Two Silicon Valley Cases Raise Fears of Chinese Espionage

U.S. Agents Try to Tie Alleged Tech Thefts To Companies Run by Chinese Government

By JOHN R. WILKE
Staff Reporter of THE WALL STREET JOURNAL

SAN JOSE, Calif. -- Federal agents are investigating whether Chinese companies were involved in alleged attempts to steal vital commercial technologies from two Silicon Valley companies.

Authorities see the two cases as part of an emerging pattern of trade-secrets theft aimed at helping Chinese enterprises. In both instances, the alleged thieves were arrested at San Francisco airport as they tried to board flights to China. The technologies at issue include computer-chip designs and software used to find oil and gas, executives of the allegedly targeted U.S. companies and federal officials say.

Investigators haven't found any links in the cases to China's state security apparatus, but they have uncovered ties to other government-controlled entities. Central- and local-government entities own most businesses in China, but they often are autonomous and pursue profits aggressively.

Denials by Chinese Government

A Chinese Embassy official in Washington said there was no central-government involvement in the cases, calling them isolated instances carried out by individuals. "There are several cases like this now in Silicon Valley," the official said. Likewise, a consular spokeswoman in San Francisco called such incidents "personal behavior [that has] nothing to do with the China government."

Prosecutors haven't charged any government entity in either of the pending cases, and there is no suggestion the two are connected. But the prosecutors and Federal Bureau of Investigation agents have noticed an increase in industrial spying by individuals associated with Chinese companies. While French and Japanese companies have been implicated in past economic espionage cases, federal officials suspect Chinese entities are now among the worst offenders. Experts say economic espionage of all stripes is on the rise, causing at least $45 billion in annual losses for the 1,000 largest U.S. companies, according to a PricewaterhouseCoopers survey released in 2001.

Federal officials say the problem is especially prevalent in California's Silicon Valley, where stealing a company's crown jewels can be as easy as clicking a computer mouse. "The losses to companies can be astronomical," says federal prosecutor Ross Nadel, who investigates such cases as chief of the San Francisco U.S. attorney's computer-hacking and intellectual-property unit. In addition to the pending criminal cases, Mr. Nadel said many other attempts to steal trade secrets for companies in China and elsewhere have been thwarted by FBI agents during the past two years, though prosecutors were unable to secure indictments in some instances. Prosecutions are hindered when "the victim companies don't come forward to report the crime or don't cooperate with federal officials" to avoid exposing their losses, he said.

"From a bottom-line perspective, economic espionage makes great sense -- it's relatively easy, and there's little chance of getting caught or punished," said Steven Fink, president of Lexicon Communications Corp., a Los Angeles firm that advises companies on how to prevent such losses.

In the most recent case, an indictment that was filed in federal court here last month alleged that two California residents conspired to steal secrets from four companies, including Sun Microsystems Inc., NEC Electronics Corp. and TransmetaCorp., the developer of an innovative new laptop computer chip. The men -- Fei Ye, an American citizen living in Cupertino, and Ming Zhong, a Chinese national living as a legal resident in San Jose -- had been arrested at the airport a year earlier, allegedly as they tried to fly to China with trade secrets in their luggage. Their arrests attracted little attention at the time.

Ties to City of Hangzhou?

The indictment alleges the men had ties to a Chinese government technology-development program and the southeast China city of Hangzhou, which is trying to expand its electronics industry. The indictment says the city helped fund a joint venture, Hangzhou Zhingtian Microsystems Co., formed by the men to commercialize the stolen technology. Federal agents found correspondence between the men and officials with the technology program -- formally known as the National High-Technology Research and Development Program of China -- as well as the joint venture's charter. One document, translated by the FBI, said a government "panel of experts" found the venture would have "a positive effect on development of China's integrated-circuit industry" and recommended that "every government department implement and provide energetic support."

People familiar with the matter say investigators are actively studying what role, if any, the city and the technology program played in the alleged conspiracy.

Economic Espionage Act Used

Both men have denied the charges through lawyers, saying the documents in their luggage weren't trade secrets. Hangzhou officials said they had never heard of Hangzhou Zhingtian Microsystems or the two men in the indictment. A supporter of one of the defendants suggested that ethnic bias may have played a role in the investigation, asserting that the men wouldn't have been arrested "if these had been white businessmen flying to Ireland."

The two men were charged under the rarely used Economic Espionage Act of 1996, which outlaws possession of stolen trade secrets with the intent to benefit a foreign nation. When the law passed, then-FBI Director Louis Freeh called economic espionage the "greatest threat to our national security since the Cold War."

Under the law, trade-secret thieves can be charged with economic espionage even if they act without the direction of a foreign company or government. For example, two Lucent Technologies Inc. employees were indicted in 2001 on federal economic-espionage charges for allegedly stealing the software code of a popular voice- and data-management product called Pathstar. They created a joint venture with China's state-owned phone company, Datang Telecom Technology Co., but prosecutors didn't allege that the company knew in advance that the software was stolen. The case is awaiting trial in New Jersey.

In another case under investigation here, an employee of PetroChina, a state-owned oil company, is alleged to have illegally downloaded the secret design -- or "source code" -- of one of the world's most powerful software tools for locating oil and gas deposits. The employee, a Chinese national named Yan Ming Shan, was training on the software at 3DGeo Development Inc. in Mountain View, Calif., and copied it into his laptop, a federal indictment alleges. He was arrested at San Francisco airport in September and remains in Santa Clara County Jail, on federal charges of fraud and unauthorized computer entry.

While he isn't charged under the economic-espionage act, the FBI is continuing to investigate his actions and could seek a superseding indictment adding new charges, as they have done in other recent cases, law enforcement officials said. Executives of 3DGeo said FBI agents recently subpoenaed the PetroChina employee's e-mails and other evidence.

The defendant has pleaded not guilty through his lawyer, Nick Humy of the federal public defender's office in Santa Clara. An official in PetroChina's Houston office declined to comment, referring inquiries to the company's headquarters in China; officials there didn't respond to inquiries.

Employee Surveillance

A unit of PetroChina sent its employee to the U.S. for training on 3DGeo's seismic-imaging software, which uses proprietary algorithms to sift through seismic data and locate oil deposits. Dimitri Bevc, 3DGeo's co-founder and chairman, said employees "were keeping an eye on" Mr. Shan because two years earlier another PetroChina employee had entered the company's offices on a weekend and entered its computer network without permission.

One day last September, a 3DGeo employee noticed that something was awry with his computer. The employee discovered that Yan Ming Shan had transferred the company's most precious software source code from the network to this employee's computer. Later, the software was discovered on Yan Ming Shan's laptop, prosecutors alleged.

Employees of 3DGeo confronted him about the transferred files in early September. A week later, on Sept. 17, he was arrested at the airport as he prepared to board a plane to China. Later, FBI agents found a program called "Crack" on his laptop, which is used to break passwords and gain unauthorized access to computer networks. They discovered that when a group of company officials from China had visited Yan Ming Shan several weeks earlier, one of them bought him a detachable disk drive capable of storing large amounts of data.

"It could have killed the company" if he had successfully stolen the source code and given it to his employer, said Mihai Popovici, 3DGeo's chief executive. He added, however, that 3DGeo hopes to continue working with PetroChina, which told 3DGeo executives it had no knowledge of any intention by Yan Ming Shan to steal company secrets.

"Companies are under attack and at great risk," said Lexicon's Mr. Fink, author of "Sticky Fingers," a new book about economic espionage. "They need to take steps to protect themselves."

January 15, 2003

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