captioning funded by cbs and ford-- built for the road ahead. >> pelley: tonight, on this special edition of "60 minutes presents"-- "21st century con." our hidden cameras captured one of the most outrageous cons we have ever reported. >> you can't find a surgeon in the world who doesn't support our approach. >> pelley: he's a 21st-century snake oil salesman bilking desperate patients out of their live savings. >> we've gotten people out of their wheelchairs. >> pelley: i'm scott pelley. i'm with "60 minutes."

his bogus treatment costs $125,000 cash and promises the impossible. i understand that you have had patients that have stood up and walked away from wheelchairs. >> there have been patients that have improved to... to that extent. >> pelley: you know, mr. stowe, the trouble is that you're a con man. >> pelley: this is what espionage looks like. the man driving the car is greg bergersen. he's a civilian analyst at the pentagon with one of the nation's highest security clearances. his companion is tai shen kuo, a spy for the people's republic of china. bergersen knew a secret that the chinese desperately wanted to know. and neither man knows that what they're about to do is being recorded by two cameras the f.b.i. has concealed in their car. >> are you sure that that's okay? >> yeah, it's fine.

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>> pelley: good evening. i'm scott pelley. welcome to "60 minutes presents." we've tracked a lot of con men over the years, and tonight, you will see some of the most brazen we have ever met. con men used to travel town to town hawking medical remedies said to be made of chinese snakes. snake oil was useless and dangerous. so the f.d.a. was created to put a stop to it, and to other food and drug scams. but today, quack medicine has never been bigger. in the 21st century, snake oil has been replaced by bogus therapies using stem cells. stem cells may offer cures one day, but medical charlatans on the internet are making outrageous claims-- that they can reverse the incurable, from autism to multiple sclerosis to every kind of cancer.

desperate people are being bilked out of their life's savings. as we first reported last april, there is no better window on this crime than the practice of a man who calls himself "doctor," a man named lawrence stowe. stowe was unaware that some of his patients had been working with "60 minutes." one of those patients is steven watters, a college administrator in lufkin, texas, who, six months before we met him, received maybe the worst diagnosis imaginable. he has a.l.s., amyotrophic lateral sclerosis, also known as "lou gehrig's disease." about 30,000 americans have a.l.s. at any given time. and like watters, they all will die, most within five years, as their nervous system gradually disconnects from their muscles. >> steven watters: everything just takes a little longer. i just set things up to where it requires minimal manual effort. just handling personal hygiene

is difficult-- teeth brushing, flossing, very difficult, time- consuming. so you just make the adaptations that you can and go on. >> pelley: eventually, watters will be able to move nothing but his eyes. the same fate is ahead of michael martin, who also has a.l.s. martin has nearly lost any ability to speak, and very soon, he won't be able to walk. i wonder what it was that your regular doctor back home told you about your disease and what your prospects were. >> michael martin: he said i had about two years. >> pelley: you had about two years to live. no patient has ever been cured of a.l.s. no patient has ever seen the symptoms reversed, even temporarily. but still, desperate people find themselves drawn to a place that promotes the impossible-- stowe

biotherapy in la mesa, california, near san diego-- which bills itself as a "medical oasis." we asked a multiple sclerosis patient to go in with a hidden camera to hear larry stowe's pitch for his miracle treatment. that's stowe telling our m.s. patient that he can reverse her disease with his program of herbs and vitamins to boost the immune system, custom vaccines, and stem cell injections. medical experts say it's nonsense, but it's the same pitch that we secretly recorded again and again as stowe claimed to reverse cancer, a.l.s., m.s., parkinson's disease and more. >> lawrence stowe: we're the only ones who've been able to get anybody that's down here back up to here, and they stay back up to here. if we were a major pharmaceutical drug company, you know, we'd be talking about all of our research associating getting nobel prizes in medicine and things of that nature. >> pelley: larry stowe is not a medical doctor.

he claims two ph.d.s, but we found he only has one, in chemical engineering. he had a career at mobil oil and holds patents in the oil industry. but by the 1980s, stowe had taken a strange turn into pseudo-science. for a time, he promoted something called "eon water," which, he said, slowed the aging process. and by 2003, he had created the stowe foundation to advocate unproven stem cell therapies. michael martin, one of the a.l.s. patients helping with our story, had heard about stowe from a friend. and before we ever met martin, he'd already given stowe a down payment of $47,000 to start the treatment. when dr. stowe said that he could reverse this disease with stem cells, you thought what? >> martin: oh, i... i wanted to believe.

>> pelley: you wanted to believe. how does larry stowe make believers of the desperate? we wanted to see. >> stowe: steve watters? glad to meet you. larry stowe. >> stowe: nice to meet you. >> pelley: so we set up hidden cameras in michael martin's home in houston, and invited a.l.s. sufferer steven watters to pose as an interested patient. stowe came in on crutches. he's missing a leg, which he says he lost to cancer. everyone in the room knew about our hidden cameras except stowe. stowe had claimed what he called a "permanent fix" for a.l.s., so we gave watters questions to ask about stowe's therapy. >> watters: so, is there a permanent fix from the stem cells? >> stowe: oh, yes. yeah. you'll be able to... >> watters: exercise again? >> stowe: ...exercise again. oh, yeah. >> watters: well, if i opt for the permanent fix, will i avoid a feeding tube? will it keep me out of a wheelchair? >> stowe: yeah. oh, yeah, absolutely. we've gotten people out of

wheelchairs. >> watters: am i going to get closer and closer to, at some point you can say, "okay, you're cured. you're healed from this disease"? >> stowe: i believe that that is 100% possible, because we've done it with other conditions. i mean, we've done it with cancer, you know, which is just a different form of tissue destruction. >> martin: didn't your mother have cancer? >> stowe: my mother had pancreatic cancer, and we completely reversed her pancreatic cancer. she died cancer-free with a healthy pancreas. >> watters: what will it cost me for the permanent fix? >> stowe: that'll be around $125,000, because it's $50,000 for phase one; the stem cell transplant is going to run you around $25,000. and then, we do follow-up therapy after that to make sure

the results hold, and that's another $50,000. >> pelley: stowe told them they would have to travel to monterrey, mexico, for the treatment. he said his research associate there would take blood-forming stem cells harvested from umbilical cords or bone marrow, and inject those cells into their spines. those blood cells, he said, would transform into nerve or neural tissue that would reconnect with their muscles. is there a stem cell fix for a.l.s.? >> professor sean morrison: no. >> pelley: professor sean morrison is director of the university of michigan center for stem cell biology. his lab is one of the world's leading stem cell research centers. so when stowe says he's going to take blood-forming stem cells and put them in the spinal cord to create neural cells, what do you make of that? >> morrison: you know, we study blood-forming stem cells every day in this lab, including umbilical cord blood cells.

and blood-forming stem cells don't make nervous system tissue. >> watters: and then, what do the injected stem cells do next? >> stowe: they start to regenerate new nerve tissue and repair the synapses. >> pelley: stowe's incredible pitch often works, because his victims have heard something about the promise of stem cells, but don't really know much about them. at one time, some scientists thought that blood-forming stem cells could replace any kind of tissue, as stowe claims. but science now knows that's wrong. stem cell therapy is the standard of care in only leukemia and certain rare diseases of the blood-- nothing else. there is very early research into whether stem cells might one day help a.l.s. patients, but nothing like the claims stowe is making. dr. morrison thinks breakthroughs are years or decades away. he says stowe's claims are baseless. >> stowe: classically, people are reporting three to four

weeks that they begin to notice the effects. >> pelley: notice the effects in three or four weeks. >> morrison: you might notice side effects in three to four weeks. >> pelley: you described it as "miraculous"-- that's what it would be. >> morrison: if somebody squirted some stem cells into the spinal cord of an a.l.s. patient and they stood up out of their wheelchair and had a permanent fix, that would be miraculous. >> pelley: but that's what stowe was promising in michael martin's living room as he weaved a pitch with lies of legitimacy. >> watters: are you currently working with anybody in the f.d.a. regarding... >> stowe: oh, yeah. yeah, we... at all levels. >> pelley: even the university of texas, he said, was planning to build a research center with a particular name. >> stowe: stowe research center for regenerative medicine in affiliation with the university of texas. you can't find a surgeon in the world who doesn't support our approach. >> pelley: after hearing the

pitch, steve watters and michael martin, working with us, told stowe they would go to monterrey, mexico, for the treatment. we followed them there with hidden cameras. and we found stowe's so-called research associate. that's dr. frank morales in the dark jacket. in an email to watters, morales claimed: "we have treated well over 1,000 patients without any side effects other than positive results, which range from minimal to miraculous." but we have found that morales is improvising stem cell procedures for profit with no scientific basis. morales is an american citizen, living in texas, with a mexican medical license. we got the credentials he submitted to one monterrey hospital, and found that the medical degree came from a caribbean school that was later shut down for selling diplomas. morales dropped out of residency training in texas. morales and stowe took our patients on a tour of the

hospital where morales was already doing stem cell procedures. he explained the techniques he uses. >> frank morales: our team will go in through a catheter and place it right up close to the brain, or will go intrathecally, you know, right into the spine, and do other things that are pretty aggressive. >> pelley: mexican officials tell us stem cell therapy for a.l.s. is not authorized. the hospital says it didn't know morales was using stem cells and wouldn't have allowed it. >> morales: so we could just go right in and, okay, you got your stem cells and you're out of here. >> pelley: we found one of morales' former patients, muna erickson, in michigan. she has multiple sclerosis, for which there is no cure. what exactly did morales tell you about what you could expect? >> keith erickson: he told me that i could expect her to be up out of the wheelchair and walking. >> pelley: she'd get out of the wheelchair? >> keith erickson: uh-huh. >> pelley: and walk away from it? >> keith erickson: uh-huh. >> pelley: erickson and her husband keith are not people with a lot of money, so in

desperation, they sold their home in order to wire $15,000 to morales. the ericksons say they arrived in a rundown mexican clinic for a scheduled spinal injection of stem cells, but morales gave her a stem cell i.v. instead. >> keith erickson: so, he ended up coming in and hanging an i.v. off the tip of her thumb that was barely viable. >> pelley: muna, show me with your hand, if you can, precisely where that i.v. went in. right at the tip of your thumb. >> muna erickson: yes. >> pelley: what did you think? >> keith erickson: i thought about taking my wife and taking her home, but she was so set on getting these stem cells, i... i think she would've had a complete mental breakdown if... had i just boarded her back on a plane. >> pelley: muna, did you get somewhat better? >> muna erickson: no, i got worse. >> pelley: back in monterrey, mexico, morales and stowe came to a hotel room, where they met patients michael martin and

steve watters. they were expecting to see another down payment-- $35,000 in cash. but that is not what came through the door. mr. stowe, mr. morales, i'm scott pelley. i'm with "60 minutes." what happened next, in a moment. >> cbs money watch update sponsored by: >> good evening. fueled by few moyle in the middle east, gas prices jumped 18 cents to an average of $3.35 a gallon. in his annual letter to berkshire-hathaway shareholders, warren buffett says america's best days lie ahead. and gnomeo and juliet won the weekend box office. i'm russ mitchell, cbs news.

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>> pelley: steven watters and michael martin, two a.l.s. patients working with "60 minutes," traveled to monterrey, mexico, to meet larry stowe and frank morales. stowe and morales said that they could treat the symptoms of a.l.s. with an unproven stem cell therapy. the men met in a hotel room that we set up with hidden cameras. stowe and morales expected to see a cash down payment of $35,000. but instead, we walked in for an on-the-record interview. that's larry stowe sitting on the right. on the couch were michael martin and steve watters. and morales was explaining how the stem cell treatment would go. hey, steve, michael. mr. stowe, mr. morales, i'm scott pelley.

i'm with "60 minutes," and i'd like to ask you a few questions on the record about what you propose. i understand that you have had patients that have stood up and walked away from wheelchairs who have a.l.s. >> stowe: there have been patients that have improved to that extent. >> pelley: you've reversed the condition? >> stowe: yes. >> pelley: you know, mr. stowe, the trouble is that you're a con man. >> stowe: really? >> pelley: you're lying about this protocol. you've lied about your association with the university of texas. you've lied about your work with the f.d.a. and now, you're lying to these gentlemen about what they can expect. >> stowe: now, why do you say that? >> pelley: nobody at the f.d.a. knows anything about any of this. and the university of texas is not going to be starting a regenerative medicine clinic with your name on it. >> stowe: really? >> pelley: when we asked stowe to back up his a.l.s. claims,

his story changed. give me a stowe foundation patient who has a.l.s. who has stood up out of a wheelchair and walked away. >> stowe: we don't have any a.l.s. patients; we have m.s. patients. >> pelley: we are talking about the treatment that you have taken their money for. is that a treatment that would allow them to stand up out of a wheelchair and walk away? >> stowe: with an a.l.s. patient? no, we've done it with m.s. patients. >> pelley: i don't believe that's what they understood. >> stowe: well, then... >> pelley: i don't believe that's what you told them. >> stowe: then, they weren't listening. >> pelley: can you give me... oh, actually, we were listening very carefully. >> stowe: okay. do you have the tape recordings? >> pelley: i do. >> stowe: pull them out. >> pelley: i have. >> stowe: pull them out. i want to hear them. >> pelley: i can do that. >> stowe: okay. >> pelley: and we did. this was your meeting in houston just a few weeks ago. >> watters: well, if i opt for

the permanent fix, will it keep me out of a wheelchair? >> stowe: yeah. oh, yeah, absolutely. we've had a number of a.l.s. patients be able to get out of their wheelchairs. >> pelley: that's not true, is it? >> stowe: the stowe foundation has not. >> pelley: you told steve that you were going to keep him out of a wheelchair. that's not true, either, is it? >> stowe: no, that's very true. >> pelley: you're going to sit here, after seeing that, and you're going to look this man in the face and tell him that he's going to stay out of a wheelchair. i mean, that's cruel. >> stowe: really? what is his prognosis if he doesn't do this? >> pelley: his prognosis is the same either way. >> stowe: no, it's not. >> pelley: mr. stowe, you told these men in houston that a cure was, in... in your memorable phrase, "100% possible." >> stowe: "possible."

is that a guarantee? >> pelley: the folks at home are wondering what goes through your mind when one of these men pushes a suitcase full of cash across the table to you. what are you thinking? >> stowe: i'm thinking that they came to the right place if they want any hope at all. >> watters: so, is there a permanent fix from the stem cells? >> pelley: many patients have pinned their hope on dr. frank morales and his improvised stem cell procedures. recently, he injected stem cells into the spine of a seven-year- old american boy in an attempt to treat the boy's autism, a procedure with no basis in medical science. we found morales' training is dubious. this is the certificate he presented to a monterrey hospital, showing he completed his training at texas tech university. but in the interview, he switched schools. have you ever been licensed to practice medicine in the united states?

>> morales: i have, and i worked under the university of texas, where i was at... at el paso and came to mexico after that. >> pelley: the university of texas, el paso, has no medical school and no record of morales as a student. but you have a license, or had a license to practice in the state of texas? >> morales: absolutely. it was an institutional license at the university of texas, el paso-- utech, utep-- so you can go there, you can find it. i mean, that's simple, if you did your homework. that's lousiness, i mean, on your behalf, i'm sorry to say. >> pelley: not only does he have no credentials from the university of texas, we found that his texas tech credentials are fraudulent. a texas tech lawyer told us: "where it was obtained or manufactured i couldn't say, but it was not issued by texas tech." several minutes into the interview, we watched the stowe- morales relationship dissolve. morales walked out, then came back to disavow stowe. >> morales: scott, scott.

yeah, you know, i think that just in the sense of... of using, you know, his... you know, using him to try to bring me down, i think that that is inappropriate. >> pelley: well, sit down and talk to me about it. legal experts tell us that both stowe and morales have broken u.s. law, committed fraud, by making a false claim. it doesn't matter that the procedure is done in another country. we wondered why the f.d.a. is not acting against the many stem cell con artists whose web sites are up for anyone to see. but the f.d.a. commissioner, margaret hamburg, declined to talk with us on camera about any aspect of stem cell quackery. many experts believe that the f.d.a. is outmatched. >> larry goldstein: patients need to beware. >> pelley: larry goldstein, a prominent stem cell biologist, and researcher doug sipp, are with the international society for stem cell research, an organization of the world's leading stem cell scientists. sipp is tracking bogus stem cell

clinics all around the world. how have these operations grown, say, in the last five years or so? >> doug sipp: i would say the growth has been explosive. i've been tracking it kind of closely for the past three years, and i've been able to come up with more than 200 clinics that are offering some version of stem cells for some type of medical condition for which there is no really good evidence that the stem cells would be either safe or effective. >> pelley: well, are all of these clinics frauds? >> sipp: on one end of the spectrum, you have people who are doing, essentially, badly designed, uncontrolled human medical experiments for profit. and then at the other end of the spectrum, you just have thieves who are preying on the sick and their families. >> goldstein: now, an a.l.s. patient might say to you, "how could i possibly be worse?" this is the question you get sometimes. "how could i possibly be worse?" >> pelley: "i'm going to die. why not give it a try?" >> goldstein: "i going to die in two or three years. why not give it a try?" well, what if, as a result of this treatment, you ended up in excruciating pain?

what if you managed to bankrupt your family through the use of one of these expensive, unauthorized treatments so that they can't care for you properly as you decline? there are things that are worse than your current situation, i think. >> pelley: the experts in stem cell research believe these procedures are at best ineffective and potentially dangerous. a study by ucla found patients at a chinese clinic often developed spinal meningitis. but there's rarely any mention of risk on the web sites that offer false hope for dozens of afflictions, ranging from down syndrome to cancer. >> sipp: one of the different things now is the power of the internet now gives just tremendous global reach to people who, in the past, would be kind of the local quack. >> pelley: so, instead of the snake oil salesman standing in the back of a pickup truck, he can now reach every a.l.s. patient on earth. >> sipp: and say, "come to me, and i'll help you out in mexico, or in russia, or in thailand." >> pelley: what we see here, essentially, is stowe on an industrial scale.

>> goldstein: stowe on steroids. >> sipp: yeah, you could say that. >> goldstein: and he might as well be sticking his hands into the pockets of those people and taking the money out without even talking to them. that's how bad i think it is. >> pelley: you know, i wonder what you think when the top people in the field that you pretend to work in call you a "snake oil salesman." >> stowe: comes with the territory. >> pelley: it does come with the territory. we wondered what stowe would say to the idea of giving michael martin his $47,000 back. >> stowe: has he asked for it? >> pelley: i'm asking. >> stowe: we'd give it back to him. >> pelley: now, that's a deal i'd like to make. >> stowe: really? okay. and when he continues to go downhill six months from now and hasn't made any progress, are you going to cover the cost of his care? >> pelley: i'm not buying what you're selling. >> stowe: fine. >> pelley: of course, that

refund never came. when we first walked into the interview, we thought stowe might not stay. but he sat there for two hours as though, if he only talked long enough, he'd convince us. thanks for sitting with us and talking to us. >> stowe: now, you're not running away on me, are you? >> pelley: well, i was planning on leaving, yes. >> stowe: okay. >> pelley: i think i'm done. >> stowe: all right. >> pelley: thank you. >> stowe: you just cost this man his life, i want you to know that. >> pelley: you know, i don't think so. larry stowe never gave up, even after his lies were exposed. when we left the room, he turned to a.l.s. patient michael martin and tried to close the sale. >> stowe: we'll keep in touch, because i can tell you-- you know what's going to happen if you don't take some type of aggressive action. >> pelley: the scene at the hotel was the end of the stowe/morales collaboration. they didn't contact the patients

again. michael martin and steve watters continued to fight the progression of a.l.s. what would you like to see happen to larry stowe? >> martin: i... i don't care. >> pelley: "i don't care," martin said. >> martin: he has to live with himself. >> pelley: "he has to live with himself." since our story first aired last april, lawrence stowe has closed his business in san diego. we've learned that the f.d.a. has been investigating stowe and morales, but the agency won't comment further. meanwhile, the a.l.s. patients who helped us with our story are losing ground to their incurable disease. steve watters had to retire from the college. and michael martin is now in hospice care and can no longer breathe on his own. i'm a 10. i'm a 10. i'm a 10.

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>> pelley: in our last story, you saw stem cell con men caught by our hidden camera. but in this story, the camera belongs to the f.b.i. you're about to witness a chinese spy caught red-handed taking american military secrets from an employee of the defense department. china competes with the united states for resources, markets, and strategic advantage. and as we showed you when we first broadcast this story last year, the chinese are also shopping for information, ranging from u.s. nuclear secrets to the deliberations of the obama white house. espionage is, by its very

nature, designed to be unseen, so this is an incredibly rare opportunity to witness china stealing america's secrets. >> gregg bergersen: there's a nice thai restaurant out there. >> tai shen kuo: oh, okay. okay. >> pelley: this is what espionage looks like. the man driving the car is gregg bergersen. he's a civilian analyst at the pentagon with one of the nation's highest security clearances. his companion is tai shen kuo, a spy for the people's republic of china. this is kuo in an f.b.i. surveillance photo. he was born in taiwan, but he's a naturalized american citizen who owns a number of businesses in louisiana. and this is bergersen, who worked at the pentagon's defense security cooperation agency, which manages weapons sales to u.s. allies. bergersen knew a secret the chinese desperately wanted to know-- what kind of weapons was america planning to sell to taiwan, the rebellious chinese island that mainland china wants

to reclaim. it's july 2007. they're driving outside washington. and neither man knows that what they are about to do is being recorded by two cameras the f.b.i. has concealed in their car. >> kuo: i'll give you... let you have the money. >> gregg bergersen: whoa, oh, are you sure that's okay? >> kuo: yeah, yeah, fine. >> bergersen: you're sure? >> kuo: yeah. >> pelley: we watched the tape with john slattery, the f.b.i. agent at headquarters who oversaw the case. he recently retired as a deputy assistant director. what's happening there? >> john slattery: information has been passed prior, and this is reward for that, or there is expectation that passage of information is forthcoming, so that's what's happening right here. >> pelley: how much money is he holding in his hand? >> slattery: i think we're probably looking at about $2,000, thereabouts. >> pelley: tai shen kuo's money and contacts came to the f.b.i.'s attention while the

bureau was investigating a different chinese espionage case. they followed him, tapped his phone, watched his email, and all of that led to bergersen. in the car, the pentagon employee and chinese spy were plotting the hand-over of secret documents that listed future weapons sales to taiwan and details of a taiwanese military communications system. >> bergersen: i'm very, very, very, very reticent to let you have it, because it's all classified. >> kuo: oh, okay. >> bergersen: and... but i will let you see it... and you can take all the notes you want, which i think you can do today. but i... i... if it ever fell into the wrong hands, and i know it's not going to, but if it ever... >> kuo: okay, that's fair. >> bergersen: ... was, then i would be fired for sure. i'd go to jail... >> kuo: yeah. >> bergersen: ...because i violated all the rules. >> pelley: he just described

them as classified documents. >> slattery: exactly. >> pelley: he knows precisely what he's doing. >> slattery: exactly. >> pelley: he's almost going down your list of requirements for an indictment by a grand jury. >> slattery: and we thank him for that. >> pelley: when it comes to espionage against the united states, is china now the number one threat that we face? >> michelle van cleave: i would be hard pressed to say whether it's the chinese or it's the russians, but they're one, two, or two, one. >> pelley: michelle van cleave was america's top counter- intelligence officer. working for the director of national intelligence, she was in charge of coordinating the hunt for foreign spies from 2003 to 2006. >> van cleave: the chinese are the biggest problem we have with respect to the level of effort that they're devoting against us versus the level of attention we are giving to them. >> pelley: what do the chinese want from us? >> van cleave: virtually every technology that is on the u.s. controlled technology list has been targeted-- sensors and optics, and biological and

chemical processes. these are the things... information technologies across all the things that we have identified as having inherent military application. >> pelley: the chinese have stolen technology used in the space shuttle and in submarine propulsion systems. in the late 1990s, a congressional commission found that china now holds the most closely guarded secrets america had. >> van cleave: we learned and the cox commission reported that the chinese had acquired the design information for all u.s. thermonuclear weapons currently in our inventory. >> pelley: let me make sure i understand-- the chinese are in possession today of the designs of all of our nuclear weapons? >> van cleave: yes. >> pelley: how did they get that? >> van cleave: the questions of how they acquired it remain, to some extent, unknown.

>> pelley: how the u.s. lost its atomic secrets may be unknown, but there are fewer mysteries in the case of tai shen kuo and gregg bergersen. the f.b.i. says that kuo wanted to expand his louisiana businesses into china. and when he sought permission from beijing, the chinese asked for a few favors for their intelligence service. the $2,000 was only part of kuo's development of bergersen. kuo wined and dined his spy, and bergersen seemed to have an appetite for espionage. at one dinner, kuo's tab came to $710. kuo took bergersen to las vegas for some shows. and the day of the ride, kuo brought a box of expensive cigars. all the while, kuo lied to bergersen, telling him that the information was being passed to taiwan, the u.s. ally. does that make any difference in the law, whether you're spying for a hostile government or a

friendly one? >> slattery: of course not. classified information's not allowed to be passed without, you know, certain approvals to any foreign government. >> bergersen: but i think when you see the information, you can get out of it what you need. >> kuo: yeah, okay. >> bergersen: you know, you can write all the... you can take all the notes you want. it's just i cannot ever let anyone know... >> kuo: good, i got it. >> bergersen: ... because that'll... that'll... i'll,... that's my job. i'd get fired for sure on that. well, not even get fired; i'd go to ( bleep ) jail. >> pelley: the recruitment of bergersen has a familiar ring to fengzhi li. li recruited spies for china as an officer in the ministry of state security. the m.s.s. is their c.i.a. give me a sense of all the different ways you would persuade someone to spy for china. >> fengzhi li: that will be a long story. >> pelley: i've got time. >> li: okay. >> pelley: in our interview, li switched between english and mandarin.

he worked for chinese intelligence 14 years, recruiting spies in russia. he's now seeking political asylum in the u.s. >> li ( translated ): let me say this-- intelligence work is different from other kind of work. when i target a hundred people, ev if 99 people have refused me, if there is one i persuade... that's enough. >> pelley: that's enough? >> li: mm-hmm. yeah. >> pelley: li told us that he recruited spies through blackmail and sometimes greed, especially if someone wanted to do business in china. once, he says, his agents recruited the official photographer for a european head of state that he still won't name. would you say the m.s.s. spends most of its effort on the united states? >> li( translated ): definitely. without a doubt. >> pelley: what would some examples be of the kind of information that m.s.s. was interested in getting a hold of? >> li: for example, what president obama thinks right now. >> pelley: they want to know

what president obama thinks? >> li: yes. >> bergersen: do you make me part of... of the honor... >> pelley: thanks to gregg bergersen, the chinese were about to find out just what sort of weapons america intended to sell to taiwan. the day of that car ride, bergersen drove kuo and the secret documents to a restaurant outside washington, d.c. inside the restaurant, kuo copied the secrets by hand. out in the parking lot, bergersen waited with a glass of wine, one of those cigars, and the f.b.i. in tow. as they left, bergersen just couldn't stop talking. >> bergersen: but i... i will be very careful to keep my tracks clean. >> kuo: of course. of course. >> bergersen: and no... no fingerprints. it's just like these documents... >> kuo: gotcha. >> bergersen: ... no fingerprints. i can't afford to lose my job. >> pelley: later, kuo left the u.s. for beijing. but while he waited for his flight, federal agents got into his bags, photocopied his handwritten notes, and put them back.

kuo's notes matched the secret document on the right. but john slattery, who oversaw the case for the f.b.i., told us the bureau didn't make arrests until six month later. but, i mean, this is drop-dead evidence, and espionage is occurring. why didn't you arrest them sooner than that? >> slattery: well, these... these investigations are tremendously complex and tremendously difficult to begin with. >> pelley: the department of defense wants you to stop it right away. >> slattery: please-- sooner than later. but the f.b.i. says, "well, listen, we want to make sure we can sustain a conviction here. and... and are there other players in this?" >> pelley: it turns out there were other players. kuo had another source inside the pentagon, and kuo was connected to spies on the west coast who were giving up u.s. space and naval technology. presumably, the u.s. is doing the same kind of spying in china, but michelle van cleave says america has so much more to lose.

>> van cleave: i think we're a real candy store for the chinese and for others in... in terms of technology and commercial products, or other proprietary information, and so we will always be the principal target for them. >> pelley: what is the most serious damage that chinese espionage has done to the united states? >> slattery: it's the totality of the collection effort. take a case like this or... or cases like... like this-- traditional espionage, penetration of the... of the interior. couple that with industrial and economic collection, couple that with cyber. it... it greatly concerns me. it greatly concerns me. >> bergersen: well, i hope this all works out. i mean, you are helping me a lot here. >> kuo: thank you. thank you. >> bergersen: but... but i don't want anyone to know about our... >> kuo: no, no, of course not. >> bergersen: ... relationship or anything, because it could get me in a lot of trouble. >> pelley: bergersen kept saying, "i could go to jail," and both men did.

in 2008, prosecutors showed them this tape and they pled guilty. bergersen got almost five years for communicating national defense information; kuo, a naturalized american citizen, is in a u.s. prison doing 15 years for espionage. prison may have been the best option bergersen had, because after he left the car, kuo pulled out his own tape recorder. we'll never know why he taped the damning conversation, but it is classic spy craft to use blackmail to get at ever deeper and deeper secrets. for every case that is broken-- like the bergersen case, for example-- how many others are there that we have no idea about? >> van cleave: oh, isn't that the important question? you never know what you don't know. but we... certainly, we have seen such an extensive range of activities by the... by the chinese that it... it should make you very uncomfortable. >> pelley: since our story first

aired, tai shen kuo's sentence was cut by two-thirds, partly because of his cooperation and partly because the judge felt that the damage to national security was limited. he's now scheduled to be released a few months after gregg bergersen. >> welcome to the cbs sports update presented by viagra. i'm greg gumbel in new york. both ohio state and purdue rolled, so the buckeyes remain one game ahead of the boilermakers in the big 10. pittsburgh wins in overtime. virginia's win helps their tournament chances. kemba walker scores 11 of his 16 points it in second half for uconn. for more sports news and information, go to cbssports.com. ♪

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