US company's China employee allegedly stole code to help local government

The charges against Xu highlight the intellectual property risks faced in other countries by development operations of U.S. companies, particularly in those countries the U.S. suspects could be involved in economic espionage.

Xu, who was initially arrested by the Federal Bureau of Investigation in December and was charged with one count of theft of trade secrets, is scheduled to be arraigned on a superseding indictment of charges of economic espionage on Thursday in a federal court in New York, the Department of Justice said.

The company whose source code he is alleged to have stolen has not been named in court filings or the DOJ statement, but a Reuters report said he was employed by IBM.

LinkedIn lists a developer with the same name as employed with IBM in China during about the same period. The company has 2,300 developers located in Beijing, Shanghai and Taipei at its China Development Lab (CDL) that was founded in 1999. IBM could not be immediately reached for comment.

Xu worked as a developer for the U.S. company’s branch in China from November 2010 to May 2014. He had full access to proprietary source code, including the ability to download it to a computer or storage device, according to the original complaint in December in the U.S. District Court for the Southern District of New York.

He resigned voluntarily in May 2014 and was allegedly caught trying to sell the code to U.S. undercover agents, who claimed they were starting a large-data storage company. Xu told the agents in May 2015 that he would consider downloading the code to the new startup for testing its functionality if they would set up a small network of computers for the purpose.

By August 2015, the files were remotely uploaded to the network set up the FBI agents and by the assessment of one of the "victim company’s" employees appeared to contain a functioning copy of the proprietary software. On Dec. 7, 2015, Xu met with one of the agents at an hotel in White Plains, New York, where he is alleged to have stated in “sum and substance,” that he had used the proprietary source code to make software to sell to customers.

Xu was arrested on Dec. 7 by the FBI. The three counts of economic espionage each carry a maximum sentence of 15 years in prison while the three counts of theft, distribution and possession of trade secrets each have a maximum sentence of 10 years.

“Economic espionage not only harms victim companies that have years or even decades of work stolen, but it also crushes the spirit of innovation and fair play in the global economy,” said Preet Bharara, the U.S. Attorney for the Southern District of New York, in a statement Tuesday.

The software is described as a key component of one of the world’s largest scientific supercomputers and of commercial applications that require rapid access to large volumes of data, according to the original complaint.

Xu is charged with the “intent to benefit” the Chinese agency but no specific charges relating to actual transfer of the code to the National Health and Family Planning Commission are mentioned in the superseding indictment.