Spy Charges In High-Stakes Microchip Race

By JOSH GERSTEIN - Staff Reporter of the Sun

SAN FRANCISCO - China's effort to acquire secrets from Silicon Valley's high-tech industry is facing renewed scrutiny after federal prosecutors filed new charges of economic espionage in the high-stakes race to improve microchip design.

Lan Lee, 42, of Palo Alto, and Yuefei Ge, 34, of San Jose, were arrested Friday after a grand jury charged them with theft of trade secrets and conspiracy. The two men allegedly conspired to steal technical descriptions of a chip in development by their employer, Net-Logic Microsystems of Mountain View. The pair also is accused of swiping chip design software from the Taiwan Semi-Conductor Manufacturing Company, which has facilities in San Jose.

"A tremendous amount of resources go into producing the chips and software that are designated as trade secrets, and we are committed to the prosecution of individuals who steal those trade secrets in an attempt to get an unfair advantage in the technology industry," the U.S. attorney for Northern California, Kevin Ryan, said in a statement.

Mr. Lee, who is an American citizen, and Mr. Ge, who is a national of the People's Republic of China, appeared before a federal magistrate in San Jose on Friday and were released on a $300,000 bond, the statement said. No pleas have been entered in the case.

An attorney for Mr. Lee, Thomas Nolan, said in a brief interview yesterday that he was caught off guard by the indictment, which stems from alleged events in 2003.

"To the best of our knowledge, there hasn't been anything happening," Mr. Nolan said. "I'm surprised to hear about this after over two years."

Mr. Ge's attorney, John Williams, could not be reached for comment yesterday. A consultant who advises firms on protecting trade secrets, Steven Fink of Los Angeles-based Lexicon Communications, said schemes to steal proprietary information are having a staggering impact on American businesses. "It's going on all the time, every day, and every company is at risk," he said. "The theft of trade secrets is the single biggest crisis facing American business today. It accounts for $250 billion a year in losses."

The indictment accuses Messrs. Lee and Ge of setting up their own Delaware corporation, SICO Microsystems Incorporated, to obtain venture capital based on stolen secrets about 130-nanometer microchips.

"That was pretty state-of-the-art then. Right now, it's standard production for the big companies, but back then it was new," an adviser on valuing intellectual property, Lloyd Nirenberg of Los Gatos, told The New York Sun. "To have those parameters is a big deal. To know what the competition's parameters are is a big deal,"

According to the indictment, Mr. Lee's home computer contained a contract under which SICO would get capital from a company based in mainland China, Beijing Electronic Development Company Limited.

FBI and customs officials told USA Today last month that China is the leading espionage threat to America. According to an FBI tally provided to the newspaper, 25 Chinese nationals or Chinese Americans have been arrested in technology-related cases in the past two years, a figure the agency said was unprecedented.

Last month, a Taiwanese businessman, Ko-Suen Moo, pleaded guilty in Miami to charges he attempted to purchase cruise missiles and military parts for communist China. In southern California, five members of one family are facing federal charges in connection with an alleged scheme to smuggle to China secrets about American Navy warships.

However, Mr. Fink said the American government's overall track record at punishing and preventing economic espionage is weak. "The government has not effectively and not successfully prosecuted these cases," he said. "Most of these cases end in plea bargains. Take a look at what the original charges were and what sentences were received. In almost every case, they are slaps on the wrist."

Mr. Fink said the new chip-theft charges are reminiscent of a case filed in New Jersey in 2001 against three men accused of stealing sophisticated computer software developed by Lucent Technologies for handling voice calls over the Internet. The program, called PathStar, was reportedly generating $100 million in annual sales for Lucent shortly before the alleged theft.

The PathStar case, which was announced with great fanfare, has since petered out. One of the defendants, Hai Lin, jumped bail in 2004 and, according to prosecutors, has probably returned to China. Last year, the charges against the other two defendants, Kai Xu and Yong-Qing Cheng, were dropped, after the technology firm the trio founded agreed to pay a $250,000 fine.

"Do the math," Mr. Fink said. "Look at the potential versus the risk. It's worth it."

While Messrs. Lee and Ge were charged under the Economic Espionage Act, passed in 1996, they were not charged under a provision that applies to crimes that "benefit any foreign government, foreign instrumentality, or foreign agent."

Mr. Fink said the State Department has discouraged use of that provision, which carries harsher penalties, perhaps for fear of causing diplomatic upset.

If convicted on all charges, Messrs. Lee and Ge face the possibility of up to 60 years in prison and fines of up to $1.5 million. However, the men would likely be sentenced in accordance with federal guidelines that provide for more lenient punishment in most cases.

June 19, 2006