Judge OKs Plea Deal in Spy Case

Closing its books on a troubled spy case, the government on Friday allowed a former FBI operative who had been accused of being a Chinese double-agent to plead guilty to lying about a sexual affair and filing a false income tax return.

Approving a plea bargain between prosecutors and defense lawyers, U.S. District Judge Florence Marie Cooper sentenced Katrina Leung to three years’ probation and fined her $10,000 but spared her from serving any time in prison.

In exchange, the prosecution agreed to drop more serious charges in which the 51-year-old Southern California businesswoman and socialite was accused of illegally copying and possessing national security documents that she allegedly stole from her FBI handler and lover, now retired FBI counterintelligence officer James J. Smith.

The government also agreed to scrap a pending criminal tax investigation targeting Leung and her husband, Kam, 54.

The prosecution’s case was already seriously hobbled. Earlier this year, Cooper threw out the government’s indictment, accusing the U.S. attorney’s office of willful and deliberate misconduct.

Cooper ruled that prosecutors acted unethically by exacting a commitment from Smith that effectively barred him from talking to Leung’s defense team. Prosecutors are prohibited from obstructing a criminal defendant’s access to witnesses.

Denying any misconduct, the prosecution asked the U.S. 9th Circuit Court of Appeals to reinstate the charges. That appeal will now be withdrawn.

Both sides claimed victory after Friday’s court proceeding.

“Today, the case against Katrina is over, and she has been vindicated,” defense lawyers Janet I. Levine and John D. Vandevelde said in a statement. “Prosecutors agreed to drop forever all claims of espionage and mishandling of classified documents. They agreed to resolve all IRS claims against her, plus the IRS will return most of the funds they seized and lift the liens that tied up the property Katrina and her family own.”

U.S. Atty. Debra Wong Yang, who attended the plea hearing, issued a statement saying she was “pleased that Ms. Leung has acknowledged criminal culpability related to her activities while employed as an intelligence asset by the FBI.”

For her part, Leung, a naturalized U.S. citizen, told the judge, “I love America and I love American values.” She said she was looking forward to putting her 2 1/2 -year ordeal behind her.

Code named Parlor Maid, Leung served as a highly prized FBI operative for 20 years. A business consultant who traveled frequently to China, Leung ingratiated herself with top officials in Beijing and with high-ranking Chinese diplomats in the United States. The information she brought back was considered first-rate, according to FBI documents filed in court.

Smith, who headed the FBI’s China squad in Los Angeles, retired in 2000 after a long and successful career in counterintelligence. During that time, he received numerous commendations for his work with Leung, whom he recruited in 1983. Their sexual liaison began about that time.

The 61-year-old Smith was initially charged with gross negligence in handling classified documents. Like Leung, he subsequently pleaded guilty to a lesser charge of lying about their sexual affair. He was sentenced earlier this year to three months of home detention.

After the case broke into the open in 2003, FBI Director Robert S. Mueller III shook up management in the bureau’s counterintelligence branch. He also launched an investigation to assess damage to the FBI’s counterintelligence operations against the Chinese. Reports circulated at the time that Leung might have tipped off the Chinese about U.S. efforts to bug China’s presidential aircraft as well as the Chinese embassy and consulates in the United States.

But after two years of investigation, a senior FBI official said the bureau had turned up no proof of any damaging leaks beyond what was publicly disclosed in the indictment against Leung.

The charges against Leung were based on three FBI documents that investigators found during a search of her San Marino home.

Prosecutors charged that she intended to use them to harm U.S. interests, an accusation she steadfastly denied.

One document contained the names, phone numbers and office addresses of FBI agents assigned to investigate Peter Lee, a TRW physicist who pleaded guilty several years earlier to giving Chinese scientists classified information.

Also seized was a copy of a seven-page communique from the FBI’s legal attache in Hong Kong, discussing China’s intelligence-gathering activities.

The third document was a verbatim transcript of two telephone calls and summaries of six others between Leung and her alleged handler at the Chinese Ministry of State Security in 1990 and 1991.

The pair talked about an FBI agent’s upcoming trip to China, a flight to the United States by relatives of a Chinese defector and the travel to China by the subject of an FBI counterintelligence investigation.

The calls were apparently intercepted during U.S. eavesdropping

Smith received a copy of the transcript in 1991 from his counterpart in the San Francisco FBI office, William Cleveland, who also had a sexual affair with Leung.

Cleveland was not charged in the case.

As a result of the discovery, FBI intelligence officials held an urgent meeting in Washington to decide what to do.

According to one participant, Smith was directed to confront Leung and decide what course of action to take.

During a tearful confrontation in her kitchen, Leung allegedly admitted giving information to the Chinese, but she insisted that she acted under duress after being unmasked as an FBI spy. Smith opted to continue using her as a paid informant, vouching for her honesty and reliability. They also continued their affair.

No further action was taken until 2002 when, for still undisclosed reasons, the FBI launched an internal affairs investigation into their relationship.