Dressed in prison khakis, two former Entellium Corp. executives made their initial court appearances this afternoon on charges of wire fraud, as prosecutors pressed ahead with an investigation into the Seattle-based company’s finances.
“We haven’t tracked down all the money,” said Carl Blackstone, the assistant U.S. attorney leading the case, outside the Seattle courtroom. “We are following the money to see where it went, and who got it.”
Neither executive entered a plea. Paul Johnston, the former Entellium chief executive, was ordered to be detained at the SeaTac Federal Detention Center. His detention hearing is slated for Friday afternoon.
Citing Johnston’s United Kingdom citizenship and the amount of money involved in the case, Blackstone called the former Entellium executive a flight risk. Johnston, 40, was arrested at his Mercer Island home.
Parrish Jones, the 39-year-old former chief financial officer, was to be released on bond after putting up his SeattleKirkland condominium as collateral. Jones, who has five children, was arrested at his Seattle home.
Both men were subdued during their Wednesday afternoon appearance before U.S. District Judge James Donohue in downtown Seattle. Each spoke only briefly, in response to questions from the judge. Friends of the two men declined to comment when approached after the hearing.
Blackstone said he started investigating the matter Friday after attorneys at the law firm Wilson Sonsini Goodrich & Rosati — Entellium’s legal counsel — notified the prosecutor’s office of the alleged misconduct.
The case is unique in part because of the speed at which it came together, Blackstone said. He applauded Entellium and Wilson Sonsini for bringing the matter to the U.S. Attorney’s Office.
“They should be patted on the back for coming forward,” he said.
Blackstone said he is still trying to figure out what happened to Entellium’s funds, including the possibility that some of the company’s capital moved offshore. Entellium operated a facility in Malaysia with about 75 employees.
Blackstone said Entellium kept two sets of books, one of which was shown to board members. He described that set as “cooked.” The other, containing real numbers, was kept secret from the board, Blackstone said.
“There’s no evidence that the board has done anything wrong, as far as I can tell,” he said.
The board, consisting of representatives of venture-capital firms Ignition Partners and Sigma Partners, simply trusted the top executives too much, Blackstone said.
According to a criminal complaint filed Wednesday morning in U.S. District Court in Seattle, Entellium reported to that board that it had received $15.4 million in revenue over the past three years. The U.S. Attorney’s office alleges that the actual revenue for that period was $3.7 million.
The status of Entellium, which had raised more than $50 million in venture funding, remains in doubt. About 20 employees were left at the company as of last week. Blackstone said the future doesn’t look bright for those workers.
At one point earlier this year, Entellium employed more than 190 people in Seattle and Malaysia.
Blackstone continues to investigate what happened to the money, saying he is trying to figure out whose pocket it ended up in. “The conduct,” he said, “seems fairly egregious.”
– John Cook, johnharoldcook@gmail.com
20 responses so far ↓
1 Former Entellium executives charged with fraud // Oct 8, 2008 at 4:43 pm
[...] Here’s our report from the federal courthouse in Seattle, where Johnston and Jones made their initial appearances this [...]
2 topwebbusinesses » Blog Archive » Prosecutor tracking money in Entellium case // Oct 8, 2008 at 5:20 pm
[...] Original Todd Bishop [...]
3 Anonymous // Oct 8, 2008 at 7:36 pm
So if there was less revenue than reported, but the expense line is not being queried, what money exactly is Blackstone searching for the ‘lack’ of money….which is why the funding was required?
And how does the remainder of the board claim ignorance of the simple accounting. We put in 4m and you are spending 1m per month, with revenue of 1m…the 4m would last, let’s see 2 months, so when, without querying the expense line the board agree they need to find more before the 2m is up….dahhhhhh!!! No innocents on that board…
4 Thug // Oct 8, 2008 at 7:40 pm
Well the question is if everytime they got funding from Ignition, was some part of that sent off to another account? Out of a total of $19 million it is possible that a percentage of that was sent to a “black hole”
I do agree with you however, on why the board would not have an independent audit to go over numbers to make sure there was accuracy.
My assumption is rest of the employees were also blasted with powerpoint slides and graphs (like the board) to present a rosy picture.
5 Anon // Oct 8, 2008 at 8:19 pm
Oh my, where to begin.
This has to be difficult for the investors and employees that were not involved.
Irrespective of the amount raised most term sheets from vc’s require an annual audit within 90-12o day from fiscal year end and at the very least the board, and with $50M a committee of the board should be receive a report from the auditor related to the financials and internal controls. The presentation from the auditors ensures that the baord or committee receives attested statements. Assuming the claims are accurate, and there are funds missing, it would be difficult to not be caught with the most basic of audit procedures on cash, accounts receivable, revenue recongnition, deferred revenue - oh yeah, and expenses. A discrepancy that large and cumulative should not go unnoticed. Apart from such annual audit and reporting to the board, quarterly and monthly review should be conducted that should drill into the supporting metrics, and of course a constant vigilence on cash burn. The investors should be upset, the board should be upset and the employees as well.
This probably started small and snowballed, influenced by incentives. It can be tough to hold firm and ward off the potential notion of aggressiveness by a CEO or Sales VP or others that have incentive to push limits to distract from internal problems, and sometimes there are consequences for not having a openness to liberal interpretation of a deal, metrics, of what is or what is not presented to a board. This should be a reminder to board members that hear the story from a CEO primarily, or only from a portion of a mangement team. Most are honest, but the unique pressures on a management team to deliver can sometimes create atmospheric conditions with unexpected results that can be dangerous and misleading or both, especially if it is all on the line or incentives are involved. If it can happen at an Enron or Worldcom, then it can happen at a private, vc-backed company. A last note, in this case, sox may not have help since there was a concerted effort by management to override controls, if they existed at all.
6 Thug // Oct 8, 2008 at 8:33 pm
Well we have to find out what the scheme was that was devised to inflate revenues. Its sounds like what they found was some financials that eventually added up to what they claimed in board meetings. So I am assuming that the former VP of Sales had no idea what was in that desk and the board went along with what was generated by the CEO and CFO.
The fact that this began in 2004 leads me to believe that there was intent right away to raise money no matter how the company performed. If you look at the burn rate, the facilities, the number of people they hired….there is no doubt that the company lived way beyond its means.
7 Anonymous // Oct 9, 2008 at 7:37 am
Ignition in the middle of another tank. It used to be a bit of a punchline on the old blog but now it’s just becoming sad.
8 Anon // Oct 9, 2008 at 8:49 am
What about Terry Murphy? He was a founder and just recently left for a 6 month sabatical. Was he in these board meetings? What was his financial involvment? What he still getting a big paycheck?
He also spent lots of time in Asia. I wonder where he is now?
9 VP of Sales // Oct 9, 2008 at 10:06 am
The VP of Sales had to know… when you close a quarter you know what came in and what didnt. If the numbers at the board meeting are different the only reason you would remain quiet is if you were getting paid on them, or in other words, commissioned for your silence.
10 Anonymous // Oct 9, 2008 at 10:07 am
About Terry Murphy, why don’t you ask him? He was in the office when the resignations were announced, he was in the office when he was laid off with the others. He is heading up an initiative for those laid off to support and help each other.
11 Interested // Oct 9, 2008 at 10:11 am
Interesting note by “VP of Sales” about the ‘VP of Sales’….nice thing about anonymous entries….????!!
12 What the Hell Happened | nPost Blog // Oct 9, 2008 at 10:38 am
[...] startup space. However, this post is different… Before I go on about it, I want to commend John Cook on his great coverage of the Entellium debacle and fraud. Without his hardwork, this criminal activity would have taken a lot longer to come out in the [...]
13 Dick Tracy // Oct 9, 2008 at 11:08 am
So I guess other Senior Management knew about these misrepresentations and didn’t say anything for some reason. Or Senior Management didn’t know about these misrepresentations and just had no idea what was going on with company revenues.
Either case is hard to believe.
Sorry to all the people that worked so hard. For those that dodged a bullet, you’re lucky but people will remember.
14 Employees, investors, VCs react to Entellium mess // Oct 9, 2008 at 11:36 am
[...] Make A Suggestion ← Prosecutor tracking money in Entellium case [...]
15 anon // Oct 9, 2008 at 12:45 pm
Their business model was a subscription basis. So yes, a VP of Sales needs to know what his team has produced in new business for a certain month. However, that does not remotely coincide with overall revenue as most of the revenue will be from current subscribers paying their monthly subscription rate.
Also, seeing that it was the “board books” that were found in the the former VP’s desk, it seems he was probably being duped with the same numbers right along with the board and the rest of the company.
16 JB // Oct 9, 2008 at 1:25 pm
HR wasnt duped, HR imediately noticed the numbers were off as soon as the “board book” was found. ANYONE at Entellium that saw the cooked numbers should have been suspicious. I am not claiming anyone else was involved but come on… # of Subs x Monthly Fee = monthly revenue. Number of Subs was not published but it also was not a secret.
17 bryan // Oct 9, 2008 at 4:20 pm
No way a VP of Sales (at a CRM company no less!) can claim ignorance of something like this.
18 Accounting firm says it didn’t finish Entellium audits // Oct 9, 2008 at 4:54 pm
[...] audit of the Seattle software startup. The information comes a day after top two executives were charged with wire fraud in federal court Wednesday for allegedly “cooking the books” at the software [...]
19 Anonymous // Oct 14, 2008 at 7:58 am
Natalee Roan was the VP of Sales but was replaced by Dave Scott, VP of Sales and Marketing, in the last year of business.
20 Anonymous // Oct 14, 2008 at 1:49 pm
Wrong, they were both VP of Sales & Marketing…
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