AtariLeaks

"First loyalties lie to Atari first!"

BRIEF SUMMARY

In November 1986, the US reached an agreement with Japan to limit the quantity and to set a minimum price for Japanese exports of DRAMs (computer memory) into the US. In documents recently released by the FBI, Atari's own employees alleged the company smuggled Japanese DRAMs into the U.S. through its Taiwan manufacturing operation in 1988.

According to the FBI report, once the chips arrived, Atari employees were instructed to put them into a special room, where they removed any labels which would identify their employer. The chips were resold to other technology companies under unusual circumstances, which informants revealed to the FBI.

Public knowledge of the operations would likely have angered Atari's shareholders and customers, the domestic DRAM manufacturers, the Japanese government and DRAM manufacturers, and US Government. The FBI documented actions by Atari which served to concealed these transactions from view.

At the end of the investigation, the FBI determined that Atari's resale of DRAMS not a crime against the US Government, but that the operation which concealed it was. The case was sent to the Department of Justice. Soon after, the FBI Special Agent was unable to conduct further investigations into the case due to an involvement in an unrelated undercover operation. The case languished.

Three years after the investigation began, the Department of Justice eventually decided not to prosecute. The FBI turned the matter over to the US Customs civil division.


SIGNIFICANCE

In 1986, the United States and Japan had reached an agreement to limit the sales of Japanese DRAM (memory) chips to the United States. This was enacted to help protect the American semiconducter industry from what was seen as unfair competition by the Japanese.

The unfortunate side-effect of this was that DRAM chips in the United States became very expensive, hindering hobbyists as well as US based computer manufacturers such as Sun Microsystems. Luckily for Atari, they were not directly impacted, since much of their manufacturing was based in Taiwan. They had continued access to Japanese DRAMs at uninflated prices.

Just a few years after the Video Game Crash of 1983, Atari was not only surviving, but starting to thrive once again. Under the new leadership of Jack Tramiel and his sons, Atari now had excess cash, and they struck out to expand the business.

Atari had negotiated a deal to purchase Federated Department Stores in order to expand their retail network. Atari knew that Federated was losing money, but believed that they could turn the situation around. Atari quickly discovered that the financial problems of Federated were far worse than they had been led to believe. They were bleeding cash quickly. But Atari's financial reports hid the magnitude of the problem.

An investigation by the FBI strongly suggests that during this time, Atari made up for millions of dollars in losses by secretly importing DRAMs from Atari Manufacturing in Taiwan and reselling them in the United States at a significant mark-up.

Atari had a lot to lose. Had their actions became public at the time, they would have outraged the industry. There was no shortage of the number of enemies they would have to face --

  • Atari's customers. Directly and indirectly, customers were paying inflated memory prices due to a perceived shortage of DRAMs in the United States. (Atari themselves, at once time, referenced the shortage as a reason for limited product availability.) I personally remember paying an incredibly high price at the time to upgrade my Atari 130XE to 320K of memory.

  • The Japanese government. While their own semiconductor manufacturers were restricted by tight export controls to the United States, Atari appeared to have been directly profiting by exporting their acquired DRAMs from Asia to the United States. The FBI was advised that it was likely that the Japanese would completely shut off Atari's supply of integrated circuits if it were known that they were smuggling DRAMs.

  • US based computer manufacturers. These guys were suffering from the limited supply and higher prices of the Japanese DRAM quotas. Computer and component manufacturers based in the US, at least, the ones who hadn't worked out a deal with Atari, would have been outraged. Not only was Atari immune to the the DRAM quota, but they were using their overseas manufacturing position to profit at the expense of other manufacturers.

  • Atari's shareholders. They would have been very upset about misrepresentations regarding the acquisition of Federated. The balance sheet gave no real indication that a DRAM resale operation was a major new source of revenue (which helped offset the Federated losses). Worse, Atari directly stated to shareholders that they were unable to pay any dividends to shareholders because of the slow down caused by the shortage of DRAMS and their ability to produce ST computers!

  • US based semiconductor manufacturers. The United States government worked out a trade restriction with Japanese to protect the US based manufacturers. If they learned that Atari was circumventing the trade agreement, it would have meant that Atari was profiting at their direct expense. At the very least, Atari's contracts with domestic chip manufacturers would have been at risk.

  • U.S. Department of Commerce. They worked with the Japanese Ministry of International Trade and Industry to have them control the supply and prices of Japanese DRAMs. All for the benefit of American semiconductor manufacturers. They would have been embarrassed as well as angered to find out that Atari was sabotaging the agreement they reached with the Japanese.

Luckily for Atari, the story was not known to the public at the time. By 1990, Atari had disposed of most of its Federated holdings. Atari had survived its poison acquisition, but the cost of the encounter had used up Atari's final chance at a big revival. Surprisingly, a court would later rule that because Atari had known that Federated was not truthful in its financial statements, it could not find that that Atari's injuries were due to those misrepresentations. This judgment would later be referenced in the Facebook vs. ConnectU case regarding the origin and ownership of Facebook. Atari was eventually sold to a disk drive manufacturer.