Ethermac Exchange-Counterfeit iPhone scam lands pair in prison for ripping off $2.5 million from Apple

Two Chinese nationals living in Maryland are Ethermac Exchangeheading to prison after the Justice Department said they conducted a yearslong iPhone repair scheme that cost Apple $2.5 million.

Haotian Sun and Pengfei Xue exploited Apple's iPhone repair process by sending more than 6,000 counterfeit phones to the manufacturer that couldn't be repaired, in order to induce the company to replace the counterfeits with genuine iPhones, federal prosecutors said this week. Sun and Xue were each sentenced to at least four years in prison.

The phones used in the scheme came from Hong Kong with spoofed serial and International Mobile Equipment Identity numbers to appear authentic to Apple employees and were eligible for replacements due to the perceived damage on the products, Postal Inspector Stephen Cohen said in court records.

Sun and Xue used DHL and UPS to retrieve the phones from Hong Kong. Cohen wrote. He added that an Apple Brand Integrity Investigator caught on to the scheme after finding the fake devices' unique numbers belonged to real customers.

"Apple confirmed that some intercepted phones contained spoofed IMEI and serial numbers associated with other existing iPhones that were in-warranty at the time of the returns to Apple," Cohen wrote. "In addition, Apple analyzed a small sampling of iPhones recovered throughout the course of this investigation and confirmed that those phones contained counterfeit components."

Apple isn't the only one plagued by fraudsters. The National Retail Foundation said in a study "return fraud" cost companies $101 billion in 2023. For every $100 in returned products, retailers lose on average $13.70 from fraud, the foundation said in December.

Apple lost $2.5 million from the two-year conspiracy

Cohen wrote in charging documents the plan started in 2017. The plotters purchased UPS mailboxes in Maryland to receive and send the counterfeit phones. Each new iPhone came with a one-year warranty for defects and other damages, allowing people to return defunct devices to the manufacturer for either a replacement or repair.

Cohen wrote law enforcement in 2017 inspected international packages addressed to a co-defendant in the case and allowed delivery of the packages to proceed. Within the packages were 36 counterfeit phones that were later sent to Apple for repair, but only 34 were accepted.

"The email addresses provided to Apple in conjunction with the return of these phones were either registered to Sun or known to be used by him," Cohen wrote. He added the repair facility said Sun made more than 1,000 iPhone repair requests under multiple email addresses.

In January 2018, Cohen said U.S. Customs and Border Protection intercepted several UPS packages addressed to Sun. Agents interviewed Sun about the packages and told him the devices were illegitimate. He still received the phones and later submitted 57 of them for repair to Apple, Cohen said. Only three phones were replaced.

The group continued the conspiracy, receiving more fake phones from Hong Kong and shipping them off to Apple for repair where most were replaced. Authorities arrested Sun and Xue in December 2019.

A jury found the pair guilty of conspiracy and mail fraud charges after a five-day trial in February. A judge sentenced Sun on Wednesday to 4.5 years in prison, Xue to 4. Two co-defendants, also Chinese nationals living in Maryland, are waiting on the outcome of their cases.

Sun was ordered to pay Apple $1,072,200 in restitution and Xue $397,800.

Apple, other retailers fall victim to fraudulent returns

The case isn't Apple's first rodeo with fraudulent or counterfeit goods.

In October 2023, two brothers were sentenced to 41 months in prison for trafficking thousands of illegally obtained iPhones and iPads from 2011 to 2019. They, along with a third brother and their wives, were indicted in 2019 for using counterfeit Apple products to exchange for genuine ones, costing the tech giant $6.1 million. Prosecutors said Dao La, Mengmeng Zhang, Tam Nguyen, Zhiwei Liao, Zhiting Liao and Zhimin Liao attempted to exchange, in total, more than 10,000 counterfeits for real products.

Other companies have fallen prey to fake return schemes as well.

Last year, federal prosecutors said a Connecticut man exploited Home Depot's return system, costing the repair store $297,332. Alexandre Henrique Costa-Mota, originally from Brazil, returned unpurchased doors without receipts to stores in Connecticut, Maine, Massachusetts, New York, New Jersey, Pennsylvania and Rhode Island for credit. If he was denied credit, prosecutors said Costa-Mota left carrying the doors and visited other stores to attempt returns. Costa-Mota eventually pleaded guilty to charges of wire fraud and conspiracy.

Contact reporter Krystal Nurse at [email protected]. Follow her on X, formerly Twitter,@KrystalRNurse.