Entellium Execs Sentenced to Several Years in Federal Prison

Paul Johnston and Parrish Jones, the former CEO and CFO of venture-backed SaaS company Entellium, received their sentencing on Friday for wire fraud. According to TechFlash, the two men choked back tears, as a Seattle judge imposed jail time and other penalties.

A press release from the U.S. Attorney’s Office is below, while you can go here to read some of our past coverage.

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.

Entellium has raised nearly $50 million in VC funding, from firms like Ignition Partners, Sigma Partners and Intel Capital.