The former CEO of CRM vendor Entellium, who faces wire fraud charges after allegedly lying about the company's sales performance, has been deemed a flight risk by federal authorities.
Also charged was Entellium's former CFO in the scheme allegedly designed to attract investors for the Seattle company.
The arrests, along with reported financial woes at Entellium, are also raising speculation about the story's effect on the overall SaaS (software as a service) market in which the vendor competes.
Ex-Entellium CEO Paul Thomas Johnston and former chief financial officer Parrish Jones were arrested Tuesday and made their first appearance in U.S. District Court in Seattle on Wednesday.
The government has filed a motion for a detention order against Johnston that states there is a "serious risk the defendant will flee." A detention hearing is scheduled for Friday.
Meanwhile, Jones was set to be released from custody after putting up a condominium he owns as collateral, according to a court document. He is scheduled to reappear in court along with Johnston on Oct. 23, according to the court.
The government alleges that Johnston and Jones, who abruptly resigned from their jobs last week, used the phony revenue numbers to gain about US$50 million in investments, according to the government.
That total included some $19 million from Ignition, a Bellevue, Washington, venture capital firm, which wired Entellium $2 million in April on the basis of the phony figures, the government said.
Entellium's board was told that 2006 revenues were about $4 million but they were actually $582,789, the government alleges. The revenue figure given for 2007 was $6.2 million, when in reality it was $1.4 million, and the 2008 revenue was said to be $5.2 million instead of the actual figure of $1.7 million, the government alleges.
A human resources worker at Entellium allegedly first found evidence of the fraud in September while cleaning out the desk of a former sales executive at the company, and a lawyer for Entellium subsequently alerted federal officials about the alleged malfeasance on Oct. 3, according to the complaint against the defendants.
Wire fraud carries a penalty of up to 20 years in prison and a US$250,000 fine.
Attempts to reach representatives for Entellium and Ignition Partners for comment have not been successful. Attorneys for Johnston and Jones did not immediately respond to requests for comment.
The arrests follow media reports suggesting Entellium, which has gained attention for the video game-influenced design of its Rave product, is in major financial trouble.
The company has reportedly made a number of layoffs and is said to be exploring the sale of some assets to another CRM (customer relationship management) vendor, Avidian.
Avidian's CEO said in a previous interview that talks are ongoing, but declined to provide details.
This possible transaction prompted questions from one observer of the CRM space.
"What happens [to] the public opinion of SaaS should this transfer not go well? Will smaller software companies be able to convince customers that they can be trusted with their data?," wrote Chris Bucholtz of InsideCRM.com. "Will on-premise CRM gain a new selling point ('you don't want to get Entellium-ed!')?"
Another observer weighed in as well.
The situation "may provide us with some of the first real data on what happens when your outsourced software services disappear, a mostly theoretical threat to this point which has been held out by more traditional software manufacturers as the bogeyman to keep customers away from SaaS offerings," wrote Scott Wilson on The CIO Weblog.
"I know of many businesses who have been bit by circumstances in which their traditional software vendor has closed doors, or simply discontinued the product, and it's a problem, but never an insurmountable one," Wilson added. "What remains to be seen is whether SaaS failures will fall into that same vein (which is my suspicion) or whether they really are more risky for customers than traditional software company failures."