Avanti pleads no contest, officials headed to jail

Avanti pleads no contest, officials headed to jail
SAN MATEO, Calif. — Avanti Corp., its chairman and six current or former employees pleaded no contest Tuesday (May 22) to charges in a trade-secrets case that rocked the design-automation community and the foundations of intellectual property.

The surprise deal in the five-year-old case put a sudden end to a criminal trial in which the defendants were accused of stealing place-and-route software code from Cadence Design Systems Inc. and using it to build a competing router that overthrew Cadence market share leadership in that niche.

Under an arrangement announced by the Santa Clara County District Attorney's office, the defendants — including the Avanti corporation itself — will pay a total of $35 million in fines, and five defendants will likely receive jail time. Trading in Avanti stock was halted with shares down a little under 4 percent to $17.84 apiece. A hearing to determine how much restitution Avanti should pay Cadence was scheduled for June 4.

Avanti chairman and chief executive Gerald Hsu, who had been a high-ranking executive at Cadence, will spend no time in jail but will pay $2.7 million in fines. Hsu pled no contest to charges of conspiracy, concealing stolen property and misdemeanor securities fraud.

Mitch Igusa, the former Cadence employee who allegedly sent code from Cadence to Avanti, will likely receive the most jail time. Igusa pled no contest to trade secret theft and will receive a sentence of up to six years in prison.

Stephen Wuu, a former Cadence employee and co-founder of Avanti, pled no contest to trade secret theft and securities fraud. He will receive 16 months to 2 years in jail and will have to pay $2.7 million in fines.

Yuh-Zen Liao, a former Cadence employee and co-founder of Avanti, will receive up to 1 year in prison and pay $2.7 million in fines. Liao pled no contest to conspiracy and securities fraud.

Eric Cho, another former Cadence employee and co-founder of Avanti, also pled no contest to consipiracy and to securities fraud. He will spend up to 1 year in prison and pay $108,000.

Leigh Huang, a former Cadence employee and later Avanti's director of business operations, will receive no jail time and pay $108,000. Huang pled no contest to conspiracy and to securities fraud.

Eric Cheng pled no contest to theft charges. He will receive a $27,000 fine and 364 days in jail.

Avanti Corp. pled no contest to conspiracy, trade secret theft and securities fraud. The corporation will pay $27 million in fines.

Charges against Mike Tsai, another former Cadence employee who was the first chief executive officer of Avanti as well as a co-founder, were dismissed.

None of the defendants was immediately available for comment. It was unclear what actions, if any, the Avanti board might take against Hsu and the others. Company officials did, however, call a 5:30 a.m. PDT press conference for Wednesday morning.

In a statement late Tuesday, Avanti chief operating officer Paul Lo said, "The company concluded that putting this matter to rest once and for all was the right thing to do. Avanti no longer sells the product that gave rise to this dispute, so this decision will have no impact on the company's current product line." He added that the company has "substantial financial reserves" to pay the fines and "maintain the company's fundamental strength."

Cadence chief executive Ray Bingham said, "This is a landmark day for protecting innovation and intellectual property. Based on the weight of the evidence, we are not surprised by the results."

The case emerged Dec. 5, 1995, when two dozen police and FBI agents raided the Avanti (formed when ArcSys and Integrated Silicon Systems merged) corporate headquarters, seizing files, computers and computer hard drives. Investigators alleged that Wuu and others had stolen up to 60,000 lines of Cadence source code from Cadence's Cell3 layout system. Cadence almost immediately filed a civil suit against Avanti alleging that former Cadence employees had gone over to Avanti and used the source code in Avanti's ArcCell and ArcCell XO place-and-route tools. The civil suit is pending.

Joe Costello, Cadence's chief executive at the time who was embroiled in a market-share battle with up-and-coming Avanti, launched a public-relations jihad against his rival, accusing it of thievery and fraud. Hsu, interviewed only rarely in public, said at one point, "I want to settle. This is really stupid. Come on, Joe, let's compete."

Costello, in an interview Tuesday, said, "If you look at the $35 million Avanti has to pay and the small jail time, the fine doesn't really fit the crime. If this had been a case against a group conspiring to steal $35 million worth of automobiles, there is no way the defendants would have gotten off that easy."

Costello, now president of MCAD company Think3, had been at the vortex of an argument that emerged from the case, namely, which intellectual property goes and which stays when an engineer changes companies. He railed against EDA customers who stuck with Avanti tools and thumped speaker's podiums in defense of intellectual property (IP). Costello left Cadence in 1997.

Tuesday, Costello said the plea deal brings legitimacy to IP lawsuits. He argued that Avanti profited for years by building other tool lines, purchasing companies, selling stock and now paying the fines with foundation code it stole from Cadence.

"They hurt not just Cadence but the rest of the EDA industry," he said.

Some of the focus late Tuesday began shifting toward how Avanti stock will perform once trading resumes, presumably Wednesday, and how customers who've stuck with Avanti through the turmoil would respond.

"Buying Avanti stock tomorrow is not a great idea," said Bill Frerichs, senior financial analyst at D.A. Davidson & Co., who earlier this month downgraded Avanti's stock from "buy" to "outperform" because the company was, in addition to jumping into the criminal trial, investing in off-shore enterprises and having accounting troubles.

Garo Toomajanian, vice president and research analyst with Dain Rauscher Wessels, said that the plea is going to cause confusion with investors, but also with Avanti's customers and employees.

"On the surface, investors are going to think 'ah, it is finally over,' but it isn't," said Toomajanian. "Avanti still has a restitution hearing to go through and a civil suit in which Cadence is seeking damages of $400 million or more. With compensatory damages it could be multiples of that. Avanti doesn't have that kind of money, and Cadence's civil case just got a whole lot better."

"Customers said they were going to use Avanti until the courts told them they couldn't," Toomajanian said. "I bet a lot of customers and investors are going to change their mind now that they are dealing with a company that has pled no contest to trade secret theft, conspiracy, concealing stolen property and securities fraud. They are going to have problems with employee morale too."

The following chart summarizes the defendants, titles, charges and penalties in the plea-bargain arrangement reached Tuesday (May 22) involving Avanti Corp.

Avanti's no-contest pleas, penalties

Defendant	Title	Charges	Penalty
Avanti Corp.		conspiracy, trade-secret theft, securities fraud	$27 million in fines
Yun-Chung (Eric) Cho	former Cadence employee, Avanti co-founder and vice president of marketing	conspiracy and securities fraud	up to 1 year in prison and $108,000 fine
Yuh-Zen (Y.Z.) Liao	former Cadence employee, Avanti co-founder and vice president of technology	conspiracy and securities fraud	up to 1 year in prison and $2.7 million fine
Tzyh-Lih (Stephen) Wuu	former Cadence employee, Avanti co-founder and vice president of engineering	trade-secrets theft, securities fraud	16 months to 2 years in prison, $2.7 million fine
Gerald Chien-Kuo Hsu	Former Cadence R&D director, now president, chief executive and director of Avanti	conspiracy, concealing stolen property, misdemeanor securities fraud	no prison time, $2.7 million fine
Shiaoli (Leigh) Huang	former Cadence employee and later Avanti director of business operations	conspiracy, securities fraud	no prison time, $108,000 fine
Mitsuru (Mitch) Igusa	former Cadence employee	trade-secret theft	up to 6 years in prison, $27,000 fine
Chih-Liang (Eric) Cheng	former Cadence employee later employed by Avanti	trade-secret theft	364 days in prison, $27,000 fine
Mon Yen (Mike) Tsai	former Cadence employee and Avanti co-founder, Avanti's first chief executive	charges dismissed