Two Silicon Valley Engineers Indicted For Economic Espionage Aiding China

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  • 03/02/2023

When Fei Ye showed up at San Francisco International Airport on Nov. 23, 2001, holding a ticket for United Airlines Flight 857 to Shanghai, he may have appeared to be just another flyer heading to the People’s Republic of China (PRC).

Only a week before, Ye, a naturalized U.S. citizen originally from China, had requested family leave from his job at Transmeta in Santa Clara, Calif. His parents were ill, he told his boss, and he wanted to return home to care for them.

The managers at Transmeta might have taken Ye’s planned China trip at face value-but one of Ye’s associates in another enterprise did not.

On November 16, the day after Ye requested his leave, Sun Li contacted the Palo Alto field office of the Federal Bureau of Investigation (FBI). The FBI immediately called him in for an interview.

Li, FBI Special Agent Kevin Koelbel explained in an affidavit submitted to the U.S. District Court in San Jose, was a partner with Ye and Ming Zhong (a Chinese national with permanent residency in the United States) in a company called Supervision Incorporated.

"Supervision Incorporated is an early-stage start-up providing silicon products for high-speed processing of data, voice, and video in a next generation enterprise," Li told Koelbel, Koelbel alleged in the affidavit. The company was "working to develop extremely high-performance, power-efficient, highly integrated processors."

The company was created to manufacture microprocessors not in the United States, but in the People’s Republic of China (PRC), according to information prosecutors presented to the court.

"Ye has more than once verbally disclosed to Li that he has downloaded proprietary and/or trade secret information from current and former employers," Li told Koelbel, the affidavit said. "Ye intends to use this information to develop a new microprocessor in China. Li has never seen these documents himself; however, Ye often mentioned that he (Ye) was designing a microprocessor using the information he has taken from his current and past employers."

Where did Ye and his partners get financing for this company? "Supervision Incorporated has received $2 million in funding to develop a new microprocessor from the local governments of Hangzhou and Guanzhou, China," Li told Koelbel, accordingly to the affidavit.

Thanks to Li’s interview with the FBI, federal authorities were waiting for Ye a week later when he arrived at the airport with partner Zhong, who was traveling with him. After the two checked into their flight, Customs Service officials pulled them aside and did a "routine border search." Executives from Transmeta and Sun Microsystems, where Ye had previously worked, were standing by to see the results.

Two officials from Transmeta told the authorities, according to Koelbel’s affidavit, that "documents in Ye’s luggage pertaining to Transmeta consisted of four compilations of Transmeta confidential and proprietary documents. . . . The compilations included circuit and component layout design schematics. All of the documents were labeled ‘Transmeta Corporation-Confidential and Proprietary.’"

The Transmeta officials also examined and identified materials taken from Zhong’s carry-on bag, which, according to the affidavit, "included two folders of Transmeta confidential and proprietary documents."

An official from Sun Microsystems, said the affidavit, told the authorities that the materials in Ye’s luggage included "schematic drawings" of a Sun microchip. The drawings were marked "Sun Proprietary." Also included was a manual that "describes how to build" two other Sun chips. "All the documents in the manual are marked ‘Sun Proprietary Need-to-Know,’" said the affidavit.

According to prosecutors, a search of Ye’s home turned up more trade secrets from Sun and also from NEC and Trident. Zhong, the prosecutors allege, also had trade secrets from Trident at his home and in his office at Transmeta.

The two were arrested at the airport and later released on bail. After a follow-up investigation led by Assistant U.S. Attorney Ross Nadel, San Francisco-based U.S. Attorney Kevin Ryan charged Ye and Zhong in one of the first-ever economic espionage cases under a law enacted in 1996. Ryan also charged the two with possession of stolen trade secrets, foreign transportation of stolen property, and conspiracy.

But the economic espionage charges are by far the most significant in terms of U.S. public policy and national security.

To convict Ye and Zhong of economic espionage, prosecutors must prove they knowingly used stolen trade secrets with the intent to benefit a foreign government.

According to the indictment filed on December 4, investigators found a corporate charter in Ye’s home "which states that the joint-venture will raise China’s ability to develop super-integrated circuit design, and form a powerful capability to compete with worldwide leaders’ core development technology and products in the field of integrated circuit design."

The indictment also said Zhong had a document in his home that states: ". . . The Chinese Group of Experts are unanimous in thinking that: implementation of the Hangzhou Zhongtian Microsystems Ltd. project possesses tremendous significance with regard to both the autonomous Chinese development of an embedded CPU and for the basic development of system chips; the project will be extremely useful to the development of China’s integrated circuit industry; and they suggest that every level of government offer their support toward the implementation of this project."

Why would the PRC be so keen on acquiring what Ye and Zhong were allegedly bringing them?

The indictment charges that the two intended to benefit the PRC’s 863 Program-a project investigated by the House Select Committee on U.S. National Security and Military/Commercial Concerns with the People’s Republic of China (commonly called the Cox Committee, after its chairman, Rep. Chris Cox, R.-Calif.).

The 863 Program, said the Cox Committee’s unanimous bipartisan report, was founded by the late Chinese Premier Deng Ziapoing "to accelerate the acquisition and development of science and technology in the PRC."

"If successful," said the Cox Committee, "the 863 Program will increase the PRC’s ability to understand, assimilate, and transfer imported civil technologies to military programs."

The PRC, added the Cox Committee, "often does not rely on centralized control or coordination in its technology-acquisition efforts."

Indeed, the committee noted, "Whereas Russians were severely restricted in their ability to enter the United States or to travel within it, PRC nationals, most of whom come to pursue lawful objectives, are not so restricted. Yet the PRC employs all types of people, organizations, and collection operations to acquire sensitive technology: threats to national security can come from PRC scientists, students, business people, or bureaucrats, in addition to professional civilian and military intelligence operations."

In a press release, the San Francisco U.S. attorney’s office said that although Ye and Zhong are charged with intending to benefit the government of China, "The indictment does not charge that the Chinese government was a conspirator."

Ye’s lawyer Paul Meltzer was asked if he contested any of the alleged factual information in Koelbel’s affidavit or the indictment? "Absolutely," said Meltzer. "We don’t believe that my client had proprietary trade secrets, and more importantly we don’t think that these are the sorts of things that one would take to China for the project that was being contemplated there. You don’t take apple seeds to grow oranges." Meltzer would not answer any additional questions. Zhong’s lawyer did not return calls.

The picture of Chinese technology-gathering painted by the Cox Committee raises the question of whether the charges against Ye and Zhong, if proved, will represent just an isolated case of economic espionage in the homeland of the U.S. electronics industry, or the tip of an iceberg.

Either way, the indictment is another signal that priorities have changed in the Justice Department since the Janet Reno years-when the department failed to successfully prosecute anyone for the theft of nuclear-warhead-design information from the U.S. Department of Energy.

"Theft and trade secrets and economic espionage represent a significant threat to the Silicon Valley and the nation’s economy," said U.S. Attorney Kevin Ryan, who is a Bush appointee. "We will use the resources of the federal government to protect the integrity of the economy, particularly where there are allegations of economic espionage."