Advanced Equities says it disclosed to Pixelon that its license was pending and defends the fees it charged, saying they were in line with the amount of work it took to solicit funds. The firm adds that it has since returned the warrants, the value of which are now in question.
Advanced Equities was so eager to fund Pixelon that its due-diligence checks into the company's executives and technology were superficial at best. A simple credit check of Fenne, who throughout his tenure at Pixelon had unlimited authority to cut checks and hire employees, would have revealed that the man didn't exist. Yet, the only background check the financiers did on Stanley was to ask him to fill out a questionnaire - in which Stanley represented he had no convictions, Wiskowski said in an interview. Advanced Equities never bothered to call relatives, former business associates and employers, as is routine when handing a company millions of dollars in financing.
The firm also never bothered to speak with anyone at eCommercial, which dropped its plan to invest in Pixelon shortly after issuing the press release. Technicians at eCommercial, which recently changed its name to MindArrow, say they had put Stanley's claims to the test shortly after agreeing to the deal in principle and found the technology lacking. "It was the pursuit of the Holy Grail that sucked everybody in," says MindArrow CEO Tom Blakeley, referring to Pixelon's claims to have a proprietary method for producing high-quality video that could be compressed into small packets. "That's what got us, until we did a little due diligence. And then we realized that their technology was paper-thin."
Had Advanced Equities paired up with an interested industry leader - as is typical in many private placements - the financiers would have had a well-informed partner to help them assess the authenticity of Pixelon's claims to a proprietary technology. The firm, however, wanted the deal all to itself.
So Wiskowski says that he sent a friend with expertise in video compression and telecommunications to check out Pixelon's technology. The expert, whom Wiskowski declines to name, was so impressed that he invested in Pixelon prior to the private placement. Wiskowski decided Pixelon was too hot to pass up. "We were seeing them come up on MTV and VH1 [Web sites], bumping multimillion-dollar companies like RealNetworks," Wiskowski says.
Others were duped, too. At a press conference that summer, Republican National Committee Chairman Jim Nicholson lavished praise on Stanley: "I want to express my personal thanks on behalf of the Republican National Committee and to Michael Fenne, the founder and chief technical officer of Pixelon, for making this revolutionary and exciting technology exclusively available to the RNC."
While Pixelon's backers were gloating, employees inside the company were among the first to grow suspicious. Gary Devore, a video-encoding engineer in charge of training new employees, was among them. Lured to Pixelon by promises that the company's proprietary compression scheme was going to turn the startup into an overnight success, Devore quickly went from being a contract employee to a manager in charge of encoding baseball games and other content so that highlights could be downloaded from Pixelon's Web site. Devore was ultimately fired after Fenne complained he was not performing his job properly.
Devore says he had suspicions about the technology, but he didn't fully appreciate the deception until the middle of August, when Pixelon claimed it was using its proprietary platform to broadcast highlights of the Iowa Straw Poll live over the Internet. When Devore reported to work that day, he says he discovered that Pixelon was using Microsoft's Windows Media Player - the very technology Pixelon so often cast as inferior - to broadcast the event. Three other former employees - including Russ Reeder, Pixelon's VP of product development - confirmed the account. A shortcoming in Pixelon's platform, Reeder says, was that it couldn't compress video into small enough pieces to send out live over the Internet. To disguise the ruse, Devore says, Stanley used a customization feature in Windows Media Player to remove all Microsoft branding.
