By most inside accounts, Starwood and Hilton were close to a settlement late last year in what was already one of the biggest corporate espionage cases in the history of the hotel industry.

Then the bombshell dropped.

Starwood, apparently through the discovery process, uncovered what it claims is proof that Hilton CEO Christopher Nassetta and 43 other high-ranking Hilton executives knew about and condoned the use of stolen documents in Hilton’s development efforts.

The new accusations threaten to taint some of the industry’s brightest stars.

The claims against Nassetta “certainly tarnish what was otherwise maybe the most positive reputation — right up there with [Loews Hotel chairman and CEO] Jonathan Tisch — in our industry,” said one industry insider with knowledge of the case. “Maybe even better than Jonathan Tisch.”

As for Starwood’s claim that Nassetta appeared to be aware of the use of stolen documents, the insider said, “I think many people found that surprising.”

The new claims also raise the stakes in the battle between the two competitors because Starwood, whose initial lawsuit forced Hilton to put its new Denizen lifestyle brand on hold, is now asking the court to halt Hilton’s development of any new or existing luxury brands, including the Waldorf-Astoria brand, which Hilton has been aggressively trying to grow.

“These are very serious accusations,” said Jeff Riffer, a partner with the Los Angeles law firm of Elkins Kalt Weintraub Reuben and Gartside. “And Starwood is asking for some pretty severe relief, which is to appoint a monitor and to not let Hilton further develop its luxury or lifestyle brands.”

It is already widely assumed that the once-bright careers of the two key players, Ross Klein and Amar Lalvani, have been severely damaged if not destroyed by the case. The two are former executives with Starwood Hotels & Resorts luxury brands who joined Hilton in 2008.

The original lawsuit accused Klein and Lalvani of bringing with them some 100,000 confidential corporate files, including so-called brand-building playbooks that the suit alleges Hilton used not just to develop Denizen but also to shore up its luxury Waldorf-Astoria and Conrad brands.

Lalvani, according to a 135-page court filing earlier this month, is now also accused of having acted as a corporate spy even before he left Starwood. The suit references email he sent to Steven Goldman, Hilton’s head of global development, who was recruiting him, and alleges that he provided Goldman with confidential reports as well as information about developers.

“Here’s an interesting one,” Lalvani wrote of a developer in email to Goldman’s personal and Hilton accounts on May 28, 2008, just before he resigned from Starwood. “This is going to be fun!!”

Klein and Lalvani were booted by Hilton after the initial lawsuit was filed last spring.

Now, the big question is how the latest accusations will affect Goldman and Nassetta, who, according to the latest filing, personally recruited Klein, then sat back while he and Lalvani worked off of and distributed throughout Hilton’s top ranks documents that Starwood claims contained valuable, proprietary information.

If the allegations are true, said the insider, “Everything I have heard and read makes me wonder: How could they have been so stupid? There are good ways to be sneaky and dumb ways to be sneaky, and they were not only dumb but piggish about it and didn’t even try to disguise it.”

Although the expanded lawsuit is rife with allegations, the insider and legal experts caution that filings like the one by Starwood often contain “excessive overstatements.”

And none of the accusations has been validated by the court.

For one thing, said Kelly Scott, head of employment law at the firm of Ervin Cohen & Jessup in Los Angeles, “I would say sometimes there is a disconnect between perception of what is confidential and the legal reality. A lot of businesses think something is confidential when it may not be.”

Scott also cautioned: “You are only seeing one side. These are, to my knowledge, well-run, respectable companies. I suspect that down the road, Hilton may have some things to say.”

So far, Hilton has declined to comment on the lawsuit and the latest filing.

Scott said lawsuits accusing executives who go to competitors of stealing trade secrets are fairly common in the U.S. What makes this case unusual, he said, is the specificity of the allegations, particularly the naming of 44 executives accused of participating in or condoning the use of what Starwood says they knew was confidential, stolen information.

While such cases might be common in other industries, hospitality experts said they are rare among hotel companies even though hotel executives often jump from competitor to competitor.

“And they are particularly uncommon,” Riffer said, “where they claim an entire brand was somebody else’s trade secret. Hilton, of course, has put that Denizen brand on hold. … And with this new filing, Starwood is getting even more aggressive by trying to stop development of any new luxury brand.”

Starwood first sued Hilton last April, accusing Klein and Lalvani of stealing the electronic files before and after they joined Hilton. Shortly after that, the U.S. attorney for Manhattan launched a criminal investigation. But the companies reportedly were in settlement talks, so the latest filing surprised many, particularly with the naming of Nassetta and top executives.

The industry insider said it appeared that Starwood found what it now describes as evidence of the involvement of the top executives during routine discovery requests for email and other communication.

“They were getting really close to settling,” the insider said. “Then something happened. … I will speculate that they figured out Chris Nassetta knew more than he let on.”

Starwood is asking the court to appoint a monitor for Hilton and to create a “penalty box” or “time-out” for further development of Hilton’s luxury or lifestyle brands.

“Since filing the initial complaint, Starwood has learned that Hilton’s misconduct was far more pervasive in terms of the staggering volume and commercial sensitivity of the information stolen, the widespread participation and personal involvement of Hilton’s senior management and the dissemination and use of Starwood confidential information across all of Hilton’s luxury and lifestyle brands,” Starwood general counsel Kenneth Siegel said in a statement.

“We will do whatever it takes to protect our brands and intellectual property for the benefit of our investors, associates, owners and customers.”

Riffer said most civil litigation between companies is settled, and he noted that both companies are spending a fortune on legal fees.

Ultimately, he said, Starwood "has got to be making a business decision on how much it is worth trying to stop Hilton from developing luxury and if they think they have a good shot at stopping it."