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The IBM Case Arches Eyebrows in Silicon Valley, Where High-Tech Spying Is 'a Way of Life'

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The folks who brought you Abscam cast a new net recently and trapped some surprising fish. Arrested by the FBI were three Japanese computer experts from Hitachi and one from Mitsubishi Electric on charges that they had paid a combined total of $648,000 to an FBI front company for documents and devices stolen from IBM. The sting was centered in California’s Silicon Valley, south of San Francisco, where high-tech companies are clustered like transistors on a microchip. That is John D. Shea’s turf. A Chicago-born 20-year veteran of the microelectronics business with an engineering degree from Arizona’s Phoenix College, Shea, 42, is president of Technology Analysis Group, a computer consulting firm in San Jose. Its services include tracking Japanese and Russian technological advancements for the Defense Department and helping companies fight industrial espionage. Shea described what’s going on beneath the surface of the IBM case to Eric Levin of PEOPLE.

The FBI called its sting PENGEM, for Penetrate Gray Market Electronics. What is the gray market?

It’s the Silicon Valley term for the traffic in stolen goods and information. The market in stolen microchips and other hardware is conservatively put at $100 million a year. You can easily pack $500,000 worth of microelectronic devices in an attaché” case. Last Thanksgiving $2.7 million in devices, many with definite military applications, were taken from Monolithic Memories Inc. in Sunnyvale, Calif. It was an inside job. Fifty percent were recovered, but the FBI believes some reached the Eastern bloc and Russia. As for the traffic in secrets, if you prorate the advantage to the recipients, it’s worth another $300 million a year.

How did Silicon Valley react to the arrests in the IBM case?

Nobody was shocked or surprised. If anything, they were more anti-FBI. The feeling was, “Hey, guys, this is the way of life. This is the culture of the Valley.”

How is espionage a “way of life”?

I’ll give you an example. Friday evenings people unwind, and competitors will get together at watering holes like the Wagon Wheel in Mountain View, the Red Coach, TGI Friday’s or Houlihan’s in Cupertino, which is geographically the center of Silicon Valley. There, over a drink, everything from design details to marketing strategies, and in some cases actual products, changes hands.

What is given in exchange?

It can be cash, gifts or memberships in prestigious athletic clubs or country clubs. Or just ego gratification—people like to brag. If it’s cash, the sums can range from $500 to $4,000. It’s usually handed over inconspicuously in a busy shopping center parking lot.

Why are people so willing to sell out their employers?

Two reasons. In the confrontational style of American management, people are pitted against each other ruthlessly. There is no trust, no loyalty. Reason No. 2: Money speaks. Life in Silicon Valley is very fast, very competitive. To keep up, you have to drive a Mercedes, live in a $300,000-to-$500,000 house, have a pool in the backyard, a cabin in Lake Tahoe if you’re a ski buff, a yacht in Santa Cruz Harbor if you like to sail. You have to belong to the Decathlon Club or the Palo Alto Golf Club and send your kids to private schools like Bellarmine or St. Francis. Then there are business dinners, cocktail parties, barbecues. It all costs money.

Are spies common in executive suites?

I would say there are two or three at every major high-tech company. I call them rogue engineers, although they are also known as sleepers or moles. Once hired, they will work as normal employees for six months to four years before the company they are spying for turns them on. All the while they earn two separate salaries, each in the $50,000-to-$75,000 range. A good rogue can spy actively up to five years.

Are they prosecuted if detected?

No, just fired, because companies don’t want to admit their security system wasn’t good enough. Detected or not, they eventually leave the company they were spying on. They may “accept an offer” from the company they were spying for and be assigned to a foreign branch for a while. Or they may move on to a new undercover role.

Is bugging common?

No, you don’t have to do that because people talk to begin with. However, from 1970 to 1976 American companies did wiretap their own executives. That started when people began spinning off and forming their own companies, sometimes sneaking out proprietary documents, program tapes or actual products to help them get launched. That still happens. But the bugging stopped, and Watergate had a reasonable influence on that. As for bugging the competition, that’s James Bond stuff. It never happens.

How else is espionage conducted?

Companies will employ an executive search firm, or headhunter, to run ads offering a high-level job. The company studies the respondents’ resumes, which can be very revealing. The company then interviews the best-placed candidates in detail, thereby assembling quite a collage of information about its competitors’ strengths and weaknesses. In many cases, there’s no job behind it at all. It’s a scam, a common occurrence.

How do the Japanese usually get restricted information?

Their technique is a little more suave than the American. They are patient. They will target some notable person and develop a very personal relationship over time, wining and dining him, inviting him to Japan, flattering him and so on. They may spend up to two years lowering the person’s guard before they start pumping.

Don’t these targets know they’re being setup?

The majority never had it happen to them before and so, of course, they don’t. It starts casually, you see. If the American is giving a paper at a conference, for instance, the Japanese gentleman may give him a card and say, “I’d appreciate a copy of your paper. I find it very stimulating.”

Are these Japanese working technologists or special operatives?

One and the same. Working technologists in Japan will be given temporary duty for up to six, seven months to find out what the outside world is up to and whether there’s something there to emulate.

Do U.S. companies spy in Japan?

No. Caucasians stick out there, and we can’t hire Japanese to do it for us because they’re so loyal to their own employers. In Silicon Valley there are two companies that provide the same kind of dynamic work environment the Japanese do—IBM and Hewlett-Packard. All you have to do is look at their domestic and international success to see how vital it is to value your primary asset, your people.

Was it a surprise that the Japanese wound up in the FBI’s net?

That’s correct. They have a vast legitimate intelligence organization here. People in Japanese-owned companies pore over technical papers, read journals, attend conferences, buy equipment and reverse-engineer it to see how it works. A lot of what is gathered is eventually tunneled to the International Ministry of Trade and Industry in Tokyo, where it is used in national technology planning. The French and the Israelis are also very involved in this kind of intelligence gathering.

Because of the tense trade climate, would the Japanese be correct in assuming PENGEM was aimed at them?

No. Based on my government contacts, I am convinced the operation was intended to slow trafficking of secrets to the Russians and the Eastern bloc. My perception is that the FBI had this in place well before IBM expressed concern about Hitachi.

What is the scope of Soviet industrial spying?

They have a consulate in San Francisco, for example, with about 80 people. Only about 30 are needed for normal diplomatic work. The majority are known to be KGB officers with high-technology backgrounds. Since their right to travel here is restricted, the Russians often use Eastern bloc personnel or their own U.N. personnel.

How do the Russians operate?

They have been known to blackmail people to get information. They can be inventive, too. One story has it that a Russian trade delegation toured a U.S. aircraft factory saying they were considering buying a plane. Supposedly, they had put adhesive material on their shoes to pick up metal filings, which they later analyzed to learn the special metallurgy of the U.S. plane’s fuselage.

How can we stem the flow of secrets?

First, employee loyalty is absolutely key. Our management system of pitting one executive against another must change. Second, some common security practices should be implemented which do not invade people’s privacy or civil rights.

Like what?

Better background checks. A good document-control system with every piece of paper dated, serial-numbered and signed in and out. Documents can be printed on special paper that glows under ultraviolet light if they have been copied. Briefcases and purses should be checked with metal detectors so that microfilm cameras can’t be brought in or equipment taken out.

What is now the most coveted secret in Silicon Valley?

Probably the advanced work being done at the Stanford Research Institute on artificial intelligence. That is a major ingredient in the drive to create the fifth-generation computer—one that can make decisions by itself or with other computers. The Japanese are working on it, as are a number of American companies. The big question is: If we get it first, will we be able to keep it?