Silicon Valley Espionage Case

Tom Abate and John Coté, San Francisco Chronicle, Dec. 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.

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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 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.

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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.

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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.”

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A Silicon Valley engineer was charged Thursday with stealing trade secrets from a San Jose software company and attempting to sell them to foreign governments and agencies, including the Royal Thai Air Force.

Xiaodong Sheldon Meng, 42, a Canadian citizen of Chinese origin, living in nearby Cupertino, California, has been indicted on 36 felony counts, including economic espionage to benefit a foreign government and various violations of military technology export laws.

Prosecutors say Meng stole the underlying code for software made by Quantum3D Inc. that is used to train military fighter pilots, and tried to sell it to the Royal Thai Air Force, the Royal Malaysian Air Force and a company with ties to China’s military.

He apparently failed. No foreign government or agent was named as a conspirator in the case.

Under US law, anyone attempting to sell such information overseas must first obtain a licence from the State Department and is subject to strict regulations. Xiaodong never applied for or received such a licence.

His case marks only the third time prosecutors have charged someone with economic espionage to benefit a foreign government, the most serious crime under the Economic Espionage Act of 1996.

Guilty pleas were also expected Thursday in one of the other cases. An afternoon hearing was scheduled in San Jose federal court for Fei Ye and Ming Zhong, two other Silicon Valley engineers with ties to China who are also charged with economic espionage to benefit a foreign government.

Their conviction on that charge would be the first since the economic espionage law was enacted. But prosecutors declined to discuss the terms of the plea deal.

Fei, 40, a US citizen from China, and Ming, 39, a permanent resident of the US from China, had been scheduled to go to trial in January.

They are charged with stealing confidential microchip blueprints and other trade secrets from their employers and attempting to smuggle them to China. The indictment alleges they planned to start a microprocessor company with the financial backing of various Chinese government agencies.

Bangkok Post, Dec. 15, 2006

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