Legal Hardball Over Software Firm’s Dealings : Litigation: The former president of State of the Art claims he was cheated in sale of his stock. The Irvine company maintains he stole trade secrets and attempted extortion.
Computer software designer Charles G. Milden thinks that there is something rotten at State of the Art Inc.
Milden is suing the Irvine accounting software company that he co-founded for alleged stock fraud and slander. The former State of the Art president claims that the company cheated him out of his stock before it went public.
State of the Art has countersued, accusing Milden of theft of trade secrets, slander and unfair competition for sharing company secrets with a rival firm. The suit alleges that Milden tried to extort money from the company and tried to interrupt its initial stock offering. Both sides deny each other’s charges.
“The lawsuit has destroyed my ability to work on my new software venture and find investors,” said Milden, who says the lawsuits have been financially draining.
“What I want is my reputation in the industry restored,” he added.
The problems at State of the Art nearly derailed the company’s initial public stock offering last May because his objections led regulators to delay the sale.
In its suit, the company said Milden was jealous of the offering, which raised $18 million for company executives and shareholders. Milden said he is frustrated but not vindictive.
The tale of corporate power struggles, computer industry rivalry and a falling out between former best friends goes back to before June, 1985, when Milden was fired as company president.
Milden, who filed his suit in March, 1991, is asking for $825,000 in damages plus compensation for emotional distress.
State of the Art, which filed its suit in December, 1990, is seeking $6.2 million in damages plus other relief. Company officials and lawyers said Milden’s suit is without merit but declined further comment.
A gifted software entrepreneur, Milden, 45, co-founded State of the Art in 1981 with his business partner and college buddy, George Riviere, the company’s vice president of research and development.
Milden was the best man at Riviere’s wedding. At work, they complemented each other well, former associates say. Milden was an outgoing executive with technical savvy who could motivate employees and investors, and Riviere was a software programming wizard.
The pair founded a company in the 1970s that developed accounting software for minicomputers. In 1979, they sold the company to Tustin-based MAI Basic Four, now MAI Systems Inc., making millions in the transaction.
With their second venture, State of the Art, the men planned to create accounting software for some of Apple Computer’s early personal computers. When International Business Machines Corp. launched its highly successful second-generation personal computer in 1984, the company was slow to adapt its software to the new standard. As a result, the company grew slowly, never making much money and never losing too much.
Eventually, relations soured between Milden and the investors who had backed the company and served as directors. In June, 1985, Milden was fired as president. Milden said he was made a scapegoat for the company’s problems in the midst of a power struggle.
Riviere stayed with the company, and David Samuels, a software dealer, was brought in to replace Milden as chief executive. The friendship between Milden and Riviere began to grow more distant, associates say.
After leaving State of the Art, Milden worked at various jobs and eventually went to work as a software consultant. But relations between Milden and State of the Art came to a head in December, 1990, when he was attempting to market a new office software product. He alleges that his old company was trying to ruin his reputation by telling potential investors in his new enterprise that he was “unstable and suicidal,” according to his lawsuit.
According to State of the Art’s lawsuit, Milden warned Riviere in a Dec. 19, 1990, phone conversation that State of the Art officials should stop making damaging statements about him. He also allegedly said he might agree to be a witness for MAI Systems Corp., a rival Tustin computer company, in a separate lawsuit that potentially could have legal and financial ramifications for State of the Art.
Riviere interpreted Milden’s statement as an attempt at extortion, and Samuels reported it to the Irvine Police Department, court records show. According to the company’s suit, Milden told Riviere, “It’s going to take a lot to shut me up” and asked for “hundreds of thousands or millions of dollars.”
The MAI dispute involved a 1986 suit in which MAI sued Basis International, an Albuquerque, N.M., software company, over rights to a software programming language. State of the Art had licensed the software technology from Basis International to use as the foundation for its software applications, SEC documents show.
In a federal filing last May, State of the Art said a court ruling in MAI’s favor could force it to rewrite its software, a process that could take up to six months. But State of the Art alleges in its suit that following Milden’s phone call in December, 1990, it decided to avoid any problems by reaching a tentative agreement with MAI.
“(State of the Art’s) lawsuit is based on a total overreaction to my phone call,” said Milden, who acknowledges having a long relationship with MAI officials but denies passing on secrets about State of the Art technology.
Two days after the call, Milden and his wife, Susan, were shadowed 24 hours a day by armed private investigators who sat in cars outside their home in Orange, he said. The surveillance lasted through the Christmas holidays, and the Mildens alleged that it constituted harassment.
In court filings, State of the Art has also confirmed that it hired the investigators to observe Milden, and it said it also hired a personal bodyguard for Samuels.
A trial on State of the Art’s suit is scheduled to begin in December in Orange County Superior Court in Santa Ana, and a second trial on Milden’s suit is due for February, said Michael T. Hornak, a lawyer for the company.
The main allegations in Milden’s suit stem from State of the Art’s initial public offering in May. In that offering, State of the Art raised $31 million at $9 a share.
Milden said the high value indicates that the company cheated him when it purchased his stock for 80 cents a share for 90,721 shares in March, 1990.
He said the company refused to allow him to inspect its books at the time of the sale, and he only accepted the company’s offer for the stock because he was under financial pressure as a result of a divorce.
“I had no idea at that time the company was planning to go public or what the stock was really worth,” he said.
The company contends that Milden is in financial straits not because of the stock deal but because of his divorce. The dispute with Milden nearly derailed the company’s initial public offering in May, both sides acknowledge.
After Milden learned that the company planned to go public, he said he obtained a copy of the company’s proposed registration form, a document required by the SEC for initial public offerings.
He then wrote a letter to the SEC alleging that a statement by the company regarding purchase of his stock was misleading. The statement said: “In March, 1990, the company repurchased 90,721 shares of common stock from a former employee for cash plus legal expenses totaling $232,000.”
At the SEC’s request, the statement was later changed to mention Milden’s lawsuit and to clarify that Milden was paid 80 cents a share, or $72,000, for his stock, Milden said. The SEC declines comment on the changes.
The SEC’s inquiry into Milden’s letter delayed the offering for an unspecified period, endangering State of the Art’s plans to go public, the company said. In March, when the offering was proposed, the stock market was more receptive to high-tech stock offerings.
By May, however, the market had become jittery. State of the Art’s Samuels said then that the company barely squeezed through a window of opportunity to go public.
In court filings, the company claims that Milden’s letters to the SEC were an attempt to make good on his extortion threats.
“State of the Art believes Mr. Milden is desperate to concoct any plausible theory to extort money to help his precarious financial condition,” the company said.
Milden said he never intended to disrupt the public offering. He said his comments were taken out of context to imply that he was attempting extortion.
