MORRISTOWN, Tenn. (AP) — A high-performing, Chinese-born chemical engineer began work at Eastman Chemical Company in Kingsport in September 2017 as the alleged linchpin in a broader industrial-espionage scheme devised to steal tens of millions of dollars worth of trade secrets, proprietary information she planned to use to jump-start a competing business in China, according to federal court documents.
Xiorang “Shannon” You, a naturalized U.S. citizen, allegedly conspired with a Chinese engineer to hijack $119.6 million worth of trade-secret information, according to an indictment drafted by Assistant U.S. Attorney Timothy C. Harker and Matthew W. Walczewski, a prosecutor with the National Security Division of the U.S. Department of Justice in Washington D.C.
The case against You and the Chinese engineer, Liu Xiangchen, who remains in China, involves a relatively obscure sector of the economy, yet one that accounts for an estimated $3 billion in annual worldwide economic activity — polymer coatings sprayed inside metal drink and food cans that minimize flavor loss and prevent the container from corroding or reacting with the contents.
An alleged double agent, eleventh-hour downloads
This federal prosecution centers on an entirely uncommon substance, but it has elements in common with higher-profile espionage cases: an alleged double agent; alleged state-sponsored theft; fevered, eleventh-hour computer downloads; and a potential financial impact large enough to buoy or blow holes in the economies of four countries.
And while the alleged $119.6 million theft is a haul, according to the FBI, it’s just an ice cube perched on the tip of an iceberg. The FBI estimates the annual economic loss to China through the theft of trade secrets, pirated computer software and counterfeit goods ranges from $225 billion to $600 billion.
As a yardstick, Tennessee state government’s entire spending plan for this fiscal year is $38.5 billion. This year’s U.S. military budget approximates $716 billion.
You allegedly stole trade secrets from Eastman that represent $13 million in research-and-development costs. The remaining $106.6 million in alleged intellectual-property theft occurred at You’s prior employer, the Coca-Cola Corporation in Atlanta, according to William Leckrone, a Knoxville-based FBI agent who testified at You’s detention hearing.
Federal prosecutors do not allege You stole from Coca-Cola directly. They maintain You plundered trade secrets belonging to six chemical companies that entrusted Coca-Cola with their proprietary can-coatings formulations, according to Leckrone.
Plundered trade secrets
The chemical companies and their reported research-and-development setbacks are: PPG Industries, $39 million; Sherwin-Williams Valspar, $30 million; Dow Chemical, $25 million; and AkzoNobel, a Dutch company, $7.3 million. The combined research-and-development losses at BASF and Toyochem, a Japanese firm, are $5.3 million, according to the FBI agent.
The federal government believes that You transferred the proprietary information to Xiangchen.
When U.S. Customs and Border Protection agents questioned You in September 2018 after she returned to the United States from China – three months after she lost her job at Eastman – she was carrying the trade-secret information from all seven companies, but that’s just one facet of the government’s proof, according to Leckrone.
The FBI agent testified that while You was still employed at Eastman, she was receiving a full-time, $7,000-a-month salary from Xiangchen’s company, Weihai Jinhong Polymer Company. The FBI has the employment contract. Text messages recovered from You’s phone provide a detailed roadmap of You’s dealings with Xiangchen, according to Leckrone.
Also, in the weeks before You was arrested on Feb. 12 in Lansing, Michigan, she was shopping for an apartment in an exclusive beachfront high-rise in Weihai, China, a city of 2.8 million inhabitants located about 250 miles across the Yellow Sea from the Koreas. Prosecutors interpret the apartment search as an indication You wasn’t long for the United States.
Millions in grant-like awards in China
What makes You’s prosecution more intriguing is that she received 13 million Chinese yuan, about $1.86 million, in grant-like awards from the Chinese national government and the Shandong provincial government.
While employed at Eastman, You won the Thousand Talents Program grant and the Yishi-Yiri award by using the stolen trade secrets “as the basis for (her) application,” according to the indictment. Eastman was unaware of the awards.
Part of the award money is earmarked for startup costs. The rest goes to the prize winner.
It appears You would have pocketed about $715,000. Leckrone testified You was in line to receive one million yuan a year for four years, about $572,000, for the Yishi-Yiri award. Thousand Talent winners normally receive about one million yuan.
However the bounty was divvied, the return on the investment for the national and provincial governments could have been enormous.
Acquiring $119.6 million worth of proprietary technology for $1.86 million is the equivalent of buying a $1 million house for $15,625, and Harker suggested the actual value of the coatings formulations could be several times the research-and-development costs.
A federal grand jury in Greeneville indicted You, 56, and Xiangchen, 61, for conspiracy to steal trade secrets, seven counts of stealing trade secrets and a single count of wire fraud. If convicted of the lot, she faces a federal prison sentence that ranges between 210 and 262 months.
Federal inmates must serve 85 percent of their sentences before they’re eligible for supervised release. A bottom-of-the-range sentence would mean You would be approaching 71 years old when she’s set free.
Xiangchen would be around 76 years old, but he has nothing to worry about from the U.S. attorney’s office as long as he stays in China or in countries that don’t have extradition treaties with the United States. The U.S. and China do not have an extradition treaty.
A star among street lamps
By any professional measure – in the field of metal-can coatings – You is a star among street lamps. But when it came to the way she allegedly plotted to plunder Eastman and Coca-Cola’s partners – and the way she allegedly belittled and otherwise mistreated coworkers and alleged coconspirators – she was a difficult employee, according to the FBI agent.
You was in her late 20s in 1992 when she began work in the United States. Seven years later, she renounced her Chinese citizenship and became a U.S. citizen around the time she earned a doctorate from the Emulsion Polymers Institute at Lehigh University in Pennsylvania, according to court documents.
You’s upward professional trajectory reached a milestone when she landed the job as principal engineer for global research at Coca-Cola in 2012, which was one of the best years ever to be a leading polymer engineer.
In 2011, France banned the use of bisphenol-A – a synthetic compound that had been a standard in the coatings industry for more than 50 years – after research suggested that even low-dose exposure was linked to cardiovascular problems, including coronary artery disease, heart attack, hypertension and angina. California followed France’s lead on BPA shortly thereafter.
At the time, BPA was also a common component of coatings for plastics. In 2012, the U.S. Food and Drug Administration banned the use of BPA in the manufacture of baby bottles and “sippy cups” after further research indicated BPA could mimic the effect of estrogen, the primary female sex hormone.
Apart from the fact that micro-dosing infants and children with an estrogen biosimilar never sounded like a good idea, the industry-wide stampede away from BPA had begun, and You was at the center of the BPA-free universe.
The six chemical companies that You allegedly compromised had agreements with Coca-Cola to share their BPA-free trade secrets to advance research and development in the field, according to Leckrone.
“The entire industry (was) interested in coming up with the best can coating product they (could) develop … They wanted it and they needed it,” Leckrone testified.
Access to the six companies’ trade secrets was on a strict, need-to-know basis. You had access to everything, and she was the only point of contact for more than one company, according to Leckrone.
Plot begins in 2017
In March 2017, Xiangchen allegedly first approached You about stealing the BPA-free trade secrets. Xiangchen sweetened the pot with the enticement that if You were successful, Weihai Jinhong would sponsor her application for the Thousand Talents and Yishi-Yiri awards, according to the indictment.
At some point, Coca-Cola managers decided to eliminate You’s research division, which ceased operations on Aug. 31, 2017. Toward the latter part of You’s employment in Atlanta, the timeline the FBI advances becomes critical.
On Aug. 10, Coca-Cola paid You $33,912 to sign a document affirming she had not retained any trade secrets. Coca-Cola provided You with a hard drive to which she was supposed to download the proprietary information. When You returned the hard drive, it was blank, according to Leckrone.
Ten days later she traveled to China to defend her application to the Yishi-Yiri award program.
On Aug. 29, shortly after 11 p.m. – two days before You’s employment in Atlanta ended – Coca-Cola computer logs show the files containing the six chemical companies’ trade secrets were moved, but they do not show the destination.
Coca-Cola security software could not block the file transfer. The chemical companies’ proprietary information would later be found on You’s Eastman-supplied laptop in Kingsport, Lekrone testified.
Coca-Cola computer forensic security staff may have strongly suspected You had stolen the files, but they couldn’t prove it. For the time being, You was in the wind, allegedly with $106.6 million worth of trade secrets.
In the wind with $106.6 million in trade secrets
Seventeen days after You started work at Eastman on Sept. 1, 2017, she traveled to China for four days – with Xiangchen’s assistance – to defend her application to the Thousand Talents award.
You’s relationships with Eastman employees were deeply flawed from the outset and they never improved significantly before she was fired in June 2018, according to the FBI.
“One manager described her as a ‘nightmare,’” Leckrone testified. “Others described her as unwilling to work on the product that they wanted, that she continually worked on products that Eastman wasn’t attempting to develop; that she was reluctant to go to the lab space …”
You, whose title was packaging application development manager, let it slip to coworkers that she owned homes in Boston, Atlanta and Shanghai, and that she planned to put the United States behind her and retire to a comfortable life in China. At one point, she told a supervisor that she didn’t need her salary, and she accepted the Eastman job as a favor to the company, according to the FBI agent.
The beginning of the end for You at Eastman dawned on April 27, 2018 when she left for what was supposed to be an eight-day trip to China to meet with Eastman officials in Shanghai “to assist them in developing their image.”
“As she put it, she was famous in the industry, and that she needed to go to China for this trip,” the FBI agent testified.
Eight days passed and You was still in China. Eastman officials contacted You and strongly urged her to return to Tennessee. You overstayed by 17 days, according the FBI agent, who later learned You had been at the Weihai polymer company.
Eastman higher-ups called her in for a “counseling” session, which was scheduled for 1 p.m. on May 21, according to the FBI agent, who testified that 20 minutes before the confab started You was downloading Eastman’s coatings-related trade secrets.
When the counseling meeting commenced, You’s supervisor presented her with a multi-page document.
She lost it
“You took the papers and threw them at individuals and became very angry, and so Eastman elected to stop the meeting for the day, let cooler heads prevail and (they) asked Dr. You to go home and work from home for the day …” Leckrone testified. “Instead, she toured the Eastman facilities looking for executive management to complain and talk to.”
Eastman’s computer security was better in 2018 than Coca-Cola’s computer security was in 2017.
By the time the meeting reconvened the next day, Eastman had identified the trade-secret files that You had transferred to her company-supplied laptop, and they wanted the hard drive, along with her company iPhone back. They followed her home to her Johnson City residence and got both.
In short order, an Eastman computer specialist identified files stolen from Eastman and the six other chemical companies. That’s when Eastman notified the FBI.
The FBI is called in
The images retrieved from You’s iPhone included photos of the Eastman lab. That’s important because the sequence of machinery Eastman uses is integral to the quality of the final BPA-free product, the FBI agent testified.
The discovery was for naught. Not surprisingly, You had copied the files to another location.
In May 2018, the FBI appeared to have You dead-to-rights, but agents didn’t take her into custody. Once a person is indicted or arrested on a federal criminal complaint, the defendant can demand a trial in 70 days. More than eight months would pass before prosecutors were ready to present the evidence to a grand jury.
By that time, You had found new employment at an unidentified chemical company in Lansing, Michigan.
Response from the alleged victim companies was cautious. None addressed the details of the alleged theft.
“As an innovation-driven maker of additives and specialty materials, Eastman takes protection of its intellectual property seriously and we have controls in place to help prevent and to detect theft of confidential information” said Amanda Allman, director of Eastman corporate communications. “Those controls worked in this case, and we have been cooperating with law enforcement in this matter for some time.
“However, this case involves someone who worked for Eastman for less than 10 months after 25 years with other U.S. companies, so our involvement with the person and the case was relatively limited.” Allman added. “Because of our limited visibility into the specifics of the case, we are not in a position to comment further.”
Max Davis, Coca-Cola communications manager, said, “At this time, we are going to respectfully decline participating in this story.”
“The proprietary research and development work done by our scientists brings great value to our customers, and ultimately impacts our position in the competitive marketplace,” said Mark Silvey, PPG Industries director of corporate communications. “As a result, it is essential that we safeguard and protect that intellectual property.”
Joost Ruempol, senior spokesperson for AkzoNobel Global Communications, declined to comment because the criminal case has not been adjudicated.
Sherwin-Williams Valspar, Dow Chemical, BASF and Toyochem did not respond to a request to comment.
Government plea deal rejected
You’s defense attorney, Johnson City lawyer Thomas C. Jessee, says he can’t comment on the facts of the alleged industrial-espionage case, but he did say You rejected the government’s plea offer and plans to go to trial, which is scheduled to begin in U.S. District Court in Greeneville on April 28.
In an order to continue the trial, U.S. District Judge Ronnie Greer indicated he’s disinclined to postpone the trial a third time. In the meantime, You will remain incarcerated in Johnson City unless circumstances arise that would require her to be transferred to another penal institution.
The 155-page transcript of You’s detention hearing provides a rare look-see inside federal prosecutors’ brief cases. The same is true for the defense.
Jessee characterized You’s case a “prosecution by trick.” Jessee does not maintain his client did not possess coatings-related information she obtained while working at Eastman and Coca-Cola.
What Jessee argues is the formulations belonging to Eastman and the six other chemical companies were old science that’s not worth anything close to $119.6 million. He suggested that if the six Coca-Cola-affiliated chemical companies possessed the industry’s Holy Grail – the perfected BPA-free coatings technology – they wouldn’t have had agreements with Coca-Cola in the first place.
“Quite frankly, she doesn’t need any of that stuff,” Jessee told then-U.S. Magistrate Clifton Corker. “They need her more than she needs some piece of paper of a test they did in 2011, and that’s what the proof will show.”
Jessee told the judge that despite what research chemical companies conduct behind closed doors, the most important result is a patent, which become a public document after public approval by the U.S. Food and Drug Administration.
The defense attorney argues the value of the files his client possessed should be “depreciated.”
What are the trade secrets worth?
If Jessee could convince jurors the trade secrets are worth substantially less than $119.6 million, he could make the case that 210 to 262 months is not an appropriate sentence.
Jessee also argued that You had ample opportunity to relocate to China after she was fired from Eastman in June 2018, but she remained in the United States for eight months and took a job in Michigan. If she had stolen valuable intellectual property belonging to Eastman and the other six chemical companies, Jessee maintains, she would have been in China.
When FBI agents arrested her in Michigan in February, her apartment contained only one folding chair, one collapsible table and a mattress, which was resting on the floor, a paucity of amenities the FBI concluded was an unambiguous indication she didn’t plan to stay in the U.S. for long.
Inside You’s sparsely furnished apartment, FBI agents confiscated what they call a “go-bag,” a brief case that contained You’s passport, naturalization papers, banking and insurance information, college degrees and thousands of dollars in U.S. currency, Euros, British pounds, Australian dollars and Chinese yuan.
Jessee argued that the government routinely runs public-service announcements encouraging people to keep vital information in one place in case of a natural disaster, so having the documents together suggests uncommon organization, not criminality.
“There’s no reason you would need five currencies in your go-bag in order to avoid an earthquake,” Harker countered.
The Chinese have a slang word for Chinese students who study abroad and then return to pursue their careers. It’s haigui, or “sea turtle,” so named for the reptiles’ propensity to travel large distances through salty waters, but return to their beach of birth to lay eggs.
The Thousand Talents and the Yishi-Yiri programs were created to transform expatriate scholars and industry leaders like You into haigui. The Chinese governments, in part, play on Chinese nationalism to convince scholars residing in other countries to come home, but patriotism isn’t the only draw.
Apart from cash awards, Thousand Talent Program winners arrive in China with the honorific title of “national distinguished experts.” Part of the money the winners received is used to construct state-of-the-art research facilities, and they get what Leckrone called a “fast pass” through customs.
The Chinese government reported that between 2008, when the Thousand Talents Program was created, and 2018, approximately 7,000 people received Thousand Talent awards, including a small number of top performers who are not Chinese.
The FBI does not allege all, or even most of, the 7,000 are engaged in spying or trade-secret theft, but the bureau has concluded that some, like You, are state-sponsored thieves that do economic harm to the United State and other countries.
What makes alleged intellectual-property theft a nightmare to police is the Thousand Talents and Yishi-Yiri programs are just two of more than 200 similar programs overseen by the Chinese government, according to John Brown, assistant director of the FBI’s Counterintelligence Division.
“Time and time again, the Chinese government has proven that it will use any means necessary to advance its interests at the expense of others, including the United States, and pursue its long-term goal of being the world’s superpower by 2049,” Brown testified before the Senate Homeland Security and Governmental Affairs Committee in November.
“These individuals are not ‘spies’ in the traditional sense of intelligence officers, but they are nonetheless collecting information sought by the Chinese government … With our present-day knowledge of the threat from Chinese talent programs, we wish we had taken more rapid and comprehensive action in the past, and the time to make up for that is now,” Brown added.
Brown told committee members when the FBI began high-profile arrests and prosecutions of Chinese nationals allegedly involved in trade-secret theft in 2018, the Chinese government demonstrated what the FBI believes demonstrates consciousness of guilt – the Thousand Talents website went dark, and other public sources of information about talent programs disappeared.
“If these programs are as innocuous as they try to imply, why the shift to secrecy?” Brown asked.
The recently announced partial trade deal between the United States and China contains assurance that China will take a harsher stance on intellectual-property rights.
Bill Priestap, who was assistant director of the FBI’s Counterintelligence Division when he testified before the Senate Judiciary Committee in 2018, said he expects the trade rift with China to deepen, not to close. Priestap told senators he foresaw the day when meaningful U.S. involvement in Chinese economy could end.
“While U.S. companies may be able to operate and profit in China for a time, it is on borrowed time,” Priestap testified. “The Chinese government will permit foreign companies to operate only so long as it is advantageous to China … A company may be allowed to operate simply to give China a better opportunity to understand how to copy the business and outcompete it globally.
“From the viewpoint of the Chinese government, many of the foreign companies doing business in China represent a temporary failure of the domestic market to meet demand,” he added. “The government believes that if something can be made in China, then it should be made in China.”
Laundering trade secrets in China
In an October 2017 message to You, Xiangchen reported he submitted false information to either the Thousand Talent or Yishi-Yiri decision-makers “in order to increase the possible monetary award they could receive,” according to the indictment.
The indictment also suggests China was not entirely a safe harbor for alleged trade-secret pirates. The trade secrets would not be held directly by Weihai Jinhong, Xiangchen’s company. You, Xiangchen and You’s aunt, Hong Mai, planned to form another company to hold ownership of the chemical companies’ intellectual property.
This would have allowed them to effectively launder the stolen trade-secret information through the second company, obscuring its origin, according to the indictment.
The indictment identifies Mai as an unindicted coconspirator. Not only did she plan to reap benefits from the alleged trade-secret theft, You and Xiangchen largely communicated through Mai. She negotiated with Xiangchen and Weihai Jinhong on You’s behalf, facilitated payments between Weihai Jinhong and You, and conducted her niece’s banking business in China, officials allege.
And while the Thousand Talent, the Yishi-Yiri and other talent-attraction programs appeal to Chinese patriotism, national duty and love of homeland, You wanted to get paid, according to the FBI agent.
“On April 8, 2018, Dr. You tells Xiangchen, ‘I won’t work, I won’t work until Weihai Jinhong Group confirms my benefits, salary, house, et cetera,’” Leckrone testified. “‘I won’t do anything before seeing money. (I am) taking the risk in all this, and won’t give away technology without money.’”
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