Risk Management

Revenue Scheme to Win Financing Is Charged

Seattle U.S. attorney targets former CFO, CEO of small software company Entellium.
Stephen TaubOctober 8, 2008

The former CFO and former CEO of small, privately-held software company Entellium Corp, were charged with wire fraud for overstating revenue to help them secure financing.

Parrish L. Jones, Seattle-based Entellium’s former chief financial officer, and former chief executive officer Paul Thomas Johnston, were to appear in U.S. District Court in Seattle late Wednesday. They face up to 20 years in prison and a $250,000 fine, according to prosecutors.

According to the criminal complaint, the pair devised a scheme to defraud investors in the company by representing that company revenues far exceeded the actual figures.

Attempts by CFO.com to reach Jones and Johnston were unsuccessful.

The alleged misrepresentations were first uncovered in September 2008, when a human resources employee was cleaning out the desk of a former vice president of sales for Entellium, according to the U.S. attorney. The human resources employee discovered “board books” that contained financial information that had been presented to the board of Entellium, which sells customer relationship management software. When the company comptroller reviewed the board books, she discovered that the company revenues had been grossly inflated, according to the complaint.

According to the government, in 2006 the board was told the company had revenue of nearly $4 million, when revenue actually was just $582,789. The stated revenue figure for 2007 was $6.2 million, when in fact it was $1.4 million. In 2008 the stated revenue was $5.2 million, instead of the actual $1.7 million.

Entellium’s legal counsel reported the matter to law enforcement, according to the complaint.

The government alleges that the false revenue numbers were used by Johnston and Jones to attract about $50 million in private investment, including over $19 million from Ignition, a venture capital firm. Two Ignition partners served on the board of Entellium and told investigators that they would not have made such a significant investment had they been aware of the accurate revenue figures, according to the complaint.

In April 2008, Ignition wired $2 million into Entellium’s bank account based on fraudulent revenue figures presented to Ignition’s partners, the complaint states.

U.S. Attorney Jeffrey C. Sullivan commended Entellium for contacting law enforcement when it became aware of inflated revenue claims made by company executives. “Corporations are on the front line in rooting out fraud, and we need and expect them to come forward,” he said.