ABOUT THIS SERIES

For the past 10 months, Chronicle staff writers Reynolds Holding and
William Carlsen investigated allegations of widespread legal and ethical
misconduct in Silicon Valley.

This five-part series is based upon thousands of pages of financial
reports, internal company memorandums, government records and court
documents, as well as scores of interviews with corporate executives, government
officials, state and federal prosecutors, judges, lawyers, academicians and
entrepreneurs.

Some of those court documents were unsealed only as a result of a
court order obtained by The Chronicle in San Mateo Superior Court

Monday, November 15, 1999: Phantom Riches: Beneath the glitter of booming Silicon Valley, executives have been
accused of lying about products and doctoring their books

Tuesday, November 16, 1999: Hollow Words: Federal prosecutors say white-collar crime is a priority, but they
have filed only a few charges against high-tech executives

Wednesday, November 17, 1999: Double-Crossed: Silicon Valley entrepreneurs say they have been betrayed by venture
capitalists and lawyers, the very people they asked for help

Thursday, November 18, 1999: Stolen Secrets: Technological breakthroughs are so valuable in Silicon Valley that
some company executives are willing to do almost anything to get them

Friday, November 19, 1999: Beyond the Law: As the SEC attempts to crack down on improper accounting, a recent
federal court ruling threatens future investor lawsuits

 
Phantom Riches: Beneath the glitter of booming Silicon Valley, executives have been
accused of lying about products and doctoring their books
 

       Silicon Valley is the epicenter for the fastest creation of wealth
in history. But the high-tech miracle has a dark side: Untold stories of
ruined investors,
       betrayed entrepreneurs and regulators who are overmatched and
overwhelmed.
 

       In 1989, Lev Dawson scoured Stanford University's Jackson Library,
searching for a shot at Silicon Valley gold.

       He found it in an unproven idea for making laptop and cell phone
batteries smaller, lighter and longer-lasting.

       With venture capital backing, Dawson created Valence Technology
Inc., and during the next four years the batterymaker issued more than $167
million in
       stock and signed potentially lucrative contracts with Motorola and
Hewlett-Packard.

       Unfortunately, the batteries had a few problems. They sparked and
exploded and burned. One burst into flames so intense that it melted
through the factory's
       tile floor and into the concrete foundation. A senior company
engineer said carrying a battery was like having ``a bomb in your pocket.''

       But word of the batteries' failures would not get out for several
years. By then, Dawson was farming sweet potatoes in northeast Louisiana,
having unloaded
       more than 2.4 million shares of his Valence stock for almost $41
million.

       Public stockholders, though, were almost wiped out. Relying on
company assurances that all was well, they bid up the stock to more than
$25 a share before
       the truth emerged in 1994, and the price plunged to $3.25.

       Jim Varano, a 53-year-old pharmacist living near Boston, believed
Valence's prospects were so promising that he borrowed money for a $320,000
stake in
       the company. After his investment evaporated, he had trouble
sleeping, working and paying his sons' tuition.

       Today, he minces no words: ``They're crooks and swindlers.''

       In recent years, Varano and tens of thousands of investors like him
have filed lawsuits accusing Dawson and other Silicon Valley executives of
securities
       fraud, insider trading and legal and ethical misconduct.

       The executives -- including Dawson -- deny any wrongdoing.

       But officials at scores of high-tech companies, from bedrock
hardware manufacturers to high-flying dot.coms, have been accused of lying
about revenues
       and products to satisfy market expectations, then dumping their
stock for millions of dollars in illegal profits.

       At the same time, lawyers at the valley's most influential firms
have been accused of playing fast and loose with conflict-of-interest
rules, in some cases
       allegedly betraying the clients they were committed to represent.

       And some of the industry's most prominent venture capitalists, the
financiers of the high-tech boom, are alleged to have stolen ideas and
companies from the
       entrepreneurs they financed.

       But the U.S. Justice Department and the Securities and Exchange
Commission have largely failed to enforce laws enacted to protect the
markets' integrity.
       During the past decade, the agencies have filed only a few criminal
and civil cases in Silicon Valley, despite warnings that corporate
misconduct is thriving.

       ``We've seen a dramatic increase in the number of complaints and
investigations -- far more than three years ago. That's got to reflect a
big increase in
       wrongdoing,'' said David Bayless, until June the head of the SEC
office in San Francisco. ``And it's the same goddamn thing every time:
faked revenues,
       35-day months, side agreements, hiding things in warehouses

       -- you name it.''

       This is a series about the dark side of the Silicon Valley miracle.
It is about some of the most egregious cases of securities fraud,
trade-secret theft and abuse
       of small entrepreneurs -- cases largely concealed from public
scrutiny by nondisclosure agreements, sealed court documents and fears of
retribution.

       Set amid the tidy light-industrial parks and sprawling corporate
campuses that line the south end of San Francisco Bay, it is a story about
greed and hubris,
       about high-powered executives and boardroom dealmakers who operate
with flagrant contempt for the rules of law and ethics.

       The story begins with two men -- a plaintiffs' attorney and a
high-tech pioneer -- whose battles with each other reflect the fundamental
conflict between
       unrestrained corporate freedom and the need to protect the rights of
investors.

       A SON OF THE GREAT CRASH, 1946

       William Shannon Lerach -- the attorney despised most by corporate
America -- was born a victim of the stock market.

       In September 1929, after receiving a substantial inheritance,
Lerach's father, Richard, went to work as a stockbroker. He invested
everything he owned in the
       market. The next month, the market crashed, and the elder Lerach was
ruined.

       In 1933 and 1934, President Roosevelt signed landmark securities
legislation to prevent the kind of speculation, manipulation and outright
fraud that triggered
       the crash and caused millions of Americans to lose their savings and
jobs.

       The legislation came too late for Richard Lerach, who was relegated
to selling metal parts for the rest of his days. But for his youngest son,
William, it would
       provide the means for a career of wealth and notoriety, one that
would ultimately earn him the sobriquet ``prince of darkness'' -- and a law
firm draw last year
       of more than $16 million.

       Bill Lerach was born in 1946 in the Ohio River Valley. As he grew
up, he worked in a series of dead-end jobs at a plant nursery, a funeral
home and a pool
       hall. He was a mediocre student until law school at the University
of Pittsburgh, where he graduated second in his class and attracted a job
offer from
       Pittsburgh's elite firm, Reed Smith Shaw & McClay.

       He excelled there, making partner in less time than any other lawyer
in the firm's history. He was brash and profane and wickedly funny, a
flush-faced guy
       with a big head of puffy red hair.

       But he was never entirely comfortable representing companies in
lawsuits and deals. He could never overcome the deep mistrust of corporate
America he had
       developed while watching his father work for almost nothing.

       ``They treated him like they treat pencils,'' he said, ``shaving him
down until there was nothing left but a nub.''

       The last straw was a lawsuit filed against his corporate client by a
shareholder.

       ``This guy's case was so good, and he was so right,'' said Lerach,
``and we just chopped him up into little pieces. We just blew him away. And
I thought, if
       that guy had had more money and a better lawyer, he would have won.''

       Lerach realized he wanted to represent shareholders -- not to
mention earn bigger paydays. So in 1976, he took a job with prominent
plaintiffs' attorney
       Melvyn Weiss, opening a one-lawyer branch office in San Diego for
Weiss' New York firm, specializing in suing companies for securities fraud.

       The office prospered and quickly expanded, taking cases around the
country. But it did not come into its own until 1984, when, for the first
of several times,
       it filed a lawsuit against a Silicon Valley company called Seagate
Technology, run by a man named Alan Shugart.

       THE DISK DRIVE REVOLUTION, 1979

       Al Shugart was in a hurry from the start, impatient to leave behind
a downscale adolescence spent surfing and fixing motors near Chino, in San
Bernardino
       County.

       In 1951, the day after earning an engineering degree from a private
college called University of Redlands, he landed work as a repair
technician for
       International Business Machines.

       Promotions came quickly. At the company's research center in San
Jose, he led a team of top-flight engineers credited with developing the
first rigid disk
       drives, a revolutionary means of storing data.

       It was an extraordinary time in Silicon Valley, the eve of the
computer revolution. And in 1969, when IBM wanted Shugart to join its New
York
       headquarters, he quit instead, ending 18 years with the company.

       He worked for Memorex for several years, then started his own floppy
disk drive business -- Shugart Associates. But his role in the enterprise
ended badly in
       1976 when the directors of his company fired him for reasons he
cannot -- or will not -- explain. For the next three years, Shugart fished
for salmon and
       tended bar in Santa Cruz. Then, in 1979, he hooked up with Finis
Conner, a former colleague from Shugart Associates. Demand for personal
computers was
       rising fast, and Shugart and Conner were determined to catch the
wave. Their idea: a hard disk drive with five times the capacity of a
standard floppy disk --
       at half the price.

       The two men recruited three more engineers through newspaper ads and
then created the company that would become Seagate Technology.

       Seagate's new disk drives began to roll off production lines in
1980. It was an increasingly competitive market. Apple Computer, IBM and
other major
       customers were starting to make their own hard drives. Japanese
manufacturers were jumping in with even cheaper products.

       Still, by the summer of 1984, Seagate claimed profits of $42
million, up 221 percent over the previous year. Shugart and other Seagate
executives crowed
       about the company's bright prospects for growth, sending the stock
price

       -- and Shugart's reputation as a Silicon Valley entrepreneur

       -- soaring.

       Later that summer, though, the Seagate success story began to unravel.

       In August, without warning, Seagate executives announced that they
expected dramatically lower profits and slower growth. The company would
have to set
       aside millions of dollars to cover obsolete inventory and accounts
that might never be collected. The huge Watsonville plant -- touted as a
symbol of the
       company's astounding growth -- had, in fact, never been used, and it
was for sale.

       The earnings report that Seagate issued in late 1984 showed
precipitous declines in revenues and profits. Almost instantly, Seagate
stock plummeted to $4.38
       a share -- a 75 percent drop from its high of $17.13 in June 1983.

       Public shareholders took a beating. But shortly before the company
issued its dire report, Shugart and other executives had unloaded much of
their own stock
       for gross proceeds of more than $84 million. Shugart's take alone
was more than $15 million.

       Bill Lerach smelled a rat.

       THE LAWYER DOLL, 1984

       Lerach had been filing class-action lawsuits on behalf of
shareholders for years, extracting multimillion-dollar settlements from
notable companies such as
       Gap Inc. and Memorex and -- with the lawyers' standard one-third
contingency fee

       -- amassing a personal fortune.

       But Shugart and Seagate were prized game, potential trophies from
the heart of Silicon Valley. And less than a month after the company
released its financial
       report, Lerach and several other lawyers filed class-action suits
that accused Shugart and his colleagues of securities fraud and insider
trading.

       In Seagate's Scotts Valley headquarters, Shugart was furious. He
vehemently denied the allegations and vowed to fight the suits no matter
how long it took,
       no matter how much it cost.

       He hated anyone who tried to obstruct his entrepreneurial freedom.
He hated lawyers most of all.

       ``Al Shugart hated lawyers so much he kept a lawyer doll on his desk
so he could periodically snap its head off,'' said one plaintiffs'
attorney. ``But he really
       detested Bill Lerach.''

       LERACH'S WRATH, 1986

       In 1986, as the Seagate case dragged through its second year of
pretrial motions, Lerach turned his attention to a lawsuit that had the
potential to make him the
       nation's best-known class-action attorney.

       It involved Nucorp Energy Inc., a San Diego oil company that issued
$150 million in securities in 1981 before declaring bankruptcy a year
later. Lerach and
       the SEC contended that the company used phony revenues to lure
investors into a disastrous deal.

       Lerach tried the case to a jury verdict, his first in more than 18
years of practicing law. He was so sure of victory that he told the lawyer
on the other side,
       ``This is going to be an ignominious end to your mediocre career.''
When jurors requested a calculator, he asked the judge to make sure it
could handle nine
       figures.

       On April 25, 1988, he invited his colleagues and the media to court
for the verdict.

       Then he lost.

       Lerach was stunned. His face blanched, then burned a furious red
before he stormed from the courtroom. His colleagues say the fury lasted
weeks.

       But rather than weaken Lerach, the humiliating defeat seemed to
galvanize him for battle against the titans of corporate America. It
intensified his belief, as he
       wrote in a memo about jurors one week later, that ``60-year-old
Republicans'' were inherently unsympathetic toward victims of securities
fraud, and a
       person's ``position in society, his sense of class, is probably the
single most important factor in determining his attitude toward (investors'
claims).''

       And Shugart -- 58 years old and rich -- would soon experience the
force of Lerach's wrath.

       THE IBM DEAL, 1988

       By the end of 1987, Seagate had recovered from its financial
problems to become one of the most prosperous companies in the high-tech
industry. And
       Shugart, undaunted by the lawsuit Lerach had filed against him,
emerged as one of the most visible and outspoken executives in Silicon
Valley.

       With a new 3.5-inch disk drive, Seagate earned revenues surpassing
$1 billion a year. The company's sprawling new production facilities in
Thailand and
       Singapore made it the largest private employer in both of those
countries.

       And in March 1988, Shugart announced a new order from Seagate's
biggest customer -- IBM -- a major announcement that nervous investors had
long been
       waiting for.

       Wall Street applauded, and the company's stock price soared, but
there was a problem: The deal didn't require IBM to order anything from
Seagate.

       IBM executives were horrified by Shugart's announcement.

       They called him and another Seagate executive to Washington, D.C.,
in May. Over dinner, the men from IBM accused Shugart of blatantly
violating a written
       agreement that barred him from announcing the deal.

       During a heated exchange after dessert, the ranking IBM executive,
Irv Abzug, accused Shugart of trying to please ``security analysts'' and
``hype''
       Seagate's stock. At that point Shugart walked out.

       For more than a month, he assured financial analysts that demand for
Seagate's disk drives was so strong that the company would expand
production and
       even raise prices -- an unheard of move in the highly competitive
disk-drive industry. But in July, Seagate disclosed that its earnings were
down 57 percent
       from the previous year. Over the next day, the value of Seagate
shares plunged $250 million -- a record for high-tech stocks at the time.

       Shugart, however, had unloaded 100,000 shares in April, when the
stock price was up.

       Lerach struck quickly. On July 29, 1988, just three months after the
devastating Nucorp verdict, he filed a second class-action suit against
Seagate, again
       accusing Shugart and other top executives of securities fraud and
insider trading.

       In a rage, Shugart categorically denied the allegations -- and vowed
to fight them with everything he had.

       THE TRUCKER'S TIP, 1989

       A tip came late the next year.

       Two attorneys working with Lerach on the Seagate case flew to San
Jose and knocked on the door of a trucker named George Armour, who had been
       employed by the shipping firm that Seagate used in 1983 and 1984.

       For four years Lerach and his associates had heard the rumors that
Seagate boosted revenues by claiming to have sold disk drives that were
actually stored in
       warehouses. And now, it seemed, the rumors could be true.

       At first Amour was reticent, but then he told the attorneys how
Seagate cleared disk drives out of its warehouses at the end of every
business quarter.

       He told them that he and other truck drivers often worked 16- to
18-hour shifts, hauling semitrailer trucks packed with disk drives to
rented warehouses in
       Santa Clara and San Jose.

       At one point, he said, the company parked at least six fully loaded
trailers in the Santa's Village parking lot in Scotts Valley. The trailers
were parked
       back-to-back, so the doors could not be opened. A security guard
patrolled the lot.

       ``It seemed a little funny to me at the time,'' Armour said. ``Those
disk drives cost a lot. They were like gold.'' Later, a second trucking
employee, Peter
       Page, described how semitrailer trucks loaded with pallets of
Seagate disk drives arrived through the night at a local freight warehouse.
Two trucking lines
       delivered the merchandise at the end of a financial quarter in 1983
or 1984, he said, and it was not removed until later the next month.

       The truckers' statements would be the turning point in Lerach's
first suit against Seagate. He would eventually force Shugart to the
bargaining table for a
       settlement: Without admitting any wrongdoing, Seagate agreed to pay
$5 million to 17,000 shareholders.

       Lerach and the other attorneys who had sued the company collected
$3.1 million in fees and $1.26 million in expenses.

       A CALL TO ARMS, 1990

       ``Enough is enough,'' blared the full-page ad from the back cover of
the April 1990 Upside magazine, a glossy monthly that covers the high-tech
industry.
       ``Are securities lawyers holding your company ransom?''

       The ad was Shugart's, a public declaration of war against
class-action lawsuits.

       For years, scores of executives at some of the most prominent
companies in Silicon Valley -- including Oracle, Apple and Sun Microsystems
-- had been sued
       for securities fraud. And whatever the merits of the allegations,
legal fees and settlements cost the high-tech industry millions of dollars
every year.

       In the ad, Shugart asked other executives to send him their business
cards if they wanted to help stop the lawsuits against their companies. His
plans were
       uncertain, but during the next few weeks, he received a couple of
dozen business cards.

       Then a mysterious envelope arrived from San Diego. In it was one of
Lerach's business cards. Scrawled on the front was a message:

       ``Dear Al: More is coming.''

       True to his word, on June 25, 1991 -- just 11 days after the
settlement of his first suit against Seagate -- Lerach struck again, filing
a third lawsuit accusing
       Seagate and Shugart of securities fraud.

       EXPLOSIONS IN THE LAB, 1991

       The class-action business was making Lerach rich, providing him the
means to support a sprawling mansion in Rancho Santa Fe, an enclave of
       multimillion-dollar homes in the Southern California hills
overlooking the Pacific.

       It was also earning him the enmity of corporate America, whose
executives called him ``pond scum'' and ``blood-sucking scumbag'' while
commiserating
       with other targets of shareholder suits about being ``Lerached.''

       But no one despised Lerach more than Shugart, who in 1994 found
himself a defendant in yet another shareholder suit -- this one over his
involvement with
       Valence Technology.

       Shugart had been asked to sit on Valence's board of directors by
Carl Reed, Seagate's former vice president of operations. A tough and
efficient manager,
       Reed was in many ways responsible for Seagate's rise to a
billion-dollar corporation with almost 40,000 employees around the world.

       In May 1991, Reed left Seagate to become president and chief
operating officer of Valence in San Jose. Several months later, he
persuaded Shugart to join the
       company's board.

       In theory, Valence's technology was compelling: a wafer-thin lithium
polymer battery that would last four times longer than standard batteries,
would cost
       one-tenth as much to make -- and would contain no liquids that might
cause the lithium to explode.

       From the beginning, though, Valence had problems.

       According to former Valence engineers, virtually all of the
thousands of machine-made batteries eventually shorted out, emitting sparks
or intense heat when
       pinched by assembly equipment.

       The equipment itself was often broken, they say, hampering attempts
to show off the factory to potential customers or investors. When visitors
arrived,
       employees would pretend the machines were working by sending
hand-made batteries down the assembly line.

       And the cost of manufacturing was prohibitive: between $50 and $60
for a battery the company planned to sell for about $15.

       ``It was like strapping a $100 bill on one of these things and then
sending it out,'' a former manager said.

       But Chief Executive Officer Lev Dawson, Reed and other top
executives publicly claimed that Valence was on the verge of success.

       In May 1992, the company said basic research on the state-of-the-art
battery was complete. In December, Valence announced a $100 million order
from
       Motorola to supply batteries for cell phones and pagers, and it set
early 1994 as the delivery target date.

       Then, in February 1993, an article in Forbes magazine questioned the
company's prospects. But Dawson controlled the potential damage, telling
``Valence
       Followers'' in an open letter, ``We remain in solid financial
position.''

       A few days later, Dawson stepped down as CEO. Reed replaced him, and
the optimistic announcements continued.

       In late 1993, Valence touted plans to open a huge new plant in
Ireland. And in January 1994, the company announced a $3.5 million contract
to supply
       Hewlett-Packard with batteries for laptop computers.

       ``We look forward to producing our first commercial batteries in
1994,'' Reed said in a press release.

       BAD NEWS REACHES BOSTON, 1994

       Across the country, in Braintree, Mass., Jim Varano read about the
developments with excitement. He already owned a few hundred shares of
Valence, and
       the latest news persuaded him to buy even more.

       ``In effect, they were saying that the batteries were perfected,''
he said. ``They had delivery dates. They were going to build a production
plant. It meant they
       had a product ready.''

       He talked it over with his broker, and in early 1994 purchased
approximately 25,000 shares on credit. Meanwhile, unknown to Varano, Dawson
and other
       Valence insiders were unloading millions of shares of their own.

       On May 4, 1994, on his way to work at the Veterans Affairs hospital
in nearby Brockton, Varano stopped at a Dunkin' Donuts for a cup of coffee.
He sat
       down and turned to the business section of the Boston Globe, eager
to see whether Valence stock had continued to climb.

       To his horror, he saw that the stock had plunged almost 50 percent.
Valence had announced it could not meet Motorola's requirements for
batteries -- and
       probably never would.

       Overnight, Varano lost hundreds of thousands of dollars.

       ``I was devastated,'' he said.

       Even worse news followed.

       In June, the company announced that it could not deliver batteries
to Hewlett-Packard. And in August, it announced that it would abandon
development of a
       solid lithium battery.

       Almost immediately after the stock crashed, Lerach and other
plaintiffs' attorneys filed class-action lawsuits accusing Valence and
Dawson, Reed, Shugart
       and other company executives and directors of securities fraud.

       Varano became the lead plaintiff in Lerach's suit. He has yet to
recover a dime.

       THE REFORM ACT, 1995

       On Dec. 15, 1995, Lerach went to dinner at the White House.

       At the time, President Clinton was grappling with the Private
Securities Litigation Reform Act of 1995, far-reaching legislation designed
to limit
       securities-fraud class actions against corporate executives.

       It proposed the most dramatic change in the nation's securities laws
since 1934, and Clinton had four days to sign or veto the bill.

       Lobbying for the Reform Act had started in earnest two years
earlier, when accounting firms and Wall Street investment banks complained
to Congress that
       they were being dragged into securities suits filed against their
corporate clients simply because they had ``deep pockets.''

       Their plea for relief went nowhere at first. Then, in November 1994,
the Republican Party swept into Washington brandishing the ``Contract With
America,''
       which included a provision against securities class actions.

       In just two months, the new Republican-led House of Representatives
passed strict rules designed to put plaintiffs' attorneys out of business.
The most
       draconian sections, which would have eliminated almost all
shareholder suits, were weakened in negotiations with the Senate.

       Top Silicon Valley executives, in their first serious display of
political power, lobbied the president to sign the Reform Act. They argued
that most securities
       fraud suits were frivolous. As proof, they pointed out that half of
the 150 largest companies in Silicon Valley had been the focus of those
lawsuits, implying
       that securities fraud could not possibly be that widespread.

       But the Democratic Party's traditional supporters -- consumer
groups, civil libertarians and plaintiffs' attorneys such as Lerach --
pushed the president for a
       veto.

       Lerach was one of Clinton's earliest and strongest political
backers. During the 1992 presidential campaign, he rode on Clinton's bus
through the nation's
       heartland. He was host for a fund-raiser for Clinton at his mansion
in Rancho Santa Fe.

       Lerach disputes published reports that suggest he persuaded Clinton
at the December White House dinner to veto the Reform Act.

       ``I was at a dinner with President Clinton and 500 other people,''
he said. ``I shook his hand and never spoke to him about the bill. There
were 20 lobbyists
       on the other side who were at that dinner.''

       But four days later, 20 minutes before the midnight deadline,
Clinton vetoed the Reform Act.

       ``The president supports the goals of this legislation,'' said
spokesman David Johnson in announcing the veto, ``but he is unwilling to
sign legislation that
       would have the effect of closing the courthouse door on investors
who have legitimate claims.''

       The veto would not last. For the first time in Clinton's presidency,
the House and Senate voted to override, and the Reform Act became law.

       SHUGART'S REVENGE, 1995

       Corporate executives around the nation celebrated, and nowhere was
the news greeted with more joy than in Silicon Valley. Shugart was
ecstatic.

       Four times he had been sued by Lerach. The first case had cost him
millions. The second had been thrown out of court. The third would be
settled for
       millions more. He had been dropped from the Valence suit because he
had not participated in running the company.

       Finally, it was payback time.

       He fired off a fax to Lerach's San Diego office. It said: ``Dear
Bill, More is coming. Sincerely, Al.''
 

       SEAGATE TECHNOLOGY

       With headquarters in Scotts Valley, Seagate is the world's largest
manufacturer of computer disk drives.

       Seagate was founded in 1979 by Alan Shugart and Finis Conner.
Shugart, who is credited with leading the team of IBM engineers that
invented the floppy
       disk, served as the company's CEO until July 1998.
 

       MILBERG WEISS BERSHAD HYNES & LERACH

       Milberg Weiss is the largest law firm in the nation to focus on
class-action lawsuits.

       The firm specializes in securities fraud suits and has filed
hundreds of shareholder suits against Silicon Valley companies, resulting
in more than $2 billion in
       settlements.

       William Lerach joined the firm in 1976. He has successfully sued
some of the most notorious figures in two of the nation's biggest financial
scandals,
       winning a $250 million settlement from Charles Keating and American
Continental Corp. and $1.5 billion from Michael Milken and Drexel Burham
Lambert.

Hollow Words: Federal prosecutors say white-collar crime is a priority, but they
have filed only a few charges against high-tech executives
 
       Robert Crowe was afraid he wouldn't be ready.

       For months, the assistant U.S. attorney had been preparing a
securities fraud case against executives at California Micro Devices, a
Milpitas chip
       manufacturer. But as the 1998 trial neared, Crowe was inundated with
600,000 pages of documents and didn't even have a clerk to work the copy
machine.

       Meanwhile, the FBI and the Securities and Exchange Commission
continued to bring him promising cases against other Silicon Valley
companies. But
       Crowe was the only federal prosecutor in San Francisco working full
time on investment fraud, and there was nothing he could do with them.

       ``The inventory of cases kept building,'' said Crowe. ``I couldn't
keep up.''

       Cal Micro was the first major Silicon Valley fraud case tried by the
U.S. attorney's office in San Francisco. It was also the last -- even
though shareholders
       have sued more than 60 high-tech companies in Northern California's
federal courts since 1995.

       Silicon Valley executives contend that most of the complaints are
frivolous, but Crowe and others say the rising number of class-action suits
shows that fraud
       is rampant in the high-tech industry.

       ``If they put together a special federal task force and sent it into
the valley, they could bring a ton of fraud cases,'' said one senior
prosecutor at the U.S.
       Department of Justice.

       But the U.S. attorney's office has done little to deter securities
fraud in Silicon Valley, filing criminal charges against only a handful of
high-tech executives
       the entire decade.

       Since shaking the recession of the early 1990s, Silicon Valley has
become the epicenter of the fastest creation of wealth the world has ever
seen. And the
       opportunities and motives for financial deceit have never been greater.

       Silicon Valley executives face intense pressure to meet Wall
Street's expectations. Missing quarterly projections can mean financial
disaster for a company --
       and for the executives whose compensation packages depend on the
company's stock price.

       For many corporate officers, the temptation to ``cook the books'' --
and then unload shares before the company's stock price collapses -- is
overwhelming.
       And unless federal prosecutors crack down, experts warn, securities
fraud will continue to flourish.

       ``More executives should be going to jail,'' said Stanford
University law Professor Joseph Grundfest, a former SEC commissioner and
national expert in
       securities fraud. ``That will grab their attention . . . and hand a
valuable lesson to the entire economy.''

       This is the story of how federal prosecutors have allowed securities
fraud to spread through Silicon Valley like a virus. It is an account of
the one major case
       that the U.S. attorney's office in San Francisco prosecuted,
desperately hoping the trial would serve as a warning to the high-tech
industry.

       And it is about an even bigger case, one of the most flagrant in
Silicon Valley history, that federal prosecutors let sit on the shelf.

       Yamaguchi's Vow, 1993

       When Michael Yamaguchi was appointed U.S. attorney for the Northern
District of California in 1993, he took over an office that had been adrift
for years
       under a string of temporary chiefs.

       As one of his first priorities, Yamaguchi pledged an aggressive
campaign against white-collar crime. But the soft-spoken tax specialist
quickly learned it
       wasn't going to be easy. ``We did not have nearly enough
resources,'' said Richard Seeborg, a former prosecutor in the agency's San
Jose office. ``When
       you compare our office to U.S. attorney's offices around the
country, we were grossly understaffed.''

       In the 1990s, the Northern California district office had, on
average, only one-quarter of the federal prosecutors per capita that were
assigned to lower
       Manhattan and one-third the number of prosecutors posted to Southern
California.

       Yamaguchi's first test came in June 1994, when former Chronicle
columnist Herb Greenberg reported allegations from former employees at
California Micro
       Devices that the company had been booking fake or premature revenue
for years.

       Shortly after the disclosures, as the FBI and SEC investigated, the
company's senior financial officer, Steven Henke, resigned. A few weeks
later, the board
       of directors fired Chief Executive Officer Chan Desaigoudar, and Cal
Micro's stock plummeted an estimated $139 million.

       As Yamaguchi's prosecutors conducted interviews and pored over Cal
Micro's records, they found that the company had booked millions of dollars
in
       revenue for products that had not been shipped. They also discovered
double bookkeeping, false financial filings and illegal write-offs. At the
same time, the
       prosecutors discovered, Desaigoudar and Henke had dumped more than
$1.1 million of their own stock before its price collapsed.

       It was the perfect case for Yamaguchi to demonstrate that his office
was serious about white-collar crime.

       The Mastermind, 1989

       Phil White was always ambitious -- even before he was accused of
masterminding one of the largest securities fraud scandals in Silicon
Valley.

       The sandy-haired White grew up in small-town Illinois, the son of an
accountant and a public school teacher.

       He majored in business at Illinois Wesleyan University and later
graduated from the University of Illinois' business school.

       He first worked for a travel company, leading tours through Latin
America, Europe and Canada and running the company's Hawaii office. But
when he
       realized he had no chance to head the family-owned business, he quit.

       ``I didn't go to school,'' he once told a financial trade magazine,
``to be second or third fiddle.''

       Next, he moved to IBM's St. Louis office, where he consistently won
sales awards. But he knew he would never challenge for the top job at IBM,
either,
       and after 15 years, nearing middle age, he decided to change course.

       In 1982, White moved to a sales and marketing job in Silicon Valley
and two years later joined the board of Wyse Technology. In 1986, when the
company
       needed an aggressive new president and chief operating officer,
White seized the chance.

       Wyse had been a prosperous manufacturer of video display terminals
for many years, but its market niche was doomed by a new generation of
desktop
       computers that could operate without mainframes. Shortly after White
took over, Wyse moved into the personal computer market, and White's
management
       team promised 20 percent revenue increases every three months. It
was an ambitious goal, and almost immediately it led to disaster.

       In the haste to meet the target, Wyse made a lot of shoddy
computers. They overheated, erased information and ejected circuit boards
during shipping. The
       pressure to meet revenue goals grew so intense that in December 1987
the company shipped computers in garbage bags after the anti-static
containers ran out.

       According to court documents, the company claimed sales on computers
that were actually sent ``around the corner'' to shippers' warehouses, then
returned
       to Wyse after the end of the financial quarter. Some computers were
not shipped at all, merely entered into records as ordered and
``processed.''

       On Feb. 16, 1988, the company reported quarterly revenue of $128
million

       -- an astonishing 75 percent increase over the quarter one year
earlier. At an industry conference in September, White proclaimed that 1988
``looks to be a
       banner year for all of us.''

       But on Jan. 5, 1989, the company abruptly announced that revenues
for the previous quarter were down by half from a year earlier.

       The stock price plunged to $5 a share, far below its high of $25.50.
Almost 600 employees -- 15 percent of the company's workforce -- would soon
be fired.
       Before the year was over, a Taiwanese company would buy Wyse for $10
a share.

       Investors, mutual funds and pension funds lost tens of millions of
dollars. Bill Lerach and other plaintiffs' attorneys sued White and other
company officials
       for securities fraud and insider trading.

       The suit was settled in 1992 for $15.5 million in cash -- with no
admission of wrongdoing.

       It was not the last time White would be accused of ``cooking the
books.''

       THE PROSECUTOR, 1990

       Robert Crowe charged out of Cornell University law school in 1983,
eager to become a criminal defense lawyer.

       But he quickly found positions as a public defender more difficult
to find than prosecutor jobs, so he wound up as an assistant district
attorney in Brooklyn,
       N.Y., and loved it.

       After several years of prosecuting street crimes, the Chicago native
began looking for something more challenging. He found it in 1989 when he
went to
       work in the U.S. attorney's branch office in San Jose.

       In 1990 he got his first securities fraud case. It involved a
company in Campbell called StarSignal Inc.

       At the time, the U.S attorney's office didn't pay much attention to
investment-fraud cases. According to several former prosecutors, the lawyer
responsible
       for them just sat on the complaints in the San Francisco office. It
got so bad, they said, that frustrated SEC officials stopped sending cases
over.

       ``The head of SEC enforcement was thrilled when I began working on
StarSignal,'' Crowe said.

       StarSignal was the brainchild of an excitable and brilliant engineer
named Robert Widergren. With several million dollars raised from private
investors, the
       company developed the world's first commercial color fax machine.
But the early machines were expensive, costing as much as $26,000, and
sales never
       took off.

       In 1990, a former executive tipped the SEC that the company was
raising money by sending investors false information -- including news of
an imminent sale
       in Spain worth $83 million. The figure, said the tipster, was
``extracted from the air.''

       That August, the FBI moved in, arresting Widergren after learning
that he planned to transfer money to Belize in Central America. Widergren
was charged
       with bilking investors of more than $3 million.

       The StarSignal case gave Crowe his first inkling that securities
fraud was more widespread in Silicon Valley than anyone suspected.

       ``Why are you doing this to me?'' Crowe remembers Widergren asking
during breaks in the 1991 StarSignal trial. ``My case is just a few million
dollars.
       There's fraud going on all over the valley worth hundreds of
millions.''

       INFORMIX'S TURNAROUND, 1993

       For nearly a decade, Informix flourished as one of Silicon Valley's
leading makers of software for managing computer databases.

       But in 1989 the Menlo Park company bought a software firm in Kansas
City, and the acquisition started to drag revenues down. So Informix
founder Roger
       Sippl turned to White, unfazed by Wyse's collapse and the
allegations of securities fraud.

       White quickly swung into action, firing a fifth of the company's
workforce. He expanded the company's business to Europe and Asia. He
directed
       Informix's engineers to change the database software so it would
work in networks of personal computers rather than just mainframes.

       When PC networks became the rage, Informix cleaned up.

       Within four years, the company rebounded from a $46.3 million annual
loss to post a $56 million profit. Its stock rose from 56 cents a share to
more than
       $30. The numbers dazzled Wall Street, and White looked like a genius.

       But then the industry began to slow. And the next year, company
executives found new ways to keep revenues growing.

       THE FIRST WARNING, 1994

       Something was wrong with the numbers.

       In May 1994, internal auditors at Informix were examining the
Australian accounts, and the figures didn't add up. The company's
Australian subsidiary had
       booked sales a full quarter before the software products were even
shipped.

       A few months later, the company's outside auditors -- Ernst & Young
-- warned company officers of similar problems in Europe.

       The auditors also chided Informix for selling software in Latin
America on ``handshake'' agreements. ``Shareholders will expect agreements
with customers
       to be documented,'' the auditors wrote in a draft memo for the 1994
year-end audit.

       Informix executives dismissed the incidents as aberrations.

       But at an annual meeting in January 1995, Chief Financial Officer
Howard Graham met with sales representatives to backdate contracts so that
January deals
       appeared to have closed in December, according to a shareholders'
suit. The result was inflated revenues for 1994.

       The executives joked among themselves that they were closing the
quarter on ``December 45th.''

       A COMPANY ON A ROLL, 1996

       In early 1996, White negotiated Informix's $400 million purchase of
Oakland-based Illustra Information Technologies.

       It seemed a stiff price for a company with less than $10 million in
annual sales and an unproven technology that stored images and sound in
electronic
       databases. But White touted the acquisition and the wonders of
Illustra's technology.

       ``This stuff is going to change the way people think,'' he said.

       And Informix, it seemed, was on a roll. White declared that he
expected the firm ``to become a billion-dollar company in 1996.''

       But for nearly two years, auditors had warned Informix's board of
directors that White, Graham and other executives were inflating revenues
through a
       variety of questionable accounting practices, including backdated
sales, ``burn deals,'' barter transactions and side letters.

       Under what Informix employees called ``Howard's rule,'' Graham would
allow sales contracts to count toward revenue even before they were fully
signed.

       In barter transactions or ``Phil deals'' -- named for Phil White --
Informix would agree to buy another company's products if that company
would license
       Informix's software. Informix would then count as revenue the entire
value of the software licenses -- without disclosing that it still had to
buy the other
       products before it could get paid. In some cases, it never received
payment because the software was returned.

       And in complex ``burn'' transactions, Informix would agree to sell
software licenses to a distributor, then loan the distributor money for the
purchase price.
       Informix would book the transaction as revenue and the distributor
would, in theory, resell the software so that it could repay -- or ``burn''
-- its loan
       commitment to Informix.

       But in many cases, the distributor was under no obligation to resell
the software or to repay the loan. Sometimes Informix would never even
deliver the
       software. The sales, though, remained on the company's books.

       In other transactions, White would negotiate side letters that
granted customers undisclosed concessions such as price breaks or longer
payment terms. The
       letters changed the deal so that the original sales contracts -- and
the revenues recorded under them -- were no longer accurate.

       As Ernst & Young was privately warning Informix directors about
these practices, though, it was publicly issuing letters giving the company
a clean bill of
       health.

       On April 15, 1996, Informix reported $204 million in revenue for the
first three months of the year

       -- a 38 percent jump from the year before.

       Wall Street was impressed. The next day, Informix stock rose $5 to
$24.25 a share. Over the next three weeks it would top $26.

       And White and Graham would begin to unload tens of thousands of
their shares in the company.

       DUMPING STOCK, 1996

       Auditors could barely conceal their frustration about the accounting
irregularities at Informix.

       ``It just gets better all the time,'' wrote one Ernst & Young
auditor after discovering several improper deals.

       In 1996, Informix booked tens of millions of dollars from
transactions that were backdated, incomplete, subject to secret conditions
-- or simply nonexistent,
       court documents show.

       ``Phil deals,'' or barter transactions, accounted for much of the
improperly recorded revenue. That year, Informix sold about $170 million
worth of software
       to companies from which it bought about $130 million worth of
computer equipment. Although Informix denied the transactions were related,
an audit would
       later determine that at least some were, and that they had
artificially boosted revenues by $55 million.

       Burn deals and side letters contributed tens of millions of dollars
more. By mid-1996, Informix's European subsidiary had booked more than $105
million
       from burn deals for which the company remained unpaid.

       The tactics served their immediate purpose: They increased revenues
and kept the share price high.

       By December, before leaving to become chief financial officer at
Siebel Systems, a San Mateo software company, Graham had sold more than
$2.8 million
       worth of his Informix stock.

       During the next two months, White and other executives dumped more
than $20 million in shares.

       Then, suddenly, everything began to come apart.

       INFORMIX IN FREE FALL, 1997

       Despite its inflated revenues and soaring stock price, Informix was
starved for cash.

       And as the company tried to collect on the burn deals it had
written, customers objected, and, in some cases, refused to conduct further
business with the
       company.

       British software firm Logical Systems International, for example,
had agreed to ``buy'' Informix software with the understanding that
Informix would resell
       it and not make Logical Systems pay.

       ``Informix asked us to do them a favor,'' wrote managing director
Stewart Ashton in a March 27, 1997, letter to the company, a favor that
would ``artificially
       inflate the quarter numbers (of Informix) for last June and
September.''

       But when Informix squeezed Ashton for payment, he howled at having
been ``coerced into this . . . arrangement.''

       Finally, Informix could no longer hide its crumbling finances.

       On May 14, in its quarterly filing with the Securities and Exchange
Commission, Informix announced that it had lost $140.1 million in the first
quarter of
       1997, and that ``almost half of the licenses sold to resellers''
since 1995 ``have not been resold.''

       White blamed an ``overemphasis'' on selling the new Illustra-based
technology rather than traditional software, but financial analysts knew
better.

       ``An unmitigated disaster,'' one analyst called the company's
announcement.

       Yamaguchi's Retreat, 1997

       Robert Crowe watched from his desk in San Francisco as much of the
U.S. attorney's office sank slowly into disarray.

       He had transferred from the San Jose office after Widergren's
conviction in the StarSignal case. He had taken charge of screening most
investment-fraud
       prosecutions and coordinating investigations with the SEC.

       But Yamaguchi's vow to crack down on white-collar crime in Silicon
Valley quickly turned hollow.

       In December 1996, Sen. Diane Feinstein recommended Yamaguchi to fill
a vacancy on the U.S. District Court in San Jose. The judgeship should have
been a
       crowning achievement for the 46-year-old prosecutor, whose father,
grandparents and thousands of other Japanese Americans were kept in World
War II
       internment camps after a series of rulings by federal judges.

       But five months later, Yamaguchi withdrew his name after his public
comment about an important drug prosecution led to a mistrial in the case.

       ``After that, and all the bad press around the case, Mike just
disengaged and hid out in his office,'' said one former assistant U.S.
attorney.

       Even Yamaguchi acknowledged later that he had ``crawled into a shell.''

       Veteran prosecutors were leaving the office in droves. Case filings
and conviction rates were plunging. And criminal referrals from the SEC and
FBI -- some
       involving serious allegations of fraud in the high-tech industry

       -- were going unprosecuted.

       Even the Cal Micro case, the office's best hope for sending Silicon
Valley executives a message, seemed in jeopardy.

       A Day of Reckoning, 1997

       Informix was at the threshold of disaster.

       On July 30, 1997, directors and top company executives gathered to
hear the devastating news in the Palo Alto offices of Wilson Sonsini
Goodrich & Rosati,
       the most powerful law firm in Silicon Valley.

       The board had already stripped White of his title as chief executive
officer and hired a replacement, former 3Com executive Robert Finnochio, to
review
       Informix's financial records. After asking White to excuse himself
from the meeting, the directors listened raptly as Finnochio described the
widespread
       accounting irregularities that White and other company executives
had allegedly engaged in or condoned.

       Finnochio's grim report meant that White was finished. When
Finnochio completed his presentation, the directors severed all ties with
White and replaced
       him as chairman with Finnochio.

       It took Ernst & Young three months to determine the full extent of
the questionable accounting schemes. On November 18, Finnochio made what he
       described as ``the mother of all financial announcements.''

       Informix would have to restate financial results for the previous
three years. The company disclosed that it had improperly claimed a
staggering $278 million
       in revenues and $236 million in profits.

       On the brink of insolvency, Informix laid off thousands of
employees. Offices were closed and operations consolidated. The company
abandoned plans to
       build showrooms around the world and announced that it would sell a
27-acre parcel of land in Santa Clara, the planned site for new
headquarters.

       Immediately, Lerach and other plaintiffs' attorneys filed
class-action suits on behalf of the thousands of investors who had lost
millions of dollars, and
       Informix braced for the onslaught.

       THE EVE OF TRIAL, 1998

       It was well past midnight in the warren of cramped offices on the
11th floor of the Phillip Burton Federal Building, and Crowe was still
working. He had
       been at it for days, his frustration mounting.

       More than three years had passed since the investigation into Cal
Micro had opened. In the middle of trial preparations, Leo Cunningham, then
Richard
       Seeborg, the two prosecutors who had worked the case from the
beginning, left the U.S. attorney's office to join big law firms in Silicon
Valley.

       Crowe had replaced them, and now, in early 1998, he was handling the
case alone.

       He looked over the 600,000 pages of documents with a mixture of
disbelief and terror.

       ``I got started so late,'' he said. ``There was no secretary, no
paralegal, no resources I could count on from the office

       -- nothing.

       ``At one point I had to decide between spending 80 hours with (a key
witness) or going through every document. I chose the witness, but I was
afraid the
       defense would find something in those papers, and I would be
blindsided during the trial.''

       Finally, the Department of Justice dispatched Pamela Merchant, a
senior fraud specialist in Boston, to help him try the case.

       Meanwhile, fraud cases from the SEC and the FBI continued to pile up
on his desk. But there was little Crowe could do.

       He tried to farm them out to other prosecutors, but he couldn't
force anyone to take them. And he was acutely aware of how Silicon Valley
would view the
       inaction.

       ``These big white-collar cases . . . should have high impact,'' he
said. ``But if you screw around for four or five years, no one takes you
seriously.''

       An Empty Victory, 1998

       The Cal Micro case finally went to trial in June.

       Crowe and Merchant believed they had a strong case, a tour de force
constructed around a stack of financial records and the testimony of two
former Cal
       Micro executives who agreed to testify for the prosecution.

       In their defense, former CEO Desaigoudar and treasurer Henke told
the jury that they had done nothing wrong, that they never saw memos or
attended