Cooked Books, Crooked CEO, Careless Auditors & Incompetent Board
No humor in this post, but certainly CRM gone wild. It's been a wild week at on-demand CRM software maker Entellium. On about October 1, Entellium CEO Paul "PJ" Johnston and CFO Parrish Jones abruptly submitted their resignations. Then on Friday, October 3rd, staff in the Seattle-based company were greeted with a company wide meeting to be informed that all but about four were being released from the company immediately. Software development staff in the company's Kuala Lumpur, Malaysia office were further disbanded. Shortly after the meeting, the FBI had arrested Johnston and Jones for charges that included wire fraud.
Now that the dust is starting to settle, it appears that Johnston and Jones had dramatically exaggerated the financial statements - by over 400% per year - from 2004 through the current date in order to secure $50M of venture funding. A resignation letter drafted by Johnston to two Board members suggests that he and Jones acted alone in their fraudulent activities.
Despite VC firm Ignition Partners putting in $19M of the $50M total and retaining board seats, the VC firm is playing stupid, saying that it would never have invested had it known the company's true financial condition. Other venture capital contributors included Intel Capital, West River Capital, Sigma Ventures and Mavcap, a Malaysian venture fund. With so many high profile ventures, where was the due diligence? Where was the independent audit?
Montgomery Securities and Cascadia Capital also helped Entellium raise money. Were they, too, duped with the company's bogus financial condition when they presented the deal to venture capitalists? Silicon Valley Bank apparently loaned Entellium millions of dollars and acted as the company's bank. As part of the normal loan acquisition process and ongoing loan management inspection process, could the bank not realize the amount of money flowing in didn't match the financial statement revenues?
And what about the local outside independent accounting firm Moss Adams who was paid twice to complete audits of the company? Moss Adams claims it actually never 'completed' an audit. Hmm, makes me wonder why the Board and the accounting firm would agree to not finish audits. While the duped parties are claiming an elaborate scheme orchestrated by Johnston and Jones, the most current information suggests that the scheme was not so elaborate at all.
As of the date of this post, Johnston remains behind bars and not eligible for bond as he is deemed a flight risk. His accomplice Parrish Jones is free on bail. The post-mortem audit now ensues. According to Assistant U.S. Attorney Carl Blackstone: "Johnston had used Entellium's credit card to pay for trips for his family around the world and had given himself more than $200,000 in bonuses, as well as two loans totaling $100,000 without the board's permission." Investigators are now trying to track down $9.6 million that was wired to Malaysia (possibly for company operations there) and Singapore (where Johnston's wife, Faith is from).