Two top former executives of CRM (customer relationship management) vendor Entellium have been charged in federal court with wire fraud after allegedly lying about the Seattle company's sales performance to attract investors.
The government alleges that ex-Entellium CEO Paul Thomas Johnston and former chief financial officer Parrish Jones, who had abruptly resigned last week, allegedly used the phony revenue numbers to gain about US$50 million in private investment funds, according to the government.
Among that total was $19 million from Ignition, a Bellevue, Washington, venture capital firm, which wired Entellium $2 million in April on the basis of the phony figures, according to the government.
Entellium's board was told that 2006 revenues were about $4 million but they were actually $582,789, the government alleges. The revenue figure given for 2007 was $6.2 million, when in reality it was $1.4 million, and the 2008 revenue was said to be $5.2 million instead of the actual figure of $1.7 million, the government alleges.
A human resources worker at Entellium allegedly first found evidence of the fraud in September while cleaning out the desk of a former sales executive at the company.
A lawyer for Entellium alerted federal officials on Oct. 3 about the alleged wrongdoing, according to the complaint against Johnston and Jones filed in U.S. District Court in Seattle.
The complaint includes the text of an e-mail message Johnston allegedly sent to two Entellium board members on Sept. 30. The e-mail reads in part:
"This is a very difficult e-mail to write but effective immediately both Parrish and I are tendering our resignation.
We have both made a grave mistake to [sic] misrepresenting our revenue reporting to the board. Looking back at the time we thought we would be able to right the wrong and correct our representation, but we have not been able to do this. Revenues have been overstated since 2004 with a delta of approximately $400K a month. All other representations are accurate and no one else in the company was aware of this.
Clearly this is devastating news and something we are both [sic] regret and are deeply sorry for. Our families are not aware of this and we are telling them now. Clearly this is going to be a difficult period all around for everyone."
Wire fraud carries a penalty of up to 20 years in prison and a $250,000 fine.
Attorneys for Johnston and Jones, as well as representatives for Entellium and Ignition Partners, could not immediately be reached for comment Wednesday. The defendants were scheduled to make their initial court appearance Wednesday.
The company is reportedly looking to sell off some of its assets to another CRM vendor, Avidian.
Avidian's CEO James Wong confirmed in an interview Wednesday, before news broke about the arrests, that the companies are engaged in talks but declined to provide many details about their nature.
"There's not much I can say right now at this point, but we are interested in talking to them and evaluating options. We're looking to see if it makes strategic sense," Wong said.
Avidian is interested in Entellium because it has a "very similar customer base to what we're targeting now, the SMB market," he added.
One Entellium customer, also interviewed prior to Wednesday's news about the arrests, said he is taking a wait-and-see approach to the vendor's apparent financial woes.
"So far, the news we have been getting is largely from the newspapers. Certainly in terms of our current engagement we're still being served," said Chris Coles, CEO of HyperQuality, a Seattle-based, quality-assurance software and services provider for contact centers. "We're tracking it, and we'll make decisions based on information we've received that is reliable and can assist us in our own decision-making."
Should circumstances develop that force him to migrate CRM operations to a new system, "it wouldn't be an ideal situation but it's certainly solvable," Coles said.
451 Group analyst China Martens described Entellium as a once-rising star that landed some big deals but subsequently faded over time.
"It sounds like they burnt through a lot of money," she said. "They probably spent a lot of money developing Rave. And they were definitely going to need a lot more money to effectively move their entire business over to being Rave-based. They also desperately needed to come up with a new mobile CRM strategy."
"From being a direct sales operation, they also want and need to quickly build up a channel, which again takes investment," Martens added.