Choking back tears in front of a packed courtroom, former Entellium executives Paul Johnston and Parrish Jones were sentenced Friday afternoon to three and two years in federal prison, respectively, for misrepresenting financial figures to the board of the Seattle startup company.

The sentences, imposed by U.S. District Judge Richard Jones in Seattle, were each less than the recommendation of the government, which had asked the court to put Johnston in prison for just under four years and Jones for slightly less than three.

"There’s no one else to blame but myself," said former Entellium CEO Johnston in court, before the sentence was imposed.

Jones also apologized, saying "I accept complete responsibility for my actions."

In remarks to the court, Entellium investor Jeffrey Esfeld called Johnston the "worst kind of con artist" because he took advantage of personal relationships.

"He’s an extremely smart, sophisticated and calculated person, which makes him very dangerous," said Esfeld, who personally invested $180,000 in the maker of customer relationship management software.

In asking for the stiffer sentences, U.S. Attorney Carl Blackstone said that Johnston and Jones held the trust of the board and employees. To whom much is given, much is expected, said Blackstone.

"They should have known right from wrong," he said.

Blackstone reserved several minutes for glowing remarks for Ignition Partners, the Bellevue venture capital firm that sunk millions of dollars into the ill-fated startup company.  Because Ignition stepped forward and cooperated with the government, Blackstone called Ignition the "true heroes." Blackstone said they’ve been criticized on blogs as a "bunch of rich guys," but they actually did the right thing.

Entellium raised more than $50 million from Ignition, Sigma Partners and others. "It was devastating to Ignition. It was liked they were kicked in the gut," said Blackstone.

Not helping matters was the revelation by Blackstone that Entellium had received a buyout offer for more than $100 million from Intuit, the software giant that ended up buying the Entellium assets for pennies on the dollar in bankruptcy proceedings earlier this year.

The initial deal was scrapped in part because executives were worried that research by Intuit would bring the fraud to light, with Blackstone saying the company may be alive today had the executives done the right thing early on. He said Johnston and Jones just didn’t have "the guts to do what was right."

In fact, Johnston admitted as much in his remarks when he said decisions were driven by fear of failure.  "I guess that fear grew over time," he said. Dressed in prison garb, Johnston made an attempt to spot Ignition’s Jonathan Roberts in the court room in order to apologize directly. (Roberts was not present.) Johnston said that Roberts — a board member  — supported him.

"He didn’t deserve what happened," said Johnston.

Johnston also apologized to the Entellium employees, which once numbered more than 200 in the U.S. and Malaysia. "I don’t think I could look them in the face," he said. "I am sick to my stomach how I allowed this situation to materialize."

By the time Johnston tried to address his family members — some of whom were in the courtroom — the emotions had taken their toll on the former software executive. Holding back tears, Johnston barely could utter his final remarks.

"They know how I feel," he said. "I think I will stop now if that’s OK?"

In addition to the prison sentences, both men must pay restitution. Johnston is on the hook for just over $2 million, while Jones must pay $864,754.

Judge Jones also ordered that Johnston and Jones provide 80 hours of service each at a homeless shelter or soup kitchen, in part to emphasize that some of the victims in the matter may end up in that situation.

"There’s an abundance of collateral damage," said Judge Jones.

Both men had already received an "enormous break" in sentencing guidelines and could have been looking at as much as 10 years in jail, the judge said. And while recognizing the lack of criminal records, the numerous letters of support from community members and their strong family and friend network, Judge Jones said the two men were, at the end of the day, motivated by greed and the allure of a "lifestyle built on false pretenses."

"They still had countless opportunities to come clean and take a step forward well before the four years," he said.

Because Johnston is a citizen of the United Kingdom, he’s likely to be deported after his release. Johnston is married with two children, with his wife currently collecting food stamps in order to make ends meet. Johnston’s citizenship also may have an impact on the type of federal prison where he’s incarcerated, with his attorney Robert Gombiner noting that Johnston won’t be going to some cushy "Club Fed."

"He’s going to be looking at that blank cell wall," said Gombiner.

Dressed in a gray suit and a gold tie, Jones declined to comment when approached by this reporter after the proceedings. "I am just going to go home," he said.

More to come.

Full press release from the U.S. Attorney’s Office:

Two former executives of Entellium Corporation were sentenced today for Wire Fraud in U.S. District Court in Seattle. PAUL THOMAS JOHNSTON, 40, of Mercer Island, Washington, the former CEO of Entellium, was sentenced to three years in prison, three years of supervised release and $2,056,989 in restitution. PARRISH L. JONES, 39, of Seattle, Washington, the former Chief Financial Officer (CFO) of the company, was sentenced to two years in prison, three years of supervised release and $864,754 in restitution.

In addition U.S. District Judge Richard Jones ordered both men to do 80 hours of community service in a homeless shelter or soup kitchen saying he wanted them “to have greater perspective on the ultimate devastation caused by their actions.”

Entellium was a privately held Seattle corporation which sold customer relationship management software.

According records filed in the case, JOHNSTON and JONES devised a scheme to defraud investors in the company by representing that company revenues far exceeded the actual figures. The misrepresentations were first uncovered in late September 2008, when a human resources employee was cleaning out the desk of a former Vice President of Sales for Entellium.

The human resources employee discovered “board books” which contained financial information that had been presented to the Entellium board of directors. When the company comptroller reviewed the board books she discovered that the company revenues had been grossly inflated. The board was told that in 2006 the company had revenue of nearly $4 million when in fact it was just $582,789.

The stated revenue figure for 2007 was $6.2 million, when in fact it was $1.4 million and in 2008 the stated revenue was $5.2 million when in fact it was only $1.7 million.

The Entellium legal counsel reported the matter to law enforcement. The false revenue numbers were allegedly used by JOHNSTON and JONES to attract approximately $50 million in private investment, including over $19 million from Ignition, a Bellevue Washington venture capital firm. Two Ignition partners served on the board of Entellium and told investigators that they would not have made such a significant investment had they been aware of the accurate revenue figures.

In April 2008, Ignition wired $2 million into Entellium’s bank account based on fraudulent revenue figures presented to Ignition’s partners. In addition, JOHNSTON had used the same false figures to privately sell $645,000 worth of his stock in Entellium to fourteen other private parties.

The stock sales were not disclosed to the board of Entellium. One of those people who purchased the stock spoke in court saying JOHNSTON was the “worst kind of con artist” who preys on his relationships to find his victims. Asking for prison time, Assistant United States Attorney Carl Blackstone said the defendants have only themselves to blame.

“They put their own selfish interests ahead of their employees,” he said. Mr. Blackstone asked the judge “to send a message to the community that this type of behavior will not be tolerated.” Judge Jones noted that the men’s actions cost many people their jobs noting “… the abundance of collateral damage to savings, investment and employment opportunities…. At the core there was greed and the allure of a lifestyle built on false promises and fraud.”

The case was investigated by the FBI. The case was prosecuted by Assistant United States Attorney Carl Blackstone who leads the U.S. Attorney’s Office Complex Crimes Section.

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and How real is ‘real-life’ Windows ad? Apple sidewalk scene looks fishy  

Microsoft is describing the latest installment in its "I’m a PC" ad campaign as a real-world account of a recent college grad’s quest for a new computer — ending triumphantly when she picks an inexpensive Windows PC over a higher-priced Mac. But if it is completely true to life, a closer look at the scene outside the Apple store reveals something very weird.

As "Lauren" walks into the store, a man is walking past the door wearing a jacket and jeans, with a camera hanging from his shoulder. The scene then quickly cuts to Lauren walking out of the store — supposedly after investigating the available Macs — and the same man is still walking by the store, his hand in exactly the same position, just a few paces ahead of where he was when she went in.

 

Now, it’s possible that this is all on the up-and-up. Maybe the man was pacing in front of the door, waiting for his wife to buy an iPod. Maybe Apple employees are just that fast at explaining the MacBook pricing structure. Or maybe there’s some other explanation.

But watching that part of the video, it’s hard to escape the feeling that the ad was something less than a straight-up, by-the-book account of Lauren’s search for a new computer. In fact, the scene feels more like a mistake involving an extra in a movie or TV show. Normally, that would be fine in an advertisement, of course, but the positioning of this ad as real life makes it different.

The company has said Lauren is an actress and office manager who responded to a Craigslist ad to be videotaped on her hunt for a computer, but she wasn’t aware until the end of the process that she would be in a Microsoft ad. Microsoft declined earlier today to make her available for an interview.

I’ve asked the company to provide an explanation of the mystery man in the scene, and I’ll update this post depending on the response. Here’s the full video again if you want to watch the scene in real time.

<a href="http://video.msn.com/?mkt=en-US&playlist=videoByUuids:uuids:0bb6a07c-c829-4562-8375-49e6693810c7&showPlaylist=true&from=shared" _fcksavedurl="http://video.msn.com/?mkt=en-US&playlist=videoByUuids:uuids:0bb6a07c-c829-4562-8375-49e6693810c7&showPlaylist=true&from=shared" target="_new" title="Laptop Hunters $1000 – Lauren Gets an HP Pavilion">Video: Laptop Hunters $1000 – Lauren Gets an HP Pavilion</a>

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and Active Answers: Microsoft tests new interactive search results  

A small feature added to Microsoft’s Live Search engine this week is the first step in a new effort by the company to make its search results more interactive and useful. Typing "flight status" into the search field now brings back not only links but also a second set of search boxes that prompts users to enter an airline name and flight number to see the status of a specific flight.

Microsoft calls the concept "Active Answers." The idea isn’t new. But Microsoft is breathing new life into the concept and looking to roll out additional features that make use of "Active Answers" fields.

"We’re playing with differerent ideas like this," said Irving Kwong, a Live Search product management director. He declined to go into detail on possible future applications but explained that the idea is to increase the level of interaction with the results page, and make it easier for people to get the information they need.

To be sure, this isn’t exactly a Google killer. Microsoft’s search market share recently hit a new low in the U.S., and the company will need to do much more if it wants to reverse that trend. But it is one example of how Microsoft is continuing to tweak its approach in an effort to differentiate Live Search results pages.

Google has also implemented interactive search results, introducing a similar feature for booking flights four years ago, for example.

There is a risk of going too far with the Active Answers concept. If the search engine misinterprets a query as appropriate for an Active Answers box, when it’s really not, that risks decreasing the relevance of the results overall. As a result, Microsoft is being selective with the Active Answers features it rolls out, to avoid those types of false positives, Kwong said.

After users type "flight status," entering the airline and flight in the Active Answers boxes takes them to another results page, with up-to-date flight information in a neatly packaged module at the top. That part of the process is called "Instant Answers," and the company has been doing that for a while, with NCAA Tournament results and the Oscars, among other subjects.

With the new Live Search flight status feature, it’s also possible for users to get directly to the flight status Instant Answers module — without first bringing up the specialized Active Answers search fields — by simply typing the airline name and flight number into the main search box. But the Active Answers step is meant to help people who don’t know to do that.

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Is venture capital rating service theFunded really shutting down?  

TheFunded.com, a Web site that allows entepreneurs to rate the performance of individual venture capitalists, is apparently shutting down on April 2, according to a message on the Web site. But TechCrunch’s Michael Arrington is calling it an April Fool’s joke, in part because of the message placed on theFunded’s Web site. (Full message below) You be the judge, though I am sure there are more than a few VCs who wouldn’t mind if it turns out to be true.

Full text of theFunded’s message titled "Conclusion: Investors are Great:"

"On Friday, March 27th, TheFunded, Incorporated (’TheFunded’ or ‘we’ or ‘the Company’), in conjunction with counsel has concluded that venture financing and the purchase of preferred equity, herein referred to as ‘investing’ or ‘investment’ or ‘investors’, is both broadly and generally good for companies worldwide.

TheFunded will officially cease reviews on April 2nd, 2009, which, from time to time, reflect negatively on the many innumerable benefits of investors or investment or investing. We encourage companies to consider seriously taking investment, and we apologize for the following statement made in haste:

"investing is predatory", "over 75% of investors are bad", "avoid banned investors."

The Company further apologizes for making any other statements and causing questions to be raised regarding the ethics and the good reputation of investors. Further updates are forthcoming Wednesday, and we encourage every Member to take an investment and then post feedback on the positive and rewarding experiences in Open Letters."

 

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