Ignition Partners, Sigma Partners Duped By Startup Executives Now Charged with Fraud

Talk about an October surprise.

Two executives of Seattle-based software startup Entellium have been arrested and charged with having cooked the books in an effort to attract, and keep attracting, venture capital funding.

Entellium’s former CEO, Paul Johnston, and its former CFO, Parrish Jones, appeared in U.S. District Court in Seattle late today, where neither entered a plea. Johnston is being held at the SeaTac Federal Detention Center because he’s a citizen of the U.K. and considered a flight risk, according to the Puget Sound Business Journal. Jones was released on bond after putting up his Seattle condominium as collateral.

Late late month, an HR employee of Seattle-based Entellium — which sells online Customer Relationship Management (CRM) software — discovered financial information in the desk of a former sales VP that suggested Entellium’s revenues were repeatedly misrepresented to its board members.

In 2006, for example, the board was told that Entellium’s revenue was almost $4 million when it was actually $582,789, according to the government’s complaint. Similarly, the board was told that revenue for 2007 was $6.2 million when it was just $1.4 million. More recently, Johnston and Jones told their board that Entellium’s 2008 revenue was $5.2 million instead of $1.7 million, according to the complaint.

Based partly on the perceived strength of its numbers, Entellium has received financing totaling nearly $50 million since its formation in 2000. Nearly $19 million of that capital has come from Ignition Partners. Entellium’s other investors include Sigma Partners and Intel Capital.

The alleged fraud was brought to law enforcement by Entellium and Wilson Sonsini Goodrich & Rosati, Entellium’s legal counsel.

Several Entellium board members have not yet responded to requests for comment from peHUB, including Ignition Partners managing director John Roberts, and Sigma Partners managing director Pete Solvik.

Entellium’s board members have told the government that they were completely unaware of the deception. Ignition also told government attorneys that in April of this year, it wired $2 million into Entellium’s bank account based on the revenue figures presented to the firm.

It could be some time before the case is prosecuted. The assistant U.S. attorney leading the case, Carl Blackstone, told the Puget Sound that his office is still busily trying to “track down all the money.” One thing is for sure: if convicted, Ignition’s most recent money transfer alone could mean a long stay in the hoosegow for Johnston and Jones. Wire fraud is punishable by up to 20 years in prison.

UPDATE: For more on this story, including the banks involved with the company and their role, read here.