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Along Harry Hines Boulevard, three men arrested in Michigan last week weren't known as potential terrorists. To shop owners there, they were seen as ambitious young businessmen. "They seemed like good guys, young, hard-working," said Jalal Charanya, owner of Wireless Way, which sells prepaid cellphones. "There are many guys selling these kinds of phones ... but they were probably my biggest supplier." Louai Othman, Adham Othman and Maruan Muhareb have been cleared of terrorism allegations. However, they were charged Wednesday with fraud and money laundering in connection with their mass purchases and sales of cellphones. They were known to sell as many as 200 cellphones at a time to Dallas businesses. Such commerce was not unusual for businessmen such as Mr. Charanya who are looking to buy cellphones for resale. The trio is among a group of entrepreneurs who buy prepaid phones in stores and then resell them -- some for use in the United States, others to be exported, stripped down, repackaged and resold for profit in places such as Hong Kong and other foreign markets. But it's a major irritation to the U.S. wireless phone companies that sell the phones at a discount so that they can make money selling telephone connections by the minute. The participants say the enterprise is legal. But federal officials in Detroit charged the Texas trio with fraud Wednesday. The officials allege that the men's practices were damaging the phone companies and misleading the consumers who eventually buy the phones. Mr. Charanya said he does business with between 30 and 100 men in the area who buy discounted prepaid phones at places such as Wal-Mart and Target and then resell them to him for about $5 profit per device. In turn, Mr. Charanya and other businesses unload the cellphones in bulk, either to other suppliers in Los Angeles, New York, or Miami, and occasionally overseas. He said the strongest international demand for prepaid cellphones is in Hong Kong. There are at least a dozen businesses in Dallas and hundreds across the country that turn a profit on discounted prepaid cellphones. At each stop in the chain, from the original buyer, to the wholesaler, to the overseas merchant, the price of the cellphones increases. So a discounted handset sold at Family Dollar in Dallas for $29.99 may eventually sell for more than $100 in Asia or the Middle East. "All these phones are headed overseas," said Sean Mobh, manager of Wireless Wholesale Stop on Harry Hines Boulevard. "Nokia knows this is going on, Wal-Mart knows this is going on, there's no secret. Nobody says anything because everybody's making a few bucks' profit on these phones." Many of the phones in the trio's possession were Nokia phones packaged by wireless phone company TracFone and sold by Wal-Mart Stores Inc. Phone subsidies Miami-based TracFone has told investigators that more than 800,000 TracFone devices "have been fraudulently converted," according to the criminal complaint. In a statement, TracFone said it "subsidizes its handset prices at retail to make its cellphones affordable to its target customers." "Sales to these individuals cause extensive losses to TracFone, as these handsets are not used with TracFone service, and the practice greatly reduces the availability to those customers seeking to purchase and utilize TracFone products," said TracFone, which says it has about 7 million customers. While the majority of U.S. cellphone users sign up for one- or two-year contracts, many customers use so-called prepaid service, including pay-as-you-go plans in which users pay a set price for every minute of use. The phones typically come with a certain amount of minutes of use, and customers can buy additional minutes as they use their phones. TracFone, for example, sells 60 minutes for $19.99 or 120 minutes for $29.99, with the minutes expiring if they aren't used within 60 days. The advantage of prepaid service is that customers aren't bound to a contract and pay only for what they use. In general, users tend to be younger, people with credit problems, immigrants or people who just don't like contracts. Virtual operators Typically, companies offering prepaid service don't own their networks. While the big carriers such as Cingular Wireless and Verizon Wireless offer prepaid services, the majority of customers buy their service from the dozens of "mobile virtual network operators" such as TracFone that contract with the big wireless networks for service. Sprint Nextel Corp. has been particularly aggressive at working with MVNOs to use its network. As of June 30, Sprint had 5.3 million subscribers through its wholesale agreements, 10 percent of all customers who use the Sprint or Nextel networks. Neil Strother, research director for mobile devices at consulting firm NPD Group, estimated that 5.2 percent of cellphone sales in the past year were prepaid phones, including pay-as-you-go phones. He declined to speculate about the legality of gray-market sales of cellphones outside the manufacturers' distribution chain. A supporter of capitalism would say that there's nothing wrong with buying a cellphone and reselling it at a higher price, he said. That doesn't mean companies such as TracFone, Virgin Mobile and other MVNOs like the practice, he said. "Clearly they've put up some money to get those phones into those retail locations," he said. "They had to brand them and put a certain amount of software in there. It's probably rudimentary, but still ... It's a nasty swamp out there."
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