Two top executives at management software provider Entellium Corp. were arrested Tuesday for allegedly exaggerating the company’s revenue in order to attract more private funding.

We’re not talking about a little white lie. Former chief executive Paul Johnston and former chief financial officer Parris Jones are accused of cooking the books to show 400 percent more revenue than was actually brought in over the last three years. In 2006, they reported $3.95 million in revenue, when the actual figure was only $582,000. This worked so well for them, that they bumped their total from $1.45 million to $6.29 million in 2007, and from $1.74 million to $5.22 million this year. Where did the numbers come from? They must have just sounded good.

At least they did to Entellium’s investors, Sigma Partners, Intel Capital and West River Capital, among them, who helped the company raise a total of $50 million — $19 million coming from Ignition Partners alone.

The scheme fell apart at the end of September when a vice president of human resources discovered the phony books, according to TechDirt. She turned Johnston and Jones over to the board, which planned to send in a contract CFO to investigate. But that was too little too late, and the execs resigned before the investigation could happen. Several days later, the staff was told the company was out of money, and 50 of the 68 employees at its Seattle headquarters were let go.

Johnston and Jones appeared at an initial court hearing yesterday, and could face up to 20 years in prison and $250,000 in fines. They also authored apology emails to the heads of Ignition and Sigma, stating that they “made a grave mistake” and that “revenues have been overstated since 2004 with a delta [difference] of approximately $400K a month.”

One might ask why a thorough audit of the company wasn’t done sooner, considering its shaky origins. Johnston founded it in Malaysia in 2000, and just two years later it underwent an intense restructuring that left some employees without a paycheck for some time.

Meanwhile, Entellium, which develops customer relationship management (CRM) software, continues to operate largely out of its offices in Malaysia. Despite the recent news, Entellium plans to keep the its doors open, potentially finding a similar company to acquire at least some of its assets and employees. CRM software company Avidian Technologies was eyeing this option before the news broke, but negotiations may understandably cool.

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