Eyeing The Competition

By Daniel Eisenberg

The title of the hand-scribbled memo outlined Waste Management's goal in no uncertain terms: "Cadiz Kill." In 1995 Cadiz Inc., an agricultural firm based in Santa Monica, Calif., was leading opposition to Waste Management's proposal to build a mega-garbage dump near its property. So, like any other tactically thinking business, the country's largest trash hauler brought in a consultant to get things moving.

Joseph Lauricella, though, wasn't your typical McKinsey man. He set up a sham pro-dump grassroots organization. His duties, according to San Bernardino County grand jury indictments and his testimony, included swiping confidential data, sabotaging potential deals and spreading rumors that linked Cadiz to illegal dumping and drug trafficking--all in an attempt to drive down its stock price and cripple its lobbying efforts. Last fall Lauricella was sentenced to six years in prison for his consulting efforts. Waste Management and four of its executives, who claim that Lauricella was a renegade acting on his own, have pleaded not guilty to various charges, including stock fraud and wiretapping.

Waste Management may specialize in garbage, but it isn't the only outfit accused of playing dirty. Far from it. Just last week, Motorola sued Intel for allegedly hiring away key employees to obtain its microchip trade secrets. Minneapolis-based agribusiness giant Cargill recently acknowledged that a rogue employee may have lifted proprietary genetic material from a competitor, an admission that effectively killed a $650 million deal to sell its North American seed division to a German biotech venture.

Next week a Taiwanese father-and-daughter business team is scheduled to be tried for paying a U.S. research engineer to pilfer manufacturing secrets from label maker Avery Dennison. Another Taiwan-based executive goes on trial in early April, charged with attempting to buy the secret formula for Bristol-Myers Squibb's cancer drug Taxol for $400,000--just one of many alleged plots to fleece R. and D.-rich pharmaceutical firms. Last spring a Gillette consultant went to prison for trying to market secret designs of the company's Mach3 razor to competitors such as Bic. And a small Maryland soft-drink distributor claims that Coca-Cola Enterprises, the bottler partly owned by Coke, used wiretapping and other shady tactics to destroy his business. CCE denies all the charges.

Cheating in business, of course, is older than the wheel. But corporate spooks and saboteurs are especially busy in today's global, high-tech economy, where the most prized assets can be stored on a disk and surveillance equipment can fit on a shirt button. To help slow them down, Congress passed the Economic Espionage Act of 1996, which carries a long prison term for intellectual-property theft. The good guys haven't had much luck yet, though not for lack of effort. The FBI has nearly tripled its investigations into corporate espionage in the past year. But in 1997 at least $25 billion in intellectual property was stolen from U.S. corporations, by a conservative estimate. And these aren't just cases of foreign spies left over from the cold war working for new capitalist bosses. Increasingly, U.S. firms are turning to Dumpster divers or computer hackers to stay ahead of the competition, and disgruntled workers are walking off with classified material. One worrisome ploy, the FBI says, is to send in spies posing as tech consultants on the Y2K computer bug.

The first federal economic-espionage case to go to trial, however, is decidedly low-tech--in essence, it's all about glue. In Youngstown, Ohio, next week, Justice Department attorneys will argue that Pin Yen Yang, president of Taiwan-based Four Pillars Enterprise, and his daughter paid Avery Dennison engineer Ten Hong "Victor" Lee $67,500 over a four-year period to steal the $3 billion-a-year company's formulas for making adhesive labels and tape. Officials say China--already defending against charges of nuclear espionage in the Los Alamos case--and Taiwan are among the most notorious purloiners of business secrets, allegedly sending graduate students to infiltrate companies and bring data home.

But, as in any case of cloak-and-dagger, it's sometimes hard to tell exactly who's snookering whom. Four Pillars recently turned the tables and filed suit in China and Taiwan, charging that in the late '80s and early '90s, Avery lured the much smaller Four Pillars (annual sales: $140 million) into discussion about a joint venture in China in order to steal manufacturing information so it could set up its own competing factory. Intriguingly, Four Pillars will argue that by luring the government into the case and helping the FBI set up a sting operation, Avery used the Economic Espionage Act as a competitive weapon. Avery Dennison, which denies those charges, says Four Pillars' suit is simply an attempt to "distract attention from its own criminal conduct."

In this era of downsizing and diminished corporate loyalty, close to two-thirds of all U.S. intellectual-property losses can be traced to insiders, according to Richard J. Heffernan, a Branford, Conn., security consultant and co-author of a biannual espionage survey by the American Society for Industrial Security. "People are always looking for somebody who looks different, when a great deal of the theft is committed by insiders who walk and talk just like you and me," notes Heffernan.

Last fall Cargill was accused by Pioneer Hi-Bred International, a leading seed developer, of stealing its closely guarded genetic material. Initially, Cargill vehemently denied any wrongdoing, but during settlement talks it acknowledged uncovering "problem areas." Though it won't elaborate much, Cargill says an employee who previously worked for Pioneer and is the target of a lawsuit may have mixed some of Pioneer's breeding material into Cargill's seed corn products without the company's knowledge.

To protect themselves against employees who walk out for the next best offer, corporations have taken a harder line against talent raids, essentially equating them to espionage. That seems to be the case with Wal-Mart's trade-secret suit against Amazon.com The nation's largest retailer contends that the Web's leading e-tailer lured 15 of its top techies out to Seattle from Wal-Mart's hometown of Bentonville, Ark., for the express purpose of duplicating its prized information database--a vast system that tracks customer shopping patterns and product flow. "There's a lot of computer talent out in the Valley," notes Wal-Mart spokeswoman Betsy Reithemeyer. "If you're coming to Bentonville, you're looking for something specific." Amazon has filed a countersuit denying the accusations. The company says it was just looking for talented people.

Robert N. Friedman, CEO of discount retailer Loehmann's, has no such defense, at least according to a lawsuit filed by Forty Three Apparel, a New York City-based women's-fashion maker. In mid-1997, the suit contends, Friedman pressured Forty Three Apparel president Mark Singer, who depended on Loehmann's for 80% of his business, into giving Friedman's wife Debbie a high-level job. Within a year, she left the firm, allegedly with clothing patterns and manufacturing processes, and started her own competing outfit. (Loehmann's says the suit has no merit.) It didn't take long, Singer argues, for Forty Three Apparel to lose its Loehmann's business to Debbie Friedman and sink into bankruptcy.

You don't necessarily need James Bond to pilfer corporate secrets. Amateur actors will do fine. Over the past few years, textile manufacturer Milliken & Co. allegedly stole information from a host of rivals without so much as a bug or a mole. Instead, according to a lawsuit filed last October by Johnston Industries, based in Columbus, Ga., one Milliken employee posed as a business-school student researching a paper, and another played a Swiss banker seeking investment opportunities. One alleged target, NRB Industries, has reportedly settled its case against Milliken. The $2 billion-a-year titan has denied the charges, but Johnston, a $330 million-a-year textile firm, claims it lost $30 million to the alleged skullduggery. "It defies logic," says president D. Clark Ogle, "that a company 10 times our size would feel threatened [enough] to do that."

Since passage of the Economic Espionage Act, only 13 criminal cases have gone to indictment. In December two men were sentenced for scheming to sell Intel prototype microchips to rival Cyrix, and most recently a California man, David Kern, was charged with stealing engineering secrets from his former employer, Varian Associates, a leading Silicon Valley maker of radiotherapy systems used to treat cancer. For more than a year, a federal grand jury has reportedly been looking into whether a subsidiary of financial-information giant Reuters was involved in an attempt to steal data from rival Bloomberg (Reuters says it is cooperating and denies any wrongdoing).

Prosecuting such crimes is no easy matter. Many companies shy away from reporting incidents for fear of bad publicity or having to divulge their treasured secrets in court. That may be a small price to pay, though. For now, the underhanded tactics "are classics for one reason," says Alan Brill, of investigative firm Kroll Associates. "They still work."

--With reporting by Elaine Shannon/Washington, Jackson Baker/Memphis, Marsha L. Gilbert/Greenville, Janice Maloney/San Francisco, Dion Nissenbaum/San Bernardino and other bureaus

With reporting by Elaine Shannon/Washington, Jackson Baker/Memphis, Marsha L. Gilbert/Greenville, Janice Maloney/San Francisco, Dion Nissenbaum/San Bernardino and other bureaus