shell companies, secret agents,
corporate scams, Bob Bernard and marchFIRST
While Bob Bernard may not end up starting his next company out of a cell in Levenworth, I would not be stupid enough to bet against that possibility. I am only half kidding. We have come to expect the worst when it comes to marchFIRST, and even though most of us really don't understand why and how this firm self-destructed so violently and so quickly, we have simply factored it into our general perspective of gloom and doom that goes hand-in-hand with precipitous drops in other stocks and the NASDAQ. Well, not so fast guys.
The true story of marchFIRST, Bob Bernard, and surrounding businesses has not even begun to be told. We have barely scratched the surface. It is a far more interesting story than the spinmeisters have put out: namely, that two big firms merged, one (USWeb) being unweildy; that the integration went very poorly, not to mention the implosion of the dotcom market on which they relied. That may be fine for Barbara Rose, the Trib. and Crain's, but it is not good enough for this report or, for that matter, the SEC.
I am just beginning to get the inside story from very well placed people who no longer have anything to fear. I told Flip Tuesday at the Union League Club that one of the reasons I am upset about the implosion of marchFIRST is that when Bob Bernard was worth $700 million, as opposed to $7, my book on him would have commanded at least the attention of a publisher, and possibly some up-front royalties. After what I have learned in the last few days, I take that statement back entirely. There is so much baloney about the way Bob operated that it will certainly sell a solid magazine article, at the very least.
Let's start with the story about HostOne because the motif established there shows Bob's M.O. (modus operendi). The pattern of buying people off to keep negative publicity from surfacing, the pattern of hiring secret service agents, and corporate spies, the pattern of a lot of devious behind-the-scenes maneuvering.
marchFIRST created HostOne because Bernard wanted his own pipeline, and he was unable to buy Exodus, which he did want to buy during the heady days following the merger of Whittman-Hart and USWeb/CKS. He was considering buying Exodus in January 2000. Host One was created in April 2000 and run by ex-USWeb people out of Virginia. marchFIRST invested between $50MM and $85MM in cash in HostOne. Why Virginia, you ask? Very simply, the DC area has the best telecom infrastructure hub in the country, as evidenced by the fact that AOL and MCI operate out of there. The reason for their superior technology is the presence of the military and the government.
The people running HostOne decided to set up a competing operation. They did so surreptitiously. They actually went so far as to get a $75 million commitment from a venture capital firm. No, I do not know the name of the firm, but I am working on it. They also lined up clients that were intended for HostOne while they were working at HostOne, but they were running the other business on the side at the same time. One of the VCs knew Bernard and called him to ask why he was setting up an operation to compete with his own company. I would have loved to have been in the room to see Bob's face for that phone call. This of course was news to Bob. Bob proceeded to bring in the FBI, but first he brought in a security guy to be a corporate spy. This person used to be in security at Motorola and handled asset loss prevention and intellectual property protection.
This story is so typical of the way Bernard operates. The deal with the VC firm did get stopped. Did the people at marchFIRST press charges? The answer is that they did press charges against some of the people, and the suit is a matter of public record, I am told. It is not really Bob's style to go public with such things, if he can keep it under wraps. But Bob also set up some of the people from HostOne with golden parachutes to keep their mouths shut. The blow up here occurred in January of this year. One of the people who was innocently caught up in this was Sue Reynolds, formerly a Secret Service agent, who went to HostOne from Chicago. There are approximately 15 to 20 ex-Secret Service agents who were on the payroll at marchFIRST. Sue got framed because she didn't know about the scam.
One last point on this topic: Flip has not done full due diligence, and he may be getting conned. Do you think it is coincidence that Flip is paying about $12MM for marchFIRST, which is the same amount that marchFIRST invested in divine? The HostOne story is just the tip of the iceberg.
First, let's review the Bernard M.O. Hire lots of ex-CIA, Secret Service, corporate spy types; investigate behind the scenes; buy off the violators with golden parachutes. The case of Jared Bobo years ago is one that I am familiar with. In that case, Bobo was accused of misconduct in his role as a corporate recruiter. It had to do with a woman applying for a job. She had the smarts to tape the meeting. Bob set Jared up with his own business on the side. Bottom line: bury the problem and keep it from the view of investors.
It's a very complicated story. The essence of it is this: Bob Bernard created a web of shell companies, the purpose of which was to allow for skimming off the top, the hiding of assets, and the puffing of the books. My information--and I believe this to be pretty reliable--is that the SEC is currently investigating these shell companies and the shenanigans that went on with them. The SEC is also investigating stock manipulation and statements to investors. The whole investigation was precipitated by the findings of Francisco Partners. My sources are inside marchFIRST, and they are pretty well placed --- well placed enough to know the general outline of the scheme, but they may not know every fine brush stroke.
If this claim is not true, it should be quite easy for Bob Bernard to prove it false. People like Bob Bernard and Joe Bong and other very senior people in the company were not paid directly by Whittman-Hart or marchFIRST. They were paid by the shell companies, so there was no way to trace the money they took out of the company. Doesn't marchFIRST and Whittman-Hart have auditors, you ask? As a matter of fact, KPMG was the accounting firm for Whittman-Hart, and I have no reason to believe that anything changed when the merger occurred. This is an easily checked fact. But I am told that KPMG never saw the real books. Some of these shell companies include Blue Vector and FormandFunction. Here's something interesting: Bob Bernard's email address is firstname.lastname@example.org. Gee, why is that? Another interesting detail: Some of the Whittman-Hart leases, I am told, are subleased through FormandFunction.
Let's stop right here and now for a general point. What I am suggesting, and make no bones about it, is that Bob Bernard was not kosher in the way he ran the business. There are many entrepreneurs in the history of Chicago high technology --- many successful ones --- and not all of them were scam artists and hucksters. I have never heard one bad thing about Mike Birck of Tellabs, or Casey Cowell of US Robotics (3Com), for example. Even Ken Pontikes, who ran an awfully political shop, was personally never accused of any of this kind of crap to my knowledge. The point is that we have role models in our midst. They are not publicity seekers though. Let us not assume that every entrepreneur, in order to be successful, has to throw respect for honest and good business practices out the window to become a success.
Another one of the shell companies is called Three Dog Bakery, which is Bob Bernard's wife's company.
Here is one of the little scams that Bernard operated with the shell companies. Through the shell companies at least $50 million was invested in probably 50 companies, a typical deal being a million dollars per investment. Here is how the scam worked. First, let me say that my sources tell me that the practice is not uncommon in the industry, but it is questionable. It is called equity for services.
Here is how it works. Little or no money actually changes hands. One of Bernard's shell companies or marchFIRST itself offers to invest in a firm. The firm being invested in needs cash and services. Bernard says, "Here is a million dollars for equity in your firm." Then he tells that firm to give him a Purchase Order for $1MM in services in exchange for the "investment." In other words, that firm has just gotten a million dollars on account, so to speak, for services that have not even been provided. They are "on credit." Then Bernard can take that P.O. and run it through his accounting system to make it appear that his firm is generating revenue for consulting services. Meanwhile, little or no cash has changed hands, and Bernard can puff the books.
Now, here is a logical question: What does the firm that is giving up the equity for bogus services get? Good question, right? The answer, as it was explained to me, is that they get the cachet of having marchFIRST as their major technology implementation partner, so that they can go to real VCs and get funding, using the marchFIRST name and supposed firepower. The reason that the deals were often run through the shell companies is that the SEC has restrictions of publicly traded firms in terms of how much equity ownership they can have in another firm. I believe that there is a limit of 19% ownership by the public firm in another company. That is the reason they have to split the deals up among these shell companies (to get around that) and the reason that all these incestuous relationships exist.
Bernard (and when I say Bernard, I mean Bob and his minions because he may not have personally executed everything) was creating the illusion that they were doing business to the tune of whatever amount of money. There was little cash involved, and the whole thing was smoke and mirrors. But it did help Bernard to create better market capital. The scheme would have worked well had the dotcom business not collapsed, forcing marchFIRST and the shell companies to write off the equity in the defunct companies.
Francisco Partners, I am told, was really planning to put in about $200MM to salvage marchFIRST. Why did they pull out of the deal? The answer, I am told, is that they found out about the shell companies and some of the nonsense that was going on. With respect to the declaration of Chapter 11 bankruptcy, the papers have been sitting there for weeks. As you see at the top of this report, Reuters reports that they filed Chapter 11 after the close of the market today. The reason that the company had not filed the bankruptcy papers is twofold. One, they are playing a PR game, and even a reference in this report to plans to declare bankruptcy may cause them to shelve it for a week or so. Two, they are trying to get all the loose ends tied up. They want to channel all the losses and unpaid debt to marchFIRST, so that Divine can purchase an entity that is free of these problems. I'm still not clear in my mind about exactly what Divine is buying. I am told that there are somewhere between 1,800 and 2,100 people left
in the company that we have called marchFIRST. Most of those people, I am told, are pretty worthless: they are management, by and large removed from their technical experience, and administrative. I am sure that i-Street or the Chicago Tribune can do a better job than I when it comes to picking apart what is left at marchFIRST. But I doubt that their story will have the part about the shell companies, the corporate spies, the FBI, and the SEC investigations. (By the way, I found out that Gary Ruderman has left the country for two weeks. So watch for TMR to gain ground on i-Street.)
The games that were played were not only by Whittman-Hart and marchFIRST. One thing I heard was that the lawyers for the H1-B visas were not paid for six months. But on the other side of the equation, there were companies that were hiring marchFIRST in the hope that marchFIRST would go out of business, and that the bill would not have to be paid. One such company, I was told, is Vcapital, which, as you know, is suing marchFIRST. They have to do that as CYA protection because they have no money of their own. Another company that pulled this little stunt was Invida.
Time to go for today. This will be continued. Those Chapter 11 papers should have a few goodies in them.