Former Chinese National Charged with Stealing Military Application Trade Secrets from Silicon Valley Firm to Benefit Governments of Thailand, Malaysia, and China

Third Foreign Economic Espionage Indictment in the United States Since the Enactment of Economic Espionage Act of 1996; Source Code Used for Military Combat Simulation and Banned for Export Without License

SAN JOSE United States Attorney Kevin V. Ryan announced that a former Chinese national was charged late yesterday in a 36-count superseding indictment alleging that he stole military application trade secrets and used them in demonstration and sales proposals to the Peoples Republic of China (PRC), Malaysian Air Force, and the Thailand Air Force. This prosecution is the result of a joint investigation by the U.S. Attorneys Office CHIP Unit, the Federal Bureau of Investigation (FBI) and Department of Homeland Security, Bureau of Immigration and Customs Enforcement (ICE).

XIAODONG SHELDON MENG, 42, is charged with stealing military combat and commercial simulation software and other materials from his former employer Quantum3D, a company based in San Jose, California. The economic espionage charges allege that Meng, formerly a resident of Beijing, China, and a resident of Cupertino, California, stole the trade secrets from Quantum3D with the intent that they would be used to benefit the foreign governments of China, Thailand, and Malaysia.

United States Attorney Kevin V. Ryan stated, This case highlights the vital importance of protecting the intellectual property and trade secrets not only in Silicon Valley but also for our country's businesses. The alleged economic espionage and theft and export of trade secrets such as these -- visual simulation training software that has military application, no less -- has real consequences that could jeopardize our country's military advantages in the world, in addition to creating substantial financial losses for our businesses which legitimately developed and owned this information. We are grateful to our law enforcement partners for taking swift and appropriate action here, and also want to acknowledge the pivotal role private industry's ready cooperation has in these investigations.

Many of Quantum3Ds products were designed primarily for military purposes, including military combat training in simulated real-time conditions during the day and night and the use of advanced infrared (IR), Electro-Optical (EO), and Night Vision Goggle (NVG) devices. The indictment alleges that Meng stole numerous Quantum3D products, including viXsen and nVSensor, which were used exclusively in military applications, and designed for precision training of military fighter pilots in night vision scenarios among other applications. Both viXsen and nVSensor are classified as defense articles on the U.S. Munitions List and cannot be exported outside the United States without an export license.

According to the charges, Meng took up employment with a competing company, Orad, to pursue other career development opportunities in China. At one point, Meng altered the Quantum3Ds Mantis program to reflect the name of a program which belonged to Orad, a competitor of Quantum3D, according to the charges. Meng then used that program as part of a demonstration project in China.

The indictment includes three conspiracy counts; three counts of economic espionage and attempted economic espionage; two counts of violations of the Arms Export Control Act; twelve counts of theft of trade secrets and attempted theft of trade secrets; fifteen counts of foreign and interstate transportation of stolen property; and three counts of making false statements to a government agency.

FBI Special Agent in Charge Charlene B. Thornton: The FBI is committed to aggressively pursue those attempting to illegally obtain and export trade secrets vital to maintaining the United States position as a world leader in innovation. Todays indictment highlights the value of cooperation between law enforcement and private industry in effectively conducting these investigations.

One of ICEs top enforcement priorities is preventing terrorist groups and hostile nations from illegally obtaining U.S. military products and sensitive technology, said San Francisco ICE special agent in charge Charles DeMore. These items are controlled for good reason -- in the wrong hands, they could be used to inflict harm upon America or its allies.

Quantum3D, Inc. has cooperated fully in the government's investigation. A company official noted that the company believes that enforcement of export and trade secret laws is critical to the functioning of our industry and were pleased to work with the government in these efforts.

Defendant Meng is scheduled to be appear before United States Magistrate Judge Howard R. Lloyd in San Jose on Monday, December 18, 2006, at 11:00 a.m. Meng was initially charged by complaint on December 9, 2004. The original indictment on the case remains under seal. Mr. Meng is currently out of custody on $500,000 bond.

According to the U.S. Department of Justice, the charges represent the third case alleging violation of the Economic Espionage Act of 1996, under 18 U.S.C. 1831. The first indictment was returned on May 8, 2001, in the Northern District of Ohio in United States v. Okamoto and Serizawa. (More information is available at: http://www.usdoj.gov/criminal/cybercrime/Okamoto_SerizawaIndict.htm). The second indictment was filed on December 4, 2002, by the Northern District of California CHIP Unit in United States v. Fei Ye and Ming Zhong, CR 02-20145-JW. (More information is available at: www.usdoj.gov/usao/can/press/2003/2002_12_04_ye.zhong.indictment.press.html).

The maximum statutory penalty for each count of:

Conspiracy, in violation of 18 U.S.C. 371, is five years in prison, a fine of $250,000 or twice the value of the property involved in the transaction, whichever is greater, a three year term of supervised release;
Economic Espionage and Attempted Economic Espionage, in violation of 18 U.S.C. 1831(a)(3), 1831(a)(4), is fifteen years in prison, a fine of $500,000 or twice the value of the property involved in the transaction, whichever is greater; a three year term of supervised release;
Arm Export Control Act, in violation of 22 U.S.C. 2778, is ten years in prison, a fine of $1,000,000 or twice the value of the property involved in the transaction, whichever is greater; a three year term of supervised release;
Misappropriation of Trade Secrets and Attempted Misappropriation of Trade Secret, in violation of 18 U.S.C. 1832(a)(1), 1832(a)(4), is ten years in prison, a fine of $250,000 or twice the value of the property involved in the transaction, whichever is greater, a three year term of supervised release;
Interstate and Foreign Transportation of Stolen Property count, in violation of 18 U.S.C. 2314, is ten years in prison, a fine of $250,000 or twice the value of the property involved in the transaction, whichever is greater, a three year term of supervised release;
False Statement to Government Agency, in violation of 18 U.S.C. 1001, is five years in prison, a fine of $250,000 or twice the value of the property involved in the transaction, whichever is greater, a three year term of supervised release.

However, any sentence following conviction would be imposed by the court after consideration of the U.S. Sentencing Guidelines and the federal statute governing the imposition of a sentence, 18 U.S.C. 3553.

An indictment contains only allegations against an individual and, as with all defendants, Mr. Meng must be presumed innocent unless and until convicted.

The case is one of the many cutting-edge cases prosecuted by the Computer Hacking and Intellectual Property (CHIP) Unit of the United States Attorneys Office. The CHIP Unit, which is based in the San Jose branch of the U.S. Attorneys Office, was established in 2000 and was the first federal specialized prosecution unit in a U.S. Attorneys Office. This model has been followed in other offices and there are now about twenty-five CHIP Units in U.S. Attorneys Offices around the country.

Criminal Division Chief Mark L. Krotoski is the Assistant U.S. Attorney prosecuting the case. This prosecution is the result of a joint investigation by the Federal Bureau of Investigation (FBI) and Department of Homeland Security, Bureau of Immigration and Customs Enforcement (ICE) - Office of Investigations Special Agents, U.S. Customs & Border Protection (CBP) Officers.

APPROXIMATE TIME-LINE OF ALLEGATIONS IN INDICTMENT

June 19, 2000, to March 7, 2003: Defendant XIAODONG SHELDON MENG was employed at Quantum3D as a Systems Engineer, computer systems analyst, and 3D Graphics Application Senior Engineer. As part of his employment, defendant Meng signed Quantum3Ds proprietary information agreement where he agreed to return all of Quantum3Ds proprietary information upon his departure from the company.
March 7, 2003: Defendant MENG resigned his position from Quantum3D. At this time, defendant falsely stated that he returned all proprietary information belonging to Quantum3D.
March 7, 2003 to April 1, 2003: MENG had no employment, consulting or other relationship with Quantum3D.
March 19, 2003: MENG entered into a consulting agreement with Quantum3D, effective April 1, 2003, in which MENG would serve as an independent consultant for Quantum3D in Asia.
March 26, 2003: MENG departed the United States from San Francisco, California for Taipei, Republic of China (Taiwan).
April 1, 2003, to December 31, 2003: XIAODONG SHELDON MENG served as an independent consultant for Quantum3D in Asia. Meng resided in the People's Republic of China (PRC).
June 15, 2003: MENG attempted to compile, Audition source code version 4.1.0.46, as part of an unauthorized use of Quantum3D products with the Malaysian Air Force.
August 17, 2003: MENG attempted to compile, and caused others to attempt to compile, Fulcrum source code, a product of Quantum3D, as part of an unauthorized use of Quantum3D products with the Malaysian Air Force.
August 17, 2003: MENG attempted to compile, and caused others to attempt to compile, source code into the MantisClient application, as part of an unauthorized use of Quantum3D products with the Malaysian Air Force.
January 6, 2004: MENG represented that he was a Manager for Orad, Inc., a direct competitor of Quantum3D, using an email address of sheldonm@orad.tv.
January 15, 2004: MENG ended his consulting relationship with Quantum3D citing an effective date of December 31, 2003. Meng had already taken a position with Orad, a direct competitor of Quantum3D, in the PRC, and indicated his desire to pursue other career development opportunities in China.
May 19, 2004: MENG conducted a demonstration for Blue Sky (AVIC I) in Beijing, PRC, as part of the unauthorized use of Quantum3D products with government agencies in China, including Beijing Lantian Aviation Simulation Technology Company, a subsidiary of China Aviation Industry Corporation.
May 24, 2004: MENG prepared Quantum3Ds OpenGVS for demonstration on the DVG (Digital Video Graphics) in the PRC, as part of the unauthorized use of Quantum3D products with government agencies in China, including Beijing Lantian Aviation Simulation Technology Company, a subsidiary of China Aviation Industry Corporation, the Navy Research Center of China, and the Shenzhen Land Management Bureau.
May 31, 2004 to June 4, 2004: MENG compared and ran Quantum3Ds product Independence with Orads DVG product, as part of the unauthorized use of Quantum3D products with government agencies in China, including Beijing Lantian Aviation Simulation Technology Company, a subsidiary of China Aviation Industry Corporation, the Navy Research Center of China, and the Shenzhen Land Management Bureau.
June 3, 2004: MENG prepared a DVG digital visual system proposal for Blue Sky (AVIC I) that discussed options for image generator solutions, as part of the unauthorized use of Quantum3D products with government agencies in China, including Beijing Lantian Aviation Simulation Technology Company, a subsidiary of China Aviation Industry Corporation, the Navy Research Center of China, and the Shenzhen Land Management Bureau.
June 20, 2004: MENG sent an email suggesting the use of Quantum3D products viXsen and Mantis for an image generator proposal. Defendant Meng also noted that he had genius engineers in China who are interested in developing Sensor products, as part of an unauthorized use of Quantum3D products with the Malaysian Air Force.
July 26, 2004: MENG programmed new demonstrations on the DVG system, as part of the unauthorized use of Quantum3D products with government agencies in China, including Beijing Lantian Aviation Simulation Technology Company, a subsidiary of China Aviation Industry Corporation, the Navy Research Center of China, and the Shenzhen Land Management Bureau.
July 27, 2004: MENG e-mailed a person mailto:sheldon@keverian.com,stating that he had retained a Quantum3D Obsidian FX in the PRC, and asked for a place to store it since it could be used for their development in the future, as part of the unauthorized use of Quantum3D products with the Royal Thai Air Force.
July 27, 2004: An individual told MENG that the Quantum3D Obsidian FX could be stored in Thailand and directed that the Quantum3D Obsidian FX be sent to the Thai Equipment Research Company, Ltd. in Bangkok, Thailand, including for the Royal Thai Air Force proposal.
August 16, 2004: MENG unzipped, or caused someone to unzip, the zip file containing source code for product of Quantum3D, as part of the unauthorized use of Quantum3D products with the Royal Thai Air Force.
September 10, 2004: MENG met with members of the Chinese Air Force about the DVG technology, as part of the unauthorized use of Quantum3D products with government agencies in China.
September 15, 2004: MENG installed a DVG demonstration unit on a PRC Navy site, as part of the unauthorized use of Quantum3D products with government agencies in China, including Beijing Lantian Aviation Simulation Technology Company, a subsidiary of China Aviation Industry Corporation, the Navy Research Center of China, and the Shenzhen Land Management Bureau.
October 21, 2004: MENG asked a person to take back the DVG demonstration system from Chinas Navy Research Center, as part of the unauthorized use of Quantum3D products with government agencies in China.
November 23, 2004: MENG sent an email to a person that he met with and discussed the installation of a DVG, 3 channel demo at Blue Sky, believed to be BASC/AVIC I, as part of the unauthorized use of Quantum3D products with government agencies in China, including Beijing Lantian Aviation Simulation Technology Company, a subsidiary of China Aviation Industry Corporation.
December 22, 2004 to January 2, 2005: MENG, directed another person unknown to the Grand Jury, to delete approximately 966 emails from MENGs email account at smeng_cn@yahoo.com.cn.

Further Information:

A copy of this press release and related court filings may be found on the U.S. Attorneys Offices website at http://www.usdoj.gov/usao/can.

Further information on the Economic Espionage Act is available at: http://www.usdoj.gov/criminal/cybercrime/usamay2001_6.htm

Electronic court filings and further procedural and docket information are available at https://ecf.cand.uscourts.gov/ (click on the link for to retrieve documents from the court).

Judges calendars with schedules for upcoming court hearings can be viewed on the courts website at www.cand.uscourts.gov.

All press inquiries to the U.S. Attorney's Office should be directed to Luke Macaulay at (415) 436-6757 or by email at Luke.Macaulay@usdoj.gov or Matt Parrella, Chief of the CHIP Unit at 408-535-5042 or at matthew.parrella@usdoj.gov.

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