Keronix IDS 16/12
Data General Nova Clone

From Business Week, July 28, 1975

Espionage in the Computer Business

George Foldvary, executive vice-president of Keronix, Inc., was quietly celebrating his 51st birthday with a woman friend at a Los Angeles restaurant on Jan. 3, 1973, when a business associate phoned to tell him there was a fire at the plant in Santa Monica. Figuring that it was a ruse to lure him to a surprise party, Foldvary, still wearing his dinner jacket, drove to the plant, ready to swing. But when he arrived, he found that the fire report was no joke. Fire officials and insurance investigators quickly diagnosed arson. Keronix Chairman Laszlo Keresztury, 40, like Foldvary a Hungarian immigrant, became impatient with local police efforts to identify the culprit and hired a private investigator. The detective's findings caused Keresztury last December to file a suit that shook the entire computer industry. Tiny Keronix, a privately owned manufacturer of minicomputer core memories whose $3.5-million sales in 1974 make it a mere blip in the $1.25-billion minicomputer industry, charged Data General Corp. of Southboro, Mass., an industry leader, with an elaborate conspiracy to put Keronix out of business. The suit alleges that these machinations ultimately led to the fire. Keronix asked $5-million for interruption of business and $50-million in punitive damages. Data General's young entrepreneurs, who in just seven years have built their company from nothing to sales of $83.2-million, angrily denied the allegations and answered the Keronix suit in kind. Their countercomplaint charged Keronix with pirating trade secrets from Data General. "Keronix and its agents,'' it said, "obtained such proprietary material by, among other methods, purchasing Data General equipment and in connection with the purchases obtaining such proprietary material, which is furnished by Data General to its customers." fair-weather friends Pressuring of customers and industrial espionage are not uncommon in the fiercely competitive minicomputer industry, which is only 10 years old and still in its rough-and-tumble formative stage. One measure of how much investors distrust the industry is the refusal of some to dismiss the seemingly far-out suggestion that big and successful Data General might really have had something to do with the fire at tiny Keronix. When the Keronix suit was made public last January (page 62), Data General's stock, always among the more volatile issues on the New York Stock Exchange, dropped to less than 9. Even the institutions, which have been friendly toward Data General, grew nervous. The biggest seller in January was said to be Keystone Custodian Funds of Boston, which reportedly sold 300,000 shares at an average price of about $9 per share. Since then, DG's stock has rebounded and is now trading at about $35 per share. While Keronix and Data General exchanged civil suits, a federal grand jury in Los Angeles spent nearly two years pondering the criminal aspects. On June 30, a gleeful Data General issued a press release reporting that federal authorities had told the company that the investigation had been terminated and that no federal indictments were forthcoming. The DG release was accurate but incomplete. As Vincent J. Marella, Assistant U.S. Attorney in Los Angeles, describes what happened, "We are declining prosecution and referring the case to local authorities because we have limited statutes." This means that the Los Angeles district attorney will inherit the grand jury files and can pick up where the grand jury left off. Meanwhile, the two companies have been lobbing allegations at each other, Keronix claiming that Data General wants to put it out of business, DG charging that Keronix is simply running a huge publicity stunt. The battle has been joined by a phalanx of high-priced lawyers. At least eight private detective agencies have at various times been hired by one side or the other, and local, state, and federal agencies have been drawn into the fray. ANTAGONISTS Keresztury, who owns 46 percent of the stock in Keronix, used $10,000 of his savings to incorporate the company he started in a spare bedroom six years ago. He had fled Hungary in 1956 and after attending the University of London came to the U.S., where he worked for Ampex Corp. and later Teledyne, Inc. There, he says, he "designed computer memories that are still being used today." Data General, on its part, accounts for 10.7 percent of worldwide shipments of minicomputers, according to a survey by Modern Data Services, Inc. That makes DG No. 2 in the industry, a long way behind Digital Equipment Corp. (DEC), which holds 33.6 percent of the market. Data General grew out of DEC. In 1968, Edson D. de Castro, then 30, quit his systems engineering job at DEC's Maynard (Mass.) headquarters to form DG in neighboring Southboro. Some of his associates were even younger than de Castro, who became president. For financing, they turned to New York attorney Federick R. Adler, who raised capital and was an initial investor. Adler, then 43, was the old man among the youthful organizers. He became secretary and a board member. No sooner had DG begun producing its Nova series of minicomputers — in direct competition with DEC's immensely popular PDP-8 line — than even smaller companies began duplicating the product. The big mainframe-computer manufacturers had long since learned to live with this kind of problem, but it was new to the infant minicomputer industry, and de Castro reportedly was enraged by what he viewed as thievery. Typically, the supplier of a computer provides the buyer with manuals that not only describe the hardware but also spell out the software — the list of instructions that tell the computer what to do. Small, low-overhead companies have been known to use the data in these blueprints to duplicate the hardware of major companies by a process called "reverse engineering." Once it knows how the original was built, a small company can begin to make replacement parts and peripheral equipment that fit the system and can be operated by the original software. These companies can almost always do the job cheaper than a big computer maker can because, as Donal W. Fuller, chairman of Microdata Corp., another minicomputer maker, explains, "they don't have the marketing, product development, and software overhead costs.'' They must be careful not to infringe on patents, which the big companies use increasingly as a defense. And there is the murky area of trade secrets which, although not patentable, may be considered privileged. Reverse engineering "is fairly new in the minicomputer industry, but it is fair play," says Microdata 's Fuller. "Keronix does it to Microdata, too, but we don't sue." DRAWING THE LINE De Castro is not so patient, though, and he has not hesitated to sue. His battles with Keronix began more than four years ago when DG's Los Angeles law firm, Keatinge, Libott, Bates & Pastor, hired California Attorneys Investigators, Inc., to learn if the Santa Monica company was stealing secrets from DG. In a confidential report dated Sept. 1, 1971, the detectives said : "There does not appear to be explicit subterfuge or espionage occurring between the subject company and the competitive computer companies, including client company. "DG was unhappy with California Attorneys" conclusions, so in May, 1972, the management hired Dan Sullivan, a Boston detective who had been used by a DG executive in a divorce fight. Acccording to attorney-investor Adier, Sullivan's assignment was to look for leaks within DG. "We wanted to know if any employee of DG was selling trade secrets, with particular emphasis on Keronix," says Adler. In a month on the job, Sullivan apparently found little evidence of leaks from within DG, so the investigation again turned to Keronix. Sullivan hired a Los Angeles private detective named Robert A. Clark to carry out the West Coast snooping. Clark attempted unsuccessfully to tap Keronix' telephone lines, according to the Keronix suit. Next, says the suit, Clark and two associates "fraudulently" obtained Keronix telephone bills from General Telephone Co.'s office in Santa Monica. The detectives were trying to learn which DG customers were also doing business with Keronix. This could lead them to companies that were passing DG manuals on to Keronix, enabling Keronix to do "reverse engineering" on DG products and to undercut DG's core memory prices. Pressure was then allegedly brought to bear on these customers by DG's marketing operation. Adler, speaking for DG management, refuses comment on the telephone bills. Nor will Richard Bates, a partner in DG's West Coast law firm. But he does allow : "You can obtain phone records of anyone for a small payment. It might be illegal for the phone company or phone company employee to give them. But it is not illegal to get them."

PRESSURE ON CUSTOMERS

Laszlo Keresztury says that he was puzzled at the time by the number of calls he got from customers complaining that DG had learned that they were doing business with him. But he gives only a few examples because, he claims, his diary was destroyed in the fire. Clinton Day, vice-president of Beehive Medical Electronics in Salt Lake City, says that a DG agent made some "mild threats" and "threatened to sue is if we continued dealing with Keronix." According to Day, the DG sales agent also "implied that DG had industrial spies that were keeping Keronix under surveillance." Another DG-Keronix customer, Frederick J. McKee, vice-president and general manager of M&M Computer Industries, Inc. a Singer Co. subsidiary, says : "Data General is a very tough competitor, and they can be very heavy-handed." Keronix' suit claims, however, that the sleuthing done for Data General by Sullivan, Clark, and others went far beyond obtaining telephone bills and pressuring Keronix' customers — and indeed led directly to the fire. But Adler of Data General says that DG finished with Sullivan's services in August, 1972 — and the fire at Keronix took place five months later.

THE ARSON JOB

There was no doubt that the fire was the work of an arsonist. Keronix' insurance carrier, Insurance Co. of North America, hired Jasich & Lowe, Los Angeles fire investigators, to look into the fire. It turned out that fires had been set in Keresztury's desk and in the blueprint room, says investigator Thomas Pugh. The locations of the fires led to suspicions of espionage. Oddly, in forcing a shipping door open with a truck, the arsonists did not set off the ultrasonic burglar alarm system. And even though there was plenty of expensive equipment about, all that was stolen were a typewriter, an adding machine, and a six-pack of 7-Up. Months later, the Los Angeles County sheriff's staff found a "fence" who was trying to sell the typewriter. The investigators traced the typewriter back to a man named Ralph A. Zoebisch, who was on probation after a conviction for receiving stolen property. Zoebisch, who is identified in the suit, says that he told the Federal Bureau of Investigation and the Santa Monica police that he worked in the shipping department of a company next-door to Keronix. He told the Santa Monica police that Clark had offered him $300 in advance and $200 upon completion for setting the Keronix fire. Zoebisch, who has since been charged with possession of stolen property, said that to make it look like a burglary he took a few items. Zoebisch repeated these statements this week in an interview with Business Week. "It was a business deal," says Zoebisch. "Clark told me what he wanted done. When you do something illegal, they don't tell you why, and I don't ask questions." Zoebisch also told how, at the behest of a detective working for Keronix, he had identified Clark as the man who had paid him for the arson. He said he pointed Clark out in the crowded lobby of a Los Angeles office building. A police source says that Zoebisch also identified Clark's photograph.

A STORY ATTACKED

The Zoebisch story has been under attack by DG's West Coast attorneys, who hired yet another private detective agency, this time the internationally known Intertel, Inc. An Intertel detective, along with Robert Clark, went to a California prison camp where the fence's brother was serving time for possession of marijuana. According to Santa Monica police sources, the fence is important because he can confirm the Clark-Zoebisch tie, as stated in the Keronix suit. DG attorneys have say that the fence is recanting some of his claims to the police about the fire. Keronix and Zoebisch argue that this took place after the prison farm visit because the detectives threatened the fence and his family. Intertel detective Albert A. Murphy would not comment on the allegation, DG lawyers and Clark deny it. Calling the prison-farm story "ludicrous," Clark claims not to have met Zoebisch or the fence until 1975, two years after the alleged arson. Keronix suggests in its suit that Data General sought to hide payments to Clark and his West Coast team by using a company called Chris D. Christimirk as a conduit. The implication is that this company "laundered" the money. No company of that name exists, but a now-defunct Boston collection agency was named Christimrick. It was founded by Barry Haraden, a Boston insurance man, and its strange name was coined from his sons' first names — Christopher, Timothy, and Patrick. But Haraden claims that he does not know any of the DG defendants and says : "I couldn't even launder my own shirt." Haraden acknowledges that he did send Clark two checks, each for $1,000. But he claims that he did this to help out DG's detective, Dan Sullivan, who, he says, was having financial problems and could not afford to pay Clark directly. Sullivan, he says, was a friend and a former employer of his wife.

WHOM TO BELIEVE?

As the case has dragged on from months into years, it has become mostly a question of whose detective you believe. Data General, for all its success and sophistication in making minicomputers, has used one detective after another in looking for evidence against Keronix. And the crux of DG's countersuit is that Keronix' private detective, who dug up all the dirt on DG's detectives, is himself a tarnished individual with a criminal past. The countersuit says that this detective has "publicly admitted that he has committed the crimes, among others, of perjury, subornation of perjury, embezzlement, bribing officials of the City of New York . . . labor union officials . . . [and] is an admitted associate of known underworld figures." Once known as Herbert Itkin, the detective was for 20 years an undercover agent abroad and in the U.S. for the Central Intelligence Agency and the FBI. He was a lawyer with a long list of mob clients, and his testimony helped send two leading New York politicians and more than a dozen organized crime figures to prison. In 1972, the Justice Dept. set him up on the West Coast with a new identity, and his new name — as well as his old one — was revealed in the Data General countersuit. As it happens, a New York lawyer, Kobert Morvillo, who handled the criminal aspects of the case for Data General, was formerly head of the frauds section in the office of the U.S. Attorney for the Southern District of New York. Itkin was his star witness in a number of criminal prosecutions, and Morvillo was among the people who arranged Itkin's new identity. Morvillo dropped out of the Justice Dept. for a time, worked for Fred Adler's law firm, returned to the government, and in 1973 left again to start his own practice. One of his first cases was to advise DG executives in connection with the grand jury investigation into the Keronix fire. Morvillo heatedly denies that he ever informed DG's executives or its other attorneys of Itkin's history. He claims that he did not know for six months that Itkin was involved, adding : "I completely isolated myself from the civil suit." When asked where Data General learned about Itkin's new identity, Fred Adler said : "I'm not going to tell you where we learned it. It was not a well-kept secret on the West Coast. To the best of my knowledge, the information did not come from Morvillo." Clearly, Data General plans to make Itkin's past an integral part of the present suit against Keronix. What DG does not say in ticking off Itkin's criminal activities, however, is that the acts were committed in the service of the U.S. government. Chances are the fight between big DG and tiny Keronix will continue for years. The criminal investigation, after being stalled in a grand jury for two years, now may be opened anew by the Los Angeles district attorney. As for the civil case, neither side shows any sign of moving toward an out-of-court settlement. Says Laszlo Keresztury of Keronix; "This whole think is a pain. But if I let it pass by, I couldn't look at myself. I am too stubborn or too Hungarian." Snaps Fred Adler of Data General : "If I thought someone in our company did something wrong, I'd have settled a long time ago. But this is blackmail, and I don't pay blackmail."