Exposed: Dangers of the Gray Market

Lockheed received the first part of the American Data-supplied switches in January 2005. Everything seemed normal as the Cisco switches passed their initial inspections without incident and were delivered to the Navy for installation.

The second shipment arrived in March 2005, but the review process didn't go as smoothly this time. According to Castro, Lockheed discovered that at least three of the switches had duplicate serial numbers and that the manufacture dates on the boxes didn't match the equipment labels.

Lockheed immediately notified Cisco and American Data, which notified Gulfcoast. Initially, Gulfcoast requested the suspect switches be returned, but Lockheed retained the switches until it could notify the Cisco Brand Protection Team, which maintains policies against counterfeit and gray-market sales. Gulfcoast reportedly declined the return of the equipment after Cisco got involved.

"We were given duplicate serial numbers from our vendor," Gulfcoast's Warner wrote in an April 2005 e-mail to American Data. "The vendor is now going through all of their invoicing and serial numbers. I am hoping that they get something to us quickly."

Cisco discovered that the serial numbers listed on the Gulfcoast invoices were attached to products produced as early as 2003 and shipped to locations all over the United States and Europe. At least three of those serial numbers were traced to units that are still being used by other customers.

"I believe that no other conclusion can be arrived at except that black-market or counterfeit equipment is involved here," Castro says. "This can only be said for the units that we are finding to still be in the physical possession of the original owners. The others would just be speculation on our part. We may find that some of the equipment is Cisco-manufactured but 'used.' We just don't know for sure."

In court filings, Gulfcoast claimed the equipment was new but agreed that it was disqualified for the standard manufacturer warranties because it was sourced through unauthorized channels.

Regardless, American Data couldn't sell the questionable Cisco switches to the Navy, so it had to seek a one-time 42 percent discount from Cisco and permission to buy through Tech Data. Since the Navy had already installed 15 of the switches at a secure facility--including at least one with a disputed serial number--American Data had to replace only 53 switches. Those cost the solution provider $4,000 a piece, and American Data had to pay $40,000 in inspection fees to boot.

"At the time the replacement order was placed, we were all under the presumption that we were probably dealing with used equipment from [Gulfcoast/]Relational," Castro says. "This was bad enough, but I think everyone at least had the idea that the switches the Navy kept were genuine, Cisco-manufactured product. And, as far as we knew, Cisco looked them over and was willing to recertify them. We left it at that."

American Data gave Gulfcoast a deposit of more than $250,000, with a remaining balance of a quarter-million dollars. Gulfcoast filed suit against American Data in the Florida circuit court for the outstanding balance on the account, and American Data filed a countersuit to recoup its losses.

NEXT: Tracing back to the source.