The Legal Nightmare of the “Cell Phone Terrorists”

A small-time cell phone reselling venture landed three Dallas men in jail and on the front pages, labeled as terrorists.

They thought it was a simple, perfect plan to make some extra money. A local college student, his brother, and his cousin would make a trip to other states, buy cell phones at a discount, then resell them in Dallas for a tidy profit. The phone-buying expedition was supposed to end at Wireless Way, on a stretch of Harry Hines Boulevard where free enterprise and immigrant aspirations collide in an explosion of cluttered import shops and resale bazaars. It was where a Nokia 2126 bought at Wal-Mart for $21 could fetch as much as $38.50.

With that kind of money to be made, why not buy and resell 1,000? Eastland College student Louai Othman, his brother Adham Othman, and cousin Maruan Muhareb had made a little money reselling clothing and electronics around Dallas. But in 2006, they discovered how much they could make buying and reselling cheap phones sold at deep discount by prepaid cell giant TracFone.

They needed to hit the road to find the much-sought-after Nokias because scores of competitors were forever cleaning out Dallas-area stores. After three short trips that summer netted them $15,000, their ambitions ran high for a fourth, north through the Dakotas, Minnesota, and Michigan. They rented a van for sleeping on the road, loaded up their favorite rap tunes, and brought along a wireless-equipped laptop for locating Dollar Generals and Family Dollar stores, which also sold the phones at a discount, in all those heartland states.

Louai Othman, a graduate of Mesquite’s Poteet High School who was studying telecommunications and computer engineering in college, was the only married guy among the three and the father of a newborn baby girl. Seeing phone reselling as a business that could support his new family, he gave the venture a name, Real Cheap, registered to pay state sales tax, and kept records as sales grew.

Once on the road, the trio often worked well into the night, which had its benefits. They found clerks on the late shift were not very rigorous about enforcing store policies limiting purchases to three phones per customer, which made it a lot easier to buy up stock.

They were down to their last $1,800, having made their way through Wisconsin and across Michigan’s Upper Peninsula, and they were beginning to think about pushing south toward home. At about 2 am, on August 11, they pulled into the all-night Wal-Mart Super Center in Caro, Michigan.

As Palestinian-Americans, the Othmans and their cousin speak Arabic, a language that likely prompted suspicions in the farm town of 4,000 about 80 miles north of Detroit. Louai Othman was born in Dallas but lived for a while with his mother in Jerusalem. His brother was born in Jerusalem, and their cousin went to high school there. Their lawyer suspects it was their Arabic banter in the Wal-Mart, and the fact that they paid cash for 40 phones, that alarmed store employees.

Thus began a long nightmare for the three young men, one that would see them arrested and branded “cell phone terrorists” on the nightly news, immediately tried and convicted by media jury. Even later, when it was apparent that the trio was just trying to make money by reselling goods, their legal troubles only intensified, as the cell phone maker sought to make of them an example to any others looking to get into the same line of business.

When a caro police officer pulled them over, they were certain that any questions about their phone purchases would quickly be resolved. They had been stopped a few days earlier in Wisconsin, questioned, and let go.

“All we did is buy the phones to sell and make money,” Louai Othman pleaded to a magistrate judge later that morning. “We’ve been checked by the FBI before. They gave us their card and everything.” After their bonds were set at $75,000, Maruan Muhareb said flatly: “We are innocent. We have done nothing wrong.”

The seriousness of the charges “was what really blew their minds,” says Nabih Ayad, a Dearborn, Michigan, lawyer who took their case.

The chief prosecutor in primarily rural Tuscola County said the 999 phones they had in their van were more than suspicious, given how they could be used to detonate bombs, and their camera contained pictures of the landmark Mackinac Bridge. Although he offered the public no proof of a plot, he said the group was targeting the bridge. He filed state terrorism charges that could have sent them to prison for 20 years.

Alberto Gonzales, the U.S. attorney general at the time, turned up the heat when he said the suspicion was warranted: “I don’t know how many of you have ever gone to a store to purchase 80 to 100 cell phones at a time. I would consider that somewhat unusual and I think it would be perfectly legitimate to say, ‘Hey, is there anything going on here?’ ”

Within three days, though, the charges fizzled. The FBI, well acquainted with the cell phone resale trade, said the Texas men had no terrorist ties. The bridge pictures turned out to be harmless tourist snapshots, as were the others of ducks, geese, and trees. “Michigan is a very beautiful state,” Louai Othman told reporters after he was released from 11 days in custody and returned to the drab, brown stucco garden apartment off Highway 80 where his wife and relatives had been harassed by neighbors as terrorists and “Arabians.”

TracFone, though, was hardly finished with the Othmans and their cousin. It guided the U.S. attorney in Michigan in filing criminal charges against the three related to reselling phones, and the company is following up today with a campaign to hit more than three dozen resellers, including middlemen such as Wireless Way and at least 10 others in Dallas, with onerous federal civil lawsuits.

It turns out that the resale of prepaid phones, a back-of-the-van cottage industry that exploits a big hole in TracFone’s business plan and those of its competitors, is really the issue with this product—not terrorism. And though the company disagrees about a practice that is costing it millions, some lawyers say it is perfectly legal, as legal as selling used books and as American as making a buck.

The economics of the issue are simple. In an affidavit filed in December in a federal civil case in Dallas, Jill Garcia, TracFone’s senior vice president of quality, explained that the Miami-based company sells its TracFone or Net 10 brand phones to consumers for “substantially less than its cost.” The company recoups that loss through profits earned on the sale of airtime cards that are required to load prepaid minutes into the phone and make it work.

Abroad, companies don’t sell handsets as cheaply, meaning a Nokia TracFone bought at Wal-Mart in the United States is worth anywhere from a few dollars more to as much as $50 more in Hong Kong or South America. The resellers simply help get it there. So the business involves runners like the Othmans who gather phones at discount stores, and middlemen buyers, often owners of cell phone shops or warehouses, who in turn ship the phones abroad or to other middlemen with overseas contacts.

The federal complaint filed against the Othmans, the first of its kind, alleged that phone reselling amounts to a criminal conspiracy to traffic in counterfeit goods, a crime punishable by up to 10 years in prison. The counterfeiting violation was said to occur when the cell phones are altered and repackaged, allegedly in bogus Nokia wrapping. Ayad, the Michigan defense lawyer, says the state terrorism charges were clearly an overreaction by small-town lawmen, one he believes was fueled by ethnic profiling and the men’s Middle Eastern heritage. The federal case was more calculated, he claims. “It was meant to create a chilling effect among people reselling these phones. Many are of Middle Eastern descent,” he says.

At a preliminary hearing in Bay City, Michigan, a month after their arrests, an FBI agent testified that the three admitted they knew the phones were destined to be sold abroad. “These were just young people trying to make a profit,” countered Ayad. “There are new ideas every day and that’s all these kids were doing: using a new idea to make money.” Because the crime allegedly occurred with the next step, when the phones were reprogrammed, the federal magistrate was interested in the government’s proof of tampering with the phones. It had none. “We don’t even know who these people are,” U.S. Magistrate Charles Binder said in throwing out the charges. “I find no evidence that the defendants agreed with anyone to alter or reprogram these phones.”

With the Feds on the sidelines, TracFone launched its own offensive. It hired private detectives, identified some of the largest resellers, many in Dallas and South Florida, and hit them by the dozen with federal civil suits alleging, among other things, trademark and copyright infringement and civil conspiracy.

After the three men returned home, the company sent them cease-and-desist letters, but the warnings were not really needed. Their ordeal in Michigan was enough to scare them out of the phone business for good. Besides, the government kept the phones that had been confiscated in Caro. The trip was a total loss.

Bob Ali, co-owner of Gasboy Texas Inc., a cell phone warehouse in Carrollton, says his brother wanted to fight the suit filed against them, but it didn’t make business sense to spend that much. “Prepaids were only 5 percent of our business, so the cost didn’t justify it. They’re a public company that could have fought us until they won,” says Ali, whose business sells refurbished phones in the United States and abroad.

Dallas lawyer Molly Richard says TracFone is just bullying small entrepreneurs like the Othmans, who, if they could defend themselves from TracFone’s legal squad, have the law on their side. “We’re a free country. There are a whole bunch of [civil court] cases that say once you put something out in the marketplace for sale, you can’t control what people do with it after they buy it,” she says. “If you want to put it on eBay and earn a few extra dollars, you can do that.” Which seems like a simple argument. Unless you’ve been branded a cell phone terrorist for doing just that.

The trade goes on, though. On Harry Hines, Dallas’ grand boulevard of second-hand goods, Wireless Way owner Jalaluddin Charanya says many people he knows in the prepaid business have been scared away, whether the law is on their side or not. But with money to be made, others have taken their place.

“You can’t hold something like that back,” he says.

Write to Tom Korosec at [email protected].

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