By the spring of 1999, Pixelon was giving every impression it was well on its way to a hot IPO within the next year. The company struck an exclusive deal with Paramount Pictures to make Web versions of its trailer for the upcoming movie, Star Trek: Insurrection, and forged a similar pact with Will Smith to make his Wild Wild West video available over the Web in Pixelon's format. In May, the company announced that eCommercial, an Aliso Viejo, Calif.-based startup that adds thin video attachments to e-mail, was purchasing a 10 percent stake in Pixelon for $4 million.
"We are using our patented media-compression technology to deliver true TV-quality video and stereo-quality audio over the Internet rather than the moving slide show available from other technologies," Stanley claimed in a widely distributed press release.
As it turns out, about the only true claim in the entire press release was eCommercial's intention to make the investment. Neither Pixelon nor Stanley have a single patent registered with the U.S. government, though he now insists from jail that he has several pending applications for patents. Nor was Pixelon's technology proprietary. To make matters worse, its playback software actually borrowed heavily from Microsoft's Windows Media Player, according to two former Pixelon executives familiar with the technology.
id=0/Touting its deals and cutting-edge tools, this year-old company with just over $1.2 million in its coffers hoped to follow in the footsteps of Broadcast.com, which Yahoo had recently purchased for $5 billion. It was against this backdrop that Advanced Equities, an investment boutique looking for its first hot deal, met Pixelon. What would clinch the firm's interest, however, was the eCommercial announcement, which not only suggested Pixelon's founder and technology were real, but that they were likely to be snapped up by some other investor if Advanced Equities didn't get them first.
On a Saturday morning in May 1999, Advanced Equities principals Lee Wiskowski and Dwight Badger visited San Juan Capistrano to learn more about Pixelon's technology. Having recently founded Advanced Equities, Wiskowski and Badger saw Pixelon as the perfect way to hit a home run.
Already, their friend Rich Callaghan had made a bundle off Pixelon. Callaghan received a salary of $75,000 per year and stock valued at $1.75 million at the time in exchange for arranging funding. Even Callaghan's previous baggage didn't prevent him from being listed in a Pixelon prospectus as an officer and head of investor relations. A real estate wheeler-dealer, Callaghan and some business associates were fined by a court in Dallas for $70 million over loans made by a savings and loan in Texas, according to court documents. Callaghan declined to comment.
The May meeting with Advanced Equities included Stanley, Steve Curtis, an early investor who eventually became a Pixelon director, and Callaghan. As he did with most of Pixelon's potential business partners, Stanley rattled off the usual litany of his former employers, which in addition to the CIA now included Walt Disney and Sony. He showed them the eCommercial press release and the Will Smith video. The financiers were impressed.
Though Advanced Equities had yet to receive its general securities dealer license, Pixelon was now agreeing to make the firm its agent for a $20 million private placement, a method of raising money from individuals with a high net worth. (Ultimately, the placement would come to $28 million) In return, Advanced Equities charged a stunning 12 percent commission and warrants to purchase more than 1 million shares of Pixelon stock, according to internal Pixelon documents.
Most of Pixelon's inexperienced executives didn't know it, but they were being taken for a ride. Standard commissions on private placements of that size were in the neighborhood of 5 percent, with no warrants. Additionally, because Advanced Equities' general securities license was still pending, the firm wouldn't be able to solicit investors for at least a few months, forcing Pixelon to postpone its first major infusion of cash. Speaking from jail, Stanley says the deal was a classic case of the former con getting conned. "They signed us up and had us by the short hairs, and they knew it, months before they had the legal right to solicit funds."
