@DINK:INT+

William Lee is a 57-year-old Harvard-educated corporate lawyer whose specialty, until recently, was international mergers and acquisitions. But a year ago, the government of France charged that he was a spy for the Central Intelligence Agency, waging a secret war to destabilize French corporate interests in Asia.

The "William Lee affair," as it is known in Paris, appears to be a bizarre case of mistaken identity. Top CIA officials say the agency has no connection to Lee, and the French have dropped their allegations. But it adds a strange new chapter to what is becoming one of the world's hottest spy rivalries, now that the Cold War is over -- the battle between France and the United States over economic espionage.

The story also opens a window on a side of France not often seen by outsiders -- the tightly interconnected world of big business and political elites that Lee calls "France Inc." It is the tale of a foreign lawyer who filed a lawsuit against a powerful French company -- and then found himself the target of what he sees as a campaign against him involving not only company executives but senior French government officials and intelligence operatives.

The Lee affair began to get nasty last Jan. 26, when French Interior Minister Charles Pasqua summoned U.S. Ambassador Pamela Harriman to complain about American spying against France. As has been widely reported, Pasqua demanded that several CIA spies leave the country.

What has not surfaced publicly until now is that one of the people initially on Pasqua's list was Lee -- a corporate attorney who had spent 20 years in Paris with Shearman & Sterling, a leading international law firm. CIA and State Department officials, who independently confirmed that Pasqua had named Lee, said they were mystified by the allegation. The agency had nothing to do with the lawyer, they assured Harriman. She repeated those assurances to Pasqua when she met with him again Feb. 10. U.S. sources say the French official warned her darkly that the CIA might be lying, but his ministry proceeded to focus on five other spy cases.

When the Paris spy scandal finally surfaced Feb. 22 with a leak to the French newspaper Le Monde, Lee was not on the list.

But his troubles were not over. He was summoned April 11 to the U.S. Embassy in Paris. The embassy security officer warned him that his life was in danger and advised him to leave France immediately. When he arrived in Washington the following week, a deputy assistant secretary of state named Mark Mulvey told him to take the death threats seriously.

Which brings us to the question: Who is William Lee, and what had he done "to drive the French crazy," as one U.S. intelligence official put it?

The answer to this mystery appears to lie in a lawsuit Lee filed in 1993, challenging the merger of two big French companies -- the arms maker Matra and the publishing giant Hachette. The suit argued that the December 1992 merger had cheated Matra shareholders because it had not taken into account a secret contract worth roughly $1.5 billion, signed the previous month, to sell Matra missiles to Taiwan.

Lee said he filed the class-action lawsuit mostly for the same reason lawyers usually file such suits -- to make money, in this case a share of a settlement that could total many millions of dollars.

But to jittery government and business leaders in Paris, the challenge to a big French defense company appeared to be part of a broad CIA plot to undermine France's corporate interests. The French believed the CIA had helped torpedo contracts for French firms in Saudi Arabia and Brazil, and they saw the assault on Matra as another example of CIA meddling.

Nonsense, said State Department and CIA officials.

"What you have here is a mix-up of two stories," said a State Department official who was closely involved in the case. "One was the spies. The other was Lee. In the real world, they had nothing to do with each other. But in the minds of the French at the time, they were connected."

Even Matra now seems convinced the French authorities had the wrong man. "We don't believe that Mr. Lee is an American spy," said a Matra spokesman. Instead, the spokesman said, "Matra is exploring whether a French competitor might have sponsored Lee's actions, including the lawsuit."

What made Lee's lawsuit so explosive, all sides agree, was a September 1994 letter his lead plaintiff sent to the president of Taiwan, with copies to then-Prime Minister Edouard Balladur and other French officials. The letter warned that the lawsuit could disclose commission payments that had been made by Matra and other French companies on arms sales to Taiwan -- and the kickback of some of those payments to French politicians.

Lee acknowledged during several long interviews that he had no hard evidence of such a scandal, and it is unclear whether the allegation was anything more than a bold bluff. But, he said, "I think that letter . . . in effect, took on France Inc." And it was the French reaction, he argues, that reveals how power in that country really works.

"The system resembled that of Italy, Japan or South Korea, where government bureaucrats (including intelligence agencies) and large companies worked hand in hand," he said. "Companies begin to feel immune from normal legal rules." On the surface, Lee's resume seems so bland he might almost be one of those Alfred Hitchcock characters who stumble unintentionally into a web of intrigue. But there is also something elusive about Lee -- a face that defies easy ethnic categorization; a lavish, expatriate lifestyle; a penchant for taking risks -- that may have added to French suspicions.

The son of a prominent Chinese-American rocket scientist and a German mother, he graduated from Stanford in 1960 and spent six years with the State Department. He left government in 1966 for Harvard Law School and then joined Shearman & Sterling, moving to Paris for the firm in 1972. He remained there for 20 years, becoming head of the firm's Paris office and one of the leading American lawyers in France. But he and the firm parted company in 1992. Lee said he was restless with his traditional corporate law practice -- finding it too staid and bureaucratic -- and decided he could have more fun and adventure as an entrepreneur.

Some of the French anxiety about Lee stems from what he did next. In mid-1992, he took a part-time position with Kroll Associates, a New York firm that provides investigative services for big companies and employs a number of former CIA and FBI officers.

For French officials, Lee's brief stint with Kroll tagged him as a suspicious person. According to French and U.S. sources, the French equivalent of the FBI, known as the Directorate of Surveillance of the Territory, or DST, suspected that Kroll's Paris operation was a CIA front. They bugged Kroll's Paris offices and harassed some of its clients, according to company executives.

Jules Kroll, the firm's chairman, says the French suspicions are groundless. "We don't work for anyone except our clients," he said in an interview in his Manhattan headquarters -- "and that doesn't include the CIA."

But the French suspicion that Lee and Kroll were corporate spies cannot be understood without some background. For nearly a decade, the United States and France have been locked in an increasingly bitter quarrel over economic espionage.

The economic spy war began to heat up in 1989, when the Bush administration concluded that the French were trying to steal secrets from U.S. companies, here and abroad. The FBI expelled several French agents and warned U.S. companies to be on guard against French spying.

It was France's turn to become indignant in 1993, when the Clinton administration began using the CIA more aggressively to gather information about foreign trade and economic issues. An article last month in the French magazine Le Nouvel Observateur cited several instances of what the French viewed as U.S. dirty tricks, including work by U.S. intelligence agencies that helped U.S. firms beat out French companies for a $6 billion airline contract with Saudi Arabia and a $1.4 billion contract for a surveillance system in Brazil.

Several top U.S. intelligence sources confirm that the CIA was indeed mobilizing its stations around the world in 1993 and 1994 to gather information about French business practices so as to "level the playing field." One agency source confirmed that as part of this effort, the CIA obtained evidence of improper French commission payments to officials in Brazil.

"The priorities were to find out where French companies were bribing people around the world to get contracts, and what they were doing to spy on U.S. corporations," recalled one top intelligence source. This aggressive program was justified, the source said, because "except for the South Koreans, the French are the only American ally that systematically conducts extensive espionage operations against us."

Lee entered this minefield in 1993 when he decided to bring his lawsuit against a big French defense company.

The Matra-Hachette merger was already controversial in Paris. For years, both companies had been run by Jean-Luc Lagardere, one of France's most aggressive and successful businessmen. Critics argued that Lagardere had used his healthy defense company to bail out Hachette, a venerable French media company that had been rocked by the 1991 collapse of an effort to create a new television network.

Lee's bold stroke was to challenge the merger through a shareholder class-action suit -- a common tactic in the United States but one almost unheard of in France. The goal of the suit from the beginning -- in addition to challenging what Lee viewed as an unfair merger -- was to force Lagardere to offer a financial settlement. "It was a no-brainer," Lee recalled in an interview. "We knew that France was ripe for introduction of U.S. legal tactics."

The suit was filed in France in June 1993. The Matra shareholders argued that because Matra's contract for sale of missiles to Taiwan, which was secret, had not been included in the formal estimate of Matra's worth, their shares had been undervalued.

Matra officials immediately began searching for the culprits who might be behind this legal assault. "The whole thing appeared bizarre from the beginning," recalled a source close to Matra. "In June 1993, we hear the name Lee. We ask, Who is Bill Lee?' What we hear frightens us -- that he's . . . {with} Kroll. The first reaction is to believe it is a Kroll operation for some American competitors."

The case bumped along in French courts, with Lee and his plaintiffs losing the initial battles. The courts accepted Matra's arguments that its valuation calculations had included the Taiwan contract.

But Lee said he still hoped to win a lucrative settlement, and in the summer of 1994, an emissary proposed that Matra pay about 150 million French francs, or roughly $30 million, to settle the case. Matra said no, and a company spokesman complained to the French press about "extortion."

On Sept. 16, 1994, the Lee forces raised the ante. Jean-Pierre Malen, a French accountant who was Lee's lead plaintiff, sent the incendiary letter to the president of Taiwan asking his assistance.

The letter cited Taiwan's unusually large down payment on the Matra missile deal, which according to Taiwan press reports may have totaled roughly $800 million, and charged that a "large portion of the down payment . . . was funneled back to your country to finance certain party activities of the ruling party." It also claimed that Taiwanese officials could face criminal action for "bribing French government officials and their relatives."

Asked to comment on the letter, the Matra spokesman said, "We strongly deny that there was anything improper or illegal about this contract." And Lee now concedes that his legal team did not have hard evidence of wrongdoing. The criminal complaint outlined in the letter was never filed.

But in the cozy salons of France Inc., the September letter exploded like a stink bomb -- and some very strange things began to happen to William Lee.

He was placed under surveillance by French intelligence, according to Lee and French sources. And one of his former employees was recruited by French intelligence to inform on her ex-boss.

Florence Drillon, 50, an administrative assistant, said in an interview that two officials of the DST showed up at her Paris apartment in October 1994 and began asking questions about Lee. They showed her French penal code language warning that anyone maintaining contact with a foreign intelligence agent "could be sentenced to 10 years in prison and a 1 million franc fine."

Drillon said she was uncomfortable with the DST request but passed along some minor information about Lee's schedule. She was unemployed at the time, and she said the DST officers suggested that, if she cooperated, they would help her find a job.

Malen, the lead plaintiff in the suit, said he also was contacted by the DST. "This government entity criticized me for the letter I had sent to the Taiwan government," he said.

Despite efforts to negotiate a truce, the Lee affair detonated in January 1995, when Pasqua summoned Harriman. U.S. officials believe the French -- who had been looking for months for evidence of American dirty tricks -- thought they had found a perfect example in Lee. They also suspect that Pasqua, who was in political trouble at the time because of a scandal involving the wiretapping of French citizens, was looking for a diversion.

U.S. officials speculate that Lee was pushed onto the list by Pasqua's intelligence advisers. According to U.S. and French accounts, these advisers operated what amounted to a private intelligence network, with contacts in key positions in French intelligence and big French companies. Even prominent French officials talk about their activities in code, using phrases such as "third force" or "black hand" to describe the secret network.

Pasqua's office in Paris said last week he would not respond to questions about the Lee affair.

By February, Pasqua had shelved the allegation that Lee was a CIA agent. But Lee still had some powerful enemies.

On Feb. 23, the French daily Liberation published an article alleging that Lee was a CIA spy. The story explained the background of the Matra case, in the airy style of French newspapers:

"The firm {Matra}, worried to see its image and contracts in question, asked the French secret services to tap this lawyer {Lee}, to follow him and check his accounts so as to determine his sleeping partners. After about three months' investigation in the United States, Europe and Asia . . . the DST affirms to hold proof that this man works for the American services (which the interested {party} denies, of course). . . ."

Matra immediately issued a statement calling the Liberation report "fiction" and insisting that the company "was never involved in the actions of the French administration and government."

Lee said he began to receive death threats in late January. The most chilling was a call his fiancee took from a man with an American accent: "You bitch," said the caller. "We'll get him, and we'll get you, too."

Rumors also began to circulate in Paris in February that a contract had been taken out on Lee's life, according to U.S. and French sources. In one version, a French mobster planned to lure Lee to the former Soviet Union, where he would have an accident. Another version had it that a Chinese Triad underworld group in Taiwan had been hired to kill Lee. A bizarre third version, provided by a French intelligence source to a journalist, had it that the CIA was planning to kill Lee, because he was an erratic agent.

The CIA began to collect intelligence about the death threats, and in April, Lee was hastily summoned to the U.S. Embassy in Paris and advised that his life was in danger. Later, according to a U.S. counterintelligence source, questions were raised at the CIA about the reliability of their source for the death threats. But at the time, officials agreed, they had no choice but to inform Lee.

Lee left Paris immediately after receiving the warning from the U.S. Embassy and flew to London. There he had scheduled a secret rendezvous to discuss the case with a top executive of Matra, Jean-Louis Gergorin. Gergorin told Lee that Matra had a powerful interest in protecting him. If the death threats were real, he said, Matra would be blamed if anything happened.

There were other efforts to protect Lee's life. A senior U.S. Embassy diplomat visited the French Foreign Ministry to warn that if anything happened to Lee, questions would be asked in Washington. Matra even discussed the problem with Kroll, the American private detective. Kroll said he used his contacts in Asia to pass a message to the Chinese Triads that it would be a great mistake to go after Lee.

Weeks and months passed without any harm to Lee, and fears that his life was in danger gradually eased. Lee, who now lives on New York's Long Island, says he is not sure whether the assassination threats were real. They may simply have been an attempt to intimidate him.

The Balladur government -- including the interior minister, Pasqua -- was swept from office in May with the election of Jacques Chirac as president. And Lee finally got some encouragement from the French legal system two months ago, when a French appeals court heard arguments on his original lawsuit challenging the Matra-Hachette merger. The "advocate general," a kind of official "friend of the court" in French cases, advised that the court should appoint an expert to assess the valuation of the Matra shares, which was one of the demands Lee's shareholders had made.

The appeals court is scheduled to announce its decision Jan. 16. CAPTION: U.S.--FRENCH SPY WAR THE PLAYERS WILLIAM LEE, 57 Harvard-educated corporate lawyer who practiced for 20 years in Paris with law firm of Shearman & Sterling. He then spent a year working part-time with Kroll Associates, a N.Y. firm that provides investigative services to big companies. In 1993, he started his own firm, known as Triangle Group. JEAN-LUC LAGARDERE Head of weaponry firm Matra and publishing house Hachette. One of France's most aggressive businessmen. EDOUARD BALLADUR Former prime minister of France. JULES KROLL Chairman of Kroll Associates, of New York, a private investigative firm that employs several former FBI and CIA officers. In 1991 the firm investigated Iraqi leader Saddam Hussein's secret bank accounts. French suspect that Kroll firm is a CIA front, but Kroll denies it. THE LAWSUIT 1992 Nov.: Matra negotiates missile sale to Taiwan. Dec.: Powerful weapons maker Matra and giant publisher Hachette merge. 1993 June: Lee files suit on behalf of nine Matra shareholders challenging the merger. The plaintiffs argue they were cheated because Matra's estimated value did not include a big contract to sell missiles to Taiwan, and therefore their shares had been undervalued. 1994 Summer: Emissary proposes that Matra pay $30 million to settle the case. Matra declines, complaining to French press of extortion. Sept.: Lee's lead plaintiff writes letter to president of Taiwan, warning that the lawsuit could disclose improper commission payments made by Matra and other French companies on arms sales to Taiwan -- and the kickback of some of those payments to French and Taiwanese politicians. 1995 April 11: Lee summoned to U.S. Embassy, warned his life is in danger and advised to leave immediately. Lee leaves. May: French government voted out of office. Nov.: French state "advocate general" recommends to appeals court that expert should assess proper value of Matra shares. 1996 Jan. 16: Final court decision in Matra suit due. FBI expels French agents for allegedly trying to steal secrets from U.S. firms. THE INTELLIGENCE RIVALRY 1989 FBI expels French agents for allegedly trying to steal secrets from U.S. firms. 1993 Clinton administration begins using CIA more aggressively to gather information on foreign trade and economics and find out if French paid bribes to foreign politicians to obtain contracts. 1994 French suspect CIA campaign against them after losing billion-dollar deals in Saudi Arabia and Brazil to American firms. Fall: Lee placed under surveillance by French intelligence; one of his former employees was recruited by French intelligence to inform on her ex-boss. 1995 Jan. 26: French interior minister, Charles Pasqua, summons U.S. Ambassador Pamela Harriman to complain about U.S. spying and demands that several U.S. spies leave the country, including Lee. Jan.: Lee begins to get death threats. Feb. 10: Harriman again sees Pasqua, who indicates CIA may be lying but now concentrates on five other alleged spies. Feb. 22: Le Monde publishes story on spy scandal, but Lee not listed. ec CAPTION: THE LAGARDERE EMPIRE Through the Lagardere Group holding company, French businessman Jean-Luc Lagardere controls two broad lines of business: media (Hachette) and defense technology (Matra).

Hachette

Publishing: includes hardback and paperback books, children's books, schoolbooks, 38 magazines in France, 21 in the U.S. including Woman's Day and Car & Driver, as well as book and media distribution systems Broadcasting: 45.1% interest in Europe 1 radio station, three other radio stations, outdoor advertising. Film and TV production. Multimedia: CD-ROMs and Interactive CD in culture and special interests. MATRA

Defense: includes manufacture of air- and ground-launched weapons systems; prime contractor for the Apache missile (in partnership with Aerospatiale); air defense systems using Mistral missile, drone aircraft, aircraft countermeasures and self-defense systems. Space: telecommunications satellites, Earth observation satellites, launch vehicles, transport and manned spacecraft. Telecommunications: telephones, answering machines, fax machines. Transport: driverless subway systems. Automobiles: Renault Espace (with Renault). In millions of 1993 -- '94 dollars

1993

1994 Net sales

9,532

9,549 Operating income

514

465 Net income

90

111 Employees

41,422

40,326 ec CAPTION: WILLIAM LEE ec