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JULY 31, 2003 NEWS ANALYSIS
By Spencer E. Ante

A Brothers' Blood Feud
Neal and Eric Hunter took LED chipmaker Cree from startup to NASDAQ star. Now, they're at each other's throats

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In years past, Christmas gatherings for the Hunter family were joyful occasions. The three Hunter boys would play football in their yard in Boone, N.C. Their mother, Annabel, would make paper angels for her sons, who would hang them on the Christmas tree. For a while, they had much to celebrate. In 1987, Eric, the middle son, and his younger brother, Neal, founded Cree (CREE ), a company that makes light-emitting diodes, or LEDs, which are semiconductor devices used to light mobile phones, car dashboards, and other products. Over the next decade, Cree grew to become one of the most successful startups ever to come out of the state's famous Research Triangle Park.

But at Christmas in 1999, the good cheer turned bitter. Eric, who had given up his chief executive post to Neal in 1994, had thought for several months that his younger brother was mismanaging the company. During the holidays, Eric voiced his concerns about the alleged misconduct, according to an affidavit from Eric's wife. The tension boiled over one night after dinner at an aunt's house, when the brothers and their cousins were outside having a snowball fight. Eric pelted Neal, and Neal responded, Eric says, by slamming him to the ground, cutting his leg. "There was blood all over the place,'' says Eric. Neal declined to comment on the incident.

CHARGE AND COUNTERCHARGE. Since then, the fight has escalated into a high tech family feud. Eric, now 44, has unleashed a blistering attack against his 41-year-old brother, culminating with a lawsuit filed in June that seeks $3.2 billion in damages from Neal and Cree. In the suit, Eric accuses Neal of artificially inflating Cree's revenues by concocting sham transactions with Charles & Colvard (CTHR ) Ltd. (C&C), a gem manufacturer that Eric co-founded in 1995 with his older brother, Jeff. Eric also alleges that Neal filed false financial statements with the Securities & Exchange Commission and made millions selling Cree stock based on nonpublic information. And Eric contends that since he started publicly questioning Neal's activities, he has been followed by strangers and threatened with physical harm. He currently is living in Switzerland -- to protect his family, he says.

Cree and Neal Hunter say these charges are absurd. The company maintains all its dealings with C&C were proper, that its financial statements are sound, and that Neal's stock sales violated no laws. Cree's current chief, Charles M. Swoboda, adds that Cree has never authorized anyone to follow Eric or his wife, Jocelyn. Cree lawyers have asked for Eric's case to be dismissed. "The airing of personal family grievances in the guise of securities fraud and harassment claims against a public company is an improper use of the judicial system,'' Cree said in a court filing. C&C lawyer Bill Raper says: "The allegations are somewhat outlandish, and we intend to vigorously defend [against] them.''

How vigorous the defense will be is becoming apparent. Lawyers for Cree have responded to the legal assault by attacking Eric Hunter's mental health. In nine affidavits, including statements from his mother and brothers, Eric is described as a problem drinker who uses prescription drugs to control his anxiety. The filings, copies of which were obtained by BusinessWeek, include several descriptions of unusual statements by Eric. They include assertions that Eric said he worked for the Central Intelligence Agency, that his family was linked with the John F. Kennedy assassination, and that Cree was involved with someone who threatened to kill former Vice-President Al Gore. "I have watched Eric's mental health decline over the past decade and particularly over the past three or four years,'' said his mother in her June affidavit.

TUMBLING STOCK. Eric Hunter says he is not mentally ill. He denies making any of the bizarre statements attributed to him and says he never has been diagnosed with "any psychosis.'' He admits to taking Quazepam to help with anxiety and Ambien for insomnia. And he says he does not have a problem with alcohol. "Have I been depressed at times and drunk a six-pack of beer? Sure,'' said Eric, during an interview from Interlaken, Switzerland. "Do I have a drinking problem? No.'' Dr. John Hand, a professor at the University of North Carolina School of Business, who has gotten to know Eric over the last four years, made an affidavit in which he said he had never seen Eric exhibit "any signs of mental instability,'' and a private investigator hired by Eric's attorneys testified that "it became very clear to me that the Hunters were indeed being followed.''

The saga of Cree and the Hunter brothers is a cautionary tale of how family feuds can dim a company's promise. Since the lawsuit was filed, Cree's stock has tumbled by 39%, to around $14 a share, slicing $700 million off its market capitalization. Short-sellers are swarming: With 33% of its shares sold short, Cree has the second-largest short-interest ratio on the NASDAQ. At least 15 class actions have been filed against Cree, echoing many of the charges outlined in Eric's complaints. On July 10, Cree disclosed in a financial filing that the SEC had opened an informal investigation into the company. And on July 29, the company reported disappointing earnings for the quarter ended June 30.

Strip away the internecine fighting, however, and Cree could have a bright future. The LED market is soaring, and Cree is one of the leading players, along with Nichia, Toyoda Gosei, and Osram. Because LEDs generally use less power and last longer, many scientists believe that as costs come down over the next 10 to 20 years they could replace Thomas Edison's lightbulb and reinvent the $40 billion illumination market. For the fiscal year ending June 30, 2004. Friedman Billings & Ramsey & Co. expects Cree to boost sales 21%, to$278 million, and profits 23%, to $44 million. "We don't think it's unrealistic to go after $1 billion in sales within five years,'' says Cree CEO Swoboda.

A FATHER'S SUICIDE. So why is Eric Hunter attacking the company he founded -- as well as his own flesh and blood? Eric says he first became upset with his brother in the early 1990s, when he was still Cree's chief executive. Among other things, Eric was distressed by Neal's relationship with a Charlotte (N.C.) stockbroker named Burt Davis. Eric says in his lawsuit that Davis artificially pumped up Cree's stock by promoting it to institutional investors -- a charge Davis denies. Eric resigned as Cree's CEO in 1994 because "I didn't want to deal with all the crap,'' he says. In recent years, Eric has become increasingly agitated by actions that he thinks are unethical and potentially illegal. "We're just out for justice," he says.

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