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[whitespace] Attorney Bonnie Sorensen
Marriage-Go-Round: Palo Alto family law attorney Bonnie Sorensen says complications in the Valley's costly boom-time divorces are at an all-time high.

For Better Or for Worth

How splitting couples in Silicon Valley are carving out new territory in divorce court

By Will Harper

ABRAHAM MA AND Judy Liu first "met" over the phone. Through months of business-related chitchat, the pair grew to appreciate each other's voices and personalities before they had ever laid eyes on each other. What began as a friendly business acquaintance discussing Ma Labs' CPUs and components and how they would benefit Judy's Texas company gradually evolved into longer conversations. Within a two-year period, their business relationship blossomed into a friendship. They spent an hour on the phone practically every day discussing the details of their lives, sharing witticisms and inside jokes, talking shop.

They saw each other infrequently. They did manage to get some face time at a couple of computer conventions, but for the most part they conducted their relationship by phone.

Then in late 1990, with Judy Liu's marriage falling apart, Ma suggested that she move out to San Jose. She did. It soon became clear that he wanted to be more than friends.

Four days after Christmas, the pair took a bus trip to Reno. On the way, Abraham asked Judy to be his wife. She accepted his proposal. The two became not only a married couple but also business partners in Ma's struggling 7-year-old company, a fledgling components maker with about 20 employees.

At the time Ma Laboratories' future looked promising, but uncertain. The company had an estimated value of $273,000.

But the couple, energized by their marriage, went to work. During their four years together, Ma and Liu worked horrific, Jolt-guzzling Silicon Valley hours--9am to 8pm--to make the company a success.

Ma provided the technical expertise. Liu, her attorney says, was the people-person with a high school education who dealt with the vendors, negotiated increasing lines of credit with banks and stopped fistfights at work.

The couple's hard work ultimately paid off. In 1994 the Business Journal recognized Ma Labs as Silicon Valley's largest privately held company. That year the company had $560 million in sales--100 times more than five years before. Ma and his wife earned combined salaries approaching $2 million and they drove around in a new Lexus 400.

But behind their platinum-card exterior, there were troubles in the marriage. The couple, both in their 40s, had become frustrated with their unsuccessful attempts to conceive a child, Judy would later say in court. They repeatedly tried in vitro fertilization without any luck. Ma badly wanted children, an heir to the couple's growing fortune.

Then, in early 1995, Judy made a discovery that brought the marriage crumbling down.

During a trip to Taiwan to attend her father's funeral, Liu tried repeatedly to call her husband one night, but he wasn't home. She became suspicious. When she returned, she wondered what happened to the monthly $48,000 interest payment the couple received from the company. Her attorney says that she eventually learned that her husband had given the money to his mistress--a woman who used to work at Ma Labs--so she could buy a home in China.

In a court affidavit, Liu claims that once she uncovered the affair, Ma actually asked her if it would be all right to let his girlfriend have his baby and come live with them in their Milpitas home. Liu declined the offer and started a lengthy and high-stakes court battle to divide the vast Ma estate, an estate symbolic of the success stories of the valley and the complexities that go with divvying them up.

It has taken, so far, four years and more than $2 million in attorney and expert fees--mostly shelled out by Ma, who reports a gross monthly income of $383,752. In the crossfire, things in this case have turned nasty.

In response to her revelations about his female-roommate request, Ma has accused his ex-wife of misappropriating hundreds of thousands of dollars from the company when they were married, and is suing her in a separate case for fraud. She, in turn, has accused her ex-husband of fudging his numbers for the purposes of tax evasion and bribing a witness.

Ultimately, what the court fight comes down to is money. Millions of dollars are at stake.

Liu wants her share of Ma Labs, a company, her lawyer argues, that skyrocketed in value during the marriage because of Liu's contributions. Liu's accountant pegs the company's value at the date of separation in February 1995 at $60 million. Ma's accountant counters that it was more like $18 million. A neutral court-appointed bean-counter came down in between the two estimates at $30 million. (Ma Labs' website boasts that the company's current annual revenues exceed $740 million.)

"It's a classic Silicon Valley case," says Shawn Leuthold, Liu's attorney. "This company rose from a small kernel of about $270,000 to a huge value of $60 million in five years. Where else but Silicon Valley can you see a company increase in value so much in such a short time? That's not the kind of growth you're going to see in another company or industry, but in Silicon Valley it's the norm."

DIVORCES LIKE the Ma case--complicated, big-stake estate battles--are becoming more common in this decade than ever before, traveling into new and often uncharted territory in divorce court.

"We started seeing the big blowup [in estate values] three to five years ago," recalls Palo Alto family law attorney Bonnie Sorensen, who regularly represents people in the high-tech industry. "At this point the $1 million, $2 million case isn't one you talk about very much ... it's the person who comes in with the $16 million, or the $40 million, or the two people who each have got the multimillion-dollar estates that we talk about now."

It's divorce Silicon Valley-style.

Where couples fight over the custody of stock options, start-ups and intellectual property rights as they would over their kids. Where the word "move-aways"--the cash-poor spouse hightails it out of the land of the $3 latte for Sanka territory--is used casually by family law attorneys. Where a "forensic accountant," a financial expert who testifies in court, can bill for $500,000 worth of hours (as in the Ma case) after navigating through a maze of cash, bank accounts and business assets. Where the numbers game gets so wacky that math-challenged judges must hire a neutral financial expert to advise them (which Judge James Stewart did in the Ma case).

"Everything we see now is so much more complicated," explains Stewart, who retired last month after serving eight years as a family court judge.

If there is any good news in this mess, it is that fewer couples are filing for divorce in Santa Clara County these days. According to County Clerk Steve Love, the number of divorce filings has gradually dropped over the last two decades. In 1980, 10,905 couples filed for divorce here. By 1998 that number had dropped to 7,509 even though the area's population had increased 31.7 percent since 1980.

At the same time, according to family court Judge Jerald Infantino, about 90 percent of divorces are resolved before they get to trial, thanks largely to the courts' aggressive efforts to get couples into mediation.

But legal sources say the remaining 10 percent of divorce cases that do make their way to trial are more contentious and complicated than ever before. The old adage that money troubles are the leading cause of divorce has a new twist: too much of it can cause problems, too. Especially when it comes after years of scrimping and saving, and just when everyone least expected it, as in the case of David and Iris Cheriton.

IN THE 14TH YEAR of their marriage, in 1994, David and Iris Cheriton and their four children lived what Judge Mary Ann Grilli called "a middle-class lifestyle." He was a tenured Stanford computer science professor who earned around six figures from teaching and consulting. She taught piano lessons part time in their Palo Alto home when she wasn't taking care of the kids. They drove a 1985 Vanagon, and their colonial-style Cowper Street home was, as Judge Grilli put it, "in serious need of repair."

One fall morning David Cheriton told his wife that he wanted to end the marriage (according to a friend of Iris', he broke the news only one hour after she had found out that her mother had died). He filed for divorce shortly thereafter.

Less than a year later, David Cheriton took a leave of absence from Stanford to work at a startup he co-founded with Andreas Bechtolscheim, one of the founders of Sun Microsystems. The pair's nascent computer networking company soon caught the attention of Cisco Systems, which bought Granite for $220 million in April 1996.

As part of the buyout, Cisco granted the 45-year-old professor an option to buy stock with a market value of around $45 million.

Another overnight Silicon Valley decamillionaire.

After her husband's incredible windfall, Iris decided that she and the kids should get a piece of the action. During their marriage, she told the court, her husband was a notorious cheapskate. Even though he was the obvious breadwinner with a university job, Iris said he insisted that his wife pay for the family's groceries and split the costs in repairing their home after the 1989 quake, using the meager income from her piano lessons. While he drove the newer Vanagon, she was forced to drive a beat-up 1970 van, which a family friend described as "the most dilapidated, unsafe vehicle I've ever seen."

But there was a significant obstacle to Iris and the kids' sharing the newfound wealth: By June 1998, David Cheriton had chosen to cash in or "exercise" only $9.7 million dollars worth of his stock options. The Stanford prof was still sitting on an estimated $40 million goldmine, which he could exercise when he felt good and ready. Iris' attorneys argued that the options should be made available for spousal and child support right away because they were vested and exercisable. And Cheriton was sitting on them, they suggested, to keep them away from his family.

In a controversial June 1998 decision, Judge Grilli disagreed with Iris' attorneys. While she ruled that options could indeed be used in calculating support, she said that those calculations couldn't be made until David Cheriton actually exercised his options.

Her decision, currently under appeal, is being watched by local attorneys eager to see which way the ruling goes on such an increasingly typical component of the Silicon Valley divorce settlement.

With so many cash-poor startups using stock options to sweeten compensation packages, these options are expected to be the battleground of the future in Santa Clara County divorces.

"We have some pretty sophisticated financial issues here that probably don't get developed in the same way in other areas," observes family law attorney Sherry Cassedy of the law firm Lakin Spears in Palo Alto. "I don't have many divorce cases anymore where there's not stock options involved. And often both the husband and wife have options. ... Stock options are becoming an everyday part of our practice. Elsewhere around the country, they're probably novel."

Because stock options are a relatively new animal in family law--the first California case hit the appellate courts only 15 years ago--there isn't much guidance from the higher courts yet. The trial courts have lots of discretion, which isn't always a good thing, because option disputes can get so complex. When the options are granted and when they vest--was it during the marriage or after?--and why they were granted in the first place--as a reward for past performance or an incentive to stay?--can all affect who gets what.

A new fight is emerging over what mathematical formula should be used to calculate how to divide options that vest gradually over time--which, in big-stake cases, can mean a difference of millions of dollars.

And because the case law around stock options is still evolving, Silicon Valley trial court judges find themselves often operating at ground zero on questions like the one posed in the Cheriton case. "Until we can get some law on this," says now-retired family court Judge James Stewart, "we're all going in the dark."

STOCK OPTIONS ARE hardly the only factor in what makes divorce in Silicon Valley unique. Attorney Bonnie Sorensen tells a story about a client who, like so many other successful professionals in Silicon Valley, decided to take an early retirement with his millions at age 50. The wife, not content with splitting the $13 million estate, wanted more money in spousal and child support. Her attorneys argued that her estranged husband retired prematurely and could still be working. Therefore, she is asking the court to calculate spousal and child support as if her ex-hubby were still going to the office and making $500,000 a year.

Then there are the couples who co-found a start-up, slave to make it a success and then decide to split up. Sometimes, family attorneys say, the couple tries to continue their business partnership for a while, only to find out working side-by-side with one's ex isn't such a great idea. At that point, the two must battle over who gets control of the company.

"We had a case," recalls Palo Alto attorney Cassedy, "where a couple who founded a startup company that went public later decided to get divorced. They really had to decide who would continue with the company and who would leave. One of them was the technical expert; the other was the marketing person. What they had to look at was who was more important to the company's future." Ultimately, the technical expert--who was the husband--stayed with the company.

Cassedy has another case now involving a new venture capitalist who got into the biz during the final year of his marriage. In that year, he only had time to complete the first step involved in the process: raising money. The actual investing in the start-ups and the reaping of possible millions are still several years away, Cassedy says. Nevertheless, the wife argues that she should get a share of the future millions because he formed the venture partnership during the marriage even if he didn't actually invest any cash during that time.

Cassedy predicts the case will have to go to trial.

Any discussion of divorce Silicon Valley-style can't omit mention of intellectual property. The value of an idea can mean big money in a divorce. Often the important question comes down to this: When did the spouse come up with a moneymaking idea? If the proverbial light bulb went off during the marriage, the other spouse is entitled to a share under California community-property law if the idea hits IPO paydirt, even after separation.

"I just talked to a client the other day," Cassedy says, "whose ex-husband's company just went public. 'And, by the way,' she says, 'he has this other idea.' The thing is, How do you prove that he had the idea before separation?"

ON TOP OF THE WINDFALLS of corporate success, another item in Silicon Valley that has crept out of control and raised the ante in divorce is real estate. What was once a slam-dunk decision to sell the family home and split the proceeds is no longer a simple--or affordable--matter. Even with high profits in the current market, one home's sale doesn't necessarily result in enough money for the purchase of two new homes. The result is what family court professionals call the "move-away." Matthew Sullivan, a family court specialist who generally handles custody cases involving upper-income households, says the move-away is fast becoming one of the most common and disturbing trends in Silicon Valley divorces.

The typical move-away goes like this: Couple files for divorce. During the court proceedings, the spouse who was the homemaker or made a modest living can no longer afford to live in Silicon Valley--where the median home price in the county is now $400,000, and $750,000 in an upscale city like Palo Alto.

"The mom, for instance, will decide, 'I don't want to live here, it's too expensive. I'm going back to Iowa,' " Sullivan says.

The mom in that kind of case, Sullivan says, will often get custody of the kids because the dad is working crazy Silicon Valley 80-hour workweeks with no extra time for parenting. The kids--on top of the stresses of their parents splitting up--are then subjected to the trauma of moving away from friends and schools and familiar things, which is often just as disruptive as the divorce itself.

Move-aways can also be especially devastating for the workaholic parent, Sullivan suggests, who often has been laboring under the notion that his unhealthy workload will be justified after he hits the jackpot because he can then spend all the time he wants with his kids and wife.

In the meantime, while he waits to strike it rich, the marriage falls apart. "Obviously it's a gamble," Sullivan says. "Even if you do strike it rich, it's not like a father and husband instantly emerge."

There are other variations on the move-away theme.

Another common situation Silicon Valley family lawyers and real estate brokers talk about is where husband and wife find that neither of them can afford to keep the home after the divorce.

"In this area, it usually takes two wage-earners," says Carl San Miguel, president-elect of the San Jose Real Estate Board, "to qualify to buy a house. If one of them leaves [because of a divorce], it's very difficult to qualify for the same house with just one wage-earner."

As a result, the couple must put their home on the market. Where do they go while they wait for a buyer? "In some cases," attorney Lynne Yates-Carter says, "I've got clients who have gone to live with their parents."

In other cases, the move-away actually gets turned on its head. "I'm seeing more people," says Palo Alto attorney Bonnie Sorensen, "who continue to live together post-separation until the house sells because they can't afford to live anywhere else."

BELIEVE IT OR NOT, there are some happy endings here. Or at least as happy as can be expected in a divorce.

While the presence of big bucks can make divorce a messy nightmare, there are times when money simplifies things. "You see it go both ways," says Michael Flicker, a Peninsula-based attorney with many high-tech clients. "Often the wife, who tends to be the one not making the big bucks, accepts less than she could get because she'll ask herself, 'How much do I really need?' "

And it's important to note other positive trends, family law attorneys say, such as the fact that 90 percent of divorce cases in the valley are settled before things get too nasty and end up in a trial. Sherry Cassedy also takes heart from the declining number of people filing for divorce in Santa Clara County, which has seen a 31 percent decline since 1980.

"What I'm finding are couples now that understand divorce is not an easy out," Cassedy says. "They see that divorce requires a long process of separation and all these financial dealings, especially when kids are involved." She adds that she comes across more couples nowadays who are trying to work things out rather than hit the eject button on the marriage.

But she also has noticed a disturbing new phenomenon in Silicon Valley divorces. While it's true that the majority of cases settle before they end up in a messy trial, Cassedy says that for the approximately 10 percent that do go to Defcon 1, the battle is nastier than ever with so much more money at stake. "The hotly contested litigation is on the uprise," Cassedy says. "The middle ground is getting lost."

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From the October 7-13, 1999 issue of Metro, Silicon Valley's Weekly Newspaper.

Copyright © 1999 Metro Publishing Inc. Metroactive is affiliated with the Boulevards Network.

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