NOTABLE PARTICIPANTS ==================== FBI Case Agent: "Linda" Styra: Atari's engineering firm. 2161 Hutton Drive, Carrolton, Texas Koral International Corporation 687 N. Pastoria Sunnyvale, California. Licensed to do business Feb 1986 as "electronic sales." FBI source advises: "they act a a go-between between companies and manufacturers. They have a reputation for having no scruples and are intent on making money regardless of whatever sleazy transactions are necessary." Teddy Bear Express: Delivery company. Sun Micro Systems (Sun Microsytstems): Unix server/workstation manufacturer. ALL PAGES ========= You will see redactions on almost all of the pages that have been released to the public. When the FBI redacts information from a document, you will see a white box with a black outline that covers up the sensitive information. To the right of the box (or on the top right corner of the page), you will see a reason for the redaction. The code is a reference to a subsection of Title 5, United States Code, Section 552, which explains the reason for the redaction. The codes used in these documents are: b2 - related solely to internal personnel rules and practices of an agency b6 - personnel and medical files and similar files the disclosure of which would constitute a clearly unwarranted invasion of personal privacy b7c - records or information compiled for law enforcement purposes, but only to the extent that the production of such law enforcement records or information could be reasonably expected to constitute an unwarranted invasion of personal privacy b7d - records or information compiled for law enforcement purposes, but only to the extent that the production of such law enforcement records or information could reasonably be expected to disclose the identity of confidential source, including a State, local, or foreign agency or authority or any private institution which furnished information on a confidential basis... When going through these documents, be aware that precision and consistency may be lacking, particularly in technical terms and in the names of companies. A DRAM might also be referred to as an Integrated Circuit or IC's. A source might tell the agent something about Sun Microsystems, but they'll transcribe it as Sun Micro Systems. A loose interpretation of names and terms is helpful in reading these documents. PAGE 1 ====== The FD-340a form is used in an evidence envelope. It lists the items contained within. 87A-40454 is the FBI case number inside of the San Francisco field office. The form referenced handwritten notes from an interview, documents provided by a source, and a list of those documents. The name of the person being interviewed has been redacted. PAGE 2 ====== The FD-340b form is used to identify the handwritten notes from a telephone interview, which is contained on the next three pages. PAGE 3 ====== This page jumps way into the middle of the story. It appears that someone in Atari's management learns that an ex-employee may have contacted the FBI, and they attempt to explain the situation. These are the handwritten notes from a telephone interview performed by the FBI's Special Agent on 10/18/88. Likely, the name of the caller from Atari was redacted from the top of the notes. The handwriting is difficult to read, but a group of volunteers has deciphered most of it as the following: talking about a BBS system no mention of M [M is believed to refer to a regular source of information] has full transcript ?cel tao??h tell [It is too difficult to decipher] H Cuft [G Cuft? It is too difficult to decipher] information old taken to president & CEO [presumably of Atari] [name redacted] quit - To the left are three lines of slanted text. The first word is unknown. The second word may be "best". The third word is "employee". The official transcript of this conversation is provided on page 23, but these raw notes provide a number of details that either didn't make it into the official transcript, or was redacted from the official transcript. PAGE 4 ====== The handwritten notes continue from the previous page. shipping DRAMS to Russians went to Sam- [presumably Sam Tramiel] instead of to subs- told Greg Prattt - don't know who [Greg Pratt would be the Chief Financial Officer of Atari] sent over - I know Linda pretty well - [Linda is unknown - perhaps an analyst in the Finance Department?] explain what's going on wait until Greg comes to us all open <--> Greg Pratt <--> explain co.'s position & what doing These guys do everything on the up & up Again, the official transcript of this conversation is provided on page 23, but these raw notes provide a number of details that either didn't make it into the official transcript, or was redacted from the official transcript. PAGE 5 ====== The final page of handwritten notes. call [redacted] at Sun [Microsystems] to check serial #s that did happen - he wasn't around Again, the official transcript of this conversation is provided on page 23, but these raw notes provide a number of details that either didn't make it into the official transcript, or was redacted from the official transcript. PAGE 6 ====== This is a list of documents which were acquired from a source during the investigation. The form indicates that the case was closed in 1991, and that the evidence is to be destroyed. The names of the documents are listed in more detail on other pages. "unsub(s)", circled, is FBI code for Unknown Subjects. PAGE 7 ====== This is another form used to describe the documents inside of an evidence envelope. It introduces the chain of custody form for the evidence which was eventually destroyed in 1996. PAGE 8 ====== The is the chain of custody record for the evidence that was obtained from a source during the investigation. It provides a general description of each of the documents. A less redacted version of this form (the original file copy) is also available on page 11. PAGE 9 ====== This is the exact log which details the chain of custody of the documents listed on the previous page. PAGE 10 ======= This is a memo to the Special Agent in Charge of the San Francisco FBI Field Office. It describes the situation as it is presently known, requests a new case be opened, and asks that the Special Agent who is presenting the case also be assigned to the case. The case is to be opened under category 87, which is defined as Interstate Transportation of Stolen Property. (The category is loosely applied here. I don't believe the Special Agent has any reason at this point to believe they are stolen goods.) The dollar amounts are important here, too. You have to reference some outside documents to get some context, but for the first quarter of 1988, earnings were $5.7 million (down from $15.3 million a year ago). You can see that sales of $1.5 million and $8 million in very high profit margin DRAMS would mean everything to a company of this size. These deals had to have been far more profitable than manufacturing computers. PAGE 11 ======= This is the original (file copy) of the same document on page 8, although less heavily redacted. The documents described were provided by a source inside of Atari (and were not officially handed over by the company or obtained via a subpoena). The source leaked the internal documents to the FBI Special Agent. PAGE 12 ======= The FBI Special Agent obtains more information from a source. This isn't the original interview which started the case (that was on September 8th, 1988), but another interview the next day. STYRA is otherwise known as Styra Semiconductor, which is a subsidiary of Atari. Styra was involved in chipset design for Atari. They were an engineering firm, but they were not known to have any significant manufacturing capabilities. (Atari, as whole, didn't have any real manufacturing facilities in the USA by that time. There were mass layoffs in 1983 when manufacturing was moved to Taiwan and Hong Kong.) This is an important name to keep track of, because Styra was listed as the destination for many of the imported DRAMS. The documents appear to show that DRAMS which were officially supposed to go to Styra wre instead being picked up by Koral International. And the same individuals appear to sometime use different names. A bit sneaky. The scope and the dollar amounts again are apparent here. Different sized DRAMS will sell for different dollar amounts (and I suspect different parties will get better or worse deals), but 100,000 units were sold for $1.5 million. PAGE 13 ======= Their source dishes out some information on Koral International. Wow. Please keep in mind that this was a source giving a candid assessment to an FBI agent of what they believed. Obviously, there was no love for Koral, but aside from Koral being a fairly regular buyer, they're don't seem to be anyone we need to focus on in particular. PAGE 14 ======= DRAMS come in a variety of sizes and configurations. Sometimes, these documents simply list them as Integrated Circuits. Sometimes DRAMS are referred to with no mention of size. Other times, the units may be wrong. What they refer to here as "one Mega Byte DRAMS" are likely 1 megabit DRAMS, which is what were being produced at that time. TECHNICAL: The specifications for a DRAM are more detailed than that. A 256kbit DRAM could be in a 256kx1 or a 64kx4 arrangement. And access times are important. Ultimately, the part numbers are going to describe exactly what is being traded. It is unfortunate that the FBI redacted the part numbers, because learning the size of the Fujitsu DRAMS that were already in the room would have told us more about their value. According to a December 1988 InfoWorld article, the US price for 1Mbit DRAMS from the Japanese manufacturers (when available) was about $14 each. When they were hard to locate (and you had to go through third parties), the price could certainly be more, even in bulk. $15/unit was the apparent price of the DRAMS mentioned on the bottom of page 12. This page also introduces us to some of the drama and the cloak-and-dagger going on an Atari with these shipments. It looks like they were trying to keep things very secret. One phrase stands out here: "they were not violating any laws, and it was only a question of business ethics." The FBI was certainly interested in the legal side of this, and in considering the legality of the operation, the FBI touches on the business ethics of this in a later document. But the "ethics" seem pretty outrageous if you look outside of the FBI documents for context. If the laws weren't an issue for Atari, public knowledge of the events certainly would have been. PAGE 15 ======= Here we see that our FBI Special Agent has engaged US Customs to assist with the investigation. PAGE 16 ======= They are likely to be talking about 256K DRAMS in the beginning of the story. For some reason, the FBI chose to redact the dates on this page (and this page alone). But from the context of the documents as well as their order, it is a safe bet that these events happened around September 12, 1988. Here, we have our first real mention of "Teddy Bear Express", which you will see later. We have more illustrations of what appears to be the cloak-and-dagger going on with the DRAMS. And another sale of the DRAMS, plus an order. (If you assume that they're re-ordering the same amount as they just purchased, that'd be $3/each, which would be an appropriate price for the 256k DRAMS. No telling for sure.) Remember the comment on business ethics from page 14? The last paragraph of this page touches on one of those issues. They told their shareholders they won't be paying dividends. Atari seemed to blame a lot of things on the DRAM shortage. (I was unable to locate an online copy of the annual report.) PAGE 17 ======= US Customs gives a general report on Atari's importing activities. Apparently, the FBI also checked up on Koral and on Teddy Bear Express. They couldn't find a business license for Teddy Bear Express. I have two thoughts on why this might be. It could have been a small-time startup. Or it could be that they weren't using the proper name for the company, which I believe to be either Teddy B-Air Express or Teddy B-Air Freight Delivery. PAGE 18 ======= Apparent change in Atari policy, wanting the money wired to them rather than cashier's checks. Atari is prepping a shipment of 40,000 DRAMS for MP Systems. That would seem to match the order back on page 16. PAGE 19 ======= MP systems was a no-show for their order of 40,000 DRAMS, but it happens that Koral shows up and picks up 4,000 DRAMS. Related? Don't know. This won't be the only time you'll see an odd coincidence that is off by a factor of 10. And the invoice was in STYRA's name yet again. Their source inventoried the chip room. It is too bad the breakdown of the parts was redacted. It would have been interesting to see the type of of 256Kbit and 1Mbit DRAMS on-hand. PAGE 20 ======= US Customs reports that there aren't any duties on the 256Kbit DRAMS. The part about the 64K RAMS doesn't seem to come into play during the rest of the documents, so it can likely be ignored. So it looks like when Atari is importing these chips, they aren't avoiding paying import taxes on them. US Customs is now intercepting and searching their shipments. The 64Kx4 circuit mentioned in the document is one way that a 256Kbit DRAM can be configured. 256kx1 would be what Atari would commonly use at that time. In this and other communications with US Customs, I'm surprised that there doesn't seem to be any effort to see what might be going in and out of Styra or Federated. But then again, none of the sources have described any such shipments happening. PAGE 21 ======= This page documents a shipment that they anticipated and finally received. Here we see that everything is off by a factor of 10. The shipping documentation states 15,000 DRAMS, but 150,000 are actually received. I have to wonder if the value is a little high here, but still, we're talking serious money. PAGE 22 ======= It looks like the FBI Special Agent sought out an opinion on importing DRAMS for resale. The US Congress had reached an agreement with Japan that set a price floor and a quantity limit for DRAMS being shipped into the United States by Japanese DRAM manufacturers. (There was no actual duty in place, just an agreement.) But Atari appeared to be importing DRAMS from Japan into Taiwan, and then importing them into the US for resale. While it technically was outside of the agreement, it was clear that the Japanese DRAM manufacturers would be extremely displeased by what Atari was doing, and they could very well cut off Atari's supply. Atari's shareholders would be upset over the reason they weren't paid dividends. US customers would be upset because they aren't being shipped products (in favor of European customers who are). Our own domestic DRAM manufacturers (who Congress was protecting) would be upset that Atari was backstabbing them. Those are all pretty bad, but Atari was risking their access to a critical component from the Japanese manufacturers in order to resell these components. Atari was gambling nothing less than the company's future on this. PAGE 23 ======= Here we have the official notes from the call that a member of Atari's management made to the FBI. The caller repeats the story that he believes that an ex-employee told the FBI. Shipping DRAMS to the Russians. Removing all Atari identification and delivering DRAMS to Sun Microsystems under the instruction of Atari's Chief Financial Officer. He wants the company to have a chance to explain it. But he himself has no explanation because he was not around. This seems to mark the time around which Atari's executive team was aware of an FBI investigation. There didn't appear to be any investigation into the claims about the Russians, at least, not by the FBI. A year and a half later, a short story will appear in the New York Times entitled "Atari is Seeking Soviet Chip Deal". Greg Pratt, Atari's Chief Financial officer, reports that they've obtained and tested DRAMS that were produced in the Soviet Union. Atari stated an interest in selling computers in exchange for components. PAGE 24 ======= This appears to be the initial interview which launched the investigation. One of Atari's own employees turned them over to the FBI. The meat of the case is presented here and on the next two pages. PAGE 25 ======= Although Sun Microsysetms is called "one of the first shipments", below in the second paragraph, they are identified as THE first shipment. It is too bad that the information about the cashier's check was redacted. I suspect that the amount paid on this first transaction would have been the $8 million that was mentioned back on page 10. There isn't much more in these documents which talk about Sun Microsystems, but outside documents explain Sun's need for a supply of DRAMS. One document suggests a key employee who was in an ideal position to arrange the first deal. Much of this page details the unusual circumstances in which the chips are resold. PAGE 26 ======= This last page contains some supporting documentation that the source provided to back up their story. PAGE 27 ======= "Loyalties lie to Atari first" would make a great movie line, but probably isn't something you want the FBI to have you on record for saying. We have some suspect deals going on, but the one on September 30th actually catches my eye. 256K DRAMS are what Atari is currently using to produce their ST computer line. They cut someone locally a deal for 50 of them, and then shipped 19,950 back to Taiwan... to manufacturing? Did Atari sell too much of its own supply of DRAMS that it had to work a deal to get their manufacturing back on track? I certainly find that more credible than the alternative, which was that Atari had access massive Japanese supplies of every kind of DRAM but the ones they needed in their own production (256kx1). PAGE 28 ======= Here we have a San Francisco Source reporting on an Atari employee. The wording of this source has me believing that they are a non-FBI government agent, but what, I cannot determine. Police officer? The San Francisco Source seems to agree with the opinion that the FBI Special Agent received on October 1st. The Japanese manufacturers are going to be very upset. And Atari would appear to have no other reason to import the chips into the US, except to resell. PAGE 29 ======= The San Francisco Source reports even more suspicious activity. And now we have an account of insider selling, and an interesting scheme to transfer software packages (for resale) to Federated Stores (a retailer that Atari recently purchased) in other to avoid costs. A fair amount of detail is put into that report. And the report of high level meetings on the DRAMS is interesting. This page does more for me than any other page in setting the tone. I don't believe what is happening is just reckless greed. I think we're seeing a company that is doing anything it can at the moment to stay afloat. In referencing some outside documents, this appears to make sense. They purchased Federated stores to boost sales of their ST computer line. But they paid much more for Federated than it was worth. Even worse, Federated was bleeding cash far worse than they expected. The acquisition that was supposed to boost sales is instead dragging the company below water. PAGE 30 ======= Now we have the specifics of how transferring the software to Atari is supposed to save money. The source says that they get to screw NAMCO out of royalties, and perhaps they get to boost Federated's reported earnings at the same time. PAGE 31 ======= More DRAM sales. If it was really $10M, it would have been the biggest sale that the FBI knew about. I tend the discount the rumor that Atari was reselling a bad batch of chips, though. It sounds like a cover story. The next story is tough to evaluate. The redacted words are really important here. If we're talking about someone who had once worked for Federated said they would buy from Atari, that would have let the cat out of the bag to Motorla. But if we're talking about an employee of Federated who was going to make a purchase through his parent company, that really isn't all that unusual. PAGE 32 ======= The San Francisco Source indicates that Atari had halted the resale operations. As you read subsequent pages, be aware that they are not in chronological order. You'll read some more reports about DRAMS being sold, but November is when the activity seems to end. PAGE 33 ======= Generally, US Customs seems to say that they'll only stop the imports if there were trade restrictions between Japan and Taiwan. Otherwise, legal action hasn't been taken for violations of the DRAM agreement between Japan and the US. While they see technical violations in Customs, prosecution usually isn't attempted unless they're using it to get around paying an import duty. There is no duty on these components. PAGE 34 ======= US Customs isn't seeing anything unusual since things have gone quiet at Atari's chip room. PAGE 35 ======= We've gone back in time, just before things went quiet. This may possibly be from a new source inside of Atari. They point out that Teddy Bear Express was only being used for the DRAM shipments, but never handled anything other shipments at Atari. The source provided copies of a number of documents which were kept by the FBI as evidence (but eventually destroyed years after the case was closed). PAGE 36 ======= A continuation of the list of documents received by the FBI. This should be identical to the evidence list on page 11. PAGE 37 ======= One of the last sales of DRAMS, and another confirmation of the transfer of software to Federated Stores. We now have a number on the expected savings in royalty payments to NAMCO: $8 million. PAGE 38 ======= Plenty of redactions here, but it looks awfully suspicious. "Teddy Bear Trucking Company had gone out of business within one week of Atari being aware that there was an investigation into Atari's importing activities." PAGE 39 ======= Is it starting back up again? We have the more expensive 1Mbit DRAMS coming straight from Japan this time. But we have that strange mismatch of pieces, once again, by a factor of 10. One count say 15,000 and another count says 150,000. PAGE 40 ======= Another confirmation, much later, than incoming DRAM shipments have stopped. News that Atari was suing Nintendo. There is a paragraph that is so redacted that there's almost no telling what it said. And finally, Atari has to sell Federated because of.... losses due to the DRAM shortage?!! Wow. A shortage of DRAMS is NOT something that Atari has, but it seems to have caught on as _the_ excuse for everything that goes wrong with the company. One particular phrase has me wondering. "Some of the individuals importing large quantities of DRAMS into the United States transferred to Atari." From an accounting perspective, was all of this revenue being handled by Federated and booked directly to the Federated balance sheet? According to the LA Times in a 1989 article, "Ailing Unit Blamed for $85 Million Loss", Jack Tramiel said (in 1987) that the purchase of Federated was part of his plan to build an international electronics company that would do everything from the design of the chips to the salesroom floor. If Federated is failing, this means that Atari's comeback is over. PAGE 41 ======= US Customs is still looking at incoming shipments, but isn't finding anything unusual. PAGE 42 ======= Here is where the FBI fires its guns. They've communicated with an Assistant U.S. Attorney and presented their case. PAGE 43 ======= They're asking the US Attorney's office to go after Atari for either Wire Fraud or Falsification of Import Documents. The Assistant US Attorney is considering it. PAGE 44 ======= Some personnel shifts, a potential new source for information, and... it looks like the DRAM resell operation might be back again? PAGE 45 ======= Odd. A year later, and they're just now being directed NOT to talk about the DRAM situation? And it looks like Atari is dealing with a number of former employees who are making accusations about the DRAM deals. PAGE 46 ======= Our FBI Special Agent is tied up with an undercover operation called CLUTCH CARGO. This would later be described as a car theft case. The investigation into Atari has stalled. PAGE 47 ======= Mass layoffs are around the corner. PAGE 48 ======= A source believes that Atari is on the verge of death. Actually, the company still manages to hang on. PAGE 49 ======= Our FBI Special Agent continues to be tied up with an undercover operation called CLUTCH CARGO. The case against Atari continues to sit. PAGE 50 ======= A newpaper article (introduced on the next page) which blames Nintendo and shows a massive drop in income for Atari in 1989. I think a good amount of the different in net income between these two years can probably be attributed far more to a lack of DRAM sales than it could be to Nintendo. For the first time, when DRAMS actually were to blame, Atari chooses to blame something else! PAGE 51 ======= Here is where the source presents the Nintendo article to the FBI. PAGE 52 ======= A new US Customs agent was assigned to the case. Some fresh blood and new activity returns to the case. The IRS has been brought into the investigation to track down some of the checks. A subpoena for bank records is with the US Attorney's office. PAGE 53 ======= The US Customs Agent interviewed a DRAM buyer which brokered through Products Plus. The agent also interviewed Products Plus. Their estimated quantity of ICs sold by Atari is very low, but Atari sold their chips to a number of different parties. It makes sense that they didn't all know about each other. Meanwhile, US Customs tries to set up an interview with Teddy Bear Freight once they've located the bills of lading. PAGE 54 ======= Teddy Bear Freight still isn't able to produce the documentation. Customs is considering turning the case over to their civil division to audit Atari's books. (In retrospect, it looks like Teddy Bear's stalling actually worked out very well for Atari.) PAGE 55 ======= It is now 1991. The United States Attorney has decided not to prosecute Atari. They don't give a lot of details, but the next page sheds some more light on this. PAGE 56 ======= The US Customs Agent has decided to turn the case over to the civil division for an audit of Atari. The FBI will close its case until the audit finds a criminal violation. And this is where the story ends. The case is never picked back up at the FBI.