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'I JUST WANT SOMEONE TO CLEAN UP THE MESS'
By 2004, the various frauds, schemes and legal disputes were spiraling out of control so badly that even Watson himself could no longer manage them. He admitted as much during his 911 call the night of his suicide, telling the dispatcher that he had committed a "horrible crime" and confessing that he was sad and lonely. "I just want someone to clean up the mess," he told the dispatcher. "I want this to end tonight."
Not long before federal agents stormed the company headquarters, Watson apparently made a few last-ditch efforts to keep the schemes going and expand CyberNet's holdings. Watson was so desperate to borrow more money that his schemes ultimately became self-destructive. For example, the FBI affidavit states that in early 2004, CyberNet's former CPA, Guy Hiestand of Hiestand and Co. in Grand Rapids, received a call from a Chicago bank regarding financial statements that Hiestand had prepared for CyberNet for 2002 and 2003. There was just one problem--Hiestand had stopped working for CyberNet in 2002, after discovering discrepancies in the company's accounts and suspecting fraud. When Hiestand asked the bank for the paperwork it had received from CyberNet, he found that someone had created phony audit opinions and financial statements with his firm's letterhead and Hiestand's name attached to it.
With every successful con, Watson's ego and bravado grew to the point where he simply convinced himself he would never be caught, no matter how risky the stunt was. "Every time he pulled the wool over someone's eyes, it excited him and emboldened him to lie more and take even bigger risks," Wood says.
In fact, just a few weeks before federal investigators finally stormed CyberNet's offices, the company made a major acquisition, purchasing 60 percent controlling interest in AyalaPort Makati, a technology company based in the Philippines and a subsidiary of Ayala Corp., a major Filipino conglomerate. With all of the investigations, charges and lawsuits associated with Watson and his company, he was still able to fool enough people to make million-dollar deals. That's because, as Straayer says, Watson knew he could always find banks eager to lend CyberNet money as long as he could whet their appetites with his expensive cars, wine cellar and luxurious offices.
But when authorities entered CyberNet's building last November, everything came crashing down. Investigators discovered that CyberNet had created multiple shell companies, such as Teleservices, that existed on paper but were nothing more than post-office boxes and mail drops at virtual business centers across the globe. According to court records, CyberNet had 16 different aliases and shell companies, including Teleservices, Cyberco Holdings and CyberNet Engineering. The FBI seized mounds of paperwork and company records, while confiscating all office equipment as well as the Watsons' personal effects--their million-dollar home and expensive automobiles, among others. At press time, around $4 million in assets had been seized by the authorities.
In December, Ayala cut all ties to CyberNet and filed a lawsuit to retrieve all shares of its subsidiary. Lawsuits were filed against CyberNet, Watson and other executives almost immediately after the company was shut down. Approximately 70 banks, lenders and creditors claimed they are collectively owed approximately $115 million because of the company's fraudulently obtained loans. In fact, according to a statement by the court-appointed receiver for CyberNet, the company's fraud is estimated to be more than $60 million from the fake server schemes alone.
Sources close to the investigation of CyberNet believe authorities have spent several months tracking the money trail and uncovering hidden accounts, suspecting that several CyberNet executives may have been laundering the proceeds of the ill-gotten loans to third parties. In fact, sources say in the company's final days following the raid, a few CyberNet executives tried to extract approximately $25,000 from a secret account in the Asia-Pacific region in order to help out-of-work employees to retain legal assistance. The investigation has also led to finger-pointing among creditors as the courts and lawyers determine what the banks knew regarding CyberNet and when they knew it.
So far, Krista Watson, James Horton, Jonathan Mast, CFO David Roepke and Paul Wright have all been implicated in the company's wrongdoing and have been put under the microscope by the authorities. Mast, Roepke and Wright were unavailable for comment. Sources say that Horton and his attorney were considering cooperating with the authorities. Calls to Horton's lawyer were not returned. Reached at his home, Horton simply said, "I don't have any comment at this point."
Krista Watson, who was unavailable for comment, recently appeared in bankruptcy court and disavowed all knowledge of the company's fraudulent activities, repeatedly telling the court she couldn't recall the details of allegedly fraudulent checks with her name on them. In the past, Krista Watson's legal team has put the blame on Barton Watson and claimed that she had no knowledge of her late husband's activities. When contacted by VARBusiness, Krista Watson's attorney, Charles Chamberlain Jr., declined to comment.
Because of the ongoing investigation, authorities have refused to disclose any details on the case. But the day after investigators raided CyberNet's headquarters, massive amounts of money were sent via wire transfers from the accounts of the shell companies to the private accounts of various parties, including James Horton's wife and Barton Watson's mother, Geraldine Watson, who, according to FBI records, has been implicated in her son's Ponzi scheme. (Geraldine Watson could not be reached for comment.) When the FBI and IRS learned of the wire transfers, some as much as $750,000, on Nov. 22, they began the process of seizing the funds. Two days later, Watson committed suicide.
"There were multiple layers to this rotten onion," Westra says. For the future, federal authorities will attempt to peel back the shell companies and disguises as investigators and attorneys comb through mounds of paperwork and digital records, much of it fabricated and essentially useless. There are many questions to be answered. How was Watson, who had no formal business training or education, able to rip off so many for so long? Were bank officials or business partners aware of the fraud? Where will the money trail end? CyberNet's story may well go down as the channel's worst scandal, but the mystery around Watson's meticulously constructed schemes may never be fully deciphered to reveal where the lies ended and the truth began.
Editor's note:VARBusiness will continue to cover the case against CyberNet and its executives as the investigation and courtroom proceedings unfold. Look for more on CyberNet in upcoming issues and on the Web at VARBusiness.com.