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'THE MOON IS BLUE'
David Martin spent only a few years at CyberNet, but it was during a critical period for the company. By the late 1990s, many ex-employees, including Martin, say that Watson's unscrupulous activities were becoming more and more obvious, while at the same time increasing in scale. At that point, it was common knowledge within the upper echelon of the CyberNet staff that the company's leadership routinely overstated revenue and falsified financial records to secure big loans and leasing agreements. Martin was recruited to open a new CyberNet office in Tampa, Fla., in 1998, and although he was far away from the eye of the storm in Grand Rapids, there was still an air of malfeasance.
For example, Martin was one of CyberNet's primary contacts for Tech Data, through which the solution provider bought a significant amount of product. But not long after Martin joined, Tech Data began to pull back from CyberNet and, at one point, put a hold on the company's credit. That's when Martin was introduced to a strange, unspoken CyberNet policy. "I was told that we were never allowed to say inside the office that the company had a credit hold," Martin says. "We were told by Barton and Krista that we had to use a code word instead. So we'd say, 'The moon is blue with Tech Data,' for example."
By the time Martin left in 2000, CyberNet was seeing more and more blue moons. Martin had seen all of the schemes at that point, he says, such as the phony leasing agreements and the falsified financial statements. When Martin resigned, he, too, was threatened with a lawsuit.
At around the same time, Watson's carefully designed image and CyberNet itself were crumbling elsewhere. Steve Kaplan, who then owned a Citrix-focused solution provider in Silicon Valley called Ryno Technology, was introduced to Watson by a senior vice president at Wyse Technology. According to various sources, CyberNet was one of Wyse's top partners and was designated as a Gold Reseller. Wyse declined to comment for this article on its involvement with Watson and CyberNet.
Watson later approached Kaplan about acquiring Ryno, and Kaplan decided to explore the offer. Kaplan, now principal and co-founder of By the Bell, a technology ROI consulting firm in Benecia, Calif., recounts the experience on his Web site, admitting that he was "beguiled by Barton's charm and intelligence." Already impressed with the glowing endorsement from Wyse and Watson's credentials, Kaplan ventured several times to Grand Rapids, where he had several meetings at CyberNet's "opulent headquarters" and was also wined and dined by the Watsons, who would travel to San Francisco and shower Kaplan and his wife with expensive meals at the best restaurants.
But as the acquisition plans progressed, Kaplan confesses he began to see another side of Watson. "He was intellectually dominant," Kaplan told VARBusiness. "He could talk about any subject with authority, or at least make it appear that way, and he used that to intimidate people." Kaplan's relationship with Watson began to fray when he discovered several holes in Watson's background, such as his Stanford M.B.A., which did not exist. When Kaplan asked Watson about the inconsistencies, he became belligerent, called off the merger and threatened Kaplan with a lawsuit.
Perhaps even stranger than Wyse's endorsement was the fact that Kaplan received positive feedback from two of CyberNet's top clients, UPS and Con-Way. By all accounts, the fraudulent solution provider did have a small number of legitimate customer accounts and performed actual services for them. One such customer was Con-Way, a multibillion-dollar transportation services company located in nearby Ann Arbor, Mich. CyberNet helmed a major project for Con-Way in 2001, deploying more than 2,500 Wyse Winterm terminals throughout the company.
But that relationship turned sour when the two parties got into a contract dispute. According to court records and various sources, CyberNet filed a lawsuit against Con-Way in Oregon Circuit Court after the client complained about the solution providers' effort on a major LAN implementation. The case went to court in 2003, with CyberNet seeking full payment for the job. Peter Alexander, principal consultant at Alexus Consulting in Corona Del Mar, Calif., served as an expert witness for CyberNet. "It was a classic example of a contract dispute where both sides started shouting at one another and things turned ugly," Alexander says. "I examined the work CyberNet did and found nothing wrong with it. But when I examined the company itself and its financials, it did look strange. I could never understand what their business was and how they made so much money."
While CyberNet won the case and received an award of more than $600,000, Watson's company hardly came out a winner. CyberNet's relationship with its biggest legitimate client was irreparably broken, and its biggest vendor partner, Wyse,was left wondering what had gone wrong with such a promising engagement. All of it exposed more holes in Watson's charade.
'SMOKE AND MIRRORS'
After the falling out with Con-Way and Hastings Public Schools, CyberNet was finding it increasingly difficult to make legitimate sales, which, according to various sources, led Watson to try to accelerate his schemes and borrow more money. But it was becoming harder than ever to maintain CyberNet's image. In recent years, according to various sources, employee turnover had risen rapidly and funds were running low; as a result, the Watsons instructed employees not to remove the name plates of departed co-workers from their cubicles and offices, and to make sure such areas were not cleaned out. "They wanted to make it look like there was still plenty of people working there when they brought in important folks," McTaggart says.
People outside of CyberNet were catching on, however. Several leasing companies and banks, concerned with possible fraud, had either ceased doing business with CyberNet or had made complaints to authorities. One of the last straws came in the spring of 2004 when Charter One Vendor Finance of Lisle, Ill., purchased two CyberNet lease agreements from another leasing firm. The solution provider had acquired financing to lease 66 computer servers from another Grand Rapids-based technology firm called Teleservices Group. Charter One, according to records, paid more than $3 million for the leases. Soon after, CyberNet asked Charter One for additional financing to lease another 70 servers, again from Teleservices.
In September, after discovering some discrepancies with the invoices sent by Teleservices, Charter One decided to do an on-site inspection at CyberNet's headquarters and verify the existence of the original 66 servers. To their surprise, Charter One officials discovered only 25 servers. According to FBI records, Horton could not explain why 41 servers were missing. Later, Horton forwarded an e-mail to Charter One that he had sent to a Teleservices executive named Dan Roland, chastising him for the inaccurate invoices.
FBI investigators had seen that name before. It was the name of Watson's former colleague at E.F. Hutton, but it had also popped up in some curious places. In fact, a year earlier, the FBI had investigated a complaint against CyberNet by First American Equipment Financing (FAEF), which had been in negotiations with the solution provider to lease more than $1 million worth of computer equipment and office furniture to CyberNet. One of the vendors was Teleservices Group, and when FAEF representatives contacted the company to confirm the computer order, they spoke with a Dan Roland.
Several sources inside CyberNet told authorities that Dan Roland was not a real person, but an alias used by CyberNet executives. In the FBI warrant, sources claimed that Mast had been instructed by Horton to sometimes answer the phone by saying, "Roland." The sources also told investigators there were no servers; employees had been instructed to install blinking lights into empty server cases and place them in the basement data center in order to fool prospective clients and lenders. "Once he started lying, there was no turning back," McTaggart says. "Each lie had to be bigger than the last because it was all a cover-up."
Indeed, when federal agents raided CyberNet's headquarters a few months later, they discovered the fake servers in the data center, complete with phony serial numbers, Teleservices logos and blinking lights. During the raid, an employee told investigators he knew of the fake servers and said CyberNet's business was all "smoke and mirrors."
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