Avant! execs could face long prison terms

Avant! execs could face long prison terms
FREMONT, Calif. — Avant! Corp.'s legal woes were compounded this week as a Santa Clara County grand jury indicted company's president and chief executive officer, Gerry Hsu, and seven other individuals for alleged trade-secret theft and securities fraud. Each defendant faces up to 12 years and four months in prison, plus fines of up to $17 million.

The indictments mirror criminal charges filed against Hsu and six others in April 1997, although the securities-fraud allegation is new. And for the first time, Mike Tsai — a founder of Avant! and current president and chief executive officer of Axis Systems (Sunnyvale, Calif.), a high-profile verification startup — is among the defendants.

The net effect of the grand jury indictments is to jump-start a criminal case that's been stalled for 18 months. Julius Finkelstein, deputy district attorney for Santa Clara County, said a trial could begin as early as March and could be expected to last three to six months. Arraignment has been set for Jan. 11, with bail to be determined by the court.

The indictments come just two weeks after a judge in the related civil case banned Avant!'s Aquarius products, as well as a translator from Aquarius to the current Apollo line, for allegedly infringing on trade secrets of Cadence Design Systems Inc. (San Jose, Calif.). The judge also partially lifted the stay on a civil trial in which Cadence seeks $1.2 billion in damages.

Though criminal complaints were filed against Hsu and the other six original defendants in April 1997, the case was delayed by legal wrangling and never got as far as a preliminary hearing that could return indictments. So the district attorney's office opted for a faster route to indictments by convening the grand jury.

"The indictments supersede the prior criminal complaint and hopefully eliminate many of the writs and appeals the defense has brought which have delayed the case," Finkelstein said.

Also this week, Judge Leon Fox dismissed Avant!'s attempt to disqualify Finkelstein. Avant! had based that effort on its assertion that Finkelstein had received inappropriate help from Cadence in the criminal case.

The defendants could now face lengthier jail sentences and far heavier fines than they would have under the original complaint. "We've added charges," said Finkelstein. "The indictment now alleges a criminal enterprise that made hundreds of millions of dollars in illegal profits through the use of stolen trade secrets, and a major fraud perpetrated against the investing public."

It's the securities-fraud charges, Finkelstein said, that result in the whopping potential fines of $17 million per defendant.

In addition to Hsu, Tsai and Avant! Corp. itself, defendants include current Avant! employees Stephen Wuu, Y.Z. Laio and Eric Cheng; former Avant! employees Eric Cho and Leigh Huang; and Mitch Igusa, the consultant who was the original focus of Cadence's source-code-theft allegations. Finkelstein would say only that Tsai was indicted "based on evidence presented."

Avant! general counsel David Stanley said the indictments are simply a "rehash" of the charges filed a year and a half ago. The new charges, he claimed, are the result of a business dispute that has been turned into a criminal matter by Cadence. Stanley said Avant! denies all allegations and will defend all current and former employees.

"I don't perceive this changes the relationship we have with our customers, and I don't perceive it has any impact on the company," said Stanley. Asked whether Hsu will resign if convicted, Stanley responded, "I'm not even going to speculate, because I don't think that is going to happen."

Tsai expressed shock at news of the indictment. "I have done nothing wrong," he said. "I am confident the charges against me will be dismissed, or that I will be acquitted by a jury."

Tsai cofounded ArcSys and was its chief executive from 1991 until March 1994, before ArcSys merged with Integrated Silicon Systems to become Avant! He was not named as a defendant in Cadence's civil case or in the original criminal case, and he has never before been linked to the source-code-theft allegations.

Gary Smith, principal EDA analyst at Dataquest Inc. (San Jose), said he didn't think the indictments would have much impact on Avant! Even if Hsu and others are convicted, he said, Avant! now has a strong management team that can take over and run the company.

"I'm really sad Mike [Tsai] got pulled into this," Smith added. "Nobody in the Valley I know who knows Mike thinks he'd be involved in anything like this."

Avant!'s stock price was down only 1.3 percent Thursday (Dec. 17) following the indictments, albeit with heavy trading. Analyst John Barr at Needham and Co. (New York) said the company's depressed stock price had reflected an expectation that the indictments were coming.

Currently priced just under $14, Avant! stock is trading at about eight times projected 1999 earnings, Barr said. "That's very low. It would easily be at 20 times earnings without the legal problems," he said.

Cadence is not directly involved in the criminal case but welcomes the indictments, said Smith McKeithen, Cadence's general counsel.

"We're gratified that a grand jury has found that the DA has presented credible evidence," McKeithen said.