Entellium CEO, CFO Charged With Fraud

"We have both made a grave mistake [by] 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 our other representations are accurate and no one else in the company was aware of this."

This excerpt is from an e-mail, cited in a legal complaint filed in U.S. District Court in Seattle by Assistant U.S. Attorney Carl Blackstone, that Paul Johnston, founder and CEO of Seattle-based software company Entellium, sent to two company board members to reveal that CFO Parrish Jones and he had misrepresented the company's revenue and to announce the pair's resignations.

The complaint, filed Tuesday, charges Johnston and Jones with scheming to defraud investors. It alleges that the pair lied about the financial state of their company to attract more than $50 million in investment between March 2004 and September 2008.

The company's largest investor is Ignition Partners, a Bellevue, Wash., venture capital firm. It has invested more than $19 million since 2004.

Johnston and Jones were arrested Tuesday and arraigned Wednesday.

Last Friday, Entellium, which makes Web-based CRM software for small and medium-sized businesses, laid off 40 of its 60 Seattle-based employees, a spokesperson for the Seattle U.S. Attorney's Office confirmed. The company also has an office in Malaysia.

A call to Entellium was not returned.

According to the complaint, Melisah Wojtacha, VP of human resources, discovered the alleged scheme when she was cleaning out the desk of the company's former sales VP. She found five books of accounting records and presented them to the company's controller, Sonya Huntzinger.

When Huntzinger reviewed the books, she found a discrepancy between the figures in the books and the company's reported revenue. From 2006 through 2008 so far, the company reported a total of $15,460,932 in revenue. Its actual revenue was $3,766,863, according to the complaint.

Jon Anderson, a general partner at Ignition, told the FBI agent investigating the case that his firm would not have invested in Entellium had it known the company's true revenue figures.

Huntzinger presented her findings to a board member, who arranged to have a contract CFO review Entellium's financial records.

Shortly after being notified of this on Sept. 30, Johnston sent his resignation e-mail.

In his e-mail, Johnston expresses the hope that the company can "right the ship" and insists that "the business has traction." He also says he is deeply shamed and sorry. "Clearly this is devastating news and something we both regret and are deeply sorry for," he wrote. "Our families are not aware of this and we are telling them now. Clearly this is going to be a very difficult period all around for everyone."