Chinese National Pleads Guilty to Economic Espionage and Theft of a Trade Secret From U.S. Company

Today, Xu Jiaqiang, 31, formerly of Beijing, China, pleaded guilty to economic espionage and theft of a trade secret, in connection with Xu’s theft of proprietary source code from Xu’s former employer, with the intent to benefit the National Health and Family Planning Commission of the People’s Republic of China. Xu pleaded guilty to all six counts with which he was charged.

The announcement was made by Acting Assistant Attorney General for the National Security Dana Boente and Acting U.S. Attorney Joon H. Kim for the Southern District of New York. The pleas were entered before U.S. District Judge Kenneth M. Karas in White Plains, New York federal court.

“Today, Xu pleaded guilty to stealing trade secrets from his former employer for his own profit and intending to benefit the People’s Republic of China,” said Acting Assistant Attorney General Boente. “The Economic Espionage Act is a key tool in protecting our economic and security interests. The National Security Division will pursue and prosecute any individual who steals intellectual property from American businesses to benefit a foreign government.”

“Xu Jiaqiang admitted and pled guilty today to stealing high tech trade secrets from a U.S. employer, intending to benefit the Chinese government. What Xu did was not only a federal crime, but a threat to our national security and the American spirit of innovation. Our Office is committed to finding, arresting and holding accountable those who take advantage of American businesses by engaging in economic espionage.”

According to the allegations contained in the Complaint and the Superseding Indictment filed against Xu, as well as statements made in related court filings and proceedings:

From November 2010 to May 2014, Xu worked as a developer for a U.S. company (the “Victim Company”). As a developer, Xu enjoyed access to certain proprietary software (the “Proprietary Software”), as well as that software’s underlying source code (the “Proprietary Source Code”). The Proprietary Software is a clustered file system developed and marketed by the Victim Company in the U.S. and other countries. A clustered file system facilitates faster computer performance by coordinating work among multiple servers. The Victim Company took significant precautions to protect the Proprietary Source Code as a trade secret. Among other things, the Proprietary Source Code is stored behind a company firewall and can be accessed only by a small subset of the Victim Company’s employees. Before receiving Proprietary Source Code access, Victim Company employees must first request and receive approval from a Victim Company official. Victim Company employees must also agree in writing at both the outset and the conclusion of their employment that they will maintain the confidentiality of any proprietary information. The Victim Company took these and other precautions in part because the Proprietary Software and the Proprietary Source Code are economically valuable, which value depends in part on the Proprietary Source Code’s secrecy.

In May 2014, Xu voluntarily resigned from the Victim Company. Xu subsequently communicated with one undercover law enforcement officer (“UC-1”), who posed as a financial investor aiming to start a large-data storage technology company, and another undercover law enforcement officer (“UC-2”), who posed as a project manager, working for UC-1. In these communications, Xu discussed his past experience with the Victim Company and indicated that he had experience with the Proprietary Software and the Proprietary Source Code. On March 6, 2015, Xu sent UC-1 and UC-2 code, which Xu stated was a sample of Xu’s prior work with the Victim Company. A Victim Company employee (“Employee-1”) later confirmed that the code sent by Xu included proprietary Victim Company material that related to the Proprietary Source Code.

Xu subsequently informed UC-2 that Xu was willing to consider providing UC-2’s company with the Proprietary Source Code as a platform for UC-2’s company to facilitate the development of its own data storage system. Xu informed UC-2 that if UC-2 set up several computers as a small network, then Xu would remotely install the Proprietary Software so that UC-1 and UC-2 could test it and confirm its functionality.

In or around early August 2015, the FBI arranged for a computer network to be set up, consistent with Xu’s specifications. Files were then remotely uploaded to the FBI-arranged computer network (the “Xu Upload”). Thereafter, on or about Aug. 26, 2015, Xu and UC-2 confirmed that UC-2 had received the Xu Upload. In September 2015, the FBI made the Xu Upload available to a Victim Company employee who has expertise regarding the Proprietary Software and the Proprietary Source Code (“Employee-2”). Based on Employee-2’s analysis of technical features of the Xu Upload, it appeared to Employee-2 that the Xu Upload contained a functioning copy of the Proprietary Software. It further appeared to Employee-2 that the Xu Upload had been built by someone with access to the Proprietary Source Code who was not working within the Victim Company or otherwise at the Victim Company’s direction.

On Dec. 7, 2015, Xu met with UC-2 at a hotel in White Plains, New York (the “Hotel”).  Xu stated, in sum and substance, that Xu had used the Proprietary Source Code to make software to sell to customers, that Xu knew the Proprietary Source Code to be the product of decades of work on the part of the Victim Company, and that Xu had used the Proprietary Source Code to build a copy of the Proprietary Software, which Xu had uploaded and installed on the UC Network (i.e., the Xu Upload). Xu also indicated that Xu knew the copy of the Proprietary Software that Xu had installed on the UC Network contained information identifying the Proprietary Software as the Victim Company’s property, which could reveal the fact that the Proprietary Software had been built with the Proprietary Source Code without the Victim Company’s authorization. Xu told UC-2 that Xu could take steps to prevent detection of the Proprietary Software’s origins – i.e., that it had been built with stolen Proprietary Source Code – including writing computer scripts that would modify the Proprietary Source Code to conceal its origins.

Later on Dec. 7, 2015, Xu met with UC-1 and UC-2 at the Hotel. During that meeting, Xu showed UC-2 a copy of what Xu represented to be the Proprietary Source Code on Xu’s laptop. Xu noted to UC-2 a portion of the code that indicated it originated with the Victim Company as well as the date on which it had been copyrighted. Xu also stated that Xu had previously modified the Proprietary Source Code’s command interface to conceal the fact that the Proprietary Source Code originated with the Victim Company and identified multiple specific customers to whom Xu had previously provided the Proprietary Software using Xu’s stolen copy of the Proprietary Source Code.

In connection with the economic espionage counts charged in the Superseding Indictment, Xu stole, duplicated, and possessed the Proprietary Source Code with the intent to benefit the National Health and Planning Commission of the People’s Republic of China.

Xu pleaded guilty to three counts of economic espionage, each of which carries a maximum sentence of 15 years in prison, and three counts of theft of a trade secret, each of which carries a maximum sentence of 10 years in prison. The maximum statutory sentence is prescribed by Congress and is provided here for informational purposes. If convicted of any offense, the sentencing of the defendant will be determined by the court based on the advisory Sentencing Guidelines and other statutory factors.

Xu’s sentencing is scheduled for October 13.

Mr. Kim praised the FBI’s outstanding investigative efforts. He also thanked the U.S. Department of Justice’s National Security Division.

The case is being handled by the Office’s Terrorism and International Narcotics Unit and its White Plains Division. The prosecution is being handled by Assistant U.S. Attorneys Benjamin Allee, Ilan Graff and Shane T. Stansbury for the Southern District of New York, with assistance from Trial Attorney David Aaron of the National Security Division’s Counterintelligence and Export Control Section.