The Company Of Spies

Nuclear warheads. That's what comes to mind when the words China and espionage are put together. But a less geostrategic although perhaps more pervasive form of Chinese spying returned to the headlines last week--one focused not on ideology but on gutsy entrepreneurship and pure capitalism. No nukes this time. Instead, the target was technology for an advanced consumer-phone system. Arrested in the incident were a trio of business partners, all Chinese immigrants, including two employed by New Jersey-based Lucent Technologies. They had dreamed of an American shortcut to their country's capitalist road. In an e-mail pitch to Beijing venture capitalists, one of the accused said their company would become "the Cisco of China."

It was Lucent, however, and not Cisco that suffered the alleged theft in a case emblematic of a fresh direction in spying. Private companies and individuals were behind more than half the incidents of industrial espionage in 1999, the most recent year for which statistics are available from the National Counterintelligence Center. Chinese commercial spies--not necessarily working for their government--have joined a throng of other agents targeting American know-how, including those from such ostensible U.S. allies as Japan, Israel, France and South Korea.

Two of the Lucent suspects left China to seek academic and monetary success in America, part of an influx of foreign-born scientists and engineers who helped propel the U.S. to R.-and-D. dominance in the 1980s and '90s. Hai Lin, 30, got a Ph.D. from the New Jersey Institute for Technology in 1996, while his future colleague at Lucent, Kai Xu, 33, got a doctorate in 1995 from Rutgers. Both found work through a technology-employment firm that places talented technicians with companies that need their expertise. For two years they worked as "distinguished members" of Lucent's staff, making six-figure salaries and settling into comfortable lives in suburban New Jersey. It is not clear when the two made contact with the third suspect, Yong-Qing Cheng, a vice president at the New Jersey-based IT company Village Networks. But according to investigators, the combination of Lin and Xu's insider knowledge of Lucent and Cheng's salesmanship led to the development of a business plan: take the source code for the PathStar Server, build a company around it and market it in China. In July 2000, Cheng traveled to Beijing to meet with the Datang company, an octopus of a communications conglomerate officially owned by the government but, like most such firms, charting its own chaotic routes to riches. Cheng secured at least $1.2 million from Datang for a joint venture dubbed DTNET. Not bad for a little company launched in his New Jersey home and now impressively called ComTriad Technologies Inc.

But Lucent grew suspicious of Lin and Xu's activities and last February contacted the FBI and the U.S. Attorney's office in Newark, N.J., which began tracking the Internet exchanges of the two scientists. Without signs of independent product development at ComTriad, investigators nevertheless found e-mails allegedly showing the partners' listing "intellectual assets" identical to those of PathStar and discussing product presentations "based on PathStar." And unfortunately for Lucent, the e-mails show that by the time the feds were on the case, the PathStar source code was in Datang's hands. It will be harder to recover than a U.S. spy plane in Hainan--if not impossible. Investigators say there is no indication of any criminal act by Datang and the Chinese government, nor any indication that Beijing and its conglomerate knew their joint-venture partner ComTriad was acting illegally.

Like many American companies, Lucent has invested millions in (and signed lucrative contracts with) Chinese companies. The incident is unlikely to dampen the company's ardor--or that of any other U.S. firm--for the promise of China capitalism. But the bottom line isn't likely to be profitable for three Chinese partners in America. The men are to be charged with wire fraud. Each faces five years in jail and $250,000 in fines. Cheng is a naturalized American; Lin and Xu were only months away from their green cards. Hoping to be the Cisco of China, they may have forfeited the right to make it in America.