The Complicated World of Corporate Espionage

Corporate espionage used to be rather straightforward – as the typical Coke-Pepsi textbook example illustrates, in which each tries to steal the other’s recipe for sugared water. It is a crime when someone steals company data/trade secrets and passes it to a business rival.

Well, yes -- but not quite, in the case a series of court decisions in the United States that complicate the issue considerably. One involves a former Goldman Sachs computer programmer, Sergey Aleynikov, a Russian who immigrated to the United States in 1991 and who was arrested by FBI agents on July 3, 2009, at Newark International Airport.

Aleynikov was subsequently jailed in December 2010 for stealing code from Goldman Sachs’ high-frequency trading platform, a lucrative new segment of Wall Street that uses complex computer algorithms to convert minute price discrepancies into quick profits through rapid fire trades. He had served one year of his eight-year sentence when he was freed by the Court of Appeals for the Second Circuit in New York in mid-February.

The court offered no explanation for overturning his conviction other than stating an opinion would be issued “in due course,” according to The New York Times.

Aleynikov allegedly stole the source code used in driving those high frequency trades at his employer prior to joining a new competitor, with plans to set up a similar trading platform – he allegedly uploaded the code onto a computer server in Germany, encrypted and downloaded it into his home computer, laptop and memory stick and took the data with him when he joined the new company.

Aleynikov’s lawyers argued that he took only the source code used in parts of the trading system but not the whole program. The prosecution lawyers argued the code was vital in building the platform and could become instrumental in developing competing programs at rival firms. He was convicted by a jury last March of violating the Economic Espionage Act of 1996 and the Interstate Transportation of Stolen Property Act.

But Aleynikov’s recent acquittal was not only a blow to his former employer but also the US Department of Justice. Most importantly, his case is an acid test to the 16-year old Economic Espionage Act, which targets theft of trade secrets.

The Economic Espionage Act makes the theft or misappropriation of a trade secret a federal crime, whether it is with the knowledge or intent that the theft will benefit a foreign power or for interstate and/or international commerce with the knowledge or intent that it will hurt the owner of the trade secret.

Coincidentally just a week prior to Aleynikov’s acquittal, another US court acquitted Chinese-born American software developer Hanjuan Jin on her alleged stealing of more than 1,000 items of confidential information from her employer Motorola Inc.

Jin allegedly booked a one-way ticket to China in February 2007 after arming herself with secrets stored on a laptop computer and several hard drives, relating to a type of walkie-talkie that the government attorneys said could benefit the Chinese military.

However, the judge said, while the evidence showed she stole trade secrets, and she is still subject to sentencing on that count in mid-April, it was not enough to prove she had committed economic espionage by selling the information to a foreign government or entity.

In the Report to Congress on Foreign Economic Collection and Industrial Espionage, 2009-2011 released last October by the US Office of the National Counterintelligence Executive, China was labelled a “persistent collector” of US high-tech data, accounting for six of seven cases in 2010 that were related to the Economic Espionage Act.

Recent court hearings involving the DuPont chemical giant and the Pangang Group of China, over stealing of secrets about titanium dioxide by the latter, are another case in point. DuPont is the principal supplier of the substance, a US$17 billion a year industry. DuPont was unwilling to sell its production methods to the Chinese. So allegedly the Chinese government stole the process through Pangang, a company it controlled. The case is now in a federal court in San Francisco.

The risk of corporate espionage, big or small, genuine or suspect, is seemingly and inevitably commonplace in the Greater China region. Risks correlate positively with the flow of investment and as China increasingly became the manufacturing capital of the world over the past two decades, and the biggest growth market for foreign companies, there is constant demand for commercial investigations, including into the possibilities of corporate espionage.

I have dealt with these matters in my business intelligence career, including cases where clients need help to handle threats and mitigate risks of corporate espionage. In one landmark case, much like the Coke versus Pepsi example, my client eventually discovered the stark reality of a major competitor’s entire department that was dedicated to stealing their trade secrets. To be more precise, their employees were engaged to steal their trade secrets for the competitor.

Separately, a news reporter I know was approached by an individual who offered to leak information for a potential news story. They met but the stranger offered nothing other than praise for the reporter about a recent news story and then asked for the identity of the sources quoted in the story, which you would expect was promptly declined.

The stranger then hinted the reporter would be richly rewarded by cooperating with him, not just for that story but on other companies and individuals he put on the table in the future. His take on the conversation progressed from persuasion to coercion. Rightly so, the reporter abruptly ended the meeting but soon realized both his mobile phone and internet lines at home were compromised. And as the world becomes more sophisticated with the rapid growth and adoption of technology, risk of corporate espionage will only become a clear and present danger.

George Smiley, the protagonist of John le Carre’s spy novels, once said a desk is a dangerous place from which to view the world. Indeed.

(Vanson Soo runs an independent business intelligence and commercial investigations practice specializing in the Greater China region. Email: soovans@gmail.com His column also appears in the Standard of Hong Kong.)