Choking back tears in front of a packed courtroom, former Entellium executives Paul Johnston and Parrish Jones were sentenced Friday afternoon to three and two years in federal prison, respectively, for misrepresenting financial figures to the board of the Seattle startup company.
The sentences, imposed by U.S. District Judge Richard Jones in Seattle, were each less than the recommendation of the government, which had asked the court to put Johnston in prison for just under four years and Jones for slightly less than three.
"There's no one else to blame but myself," said former Entellium CEO Johnston in court, before the sentence was imposed.
Jones also apologized, saying "I accept complete responsibility for my actions."
In remarks to the court, Entellium investor Jeffrey Esfeld called Johnston the "worst kind of con artist" because he took advantage of personal relationships.
"He's an extremely smart, sophisticated and calculated person, which makes him very dangerous," said Esfeld, who personally invested $180,000 in the maker of customer relationship management software.
In asking for the stiffer sentences, U.S. Attorney Carl Blackstone said that Johnston and Jones held the trust of the board and employees. To whom much is given, much is expected, said Blackstone.
"They should have known right from wrong," he said.
Blackstone reserved several minutes for glowing remarks for Ignition Partners, the Bellevue venture capital firm that sunk millions of dollars into the ill-fated startup company. Because Ignition stepped forward and cooperated with the government, Blackstone called Ignition the "true heroes." Blackstone said they've been criticized on blogs as a "bunch of rich guys," but they actually did the right thing.
Entellium raised more than $50 million from Ignition, Sigma Partners and others. "It was devastating to Ignition. It was liked they were kicked in the gut," said Blackstone.
Not helping matters was the revelation by Blackstone that Entellium had received a buyout offer for more than $100 million from Intuit, the software giant that ended up buying the Entellium assets for pennies on the dollar in bankruptcy proceedings earlier this year.
The initial deal was scrapped in part because executives were worried that research by Intuit would bring the fraud to light, with Blackstone saying the company may be alive today had the executives done the right thing early on. He said Johnston and Jones just didn't have "the guts to do what was right."
In fact, Johnston admitted as much in his remarks when he said decisions were driven by fear of failure. "I guess that fear grew over time," he said. Dressed in prison garb, Johnston made an attempt to spot Ignition's Jonathan Roberts in the court room in order to apologize directly. (Roberts was not present.) Johnston said that Roberts -- a board member -- supported him.
"He didn't deserve what happened," said Johnston.
Johnston also apologized to the Entellium employees, which once numbered more than 200 in the U.S. and Malaysia. "I don't think I could look them in the face," he said. "I am sick to my stomach how I allowed this situation to materialize."
By the time Johnston tried to address his family members -- some of whom were in the courtroom -- the emotions had taken their toll on the former software executive. Holding back tears, Johnston barely could utter his final remarks.
"They know how I feel," he said. "I think I will stop now if that's OK?"
In addition to the prison sentences, both men must pay restitution. Johnston is on the hook for just over $2 million, while Jones must pay $864,754.
Judge Jones also ordered that Johnston and Jones provide 80 hours of service each at a homeless shelter or soup kitchen, in part to emphasize that some of the victims in the matter may end up in that situation.
"There's an abundance of collateral damage," said Judge Jones.
Both men had already received an "enormous break" in sentencing guidelines and could have been looking at as much as 10 years in jail, the judge said. And while recognizing the lack of criminal records, the numerous letters of support from community members and their strong family and friend network, Judge Jones said the two men were, at the end of the day, motivated by greed and the allure of a "lifestyle built on false pretenses."
"They still had countless opportunities to come clean and take a step forward well before the four years," he said.
Because Johnston is a citizen of the United Kingdom, he's likely to be deported after his release. Johnston is married with two children, with his wife currently collecting food stamps in order to make ends meet. Johnston's citizenship also may have an impact on the type of federal prison where he's incarcerated, with his attorney Robert Gombiner noting that Johnston won't be going to some cushy "Club Fed."
"He's going to be looking at that blank cell wall," said Gombiner.
Dressed in a gray suit and a gold tie, Jones declined to comment when approached by this reporter after the proceedings. "I am just going to go home," he said.
More to come.
Full press release from the U.S. Attorney's Office:
Two former executives of Entellium Corporation were sentenced today for Wire Fraud in U.S. District Court in Seattle. PAUL THOMAS JOHNSTON, 40, of Mercer Island, Washington, the former CEO of Entellium, was sentenced to three years in prison, three years of supervised release and $2,056,989 in restitution. PARRISH L. JONES, 39, of Seattle, Washington, the former Chief Financial Officer (CFO) of the company, was sentenced to two years in prison, three years of supervised release and $864,754 in restitution.
In addition U.S. District Judge Richard Jones ordered both men to do 80 hours of community service in a homeless shelter or soup kitchen saying he wanted them “to have greater perspective on the ultimate devastation caused by their actions.”
Entellium was a privately held Seattle corporation which sold customer relationship management software.
According records filed in the case, JOHNSTON and JONES devised a scheme to defraud investors in the company by representing that company revenues far exceeded the actual figures. The misrepresentations were first uncovered in late September 2008, when a human resources employee was cleaning out the desk of a former Vice President of Sales for Entellium.
The human resources employee discovered “board books” which contained financial information that had been presented to the Entellium board of directors. When the company comptroller reviewed the board books she discovered that the company revenues had been grossly inflated. The board was told that in 2006 the company had revenue of nearly $4 million when in fact it was just $582,789.
The stated revenue figure for 2007 was $6.2 million, when in fact it was $1.4 million and in 2008 the stated revenue was $5.2 million when in fact it was only $1.7 million.
The Entellium legal counsel reported the matter to law enforcement. The false revenue numbers were allegedly used by JOHNSTON and JONES to attract approximately $50 million in private investment, including over $19 million from Ignition, a Bellevue Washington 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.
In April 2008, Ignition wired $2 million into Entellium’s bank account based on fraudulent revenue figures presented to Ignition’s partners. In addition, JOHNSTON had used the same false figures to privately sell $645,000 worth of his stock in Entellium to fourteen other private parties.
The stock sales were not disclosed to the board of Entellium. One of those people who purchased the stock spoke in court saying JOHNSTON was the “worst kind of con artist” who preys on his relationships to find his victims. Asking for prison time, Assistant United States Attorney Carl Blackstone said the defendants have only themselves to blame.
“They put their own selfish interests ahead of their employees,” he said. Mr. Blackstone asked the judge “to send a message to the community that this type of behavior will not be tolerated.” Judge Jones noted that the men’s actions cost many people their jobs noting “... the abundance of collateral damage to savings, investment and employment opportunities.... At the core there was greed and the allure of a lifestyle built on false promises and fraud.”
The case was investigated by the FBI. The case was prosecuted by Assistant United States Attorney Carl Blackstone who leads the U.S. Attorney’s Office Complex Crimes Section.
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