I have no idea how such a stunt could
be pulled off. But extremely clever in that most of us, me included,
would not think to check the capacity.

Is this a case of "if its too good to be true - it is" case?

Not in all cases. Some are finding their way into worldwide markets & being
sold at similar prices to the genuine item.
Admittedly ours were purchased at around 60% of the retail prices here but
that is not uncommon for the many good quality products we've obtained over
the years from Asian based sellers.

Apparently the chips are hacked via firmware to display a much higher than
actual capacity.
Our research has shown a huge variety of units on the market from large
numbers of sellers.
Some displaying well-known names including Samsung.
I still wish to buy an 8 or even a 16GB drive to try with Ubuntu but who do
I trust after being stung by 3 different units from 3 sellers?

Who to trust? I'd say one of the larger retailers who offer 16 -day or
30 day money back if not satisfied. I bought a remote drive caddy (£10
in UK about the same price for a larger flash drive) and put an old 20
GB for storage with another for backups. With linux updates every 6
months i only keep the system on the actual machine hard drive - saves
the risk of doing an install of a new release and wiping away valuable
data!

Not the place I would go for Flash Drives given that they are now
competitively cheap in local stores.

I was meaning the sort of retailers that offer money back guarantee.
In the UK that is people like Staples, and including supermarkets like
Asda and Tesco. Many smaller local shops also offer that sort of
service.

eBay and local Sunday market are worth avoiding - generally speaking
that is... i bought a decent flash drive from a genuine enough trader
- always read feedback very carefully. You get what you pay for in all
honesty.

I would get a straight exchange from the shops I mentioned

All very well if you have access to a local store selling "competitively
cheap" PC components..
When due to location your only viable option consists of mail-order, at
least ebay offers limited protection in offering feedback & paypal.

I buy a lot by mail order and go to people who are safe and reliable.
Ebuyer(UK) are excellent. I had a problem with an item worth about
£20; on the morning it was delivered i tested the item, found it
faulty, and telephoned them at lunch - a replacement was dispatched
that afternoon arriving the following morning. That is excellent
service and no worry about whether the item will arrive like there is
on ebay (one or two of mine haven't which could have been genuinely
lost in the post).