Due to the space limitations of book publishing, some of the abbreviated case studies highlighted in the chapter, "Do You Want Fries With That Secret?" of Sticky Fingers are published in their entirety here. However, please note that the text carries the same notice of copyright protection as if published in the original book. You may also want to look at the Case Updates page.
IDEXX Laboratories: Animals and Spies -- Large, Small and Dumb
IDEXX Laboratories, Inc., of Westbrook, Maine, calls itself a world leader in providing diagnostic, detection, and information products to the animal health industry as well as quality assurance products and services to the dairy and water industries. Its revenues in year 2000 exceeded $367 million.
The Atlanta Journal-Constitution: Stop the Presses
Caroll Lee Campbell was the circulation manager for the Lawrenceville, Georgia, Gwinnett Daily Post. The Rockdale Citizen of Conyers, Georgia, was a sister paper of the Gwinnett Daily Post. Paul Soucy was the Citizen’s district circulation manager.
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In September, 1997, the much larger Atlanta Journal & Constitution was involved in litigation with its rival, the Gwinnett Daily Post, over the right to publish Gwinnett County legal notices, and a related issue regarding a dispute over paid newspaper subscriptions and a contract between the Daily Post and a local cable TV operator.
Looking to make a fast buck, Campbell contacted lawyers and business representatives for the Atlanta Journal & Constitution and offered to sell proprietary financial and business information from the Daily Post for $150,000. Using the code name “Athena,” he directed the recipients of his offer to place an ad in the “personals” section of the Atlanta paper if they were interested in doing business.
The FBI was brought in and placed a “Message to Athena” ad in the paper and began negotiations. Several back and forth messages letter, Campbell finally sent a message saying, “Show me the money.” The FBI arranged to meet “Athena” at a local shopping mall where the Feds were to pay an initial $5,000 and some of the information. Campbell would get the rest of the money after he turned over the remainder of the information.
After getting the $5,000, his wife, Susan, gave $1,500 of that money to Soucy, who had been acting as a lookout. Campbell also tried to buy a circulation list from another employee for $300.
It didn’t take long for the FBI to wrap this one up. Campbell pled guilty to conspiring to steal trade secrets and was sentenced to three months in prison, three years of supervised release, and was also ordered to pay $2,800 in restitution. Soucy, also pled guilty, and was sentenced to three years probation, a $1,000 fine and $500 in restitution payment. The charges against Susan Campbell were dropped after her husband pled guilty and was sentenced. [i]
[i] Department of Justice sources and website; Carr, Chris; Morton, Jack; Furniss, Jerry, The Economic Espionage Act: Bear Trap or Mousetrap, The Texas Intellectual Property Law Journal, Vol. 8, No. 2, Winter 2000, pp. 185-186.
Intel and Cyrix: Meet Dumb and Dumber
Two computer literate thieves, Steven Hallstead and Brian Pringle, contacted Cyrix Corp. and offered to sell it five “Slot II” computers that had been stolen from Intel, Inc., in April 1998. Intel placed the value of the various trade secrets contained within the prototype computers at $10 million, had a competitor been able to get their hands on the information before Intel released the computers to the public the following month.
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Hallstead, identifying himself on the telephone only as “Steve” contacted Cyrix in Richardson, Texas, and offered to sell Cyrix Intel’s Slot II CPUs. Hallstead told Cyrix that the CPUs were being developed by Intel and that they would be valuable to Cyrix. Cyrix, wanting no part in the scheme, immediately contacted the FBI.
Cyrix cooperated with the FBI in carrying out a sting operation to identify and nab the individual who was attempting to sell the sell the prototypes. Cyrix permitted an FBI agent to pose as a Cyrix employee. Hallstead offered to sell the computers to the FBI agent for $75,000. FBI agents in Dallas, working with FBI agents in California, identified and located Hallstead and his partner, Pringle, in California. Hallstead had Pringle travel from California to Texas to deliver two of the Slot II CPU’s to the Cyrix offices in Richardson. The FBI greeted Pringle when he arrived at the Cyrix offices and delivered the CPUs to FBI agents who were posing as Cyrix employees. Hallstead was arrested later that same day in California.
Hallstead and Pringle both pled guilty to, among other things, conspiracy to commit theft of trade secrets. Hallstead was sentenced to 77 months in prison and a $10,000 restitution fine; Pringle received a 60 month sentence and $50,000 restitution.[i]
[i] Department of Justice sources and website; Carr, Chris; Morton, Jack; Furniss, Jerry, The Economic Espionage Act: Bear Trap or Mousetrap, The Texas Intellectual Property Law Journal, Vol. 8, No. 2, Winter 2000, pp. 190.
Varian Associates: Big Mouth
David Kern was fired from his job at Varian Associates and took a job as head of engineering at Radiological Associates, one of Varian’s competitors located in Sacramento, California. Ironically, in his new job, Kern was responsible for maintaining and repairing Varian radiological devices at hospitals and treatment centers in Northern California. One of Varian’s technicians inadvertently left his laptop computer at a Northern hospital in Sacramento after completing a service call, and Kern found it.
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Using a popular file transfer software program called Laplink, Kern downloaded the contents of the found computer onto his own laptop. The information contained many of Varian’s trade secrets regarding its proprietary and confidential methods and protocols for servicing the million dollar cancer treating therapy machines. However, he later discovered that all of the information was encrypted.
Not wanting to a little thing like encryption stand in his way, Kern recruited a Varian employee to steal a security key from a Varian technician so he could unencrypt the data. He was successful and printed out all of Varian’s trade secrets that were contained on the computer.
He might have gotten away with it but for one thing. He apparently was so pleased with himself, he couldn’t keep his big mouth shut. He bragged of his exploits to numerous associates, who notified Varian.
He pled guilty to theft of trade secrets and having a big mouth. He was sentenced to one year in prison and three years supervised release.[i]
[i] Department of Justice sources and website; Carr, Chris; Morton, Jack; Furniss, Jerry, The Economic Espionage Act: Bear Trap or Mousetrap, The Texas Intellectual Property Law Journal, Vol. 8, No. 2, Winter 2000, pp. 192-193; the website of attorney R. Mark Halligan.
R.P. Scherer: Paintballs and Dumbbells
Jolene Rector managed to get hold of numerous pieces of proprietary information owned by R.P. Scherer, Inc., in Florida. RPS is a leading international developer and manufacturer of drug, supplement, cosmetic and recreational product delivery systems. Its proprietary advanced drug delivery systems are supposed to improve the efficacy of drugs by regulating their dosage, rate of absorption and place of release.
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RPS customers include global and regional manufacturers of prescription and over-the-counter pharmaceutical products, nutritional supplements, cosmetics and recreational products such as paint balls.
This information Rector obtained – from a friend, Steven Snyder – included such things as the company’s proprietary gel formulas, fill formulas, shell weights, and experimental production order data. She knew the information was proprietary, confidential and much of it was RPS trade secret information. She told Snyder to mail her the information so she could use it in her new job with an RPS competitor in Nevada, and he complied.
Then, she had a conversation with the Production Manager of Nelson Paint Ball, Inc., in Kingsford, Michigan, in which she told him that she had gelatin formulas and she was willing to sell the lot for $50,000. She said that she had obtained the formulas while working at RPS. She went on to explain that she was then living in Nevada and had been working for Soft Gelcaps West, but had recently been fired. After he hung up with her, the Production Manager contacted his company’s Executive Vice-President with this information.
A few days later, she spoke directly with the EVP and elaborated upon her offer. She said she had 65 paint ball color formulas and 108 gelatin formulas for sale. She was quite open in explaining that the information had come from her days at RPS, apparently thinking that would enhance the value of the trade secrets.
The Executive Vice President of Nelson Paint Ball then contacted the RPS corporate counsel office and blew the whistle on Rector. RPS asked Nelson Paint Ball to request Rector to fax some of the data to have it evaluated. Nelson Paint Ball cooperated by contacting Rector and asking her to fax some pages of the fill and gel formulas, maintenance instructions, paintball facility layout map and the pilot plant notebook. It took her only ten minutes to fall into the trap. Nelson Paint Ball faxed the information to RPS who then contacted the FBI.
Nelson Paint Ball cooperated with the FBI in setting up a sting on Rector. The next time she spoke to Nelson Paint Ball, she advised the EVP that she had already sold part of the documentation to an unnamed buyer. However, she still had some of the original documentation in her possession and was still willing to sell it for $25,000.
The next time they spoke, the EVP asked her to come to Michigan, but she balked, too smart for that old trick. She didn’t want to come to Michigan just to deliver stolen goods, she explained, as the FBI was tape-recording her call:
Yeah, well on an illegal thing no...(laughing), because you doing something that’s not ill.., not legally put down as like I’m doing a job...Yeah, then I’m setting myself up to get caught or whatever...you know wherever I go I’m setting myself up...but if there’s a contract and a job, you know a job contract, then it’s not a set up it, you know I’m basically doing a legal work...because it actually has...it doesn’t have nobody’s name on it , it is my stuff.…
Then, when the EVP asked her what she had done with the all of the stuff in the book from the pilot plant, she explained to him and to the listening FBI that she cleverly rewrote it all in her own handwriting it and that she destroyed the book so that there were no names. Then, trying the old high-pressure ruse, she said that the company that she had sold half of the pharmaceutical formulas to previously was also interested in buying the paint ball formulas, so Nelson Paint Ball had better act fast if they wanted the goods. What did she have left to sell? A maintenance manual for Japanese Sankyo encapsulation machine, approximately 106 gel formulas, and some 60 paint ball formulas. Oh, and where did the information come from, she was asked? RPS, she replied.
Now the FBI stepped in and an undercover agent met with Rector, claiming to have been sent by the EVP as a go-between. With a hidden video camera rolling, she turned over a maroon colored, three-ring binder containing machine maintenance instructions, paint ball and gel formulas, and list of shell weights all belonging to RPS. The undercover FBI agent then gave her a check for $25,000.
But, immediately following the exchange, the FBI notified her that the meeting had been a sting. However, even though she was told that she was not under arrest (yet) and she was free to leave, she consented to be interviewed. She confessed, and also said that she had burned a lab notebook containing experimental RPS products and notes while in Kentucky.
Rector and Snyder were arrested and pled guilty to theft of trade secrets in the first prosecution under the EEA in the Middle District of Florida.
On January 25, 2002, Jolene Rector was sentenced to 14 months confinement, half of which will be served in a community correctional center, two years supervised release, and a $200 assessment.
Steven Snyder's sentence was almost identical: 10 months confinement, half of which will be served in a community correctional center, two years supervised release, and a $200 assessment. [i]
[i] Department of Justice sources, grand jury presentment, website and news releases and interviews with the United States Attorney's office in Tampa, Florida.
Preco Industries: Peter Principle?
For those who don’t remember, the Peter Principle said each employee will rise to his or her own level of incompetence. Meet David Sindelar.
You might think that a guy who was hired as a Vice President of Corporate Development and soon thereafter promoted to Vice President for Sales-Western Region for a successful company wouldn’t have too much to beef about. But something apparently turned Sindelar against his employer, Preco Industries, Inc., a Kansas-based firm that designs, manufactures and sells industrial equipment.
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One day, after Sindelar had been on the job in Kansas for about three years, Preco received a letter from one of its competitors, Edale, located in the United Kingdom. Edale was writing to let Preco know that it had received a copy of Preco’s Sales Order Forecast, a valuable trade secret to be sure. As if that weren’t enough, a couple of weeks later, another UK competitor, Rolt Engineering, sent a letter to Preco containing not only a copy of Preco’s Sales Order Forecast, but design and specification information on Preco’s Solid Phase Pressure Forming System. This was also a valuable trade secret.
Well, there were only so many people who had access to that information, and Sindelar was on the very, very short list. So short that he was promptly charged with theft of trade secrets under the Economic Espionage Act, and pled guilty in a plea bargain. He was sentenced to five years probation, $16,600 in restitution, and a $10,000 fine.
Incidentally, he never made it to England.
Solar Turbine: The Caterpillar's Crawl
What is noteworthy about the following case is how clearly it demonstrates how stolen trade secrets can be used to benefit a competitor, or for someone to go into business against his former employer. It is important to remember that this happens everyday all over the country, and all over the world. Not all spies and thieves are caught, and not all victims want the publicity that going public will likely bring. The Solar Turbine case might never have come to light had it not been for a couple of twists of fate.
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In this case, Jack Shearer used information from his former employer to start and build a successful $8 million business. Perhaps if he had been more successful in his previous employment, he wouldn’t have been fired.
But Shearer was terminated from Solar Turbines, Inc., of San Diego, after 26 years of employment. Solar, with 5,100 employees, is a wholly owned subsidiary of Caterpillar, Inc. The company designs and manufactures industrial gas turbine engines and turbo machinery systems for the production and transmission of crude oil, petroleum products and natural gas all over the world. The machinery generates electricity and thermal energy for a wide variety of industrial applications. Solar’s equipment is used to provide electrical power for industrial operations such as oil drilling operations in the Middle East. Caterpillar is the world’s leading manufacturer of construction and mining equipment, diesel and natural gas engines, and industrial gas turbines.
After his termination, Shearer decided to compete with Solar and started Tejas Compressor Systems, Inc., Tejas Procurement Services, Inc., and Procurement Solutions International, all headquartered in Conroe, Texas. Shearer’s original plan was to use the Tejas companies to overhaul and refurbish Solar turbines and compressors, as well as to provide field maintenance and service for customers who used equipment originally manufactured by Solar.
Using at least two accomplices – and probably more – working for Solar, Shearer obtained Solar’s trade secret information from 1993 through 1999. He used the stolen information, valued at millions of dollars, to manufacture counterfeit Solar parts through the Tejas companies. His known conspirators were William Humes and Jack Edward Nafus, who provided him with the necessary plans to have third party manufacturers counterfeit Solar equipment and parts.
Shearer, through Tejas, paid Humes and Nafus to provide Solar drawings, plans, and schematics that included confidential specifications describing the dimensions and manufacturing details of Solar parts. Shearer was aware that these were proprietary trade secrets and that stealing them would in all likelihood harm Solar. Humes received more than $40,000; Nafus received $26,700, and in 1998 Shearer agreed to pay Nafus a retainer of $2,000 per month to continue to provide the information Shearer needed. A third conspirator – whom the FBI will not name and who may have entered into a sealed plea bargain in exchange for his testimony – received $42,000.
Shearer directed his employees to “sanitize” the Solar plans, drawings, designs and schematics so that a third party wouldn’t be able to tell the original source. The employees were specifically directed to remove all of Solar’s proprietary warnings and transfer the information to third party machine shops where the actual manufacturing of the parts took place.
However, it’s hard to get good help these days, especially with crooks and spies. In some cases, Shearer and his employees transferred the stolen Solar plans, drawings, designs and schematics to those third party machine shops with Solar’s clearly marked proprietary warnings still affixed and clearly visible. In addition, to those in the know, Solar’s parts have a specialized form, fit, and function, and plans depicting Solar’s parts are readily identifiable as Solar’s proprietary property. Think of a fingerprint.
Shearer and his band were quite successful. Over the years, the Tejas companies acquired a collection of Solar plans that numbered well into the hundreds. Tejas provided this information to various third party machine shops that needed the plans and schematics to manufacture the counterfeit Solar parts for which Shearer was paying them. However, because the counterfeit parts produced by these machine shops were not manufactured to Solar’s precise safety standards, the use of the equipment in the field raised serious safety concerns.
After producing a counterfeit part or machine, the third party manufacturers shipped the finished product either directly to the end user, or to Tejas, which would then ship out the parts to its customers. In all cases, Shearer directed his crack sales force to tell end users that the counterfeit parts were in fact genuine Solar parts. Using as a guide the original stolen Solar drawings, Shearer instructed its employees to place identical Solar parts numbers on the counterfeit manufactured parts in order to deceive the end users. As a nice finishing touch, Shearer had his employees create completely bogus “Certificates of Compliance” for the counterfeit parts. These were similar to legitimate Solar certificates and were created specifically for the unsuspecting customers that requested proof that what they were receiving were, in fact, genuine Solar parts.
As if all of this wasn’t enough, Shearer, on behalf of his third company, Procurement Solutions International, also purchased stolen trade secret information on Solar fuel control valves for its turbine engine. Shearer paid Nafus $6,500 for this information.
Here’s where it gets interesting.
While he was employed at Solar, Shearer lived overseas and serviced a huge sales territory that included Libya, Jordan, Syria, Lebanon, Iraq, Iran and Saudi Arabia. So, he had numerous contacts and potential customers in that part of the world. And it didn’t take him long to capitalize on his contacts.
One of his primary customers was an Iranian businessman who operated an oil and gas parts broker business in Sweden. This businessman placed millions of dollars of orders per year with Tejas. The orders he placed were designed for oil field applications, but they were all painted desert beige. Some of Tejas employees became suspicious that the machinery and parts that were ordered by this Iranian businessman were going to prohibited countries, such as Iran, and used in Iran’s oil fields, in direct violation of U.S. policy.
Think about this for a moment: On the one hand, Shearer doesn’t think twice about committing economic espionage against his former employer, Solar. But, now Tejas is confronted with the sticky ethical problem of whether or not to fill the Iranian’s order since Tejas is now suspicious that doing so might violate U.S. national policy against providing goods and services to a prohibited country.
By coincidence, at the same time, one of Tejas’ own suppliers suddenly refused to manufacture parts for Tejas. Why? The refusal was apparently based merely on the type of gear Tejas asked to be manufactured since the supplier determined that it was a proprietary Solar part for a Solar turbine engine located in Iran. Why would Tejas be ordering a replacement part for a piece of Solar equipment in Iran?
Additionally, the supplier told Tejas that it refusal decision was based on the presumption that manufacturing the requested part would put the company in violation of the Presidential Order prohibiting sales of such parts to prohibited countries such as Iran – which was the same dilemma Tejas was facing.
Even crooks and spies apparently have their limits. One third party manufacturer called Nafus at Solar to inquire about a price quote for an order that was placed by the Iranian businessman. The manufacturer learned from Nafus that the type of shaft it was trying to procure belonged to a turbine unit located in Iraq. Nafus – the spy who had been freely supplying his employer’s trade secrets to Shearer for years and years! – suddenly found religion and refused to provide the requested information unless Tejas could provide verification that the shaft was not heading to a customer in an embargoed country.
But the bigger dilemma occurred when Solar brought in the FBI.
Shearer, Humes, Nafus, as well as the Tejas companies, all pled guilty to conspiracy to steal trade secrets under the Economic Espionage Act. Shearer was sentenced to 54 months in prison and three years supervised release, and was ordered to pay restitution of $7.6 million; Nafus got 21 months, 3 years supervised release and was ordered to pay $3.8 million restitution; Humes got 27 months, 3 years supervised release and was ordered to pay $3.8 million restitution. Each of the Tejas businesses and Procurement Solutions International were placed on five years probation and ordered to pay $7.6 million in restitution.
These sentences are among the longest sentences ever imposed in an Economic Espionage case. [i]
[i] Department of Justice sources, website, grand jury presentment, plus DOJ news releases; Carr, Chris; Morton, Jack; Furniss, Jerry, The Economic Espionage Act: Bear Trap or Mousetrap, The Texas Intellectual Property Law Journal, Vol. 8, No. 2, Winter 2000, p. 195; website of attorney R. Mark Halligan.