Cellular phone firms lost millions to ingenuity of two hackers

June 15, 1991|By John J. Keller | John J. Keller,Reprinted by permission of The Wall Street Journal 1990 Dow Jones & Co. Inc. All rights reserved

Robert Dewayne Sutton wants to help stop the tide of fraud sweeping the cellular telephone industry. The 35-year-old clearly knows plenty about fraud. After all, he helped spark the crime wave in the first place.

Mr. Sutton is a computer hacker, a technical whiz who used an acquaintance's home-grown computer chip to alter cellular phones so that they dial for free. Mr. Sutton went into business selling the chips, authorities say, and soon fraudulent cellular phone calls were soaring nationwide.

In February 1989, federal agents finally nabbed Mr. Sutton in his pickup truck at a small Van Nuys, Calif., gas station. He was about to sell five more of the custom chips to a middleman. But by then it was too late. The wave of fraud Mr. Sutton had helped launch was rolling on without him.

All those free calls are adding up: Experts say the industry is out about $200 million a year -- more than 4 percent of annual U.S.revenue -- because of fraud involving cellular phones, which transmit calls via high-frequency radio waves. Cellular industry investigators and the U.S. Secret Service, which handles phone crime, have uncovered numerous scams along with Mr. Sutton's, including instances where access numbers of legitimate customers have been stolen from phone company offices.

"Our fear is that cellular fraud could reach $600 million next year ,, and that there are no security departments at the cellular companies to deal with it," says Earl Devaney, who is in charge of the Secret Service's fraud division. "Managers are just waking up to the problem."

Mr. Sutton, on the other hand, spotted the opportunity some time back. About seven years ago, the soft-spoken chain smoker, who liked to tinker with motorcycles, took a used computer as partial payment for a car he sold. It proved a watershed event in his life. Soon Mr. Sutton was programming the thing like an expert. "I knew I wasn't an idiot; anything I do I'm pretty good at," he says in an interview.

His foray into computers soon led to the soul of the machine itself: the memory chips that produce the programs. Mr. Sutton, who lives in Saugus, Calif., taught himself to "burn," or reprogram, a chip, a complicated process that involves electronically altering the chip's software. It also led to swapping tips with other hackers, such as Kenneth Steven Bailey, an acquaintance who lived in Laguna Niguel, Calif.

It was Mr. Bailey, investigators say, who actually cracked the cellular system. In early 1987, Mr. Bailey allegedly took apart a Mitsubishi cellular phone and discovered that he could use a personal computer to rewrite the software in the phone's memory chip. Authorities say his new program made it possible to change the phone's unique electronic serial number, which tells a cellular phone company's computers to accept a phone call and let it pass. By replacing the factory's chip with one of Mr. Bailey's homemade devices, a user could gain free access to the phone system.

Keen to control his new market, Mr. Bailey allegedly included a security check in his program that forced users to return to him each time they wanted to transfer the program to a new phone, investigators say. That way, the program couldn't be copied.

But fate worked against Mr. Bailey, investigators say. One night, during a party, he allegedly asked Mr. Sutton's help in rebuilding a portion of his computer. In the course of his tinkering, Mr. Sutton ran across Mr. Bailey's special program, investigators say. He decided to copy the program but made one crucial omission: He left out the electronic security check.

Now Mr. Sutton had a much-in-demand program, which authorities say he eventually sold for several hundred dollars a copy. (Mr. Sutton denies he sold the chips, though he admits to making them.) But he also had no control over its spread: Anyone who had a copy could now duplicate it at will. Soon, the program was spreading like wildfire across the country.

Pirate phone operations sprang up from Queens County, N.Y., to Southern California. Simply give a few dollars to the guy in the parked car with the blacked out windows, police say, and he'll let you hop into his back seat and call anywhere in the world for 15 minutes.

"Top-level cocaine traffickers and money launderers have these phones," says Patrick McCurry, a lieutenant in the San Bernardino, Calif., Sheriff's Office. "In fact, we haven't arrested anyone recently with a legitimate cellular phone."And all of the altered chips can be traced back to the basic Bailey-Sutton design, the police say.

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