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Small Business

A Brothers' Blood Feud

By Spencer E. Ante

The Hunters were not always at war. They started out as a tight-knit, North Carolina clan. Their father was a doctor, and Mom was a homemaker. But their happy childhood was shattered when their father committed suicide in 1967. "They found him in a graveyard where he cut his wrists,'' says Eric. To this day, Eric says he does not know why his father killed himself.

The boys remained close. Eric and Neal swam on Watauga High School's relay team together. All three boys attended North Carolina State University in Raleigh in the early 1980s. And when Eric came up with the idea of starting a company based on a new semiconductor technology that he worked with at N.C. State while getting his masters in materials science, he turned to Neal. "We met at a biscuit place in Boone and decided to do the company,'' recalls Eric. They called it Cree after their old man, Charles Cree Hunter.

Eric ran the company for seven years and took it public in 1993, but he handed the reins to brother Neal in August, 1994. Neal, say several investors and former Cree executives, proved to be a better manager than Eric had been. Over the next few years, sales and profits soared. "Cree would not have been a tenth as successful without Neal Hunter,'' says Bob Lynch, who served as Cree's vice-president for operations from 1994 to 2000.

ALL THAT GLITTERS. Eric took advantage of his decreased responsibilities to start a new business. In June, 1995, he and Jeff founded C3, now known as Charles & Colvard, to create gems out of silicon carbide crystals. They named the company after their father and grandfather, Fred Neal Colvard, who helped raise the Hunter boys after their dad's suicide. Jeff was chairman and president, while Eric was a consultant and the biggest shareholder, with 18% of its stock. Neal was granted 70,000 shares of stock but had no operational role in C&C.

Several years later, Cree and C&C began to have such close dealings that they came in for criticism from Eric. And some analysts and accounting experts say they used unusually aggressive accounting. Off Wall Street, an investment research firm, published a report in December, 1999, calling attention to Cree's dependence on sales to C&C. For the fiscal year ending June 30, 1999, Off Wall Street concluded that sales of silicon carbide crystals to C&C made up 24% of Cree sales and 75% of its operating income. Off Wall Street wrote that Cree's growing sales to C&C coincided with C&C's ballooning inventory. In the quarter ended Sept. 30, 1999, C&C had 977 days of inventory, up from 341 the quarter before. "It is difficult to think that the fact that inventory is rising is anything other than an accommodation to Cree,'' wrote Off Wall Street. In its 10-K filing for 2001, C&C said the excess inventory was in anticipation of "substantially greater sales growth than we have experienced to date.''

Other transactions between Cree and C&C drew fire, too. From 1998 to 2000, Cree sold $6 million worth of equipment to C&C, but the gear never left Cree's premises, and Cree continued to operate it. "Given that Cree is operating the equipment, it sounds like a true sale has not taken place,'' says J. Edward Ketz, a professor of accounting at Pennsylvania State University. Cree maintains that the transaction was a legitimate deal to add capacity to service C&C and that it had set up a two-person committee to prevent potential conflicts of interest.

AN EXILE'S LIFE. About the same time, Eric became concerned about stock sales by his brother. He alleges that Neal sold Cree stock before it was apparent to the public that Cree's December, 2000, acquisition of UltraRF, a wireless chipmaker, would not work out. Trading records show that Neal sold 150,000 shares of Cree stock eight months before Cree disclosed a $76.5 million write-off related to UltraRF in April, 2002. The holdings were worth more than $3 million and made up about 30% of Neal's holdings. In the two months following the disclosure, Cree's stock fell about 18%, to $18. Neal says that his stock sales were part of a broad plan to diversify his assets -- and he points out that he exercised options on 200,000 shares in February, 2002, and held on to the shares until after the April announcement. Columbia University law professor John C. Coffee Jr. says the options exercise "is inconsistent with the normal pattern of insider trading.''

Eric says that after he began talking to the SEC in early 2003, the threats picked up, including several phone calls in which people have threatened his life. In June, Eric, his wife, and two children moved to Europe. Now, Eric says he just wants to set things right at Cree and return to a quiet life in the States. "All we want to be is left alone,'' he says. That won't happen anytime soon: Eric will return to the U.S. for a court hearing onAug. 14.

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