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March 10, 2012

FBI Traces Trail of Spy Ring to China

By JUSTIN SCHECK And EVAN PEREZ

ORINDA, Calif.--Federal agents were searching Walter and Christina Liew's home here last July for evidence of corporate espionage when a safe deposit box key caught their attention. They asked Ms. Liew if she knew where the bank was located. Her husband told her in Chinese to say she didn't, according to an account later given by federal prosecutors.

An agent who understood Chinese picked up on the exchange and followed Ms. Liew as she left the house, drove to an Oakland bank and tried to empty a safe deposit box the key fit. The box, according to prosecutors, contained documents outlining a more than decadelong plot to steal DuPont Co. corporate secrets and sell them to a Chinese government-owned company.

The Liews now are at the center of a case that the Justice Department says marks the first time U.S. officials have filed criminal espionage charges against a state-owned foreign company. The company, Pangang Group, is fighting the charges, which were unveiled a month ago in San Francisco. The Liews were charged with conspiring to steal trade secrets and sell them to the Chinese, charges they deny.

The allegations involve an obscure chemical and a 50-year-old technology that is hardly cutting edge, but one DuPont has wanted, for decades, to keep secret. The case, described by people intimate with its details and revealed by documents reviewed by The Wall Street Journal, provides a rare view inside a stepped-up drive the federal government has mounted to combat organized efforts by foreign governments to steal U.S. intellectual property.

"What we've learned since the end of the Cold War is that when it comes to the economy, our adversaries and even our allies will spy on us when it's in their economic interest," said Frank Figliuzzi, the Federal Bureau of Investigation's assistant director for counterintelligence. He wouldn't comment on the DuPont-related case but said that, speaking generally, the FBI is doubling down on corporate-espionage investigations because despite years of attempts by the bureau to raise awareness at companies and prosecute trade-secret theft, the problem is growing.

Since passage of a law in 1996 giving the Justice Department wide powers to prosecute corporate espionage, only about a dozen cases have been brought. The number of cases has remained low even as Department officials publicly announced attempted crackdowns on corporate spying before, including one in 2007. Convictions are hard to get because they require tying companies directly to foreign governments, said Patrick Rowan, a former national-security prosecutor.

Lisa Monaco, assistant U.S. attorney general for national security, who also wouldn't comment on the DuPont-related case, said that while espionage is traditionally thought of as nations trying to steal military or diplomatic secrets, "today's espionage also involves nation states like China focused on stealing research and development, sensitive technology, corporate trade secrets and other materials to advance their economic and military capabilities."

China regularly denies that its government or state-owned companies engage in concerted efforts at corporate espionage. On a broader level, China aims at gathering already-discovered technical know-how to build global competitors through legitimate means such as joint ventures. More controversially, China has been insisting that foreign companies hand over technology as the price of market access. Within China, many foreign companies are so concerned about intellectual-property theft that they avoid bringing in their cutting-edge technology and manufacturing processes.

Federal law-enforcement officials contend many U.S. companies do too little to protect their interests, failing to monitor employees and rarely bringing problems to federal agents for fear of bad publicity.

That is not the case with DuPont. It hires former high-ranking federal agents to keep tabs on its intellectual property and notifies federal officials of problems. The Justice Department has won at least four DuPont-related cases in recent years, among them convictions in 2009 of a former DuPont employee for stealing information related to Kevlar high-strength fabric and giving it to a Korean company, and of another for stealing trade secrets related to light-emitting diodes and taking them to China.

DuPont tries as hard to protect long-established technologies as new ones. It was more than 50 years ago that the company laid the groundwork for an efficient process to produce titanium dioxide, a white pigment used in paints and other products, according to court filings. The company honed the process through the years, becoming the world's largest producer of the chemical. To keep its complex production process secret, DuPont allowed most employees to know about only individual pieces of it.

Chinese state-owned companies, including Pangang, a conglomerate based in Panzhihua in Sichuan Province, talked for years with DuPont about opening a joint-venture titanium plant in China, say people familiar with the matter, but a deal was never worked out.

In the 1990s, according to documents confiscated from Mr. Liew in Orinda last summer and since filed in federal district court in San Francisco, Pangang and Chinese-government officials started asking businessmen to procure DuPont's proprietary titanium-production methods.

A spokesman for the Chinese embassy in Washington called that assertion "groundless," saying: "There would not be any kind of instruction or request to Chinese businessmen. They behave on their own behalf." He said the DuPont case is a business dispute and the businessmen involved "have no connection to the Chinese government."

Pangang didn't respond to requests for comment. A former chairman of the company denied it dealt in stolen intellectual property.

One document taken in the search of the Liews' home and filed with the court is a letter Mr. Liew addressed in 2004 to Pangang officials, in which he stated that a high-ranking Chinese Communist Party leader asked him in 1991 to bring titanium-dioxide-making secrets back to China.

"Some years ago China let me know that she urgently needed titanium white by chlorination technology," the letter reads. "After many years of follow-up research and application, my company has possession and mastery of the complete DuPont way."

In an affidavit filed in court, Mr. Liew--a 54-year-old Malaysian-born naturalized U.S. citizen who worked in Silicon Valley as an electrical engineer--said, "Those documents are not accurate or reliable." Mr. Liew said he had misrepresented facts, including his employment history and relationships with Chinese officials.

A lawyer for Mr. Liew said during a bail proceeding that his client hadn't told the truth in some documents cited by the government, including business pitches that claimed ties to Chinese Communist Party officials.

A former Pangang executive to whom the letter was addressed, Hong Jibi, said he was unfamiliar with Mr. Liew. "I don't know him, I never met him, I never dealt with him, and I never got any letter from him," Mr. Hong said in Beijing.

Over the past 15 years, according to court filings and people familiar with the matter, Mr. Liew hired several former DuPont employees knowledgeable about specific pieces of the titanium process--a practice that isn't illegal.

One was Tim Spitler, an engineer in Reno, Nev., with a reputation for great titanium expertise. He told a friend around 2003 that he was working with Mr. Liew to cobble together titanium-making know-how to sell to a Chinese company, the friend said in an interview. A lawyer for Mr. Spitler said he eventually agreed to cooperate with investigators.

Another was Tze Chao, a 36-year DuPont veteran. Mr. Chao--who last week pleaded guilty to conspiracy to commit economic espionage--said in a statement filed in court that shortly after his 2002 retirement, Pangang officials asked him to provide DuPont titanium-dioxide-making information. Mr. Chao said he hooked up with Mr. Liew after learning Mr. Liew was trying to sell similar information to Pangang.

Prosecutors have filed in court letters purportedly written by Mr. Liew in which he says he has sold DuPont titanium-oxide technology to various companies affiliated with the Chinese government.

Mr. Liew's companies received more than $12 million from a Pangang subsidiary between 2009 and 2011 for his efforts, prosecutors alleged in their indictment of the Liews. The couple, prosecutors charged, "wired millions of dollars in proceeds from Pangang Group to Christina Liew's relatives" in China.

In 2010, DuPont received an anonymous letter saying that Mr. Liew and one of his employees, a Bay Area man who was also employed by Chevron Corp., had sold DuPont information to a Chinese company, according to court filings.

Chevron security officials began an investigation after hearing from DuPont, court filings say, and searched the computer of the employee, named John Liu. They found documents related to DuPont technology, court filings said. Mr. Liu's lawyer noted that his client hasn't been charged. According to people familiar with the case, Mr. Liu has cooperated with prosecutors.

Chevron last March forwarded information found on Mr. Liu's computer to DuPont, which in turn brought it to FBI agents in San Francisco, said people familiar with the case.

DuPont last spring also filed a civil suit against Mr. Liew in San Francisco federal court, seeking damages for alleged theft of trade secrets. Mr. Liew's response denied that he and his partners possessed DuPont trade secrets and said there was "no uniqueness" to its titanium-dioxide process. He filed a counterclaim alleging that DuPont had improperly obtained his trade secrets. The suit is pending.

DuPont said the case "demonstrates that DuPont reacts swiftly and vigorously when its trade secrets are stolen. When we learned of the suspected theft, we investigated further until we had sufficient information to file suit. We also notified law enforcement."

On July 19, FBI agents searched the Liews' gray house in Orinda, a hilly suburb about 25 miles east of San Francisco. It was during that search that an agent trailed Ms. Liew to a safe deposit box that contained documents and disk drives, prosecutors wrote last month in a court filing opposing bail for Mr. Liew. The Liews were arrested on charges of obstructing their investigation.

FBI agents soon learned that two senior Pangang executives were in California and preparing to meet with the Liews, according to lawyers familiar with the case. They included a top company executive, Zhuang Kai. Agents confiscated the Chinese executives' passports and told them to stay in the hotel in Alameda, Calif., as material witnesses while the investigation continued.

Federal agents began translating thousands of pages of Chinese-language documents confiscated from the Liews and following the leads generated.

The investigation led them to Mr. Chao, the DuPont retiree. Agents searched Mr. Chao's house in Delaware in October, according to a statement he made as part of his guilty plea. While they found some DuPont-related documents, said a person familiar with the case, they missed others.

A few days later, Mr. Chao's court filing says, he took those others into his yard and burned them. But the information the FBI did find was enough for the 77-year-old to decide to cooperate with investigators, court filings show.

Prosecutors granted immunity to the two Pangang executives visiting California so they would talk with prosecutors with their American lawyers present. In late fall prosecutors decided they could no longer hold the men as witnesses and let them return to China. Lawyers for both men say their clients have done nothing wrong.

Prosecutors went ahead with preparations for a case against others, and made plans to ask a grand jury to hand up an indictment on a Wednesday in early January, said people familiar with the case. But days before the scheduled grand jury meeting, one intended witness, Mr. Spitler, the Reno-area engineer with the wide knowledge of the titanium dioxide process, shot himself. His family hasn't returned calls requesting comment.

Prosecutors regrouped, and in early February obtained indictments that included Mr. and Ms. Liew; Pangang Group and three affiliates; a midlevel executive of a Pangang affiliate in China for whom the indictment said an arrest warrant had been issued; and a former DuPont engineer named Robert Maegerle. All were charged with conspiracy to commit economic espionage except for Mr. Maegerle, who was charged only with conspiracy to commit theft of trade secrets. He pleaded not guilty on Thursday.

Mr. Chao, in pleading guilty in San Francisco federal court a week ago to conspiracy to commit economic espionage, said he had been led astray after officials from the People's Republic of China "overtly appealed to my Chinese ethnicity and asked me to work for the good of the PRC."

Pangang Group's lawyers have said they believe the prosecutors must go through the Chinese judicial system to serve the indictment and are fighting the matter in court. They haven't filed a plea.

Ms. Liew pleaded not guilty Thursday. Mr. Liew intends to do so as well, his lawyer said. Mr. Liew remains in an Alameda County jail, where he has been since the July raid on his home in Orinda.

--Kersten Zhang and Carlos Tejada contributed to this article.

Write to Justin Scheck at justin.scheck@wsj.com and Evan Perez at evan.perez@wsj.com