubious business ethics) that got Atari into trouble. It it was the concealment of that operation that got Atari into trouble. The coverup becomes the crime and provides the smoke which draws attention to it. You might even think of other situations where this has happened.

 

So, was this "a little bit of grey-import on the side"?

 

No, far worse. We're looking at something like $6 million a month in profits on over 600,000 DRAMs, and continuing for a year. According to the government numbers, this looks like DRAM smuggling on an industrial scale.

 

So, "this is all brought as if it is some major crime"?

 

Yes and no?

 

Atari was working against government interests, and (despite views on protectionism) the people who the government intended to protect were being directly harmed by Atari. What the government saw as smuggling (concealment of shipments from government knowledge) actually was a crime. But was there a criminal prosecution? Once the US Attorney's office had everything together, the FBI case stops. That is also around the time Atari's shipments stops. There isn't any proof, but I can accept someone else's suggestion that they came to a back-room deal, off the record, in order to help protect from being destroyed by making it public knowledge.

 

If there was no prosecution of criminal activity, what is the significance of any of this?

• A detailed record of a government investigation into Atari (interesting if only as an historical time capsule)
• We learn about a clandestine operation where Atari enriched itself while screwing over much of the industry
• We learn about a secret which could have destroyed the company if it was made public knowledge
• We look for context. Why would Atari be engaged in something like this which could destroy the company? We find an urgent need: the Federated acquisition.
• Annual reports looks fine, but court records later show that Federated was bleeding at an unexpected rate of $3M/month
• The massive financial bleed from Federated was not made public and did not originally appear on 1988 financial statements to investors
• Profit from DRAM operation seems connected, gives Atari the breathing room to privately try to turn Federated around
• Atari's internal audit of Federated's, not publicly known at the time, provides a new explanation of why Jack Tramiel left Atari to his sons when he did (Atari's financial nest egg is cooked - an industry titan's comeback story became much more unlikely)

If the FBI Special Agent would have pulled on the strings, I think she may have started looking at the company's financial statements and with its reports to shareholders (which I located two annual reports, examined them, and made them available online), and started questioning if there was financial statement fraud (in the 1988 quarterly and annual report) as part of the concealment. Securities fraud. That would be a far more serious crime (and also would have damaged the company in a different way).

 

So, I hope this is a solid reply.

 

I understand that you have disagreements with the US government's actions and conclusions. That's fine with me. I'm just attempting to an honest job of explaining the documents in a broader context. Picking up all the pieces and retelling it as a more coherent story requires some level of interpretation.

 

I'll pick up the rest of your message in a later reply.

Edited December 23, 2017 by jmccorm

[jmccorm]

Apart from this: That US -Japan deal sounds like 100% protectionism. It was probably not a deal but an offer the Japanese could not refuse because there would probably be serious countermeasures from the US if they didnt sign the deal. As mentioned the only two companies still making RAMs in the US were TI and Micron (and Microns quality was utter crap as we all have learned from our XEs).

 

The results were clear enough: RAM prices in the US went up, the companies still producing complete computers inside the US got hurt (I guess Apple and maybe HP or IBM still made machines there in those days) while those who manufactured in the far-east had no issues.

 

So, in this way the whole protectionism idea back-fired, as this situation would have made the choice for companies still producing in the US to move their production to the Far East a lot easier....

 

I figured I could respond to this one real quick. But I know that I'll probably type another small novel.

 

At AtariLeaks, my role was in obtaining the document, re-rolling its contents into a more digestible form, and then publishing the results. Very "just the facts" and "if I can directly reference it, then I can say". Here in the AtariAge forum, I've loosened those restrictions to include analysis and opinion where I think it is useful in connecting the dots to the larger picture.

 

So many of us remember that these trade restrictions were a big issue in the US during the 1980s. My own story was in having to pay incredibly high prices for just a 320KB mod on a 130XE (because there was no way I could afford the 1MB mod at the time). I think you nailed it how computers manufactured in the US were hit hard, while those with overseas operations were unaffected.

 

I personally believe that there may be times where protection is needed in response to unfair foreign activity. I know that, depending on country and political ideology, some may favor no intervention, while others will favor heavy intervention. I can accept those differences in opinion. In 1986, the problems were alleged to be both price-dumping in the US, and a lack of market access in Japan. I'm not in a position to easily evaluate the strength of those claims, but it certainly has been a topic of pontification for researchers and think tanks such as the Brookings Institution [PDF format].

 

With trade restrictions, there is that aspect when you've identified with the intended domestic winners and the unintended domestic losers. US based semiconductor manufacturers won, but at the expense of US based PC manufacturers, accessory manufacturers, and hobbyists. The FBI case file clearly singles out Sun Microsystems as one of the domestic manufacturers. Actually, come to think of it, during my research, I came across the resume of a former Sun Microsystems employee who's listed duties included hedging multiple sources of DRAM suppliers to ensure a continuous supply for manufacturing.

 

The funny thing is that right now, here in the US, we're at the edge of a very similar situation. The US is currently considering protection of the few remaining US-based solar panel manufacturers after the U.S. International Trade Commission found that there was unfair price competition from China and other Asian countries. We personally know that if they enact measures to protect the surviving companies, they're also picking domestic winners at the expense of domestic losers. If you help the US based solar panel manufacturers, there is the risk that this impacts the companies which install and maintain those solar panels.

 

I don't pretend to have a universal answer. If they go forward with similar market protections, Atari certainly lead the way in demonstrating how others should (or should not) legally exploit those restrictions for big returns. Unfortunately, the size and weight differences make these panels make them far more of a problem to deal with, and the manufacturer brand names (and associated 25 year warranties) are arguably more important on solar panels than on DRAMs, but an installer may at least be willing to self-warranty the grey-market panels.

 

Cheers.

[Level42]

I’ll respond later but I just happened to come across this video and thought it was pretty relevant:

 

 

 

Well, with your info in mind, this is one desperate looking man on that screen....

[jmccorm]

I’ll respond later but I just happened to come across this video and thought it was pretty relevant:

[Edited to remove video.]

Well, with your info in mind, this is one desperate looking man on that screen....

 

Actually, I was taking advantage of this time to go back to look at my assumptions and do some additional research before I replied on the final issue. [That won't be this message.]

 

Dealing with the flu and half-sleeping on the couch, I binged on Jack Tramiel videos (and a few from Leonard... one of which would completely rewrite all the commonly known stories of why Jack left Commodore). I had intended to reference your video into my reply on the issue of "what killed Atari." You're right! That is an excellent video in the context of this discussion.

 

I think that video fits in very well into who Jack is, how he operates. (It is hard for me to know for certain if this is a 1987 or a 1988 video... guessing 1987 because he's still trying to get them in-line on the weekly videos. It doesn't change much, but confirmation is always appreciated.)

 

There was this one point I that I going to clarify here (and elsewhere), but it didn't change the final numbers (it looks like it may have been invisibly credited against the disposal charge for Federated), and the whole issue confuses things. But I can break it out here without too much fear of confusing the story. Back to the Federated purchase...

 

Atari didn't exactly buy Federated for $67 million. I made mention of what the court called a daredevil "bet agreement". Atari CFO didn't trust Federated's numbers, which was good instinct. Atari wanted to walk away, but Federated threatened to sue Atari for driving it into bankruptcy, and so they reached this compromise. Atari would buy Federated for $67 million, subject to an audit to be completed after the purchase.

 

"If the audit revealed the need for adjustments between $27 and $32 million, Atari would be locked into the $67 million purchase price. But if the audit revealed the need for adjustments greater than $32 million, Schwartz would have to pay Atari one dollar for each dollar in adjustments, up to $37 million", effectively reducing the purchase price of Federated to as low as $62 million.

"On February 15, 1988, the results of Coopers and Lybrand's audit were released identifying adjustments of $43 million dollars. [ ... ] Pratt [Atari's Chief Financial Officer] claims that he never believed the adjustments would be as high as that, and if he had, he would not have agreed to going forward with the deal."

 

$43 million in adjustments on a company with audited financial statements that valued it at $67 million. That's how bad the Federated deal was. Somehow, a $5 million rebate along with the careful treatment of financial figures is said to work out to Atari effectively paying $62 million for a company that was only worth $33 million... and is losing millions each month in operations.

 

PS: Does anyone want to follow up with the guy on YouTube and see if he has any more of the Jack Tramiel videos from Federated that were for internal communications with the store managers?

Edited December 26, 2017 by jmccorm

[Level42]

Yeah it would be most interesting to see more of those videos.....I'd actually love to see some of those "bad ones" from the stores

 

The funny thing was that I was searching for something Atari related and it was one of the suggested videos.

 

About the year of the video, I guess it was 1988 because he mentions planning the future for 1989 in the beginning....

 

This one has an interesting remark about prices of 256k DRAMs too, but this was much earlier than the Federated days. This clearly was around the first promotion for the ST. Video is from April 1985. The ST on the desk seems to be not fully closed (!), the floppy drives are a model I never saw before and so is that monitor....

 

 

Watch from 5.00 where he mentions specifically the price of 256k RAM chips :)

 

Later on in the video he also already gives a hint why it went wrong......20.07:

He says he'll sell to anyone who can pay for it....in other words....there was no clear plan...theC64 kinda sold itself and he hoped the ST would do too. It did, in Europe.

Edited December 26, 2017 by Level42

[jmccorm]

UPDATE:

I've followed up with the FBI. After loosening my search constraints, they've identified 900 more pages of Atari documents. I've requested them. Additionally, they found 50 more pages which did not strictly match my request, but they thought might interest me. (My feel is that it is unusual for them to go out of their way like this.) It turns out to be 50 pages an involves the "misuse of the FBI name" by Atari. I think that this might have piqued the agent's personal interest?

 

I've requested a total of 950 pages, and they've been upgraded from the "large case backlog" into the "medium backlog". No ETA, so expect a year or two.

 

Thanks,

Jmccorm

[Kyle22]

Was the Infamous Peter Strzok (pronounced 'stroke') involved in this?

[Level42]

 

It turns out to be 50 pages an involves the "misuse of the FBI name" by Atari. I think that this might have piqued the agent's personal interest?

 

 

 

Mmmm....weird because Atari had FBI warning screens on certain arcade games games ?

Edited September 12, 2018 by Level42

[jmccorm]

Mmmm....weird because Atari had FBI warning screens on certain arcade games games ?

You know, you might just have actually hit the hammer on the nail. The FBI has had issues with how their seal was used along with copyright warnings. For example, from a modern-day website on the FBI website regarding their new Anti-Piracy Warning Seal:

 

...it has come to the FBI’s attention that “Fair Use Warnings” accompanied by an image of the official FBI Seal (or similar insignia) have been posted on various websites, giving the appearance that the FBI has created or authorized these notices to advise the public about the fair use doctrine in U.S. copyright law. These warnings are not authorized or endorsed by the FBI.

 

Perhaps as far back as the 80s, they might have had concern with how their logo was used and its potential to seem like an endorsement of whatever message was on the screen. That's just speculation, though. Heck, they could have just had angst over the FBI agent in the E.T. Cartridge for the 2600. Once we get the docs, we'll know the real issue for sure.

 

jmccorm