MOD Systems co-founder charged with wire fraud

Mark E. Phillips, co-founder of Seattle high-tech startup MOD Systems, has been charged with wire fraud by federal prosecutors who allege he used company money to buy a pair of $30,000 watches and tried to wrest control of the company's bank accounts without permission.

Phillips, 35, appeared Tuesday before U.S. District Judge James P. Donohue on two counts of wire fraud after surrendering to U.S. marshals. He was ordered detained pending a Friday hearing

He did not enter a plea.

The judge set a preliminary hearing for April 13.

Phillips' attorney, David Bukey, declined to comment after the hearing. In court, he said it appears the investigation was sparked by a tip to the U.S. Attorney's Office from the "other side" of hotly contested lawsuits involving Phillips, investors and MOD Systems.

Wire fraud is punishable by up to 20 years in prison and a fine of up to $250,000.

MOD Systems designs and markets retail kiosks where buyers can download music, movies or other content directly to a memory card or a personal multimedia device.

The company, with offices in Belltown, received $35 million in startup money from investors in 2008, according to news reports.

Phillips was a co-founder and served as MOD Systems' first CEO until last March, not long after an investor approached company officials with allegations that Phillips had misappropriated money, according to the court documents. Phillips left the firm that month.

A complaint against Phillips unsealed Monday alleges attorneys for MOD and an investor contacted federal prosecutors March 16 with information about the alleged fraud that surfaced in a series of bitterly fought lawsuits and countersuits between investors, Phillips and MOD Systems in King County Superior Court.

The case was referred to the FBI, said Assistant U.S. Attorney Aravind Swaminathan.

Among those who have sued Phillips is investor and philanthropist Robert Arnold, a MOD stockholder, whose initials "R.A." correspond to those of the investor who took the case to the U.S. Attorney's Office earlier this month.

The charges allege Phillips in 2008 conspired with his then-girlfriend, a Phoenix businesswoman, to submit false consultant claims for $70,000 to MOD, and then use the money to purchase a pair of Breguet luxury watches — the "pink-gold" model and one with a perpetual calendar.

He allegedly used $10,000 for a personal investment, according to the complaint.

The relationship with the woman — identified only by the initials "J.W." — ended and, according to an affidavit filed by FBI Special Agent Spencer Walker, she was granted immunity in exchange for her statement.

Since the relationship ended, she has refused to return Phillips' $162,000 2007 Aston Martin sports car, the charges say.

Assistant U.S. Attorney Carl Blackstone, who heads the U.S. Attorney's Complex Crimes Unit, said the investigation is ongoing.

The complaint says prosecutors are in possession of an internal investigation by MOD officials that concluded last year that there "is evidence that Mr. Phillips has incurred as much as $524,000 in personal or nonbusiness expenses that have been paid" by the company.

Among those expenses were $8,000 for Salvador Dali lithographs, $13,000 for Hermes and Louis Vuitton items and "$6,150 in dental and DNA testing expenses," Walker wrote in his affidavit.

The charges also allege Phillips twice attempted to convince bankers that he was allowed to access the MOD bank accounts when he no longer was authorized to do so.

MOD Systems CEO Anthony Bay said in a prepared statement MOD is "fully cooperating with the U.S. Attorney's Office.

"Mr. Phillips has had no involvement in the company's business or operations for nearly a year," Bay said.

Mike Carter: 206-464-3706 or mcarter@seattletimes.com