The scam saw a Wenzhou Apple shop owner turning in what he claimed were 121 iPhone 4S BAND parts (the core of the phone, worth about $476 each) that were broken and asking that they be replaced back in December of 2012. Apple complied, but in January discovered that the parts he submitted as broken were actually counterfeits. They reported this to the shop, which claimed innocence and reported the case to the police.
According to the report, one of the shop's engineers and her boyfriend were arrested on April 1 over the scam, with several other employees at the shop also having been arrested after being implicated.
Counterfeit iPhones are prevalent in China, and Apple has reportedly had only mixed success in receiving cooperation from authorities in cracking down on the issue.
Earlier this month, Apple altered its warranty policies for iPhone 4S and 4 repairs in China following criticism from state-run media, ensuring that replacement devices would be entirely with a full one-year warranty along with offering clearer support information and additional training for service providers.