Software company Entellium's CEO, financial officer charged with wire fraud

The chief executive and top financial officer of a Seattle software company that laid off most of its 100-person workforce last week have been arrested and charged with wire fraud for grossly inflating the company's sales for years to attract more than $50 million in private capital.

Entellium CEO Paul Thomas Johnston, 40, of Mercer Island, and the company's financial officer, Parrish L. Jones, 39, of Seattle, were arrested Tuesday night by the FBI. They will appear this afternoon before a U.S. magistrate judge in Seattle.

Entellium is a privately held Seattle corporation that sells customer-relationship management software.

"Entellium has been cooperating with the U.S. attorney for the Western District of Washington," the company said in a statement today. "Beyond that, the company cannot comment on personnel matters or on pending legal action."

A complaint filed Tuesday in U.S. District Court alleges Johnston and Jones "devised a scheme to defraud investors in the company by representing that company revenues far exceeded the actual figures," according to a news release from the U.S. Attorney's Office.

Using the inflated revenue figures, the company was able to attract $50 million in private investments, including $19 million from Ignition, a Bellevue-based venture capital firm. Ignition's partners have said they never would have invested that much money had they known Entellium's actual earnings.

The complaint alleges that in 2006 Johnston and Jones told Entellium's board of directors — which includes two Ignition partners — that the company had revenue of nearly $4 million. The actual number was just over $580,000, according to federal prosecutors. In 2007, they announced revenue of $6.2 million, when in fact the amount was $1.4 million. Last year, they stated revenue was $5.2 million, when in reality the company brought in just $1.7 million.

Based on those allegedly fraudulent figures, Ignition wired the company $2 million in April, according to the charges.

The charges contain a copy of an e-mail sent from Johnston to two board members when he and Jones resigned a week ago. It says, in part: "We have both made a grave mistake to misrepresenting our revenue reporting to the board. Looking back at the time we thought we would be able to right the wrong and correct or representation, but we have not been able to do this. Revenues have been overstated since 2004 ... Clearly, this is devastating news and something we are both regret [sic] and are deeply sorry for."

Ignition Partners could not be reached for comment today.

Entellium announced the unceremonious departures of Johnston and Parrish last week and removed any references to them on its Web site. On Friday, the 8-year-old company laid off all but a handful of its 100 workers. They were told the company's money had run out.

The company said its remaining staff in Seattle and Malaysia continue to support its customers and products.

The complaint alleges the scheme was discovered when an employee in the company's human resources department found a set of cooked financial books while cleaning out the desk belonging to another Entellium executive. Discrepancies were found and the books were taken by the company's lawyer to the U.S. Attorney's Office.

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

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

Kristi Heim: 206-464-2718 or kheim@seattletimes.com