Silicon Valley Espionage Case: Feds Accuse Man of Trying to Sell Software to Asian Military Buyers

By Tom Abate, John Coté, Chronicle Staff Writers
Friday, December 15, 2006

Federal prosecutors in San Jose say a "former Chinese national" living in Cupertino stole night vision training software from a Silicon Valley defense contractor and tried to sell it to military buyers in Thailand, Malaysia and China.

A federal indictment announced Thursday against Xiangdong Sheldon Meng is being pursued under the 1996 Economic Espionage Act, a federal law intended to give prosecutors more power to reduce industrial theft.

U.S. Attorney Kevin Ryan, whose office oversaw the investigation, issued a statement saying the technology involved made the charges particularly serious.

"The alleged economic espionage and theft and export of trade secrets such as these -- visual simulation training software that has military application, no less -- has real consequences that could jeopardize our country's military advantages in the world," he said in the statement.

He added in an interview: "We own the night. And there are people who want to take it from us."

In an unrelated corporate espionage case, two other men pleaded guilty in federal court in San Jose Thursday to stealing civilian chip technology from two Silicon Valley firms. The guilty pleas by Fei Ye, a U.S. citizen, and Ming Zhong, a permanent U.S. resident, are the first convictions ever under the 10-year old Economic Espionage Act.

Ye and Zhong face maximum prison terms of 15 years, although U.S. District Judge James Ware is expected to take their guilty pleas into account when sentencing them in April.

The attorneys representing the two men did not return calls for comment.

San Francisco attorney Ross Nadel, a former U.S. prosecutor who initially worked on the Ye and Zhong case, said Thursday's guilty pleas and the new indictment could help provide a deterrent.

"It should send a message in Silicon Valley and beyond that the government and federal law enforcement are serious about economic espionage, particularly when it involves Silicon Valley trade secrets going overseas," Nadel said. "That's a serious matter."

The 36-count criminal indictment against Meng alleges that he stole night-vision training software and other simulation tools from Quantum3D, a San Jose defense contractor for whom he worked between 2000 and 2003. The indictment alleges violations of several federal statutes, including the Economic Espionage Act and the Arms Export Control Act -- charges that could lead to hefty fines and lengthy jail terms.

Meng, 42, is free on $500,000 bond and is scheduled to appear Monday before United States Magistrate Judge Howard Lloyd in San Jose.

But Meng's attorney said her client is innocent.

"There is no evidence supporting these charges," said federal public defender Angela Hansen. She noted that the indictment announced Thursday superceded an earlier, single-count charge of interstate transportation of stolen property.

"The government has misinterpreted innocent acts," she said.

According to the indictment, Meng returned to China after he quit working as a systems engineer and consultant for Quantum3D in 2003. It alleges that he showed the company's software -- including the night vision training system -- to Thai and Malaysian air force officials and to Chinese government agencies and aviation firms.

"It's a small community, and someone at an event in China saw our software on a competitor's hardware,'' said Ross Smith, president of Quantum3D, which informed the FBI.

The guilty pleas entered Thursday by Ye and Zhong recount how the two men knowingly stole trade-secret chip designs from two Silicon Valley firms, Transmeta and Sun Microsystems, with the intention of using these designs to start a chipmaking firm with financial backing from the city of Hang- zhou and the provincial government of Zhejiang, both in China.

In a dramatic development that made headlines at the time, the two men were arrested at the San Francisco International Airport in November 2001 as they prepared to board a plane for China.

Steven Fink, a Los Angeles-based consultant on economic espionage and author of the book "Sticky Fingers: Managing the Global Risk of Economic Espionage," contends that such prosecutions are rare because federal prosecutors are wary of using the statute.

"The short answer is the government is afraid to use it," Fink said. "They don't want to antagonize certain foreign governments."

Fink welcomed Thursday's guilty pleas but said any deterrent effect would be determined by the sentences.

"It's about time," Fink said. "It's been 10 years. And what happened to all the other cases that slipped through their fingers? There is virtually no deterrent against people and foreign governments that want to steal our trade secrets."