Meet Paul Johnston (CEO) and Parrish Jones (CFO), two former Entellium executives who have been indicted with wire fraud yesterday.
The criminal complaint says that the company executives devised a scheme to defraud investors by overstating revenues. The government alleges that actual 2006 revenues were $582,789 but the pair inflated the revenues to nearly $4 million; actual 2007 revenues were $1.4 million inflated to $6.2 million; and actual 2008 revenues were $1.7 million inflated to $5.2 million.
The false revenue numbers, according to the government, were used by the pair to attract $50 million in private investment, including $19 million from Ignition Partners, of Bellevue. Two Ignition partners told government investigators that they never would have made such an investment had they known the actual revenue figures.
During recent troubled economic times, we’ve been bombarded with developing stories of business corruption and greed. Yet, this news hits especially hard for me. These are local players within the greater Seattle entrepreneur community.
Paul Johnston lives in my suburban town. We’ve shared a table at our neighborhood Starbucks discussing his company. The Ignition Partners is a prestigious local venture capital firm. Many of us know their partners. They don’t deserve this kind of notoriety.
Even more disturbing may be that I know how easy it is to be deceptive. All executives are under tremendous pressure to perform by meeting expected numbers. No matter how many rules and regulations are rolled out, there will be grey areas that business executives can manipulate. It’s personal integrity that determines how each executive plays in these grey areas.
In larger companies, there are more checks and balances. Yet, the Enron fiasco has taught us that even audits from one of the most prestigious accounting firms of that time don’t ensure against foul play. In the smaller companies, especially those in the startup arena, I suspect mis-information is common. That’s why venture capitalist normally invest in “people”, not just “ideas”.
These Entellium executives, however, had clearly crossed the line of fraud and deception, if the allegations are true. There is no “grey” here. So again, we are reminded about the one achilles heel of our high-energy capitalist system — unbridled greed.
So, do we regulate more to guard against the actions of desperate, greedy executives? Maybe, however, they will not in of themselves alleviate the problem. What our capiitalist society need most is to collectively value personal integrity more than it currently does. We humans innately value integrity. In America, however, we’ve given material wealth and success a higher status than integrity for the last some 30 years.
Our free-entreprise system is just an economic system. It is actually quite a good one that can inspire tremendous human ingenuity, innovations, and achievements. Our society, however, needs to be the watchdog against our innate greed. I think the recent painful economic events will help our social and cultural mindset to shift appropriately to increasingly valuing personal integrity. At least, I hope so.
Nice writing. You are on my RSS reader now so I can read more from you down the road.
Allen Taylor
The possibility of uber-wealth sometimes creates an environment of moral hazard, which is what happened leading up to this credit crisis, with bad mortgages, packaged bonds backed by mortgages, and their other brother, the supposed insurance policy of credit default swaps. Looking through the food chain, individuals were faced with the hazard by being lured into quick windfalls in real estate speculation, mortgage brokers were faced with the hazard of luring commissions, banks were lured into the hazard of bad loans that paid high returns, and Freddie/Fannie bought all those mortgage bonds based on the lure of executive bonuses, even though it was a quasi-government agency. What it comes down to is character and integrity. Looking at yourself in the mirror, will you resist the next potential moral hazard?
[...] Roberts, a venture capitalist at Ignition Partners and board member of Entellium. Previously, I blogged about the arrest of two former Entellium executives for cooking the company books and deceptively raising nearly $50 million in venture money. [...]
[...] observations in following the Entellium saga have been about “personal integrity”. As I’ve stated previously, Paul Johnston and Parrish Jones had none. I was confident that Jonathan Roberts would do the [...]
[...] Terry’s claim that he just didn’t know about the shortfall because the company didn’t keep detailed financial records is interesting. Obviously, Terry wanted to show that there was no malice intent to take money from the youth programs. He certainly wanted to make a clear distinction between his situation and that of Entellium, where the CEO and CFO knowingly cooked the company’s books to raise funds. [...]