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Trial of Houston businessman stirs debate over U.S. crackdown on China’s economic espionage

Houston businessman Shan Shi is charged with stealing information about syntactic foam, which is used to provide buoyancy to pipes that link oil platforms to drilling equipment as far as two miles under the sea.
Houston businessman Shan Shi is charged with stealing information about syntactic foam, which is used to provide buoyancy to pipes that link oil platforms to drilling equipment as far as two miles under the sea. (Marc Morrison/BP)
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Five years ago, Houston entrepreneur Shan Shi saw an opportunity in China’s thirst for oil under the South China Sea and founded a company to learn how to make a type of crush-resistant foam that helps keep deepwater drilling rigs afloat.

Now Shi, a 54-year-old naturalized U.S. citizen, is fighting criminal charges that he conspired to commit economic espionage for China to advance its quest to develop its maritime engineering industry.

Shi’s legal battle played out in federal court in Washington this month — one in a growing list of Justice Department prosecutions of alleged trade-secret theft and commercial spying that Trump and Obama administration officials have said mark a systematic campaign by China to steal its way to economic dominance.

Shi’s defense team says prosecutors targeted an innocent man in a case that went to a federal jury Wednesday. His attorneys argue that the trial is the latest example of an overzealous focus on Chinese Americans whose work or scientific research exposes them to suspicions that they are spying on behalf of Beijing, even when their efforts are neither directed by the Chinese government nor involve military or export-controlled technology.

Scrutiny of Chinese American scientists raises fears or ethnic profiling

Without getting into specifics, Justice Department spokesman Marc Raimondi expressed confidence in the government’s case, saying, “We’ll let the evidence speak for itself in this pending prosecution and await the jury’s verdict.”

Shi is a married father of two who has lived in the United States since he arrived in the Midwest in 1990 to study engineering. He has pleaded not guilty to conspiring to commit economic espionage, trade secret theft and money laundering — charges punishable by up to 20 years in prison and $10 million in fines.

Countering Chinese trade policies and security threats has been a top priority for the U.S. government this decade, with the current White House elevating warnings of Beijing’s “economic aggression” in acquiring intellectual property and targeting emerging high-technology industries. The Chinese telecommunications giant Huawei, for instance, faces a U.S. ban on purchasing American products on national security grounds.

About 80 percent of U.S. indictments alleging economic espionage to benefit a state involve China, as well as more than two-thirds of trade secret theft cases, although not all cases included proof that Beijing directed the thefts involved, Justice Department officials said.

Between 2013 and April 2019, the U.S. government brought 22 prosecutions under the Economic Espionage Act, more than twice as many as it did in the seven years before 2013, according to Syracuse University’s Transactional Records Access Clearinghouse, which collects Justice Department data.

Some cases went nowhere.

Prosecutors dropped charges against two former Eli Lilly & Co. scientists, Guoqing Cao and Shuyu Li, for example, after they were accused of passing stolen drug trade secrets to a Chinese company and also dropped the case against National Weather Service hydrologist Sherry Chen, who was accused in Ohio of downloading sensitive data about dams and lying about a meeting with a Chinese official.

U.S. authorities also dismissed charges against Xiaoxing Xi, a physicist at Temple University whom they had accused of wire fraud in the exploitation of technology to help China.

Some defense lawyers and activists say a pattern persists of prosecutors bringing cases in which they do notfully understand the science or overstate the trade secrets in dispute, threatening a new economic cold war that places unfounded suspicion on Americans of Chinese descent legitimately trying to conduct research and do business in China.

Frank Wu, a former dean of the University of California Hastings College of the Law and president of the Committee of 100, a nonprofit organization of Chinese American leaders, said, “There are people of Chinese descent who have broken the law who should be prosecuted and punished.”

But, he added, “there are also people of Chinese descent who appear to have been targeted because of their national origin or ethnicity and have the book thrown at them. . . . They are cases of disproportionate punishment.”

Raimondi said that the Justice Department conducts investigations and prosecutions without regard to the ethnicity of subjects but that dozens of related convictions over the past decade remove any doubt that the Chinese government has made systematic theft of intellectual property an industrial policy.

“We make prosecutorial decisions based on facts, evidence and the evenhanded application of the law,” Raimondi said. He said officials “agree with Mr. Wu that people who break the law should be held accountable for their actions and remain committed to vigorously, and impartially, investigating and prosecuting the multibillion-dollar economic thefts targeting American corporations from China.”

Even if prosecutors cannot prove direct ties to a foreign government with unclassified evidence in open court, there are cases in which a government “may be aware of theft or reward it either after the fact or as a matter of policy,” he said.

In the recent case in federal court in Washington, Shi and six others were indicted in June 2017 and charged with conspiring to steal trade secrets from Trelleborg Offshore, a Houston-based U.S. subsidiary of the Swedish engineering giant Trelleborg.

Prosecutors allege that from 2013 until Shi’s arrest in May 2017, his firm, CBM International, received $3.1 million from its private Chinese parent company to help make and sell syntactic foam in China, using information stolen by former Trelleborg employees in Houston hired by Shi’s firm.

Versions of the strong, lightweight foams have military and civilian uses, including in oil exploration, submersible vessels, and aerospace and stealth technologies.

Prosecutors contend that the Chinese parent firm hoped to supply the foams to China’s navy as well as its civilian-led, state-owned oil and shipbuilding industries. The parent firm received state-funded research grants and partnered with state-run Harbin Engineering University, which specializes in research for China’s navy, prosecutors said.

Shi was arrested at a meeting with undercover FBI agents posing as buyers with a U.S. defense contractor seeking to build undersea remote-operated vehicles. By pitching his product at the meeting, Shi sought to convert Trelleborg’s secrets to his benefit, prosecutors said in charging documents.

Although some evidence in his case is classified, Shi is accused of stealing trade secrets related only to a civilian product used to encase and provide buoyancy to heavy undersea pipes that connect oil platforms and rigs on the ocean’s surface to drilling equipment as far as two miles below on the seafloor.

China’s central planners made developing that kind of technology a priority to help tap oil offshore, cut dependency on foreign oil and fuel the growing economy’s massive energy needs, prosecutors said.

“Shan Shi heard that mandate and acted on it,” Assistant U.S. Attorney Jeff Pearlman of the District told jurors in opening statements July 9 at Shi’s trial. “He stole it for his own benefit, and for the benefit of the People’s Republic of China.”

Shi’s defense team says the government’s case conflates a desire to sell to Chinese-government entities with a conspiracy to act for their benefit . This is a mistaken notion fueled by the Justice Department’s drive to mount China-related prosecutions, the defense says.

Shi’s attorneys argue that he has been singled out for conduct in which Trelleborg and its competitors engaged, such as hiring away each others’ engineers and closely tracking their rivals’ production capabilities. And they contend that any Trelleborg data that may have been taken was publicly available and was not a trade secret, or had been acquired by former employees without Shi’s agreement or knowledge.

“The government wants you to decide this case, and they hope you will convict Dr. Shi, based on fear and not on facts,” lead defense attorney Peter Zeidenberg said. Zeidenberg previously represented Chen, the Weather Service hydrologist, and Xi, the Temple physicist.

“There was no conspiracy between Dr. Shi and anybody else, no agreement to steal trade secrets. . . . There was nothing about these documents that would make Dr. Shi or anyone in his shoes think they were trade secrets,” Zeidenberg said.

During his three decades living in the United States, Shi built from scratch a 150-worker Houston company focused on oil-platform technology and had ambitions to break into a market dominated by four firms in the United States, Australia, Britain and Sweden, his attorneys said.

Trelleborg disputed Shi’s claims in court filings, calling itself a victim of his alleged crimes. Current and former employees testified that although they had no evidence of a formal agreement to steal secrets, Shi knew or should have known that he was receiving proprietary information.

“Dr. Shi . . . or anyone in this industry would that know that this data is specific to our business and shouldn’t be shared,” Trelleborg Offshore President Alan Burgess testified.

Prosecutors also alleged that Shi made the decision to steal Trelleborg’s data only after exploring how much it would cost to buy or license a competitor’s technology, and concluding that at about $3 million it would cost too much and take too long.

Of six co-defendants in the case, four have pleaded guilty to conspiring to commit theft of trade secrets, and two who have been sentenced have received probation.

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