CyberNet Chief Found Dead Following Raid By Federal Agents

Watson, according to authorities, barricaded himself inside his home in Ada Township, Mich., last Tuesday evening during a standoff with local police. Authorities urged him to surrender, but early morning Wednesday several gunshots were heard inside the house and police lost contact with Watson. He was later found dead of an apparent suicide, though investigators have not disclosed if a note was found at Watson's home. According to media reports, Watson called 911 Tuesday evening and told authorities he was contemplating suicide.

During a massive raid on CyberNet's headquarters on Nov. 17, members of several federal agencies, including the FBI, IRS and U.S. Postal Inspector's Office, confiscated computers, servers and digital records while executing warrants in conjunction with the U.S. Attorney's Office. Authorities have not disclosed the details of the investigation or announced any charges against the company or its executives, including Watson. However, a source with intimate knowledge of the company said CyberNet (No. 110 on the 2004 VARBusiness 500) is being investigated for wire, mail and bank fraud. According to the source, the company allegedly inflated its revenue with bogus transactions and inaccurate financial records.

Last week's tragic incident leaves the solution provider essentially rudderless as it tries to sort through the ongoing federal investigation, which has put the company's future in doubt. CyberNet has made no official statement regarding Wednesday's incident with federal authorities or the death of its chief executive. Calls to CyberNet's offices were not returned. According to various news agencies, CyberNet employees returned to work following the raid at the company's Grand Rapids building. However, truckloads of equipment and records were removed from the offices by federal authorities during the raid. In the week that followed, many creditors also arrived at the company's offices to collect and confiscate various properties and assets. According to sources, more than 70 banks have loaned money to CyberNet.

A lawsuit was reportedly filed against CyberNet's parent company, CyberCo Holdings, shortly after federal investigators took action. According to various news agencies, Charter One Vendor Finance of Illinois has filed a civil suit against the solution provider, alleging fraud and breach of contract with the financial services firm. Specifically, the lawsuit states that CyberCo acquired a $3 million loan from Charter One to buy more than 60 servers, yet Charter One claims CyberCo has just 25 servers at its headquarters and alleges that the company used false information to acquire the loan and then misused the funds. In addition to CyberCo, Charter One also named Watson and his wife, who is a major shareholder in the company, as well as CyberNet president and COO James Horton.

CyberNet, which reported more than $300 million in sales for 2003, was started in 1989 and specializes in managed services and IT outsourcing. The company has more than 1,000 employees and offices in several overseas locations, including the United Kingdom, Australia and Hong Kong. Earlier this month, CyberNet acquired a majority stake in AyalaPort Makiti, a technology outsourcing company based in the Philippines and a subsidiary of Ayala Corp., a major Filipino conglomerate. CyberNet purchased a 60 percent take in AyalaPort, but the exact value of the deal was not disclosed. AyalaPort officials released a statement saying Watson's death will not affect the company's operations in the Philippines.

Court documents published by local news media in Grand Rapids show that Watson and his company have had run-ins with authorities in the past, including a two-year prison sentence for securities fraud. CyberNet Group was also embroiled two years ago in a legal dispute with Hastings Area Schools in Michigan. CyberNet allegedly sold the school district remanufactured computers that the company passed off as new units. The case was settled out of court.