Was assigned to the U.S. Embassy in Vienna, Austria in March 1986. While in Vienna, Lonetree met with Sasha and provided him with information about embassy employees and with floor plans to the building. In return he was given $2,500 US. Over time, Lonetree provided TOP SECRET documents as well as a burn bag containing more than 100 documents related to U.S. arms reduction.

On December 12, 1986, Sasha turned Lonetree over to another handler, who promised to aid Lonetree in re-uniting with Violetta. Two days later, however, Lonetree reported his actions to the CIA station chief. He was immediately turned over to the Navy Intelligence Service (NIS) and placed under arrest, charged with espionage.

NIS launched a nine month investigation, during which all of the Marine guards in the Moscow embassy were replaced. NIS also arrested Corporal Arnold Bracy, who signed a confession indicating that he acted as a lookout for Lonetree, while Lonetree secreted KGB operatives into the embassy to plant bugs. Also arrested was Marine staff Sergeant Robert Stufflebeam, who was charged wit failing to report fraternization with Soviet women. The charges against Bracy and Stufflebeam were eventually dropped.

NIS was highly criticized for its over-exuberance with its investigation, accused of blowing things way out of proportion in order to show off having disrupted a spy operation. Lonetree was convicted on multiple counts of turning over classified information, was court-martialed in 1987 and sentenced to 30 years in prison. Because of his cooperation with authorities, his sentence was reduced to 25 years of which he served nine before being released in February 1996.