THE INDUSTRY STANDARD MAGAZINE
Issue Date: Jul 03 2000
David Stanley was running from the law when he saw an opportunity: the Internet. He adopted a fake name and started Pixelon, a company lauded by investors and the press. Then the scam began to unravel.
Late in the afternoon of Nov. 12, several squad cars from the Orange County Sheriff's Department converged on the San Juan Capistrano, Calif., corporate headquarters of Pixelon, a high-profile Internet company selling a new way of broadcasting television-quality video over the Internet. A hastily formed coalition of company officers and directors were planning to oust Pixelon's founder and chairman, Michael Fenne, a formidable 350-pound man. They called the deputies because they worried that Fenne might turn violent.
The day's trouble had begun much earlier. At a morning meeting with investors, Fenne pounded his fists on a conference table and vowed, in a two-minute tirade laced with profanities, that he would never willingly leave the company he had worked so hard to build. An irate founder bent on sabotage was something Pixelon's leaders openly worried about, especially considering the company's millions of dollars worth of computer equipment. But what most concerned this coalition were the two large bodyguards who stood outside Fenne's office that afternoon. The pair wore large pouches strapped around their waists, leading some - including Pixelon interim CEO Paul Ward, according to a lawsuit - to believe they were armed.
From the start, Fenne, who was partial to signing his e-mail messages as the "Big Giant Head of Pixelon," had proven to be an unusual founder and board chairman. He had no driver's license or Social Security card, and demanded that he be paid solely out of the company's expense account. He also displayed a tyrannical management style, requiring some employees to work 36-hour shifts. He launched into tirades over the public address system and held a mandatory prayer meeting in his office.
Later, in the weeks before his ouster, Fenne's behavior grew worse. Without the board's consent, he had promoted the company's public relations director to CEO only to fire her two weeks later and went on a stock-granting spree, handing out millions of shares to employees and partners. The company's investors had also just learned that Pixelon had spent no less than $16 million - out of $20 million in financing closed just one month earlier - for a star-studded launch party that included performances by the Who and the Dixie Chicks.
Pixelon director Lee Wiskowski was chairman of Advanced Equities, the Chicago investment bank that had handled the financing. When he heard about Pixelon's party tab, he and his two lieutenants left for Orange County for an emergency board meeting.
They arrived at company headquarters on the morning of Nov. 12. The first thing Wiskowski and his two cohorts heard was the sound of Fenne's voice over the Pixelon public address system. "This is the master speaking," at least a half dozen people present remember Fenne barking. "George better respond to me immediately, and if he doesn't have all the answers I might have to take him out behind the barn for a whooping!" Then, another message rang out,"Frank, report to the woodshed, your uncle is going to give you a whooping." The repeated messages, which appeared to be randomly directed at various employees, might have been funny were it not for the air of fear they created.
Later that morning, a Pixelon executive briefed Wiskowski's group. A week or two earlier, the executive told them, he had walked into Fenne's office for a scheduled meeting to find another executive on his hands and knees with his head bowed before Fenne, who was sitting in a chair with his hands on the back of the kneeling executive's head. "I've never been around a cult leader," the executive told the team, "but that's the way it felt."
The Wiskowski team had arrived at Pixelon headquarters thinking they might ask the interim CEO, Ward, who was also an early investor and director of the company, to take the fall. But the trio decided on the spot that it made more sense to oust Fenne, even though only several months earlier he had been given an employment agreement guaranteeing him the position of chairman for at least seven years. The three investment bankers retired to a nearby parking lot with Ward, a second Pixelon director and several Pixelon officers to hatch a plan. They needed at least one more board vote to take Fenne out, however, and frantically tried to reach two other board members. In the meantime, they agreed, they needed to keep Fenne from discovering their plans and be ready to call the sheriff's office.
"This feels weird," one member confided to another after they hatched the scheme. "This feels like someone could die tonight."
Stanley was born in the rural south, the son and grandson of Appalachian preachers. In his 20s, he used his status and a near-hypnotic speaking style to fleece many of his impoverished neighbors, including parishioners of his father's church, out of over a million dollars. In 1989 Stanley pleaded guilty to more than 50 fraud-related charges. A judge sentenced him to 36 years in prison and agreed to suspend all but eight if Stanley would repay his victims. In early 1996, while working as a traveling salesman and having paid only a fraction of the money he had promised his victims, according to court records, Stanley vanished.
He turned up in the sleepy town of San Juan Capistrano in late 1996, just as the Internet was transforming the most unlikely people into overnight multimillionaires. The setting would provide the perfect environment for the then 35-year-old con man.
imageWith little more than a made-up name, a dilapidated Hyundai and his wits, Stanley would convince an unsuspecting group of locals that he had found the Holy Grail of Internet broadcasting: a unique means for stuffing television-quality video into ultra-thin files that could download in a matter of seconds. It was only later that Stanley would learn rudimentary programming in languages such as C++ and Visual Basic, but his polished sales pitches convinced just about everyone at the time that he was an accomplished programmer whose skills were sought after by the CIA and the Saudi royal family. He was also emerging as a pillar of the community, teaching Bible studies at a local church and playing piano during services.
By mid 1999, Stanley had convinced Advanced Equities, a fledgling investment firm in Chicago, that his technological breakthrough was about to transform the way video would be delivered over the Internet. The investors were so smitten by Stanley's claims that they coughed up $28 million. They were hardly the only ones to fall for Stanley's scheme: Pixelon was also cutting high-profile deals with the likes of VH1, Paramount Pictures, the Republican National Committee and actor and singer Will Smith.
Now, just one year later, Pixelon is nearly a goner, and Stanley sits in a Virginia county jailhouse. During a rare jailhouse interview in Wise County, Va., Stanley comes off as a humble man, bright and gifted with words. Though this blue-eyed, cherubic-faced man seems large enough to wrestle a bear, the soft-spoken Stanley can make just about anyone feel warm in his presence. Many who have known Stanley for only a short time are quick to call him a genius, a deeply gentle soul and one of the most gifted piano players and singers they've ever heard. Even after it was revealed that he was a convicted con artist living under a fake name, his supporters remain steadfast, as convinced as ever that Stanley has a special blessing from God.
From his sweaty jail cell and in the many accounts passed along to friends and acquaintances, Stanley claims over and over that he's the real victim, horribly abused by family members and fellow parishioners, conned by double-dealing business associates and betrayed by a legal system that won't let go a minor transgression he made 10 years ago.
It's no coincidence the judge hearing Stanley's case branded him the golden-tongued salesman. Many who met him were so hungry to strike it rich that they were ready to believe just about anything he said. They lost their fortunes and personal reputations, and tolerated the indignities of a man inclined to humiliate them publicly and deceive them privately. The Pixelon story reminds us of the old adage: Deals too good to be true usually are.
Wise County, Stanley's home through much of his early life, is in the Appalachian Mountains near the Kentucky, Tennessee and West Virginia state lines. Unemployment is in the double digits, and a great many of its residents try to adhere to the Ten Commandments. Even during the coal boom in generations past, only a handful of residents ever got rich, and times have only gotten tougher since then. It was here, in a county where even $40,000 can be considered a nest egg, that Stanley worked his first cons.
Pack says he asked Stanley for his money back, but instead got a runaround. At first Stanley said he couldn't pay him because of a bounced check, then it was a long story about his life being in danger because of dealings with some questionable people living in Florida. Pack eventually had what he called a "gentlemen's discussion" with Stanley; essentially, Pack says, he demanded that Stanley "pay up or else." He finally got most of his money back, but the episode left him with a strong impression.
"He was the most convincing liar you ever met in your life," recalls Pack, one of the few victims to be repaid. "He was so convincing when he told you something that I don't think it registered with him what he was saying."
Tiny Baker, still trying to recover her investment in the scheme, was a more typical victim. Baker says she invested just over $129,000 after J.C. Osgood, Stanley's grandfather and the founder of the Beverly Hills Tabernacle, recommended his grandson's investment services. As a preacher, the owner of a land-surveying business and the holder of valuable mineral rights in the area, Osgood was widely regarded as a town elder. His seal of approval was all Baker needed to convince her of the wisdom of investing money with Stanley, a fellow parishioner who played piano during Sunday services.
But later, when Baker needed some money for heart surgery, Baker couldn't even get a call through to Stanley. According to her attorney, Baker hasn't received a dime from Stanley. "David Stanley ruined my life and he ruined my childrens' lives," Baker says. In all, prosecutors allege, residents from Wise County and nearby Sullivan County in Tennessee lost more than $1.25 million in Stanley's investment scheme.
In 1989, when Stanley pleaded guilty, he knew, he says now, that the insurance company for the securities firm where he had been working would repay his victims the more than $1 million they had lost. Stanley failed to take into account, however, that one-third of the payout would go to an attorney representing Stanley's victims, and Stanley would be left to repay the remainder.
The prospect of living in poverty while paying hundreds of thousands of dollars in restitution - only to then spend eight years in prison - was unappealing. In 1996, with only a fraction of his restitution paid, Stanley fled.
Among the victims he left behind were members of his own family. Besides conning a relative in his investment scheme, Stanley left his parents with thousands of dollars in debt and restitution payments when he vanished. Last year the couple filed for bankruptcy, and they face legal problems after co-signing some of the loans he never repaid.
The Rev. Stanley can hardly show his face in town without the locals pointing him out as the preacher whose son bilked his following out of a million dollars. Yet the elder Stanley, who says he had no idea whether his son was dead or alive during his four-year absence, steadfastly defends the honor of his son.
During a recent Sunday service at the Beverly Hills Tabernacle, the elder Stanley referred to his son, incarcerated in the county lockup less than a mile down the road, in mellifluous tones no fewer than three times. "He's still in jail, but we have faith that what has been spoken through prophecy is going to come to pass," the Rev. Stanley said. Like Stanley and so many of his supporters, the preacher seems to believe his son occupies a special place with the Almighty.
There was the year that Stanley paid more in restitution than was reported in his earnings statements, prompting special prosecutor Gerald Gray to accuse Stanley of misleading the court. Citing numerous violations of probation, Gray repeatedly filed court motions for Stanley to serve his prison sentence. Then, in 1995, Stanley faced new charges, including writing a bad check. When he left Tennessee in February 1996 with just $3,300 to his name, his third wife chose to remain in the state with the couple's first child, due in a few months, rather than live on the lam with her fugitive husband.
The teary-eyed departure, he says, was the beginning of a sad and soul-searching journey westward as he tried to rebuild his life. Using a laptop computer and portable printer, he forged a temporary driver's license. In St. Louis he painted his 1993 Hyundai gold, and bleached his dark curly hair bright blond. While on the road one of his molars became abscessed, but he says he so feared being identified that he anesthetized himself with Jack Daniels and yanked out the tooth with a pair of pliers. He says he was stabbed at a truck stop in Kansas City, Kansas during a robbery attempt, receiving a six-inch gash in his torso, but was forced to suffer in silence. "You can't call 911 or the police when you yourself are living underground," Stanley says from jail. Fear and heartache, he adds, dogged his every waking moment.
But in a five-page, single-spaced letter Stanley sent to his wife shortly after he fled, he paints a starkly different account of his life on the run, lashing out at the mother of his child for not leaving with him. "Every single time you look at our child, I want you to remember exactly what YOU and YOU alone did to its biological father," Stanley wrote. "Every day of your life. You deserve that." (Within a few months of sending the letter, Stanley would marry his fourth wife, who would soon be pregnant.)
Besides revealing his gift for manipulation and a tendency to become enraged, the letter shows the tentative but grandiose self-image Stanley worked so hard to construct. "In the new life I have here, (the one I so desperately wanted to share with you) EVERYONE loves me," Stanley's letter continues. "In my home, my female roommate and my new friends all flock around me just to 'touch the flame.'" He goes on to compare himself to biblical figures and promises to throw authorities off his trail by having plastic surgery. "It has always been, and always will be, a mistake to lose faith and underestimate me," Stanley wrote. "God has blessed me with a unique ability to defy reality."
Stanley and his new wife Sheila stumbled upon San Juan Capistrano in November 1996, and decided to stay because she liked the sunny days and mild winters. His weight, once a fit 220 pounds, had ballooned to more than 350 pounds. He had no bank account, no driver's license, no Social Security card and he could only accept cash for the few odd jobs he took on. They lived out of their Hyundai and showered at a nearby beach.
But the city, roughly an hour's drive southeast from Los Angeles, had an added benefit: Its residents tended to be as trusting as they were affluent. They didn't seem to suspect a thing about the man now calling himself Michael Fenne. He explained away his unusual circumstances with a series of tales, including that he had done covert work for the CIA, had appeared in numerous major movies, and had written songs for and performed with some of the most notable country and western and rock acts of the 1970s. He also said he was keeping a low profile because his wife had recently escaped a Mormon cult that was bent on getting her back. Remarkably, many people believed them.
Looking for work, Stanley responded to an ad placed in the local newspaper by Chuck Hauswirth, now 68, the owner of a "tele-business center" that leased furnished office space to people so they wouldn't have to commute to Los Angeles. Hauswirth wanted someone who could teach tenants how to use Microsoft Word and other computer applications. Stanley arranged a barter: In exchange for a modest-size work cubicle, Stanley offered a cut of his fledgling computer repair business, which he called Restec, an anagram of the word "secret." He claimed his clients included the Saudi royal family.
Some of his Restec customers who had ties to the church eventually asked Stanley if there was a way to replay races at the local horse track over a computer so that people in other locations could place bets. Stanley told them their inquiry had caused him to stumble on a totally new way of playing high-quality video over everyday computers. Excited by the news, Hauswirth and two customers gave Stanley money to help him move into a modest hotel. By the middle of 1997, Stanley, Hauswirth and two associates founded Digital Motion Video.
Pulling video off a television and turning it into a file that can be played over a computer is no small feat, and this was even more true in 1997. The amount of information carried in the typical video is so vast that it would take a day or more to download a 30-minute sitcom, even with a super-fast broadband Internet connection. Computer scientists have learned to work around this problem by mathematically "compressing" the video in order to produce significantly smaller file sizes. The compression, however, comes at a price: The smaller the file, the smaller the picture, and the more jerky the movement and grainy the picture.
But in less than a year's time, Digital Motion had come up with video that seemed on the cutting edge. Unlike software that Apple Computer and Microsoft were marketing at the time, Digital Motion's software produced images that took up a computer's entire monitor and could be refreshed 30 times every second, giving the video the same size and fluidity it would have on television.
The magician who performed this feat was Digital Motion cofounder and president Robert Dunning, a former marketing manager at high-end computer manufacturer GST-Micro City in Southern California. Dunning used highly specialized hardware and software, much of it still in the testing phase, designed by Sunnyvale, Calif.-based FutureTel and other niche companies in the graphics and publishing industries. Dunning's achievement, according to Dunning, Hauswirth and the third Digital Motion partner, was in assembling off-the-shelf components in a way no one else had done before to produce high-quality video. Soon enough, Stanley would hijack Dunning's work, wrongly calling it proprietary technology that Stanley himself had developed.
Digital Motion would soon dissolve, and to this day the four business partners disagree over who is to blame for the failure. Stanley's three business partners, however, all remain adamant that he used his easygoing charm to talk them out of their money and time. They say he also deliberately sabotaged deals that could have gotten the company off the ground. "He's slick," says Hauswirth, who claims that Stanley still owes him more than $60,000. "All of these transactions were based on friendship and a handshake. I just fell under his spell."
Stanley, however, denies that he wronged anyone at Digital Motion, and pins the blame for the company's woes on others. Stanley was able to assuage Hauswirth's anger over the collapse of Digital Motion, he says, by going out of his way to later secure a job at Pixelon for Hauswirth. Hauswirth was laid off once Pixelon hit hard times.
Within weeks of Digital Motion's breakup, Stanley was showing off Dunning's technology to a fresh crop of unsuspecting associates. This time, according to the former Digital Motion partners, he claimed he was a mathematician and computer programmer who had developed the device using a series of technologies he had designed himself. Stanley remains adamant that he was the one who discovered the technology while living out of his car. "I knew I was on the frontier of a totally new area and I got real, real, real excited," he says.
Soon Stanley was pitching his plan to launch a 1,000-channel Internet broadcasting empire that would rival anything that CBS or Disney could ever build. San Juan Capistrano proved the perfect base. Populated by an ample supply of affluent people who recognized the tremendous investment opportunities offered by the Internet, it was close enough to Los Angeles and Silicon Valley to attract talented employees and business partners - but far enough to escape any careful scrutiny.
Fenne's first crop of takers included a psychologist, the owner of a tile company, a local insurance agent and a marketing manager from Procter & Gamble. Each of them invested between $50,000 and $125,000 in the business. Paul Ward, a lawyer who owned a local insurance company, donated legal services in exchange for a small piece of the company. And thus was born Future Link Communications, later renamed Pixelon.
"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."
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 into 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's 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," he said.
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 discovered 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.
There were other signs of trouble. Stanley demanded that he be paid out of an expense account. For another, nepotism at Pixelon was rampant. According to Reeder, Paul Ward had at least three relatives working at the company, while Reeder had two. Dave Snyder, a board member, had recently taken a paying job at Pixelon, as had Snyder's daughter.
Stanley's management style was also becoming increasingly erratic. Not only was he requiring some employees to work 36-hour shifts, but he was also becoming increasingly abusive.
Perhaps most alarming was a mandatory prayer gathering. One Sunday in August, Stanley instructed all employees to meet in his office for what was described as a worship service to bless a new space Pixelon had just taken over. Among those attending was Robert Feldman, who, although he was Jewish, says he had received an e-mail saying he was expected to attend. Dave Snyder was there with a book of religious scripture in hand. Reeder, who carried a Bible, was also there.
Some say Snyder began the meeting by reading a New Testament passage in which Jesus miraculously feeds 5,000 people with just five loaves of bread and two fish. As was always the case, the air-conditioning in Stanley's office was turned up high, and it was so dark that the light from a nearby computer monitor cast an eerie glow on Stanley. Stanley's chair sat on a small platform so that he was elevated above everyone else sitting in the room. After the readings, Stanley played a piano and sang a hymn he said he had written. His wife sat close by, wiping tears from her eyes.
Snyder says he remembers reading scriptures with some employees at Pixelon once, but is sure he didn't read the story about the loaves of bread and fish. He also strenuously denies there was anything out of the ordinary about the meeting. "I certainly wasn't trying to equate Michael Fenne with Jesus Christ," says Snyder.
Devore says he was offended by the meeting, but he went along to keep from rocking the boat and because he still had hopes of becoming rich in March, when Pixelon was supposed to go public. "Michael would say in meetings that everybody in this company is going to be a millionaire in a short period of time," says Devore. "The mania [was] the glue that kept the dysfunctional family together."
Up until the fall of 1999, the drama and deception unfolding inside Pixelon was a carefully kept secret, touching perhaps only a few dozen people at most. It likely would have remained that way were it not for iBash '99, Pixelon's extravagant launch party.
Held at the MGM Grand in Las Vegas on October 29, the day-long extravaganza included a reunion by the Who and performances by the Dixie Chicks, Chely Wright, Faith Hill, Tony Bennett, the Brian Setzer Orchestra and Kiss. Originally intended to cost Pixelon only $1 million and take place at Anaheim Stadium, not far from San Juan Capistrano, those modest plans quickly vanished with the hiring of music veteran Danny Socolof as Pixelon's chief marketing officer, according to at least four people familiar with iBash discussions.
But it never happened that way. Despite some spectacular performances, Pixelon was unable to broadcast the event live using the very proprietary platform the event was designed to hype. Even worse, the vast majority of footage from the event never made its way online. If Pixelon meant to become an instant success among a public hungry for unique content on the Web, it became only the object of scorn. "This has got to be the most incompetent, pathetic Internet company I've seen to date," one person wrote in an Internet discussion group after unsuccessfully trying to access iBash footage for days. "Pixelon is a perfect example of how new technology should NOT be used," another frustrated viewer wrote.
Worse than being a public relations disaster, iBash turned into a financial black hole that largely sank Pixelon's chances of ever getting off the ground. Socolof, who was fired two months before iBash, received a severance package of $150,000 in cash and stock conservatively valued at $870,000, Paul Ward says. The music veteran, his secretary confirms, went on to take the coveted position of road manager for the Who's North American tour.
For their efforts the Who received $2 million in cash and a generous offering of stock; LeAnn Rimes made $1 million; and the Dixie Chicks got $875,000 and at least $230,000 in stock. All told, iBash cost more than $16.2 million, more than 75 percent of the capital Pixelon had taken in during its year and a half existence. As if it made any difference, the company continued to tell the press the event's price tag was $12 million.
Fuming over the launch debacle, the principals from Advanced Equities were in no mood for negotiations when they arrived at Pixelon on Nov. 12. They had received enough reconnaissance information to know that the situation was dire. The trio's message as they stopped at each executive's office was the same. "It's not a negotiation. It's not a debate. It's not a discussion," one person remembers one of the principals saying. "If we don't have an agreement by the time we leave, you will have a class-action lawsuit on your desk within 48 hours."
Interim CEO Ward called Michael Kelley, a director living in Northern California, and told him to take the next available flight to San Juan Capistrano. He also began tracking down Bart Moore, another board member who was on a horseback riding trip for the day.
It was 10:30 that morning when the investors had their first contact with Stanley, who was clearly unhappy about their visit. Badger, who had been instrumental in sealing the deal with Pixelon, stood up and offered to shake his hand, but Stanley, who appeared out of breath and badly in need of sleep, just walked past the man. Stanley, according to some in attendance, then launched into a long and sometimes vulgar rant about how he would never give up control of the company. He seemed on the edge of violence.
The investors, however, were digging in. "We sold this deal as a $57 million market cap and we're not taking a percentage point less," one of them responded. "If you don't rectify this, you'll never raise money again."
The investors ticked off a plethora of concerns. There was the firing earlier that week of Pixelon's newly appointed CEO, Judy Smith, a former deputy press secretary during the Bush Administration and communications exec at MSNBC. She was probably best known for being Monica Lewinsky's spokeswoman after the intern's affair with President Clinton became public. For months, Stanley had been pushing Smith as a candidate for the CEO spot, but Advanced Equities had resisted. Finally, at a shareholders meeting just two weeks earlier, Stanley had stunned the investors when he stood and with great fanfare introduced Smith as Pixelon's next CEO. Now, just as they were getting used to the idea, they had learned she had been fired. Advanced Equities was also upset about the massive and unauthorized grants of Pixelon stock that grossly diluted current shareholders' holdings.
As the day wore on, Wiskowski and others who wanted to oust Stanley were concerned about whether they had the votes. Of course, Stanley was sure to vote against the measure, as was Snyder. That meant the plan would need the support of either Moore, who was unreachable on his riding trip, or Kelley, who was still in flight from Northern California. In the meantime, they continued to worry that Stanley might get violent if he learned of the plan. They decided to get Stanley into the conference room and that Feldman, the recent Pixelon hire, would keep on eye on the room from outside through a window. If the plotters thought Stanley was about to go ballistic, one of them would gesture to Feldman with a thumbs down, the agreed-upon signal for him to call the police.
"Give me 90 days and I'll turn the company around," he told them. Cam Fraser, another recently hired executive, approached the office door and asked the bodyguards to leave, but they refused. As nonchalantly as he could, Wiskowski feigned a yawn and a stretch, clasping his fingers together and turning his hands so that his two thumbs were clearly pointing downward - the prearranged signal to call the cops.
Within a half hour, squad cars arrived and removed the bodyguards peaceably. Although Stanley steadfastly denies bodyguards were ever on the premises that day, the two men, Lindsey Largess and Anthony Vaughan, would file suit three months later accusing Pixelon of false imprisonment and slander in connection with the incident.
The bodyguards gone, the three Advanced Equities principals remained in Stanley's office trying to coax him into the conference room. Meanwhile, board member Kelley was arriving by cab. The driver, panicked by the cop cars, refused to stop, and Kelley says he jumped out of the car while it was still moving.
By nightfall, the board meeting finally got into gear. In addition to Stanley, five board members - Wiskowski, Curtis, Ward, Kelley and Snyder - were there. People were still trying to track down Moore, the seventh director.
Fenne, ever a master at deception, opened the meeting with a cryptic remark: "I've reached an interesting agreement with the gentlemen from Advanced Equities, but we'll leave that action for last in our meeting," at least four people remember him saying.
His remark spooked the group and Ward now worried that the plan to remove Stanley had been derailed. He silently counted votes, wondering if the needed four members would turn against Stanley. Just a few hours ago, three members - Ward, Wiskowski and Curtis - had vowed to vote in favor; it was unclear how Kelley and Moore would vote. Any splintering of this fragile coalition would surely sink the plan. Stanley's unique ability to defy reality was showing itself again.
"I kept thinking, 'This son of a bitch is going to survive this meeting with his chairmanship intact,'" one board member recalls. "'This 350-pound guy is going to squeeze through the crack!'"
The meeting moved on to other matters. Finally, Wiskowski smacked his palm on the table and made a motion that Stanley be suspended as chairman and CTO for 30 days. "You betrayed me," one meeting participant remembers a clearly stunned-looking Stanley saying. Ward seconded the motion before Wiskowski had a chance to respond. Stanley was now even more shocked. "Now I know who my Judas is," Stanley replied.
A clearly irate Snyder called the move illegal in light of the employment agreement Stanley had executed only a few months earlier. As the sparks continued to fly, Bart Moore finally appeared, dressed in cowboy boots and jeans that were caked in mud. When Wiskowski's measure finally came up for vote only Stanley and Snyder failed to vote in favor. Stanley's reign at Pixelon was over.
Almost immediately, however, it was clear that the drama would not be over. Soon after the board meeting, word circulated in Pixelon's inner circles that someone had found a document on Stanley's computer suggesting he had been harboring a profound secret. Addressed "Hi Guys," the undated letter laid out a detailed plan in the event an unidentified "they" ever discovered his con. "The fact remains that someday they might get lucky ... and I need to be ready to depart the country altogether in that event," he wrote. "If that is God's will for our lives, then so be it." The letter discusses using hair dye and colored contact lenses to create a new identity, and eventually reentering the country as a naturalized citizen. "I would only do this after a face change through plastic surgery," the letter says. Snyder says Stanley wrote the letter but never sent it out. He declines to discuss the letter further, saying it is likely to be the subject of a lawsuit he plans to file against Pixelon.
Despite the rumors that flew about the document, a December severance agreement shows Pixelon agreed to pay Stanley $660,000 over 30 months to purchase 2 million shares of his stock. (Stanley had owned 3 million shares and had options to own another 9 million. He says he has since sold yet more shares but still owns a small amount of Pixelon stock.)
Besides facing the extreme legal exposure of paying off an officer whose integrity there was good reason to doubt, Pixelon's management faced other problems. It was only after Stanley signed his severance agreement preventing Pixelon from making any future legal claims against him that executives learned they had failed to secure the rights to future versions of the Pixelon Player, the software used to play video over a computer. In their haste to execute the agreement, they had failed to notice that the player had been developed for Digital Motion by an outside consultant who still owned rights to the source code.
By February, Pixelon's troubles just seemed to get worse. The CEO brought in to reorganize the company suddenly resigned, creditors began demanding payment for hundreds of thousands of dollars in unpaid bills and jilted partners began taking legal swipes at the faltering company.
More serious still for Pixelon are lingering doubts about the value of Pixelon's intellectual property. Several investors and potential partners who had considered forging deals with Pixelon say their initial inquiries into Pixelon's technology gave them pause. The Pixelon Player, they say, appears to borrow so heavily from Microsoft technologies that its worth is questionable.
Meanwhile, the encoder, or compression technology, attracts slightly higher investor interest. A prospectus and at least two Pixelon executives say the company's current version of its technology has at least as much to do with work done by LocoLabs - a San Jose, Calif.-based company that bills itself as having "magnetically attracted a staff of mad-scientist types," - than it ever did with anyone at Pixelon. (Brad Hoffert, LocoLabs' president, didn't respond to numerous requests for an interview.) The arrangement means that LocoLabs has joint ownership of the technology. Also, the technology is generally regarded as comparable to products already being manufactured by companies such as Ligos and Digital Bitcasting.
That might explain why a $70 million offer in January by New York-based Internet broadcaster On2.com quickly fell by the wayside. Pixelon entertained the suitors, according to two sources familiar with the negotiations, but ultimately refused to let On2 engineers inspect Pixelon's technology. In May Pixelon laid off its remaining employees.
Acting CEO Ward and Pixelon's remaining executives were fired last week. Ward was not available for comment. Peter Foley, executive vice president at Unified Financial Services in New York, was named president. Wiskowski says the new management plans to assess the true worth of the company's assets in an attempt to either sell Pixelon or attract new investors. An initial audit conducted Wednesday indicated Pixelon has proprietary rights to an advanced encryption scheme and technologies for inserting personalized ads that collect user feedback in real time, which might be considered a core asset. One executive still believes Pixelon's assets could be worth as much as $25 million.
Stanley, meanwhile, wasted no time rising from the ashes of his failed company. A week after receiving a down payment of nearly $200,000 from Pixelon, public records indicate he paid nearly $181,000 in cash for a house in Big Bear City, Calif., and put it in the name of a company he had set up called Landragon Development. Through Landragon, he had several other properties in escrow, according to real estate and law-enforcement sources in San Bernardino County. Working with Snyder and several other close friends, Stanley established several other businesses, including Lazaron Ventures, Axitar and Ailos. Snyder, who is president of Lazaron, says the company's initial focus will be on using satellites to access the Internet.
Then, in early April, Stanley got the call he had dreaded for four years. A disgruntled associate from one of Stanley's earlier San Juan Capistrano ventures had spotted a picture of David Kim Stanley, one of Virginia's 12 most-wanted fugitives, and thought it looked a lot like the man called Michael Fenne. A few days later, as San Bernardino sheriff's deputies moved to take custody of Stanley, they found only his empty house, which had clearly been vacated in a hurry. Stanley says he turned himself in after Snyder, who had heard about the imminent capture through the grapevine, convinced him there was no other way to respond.
He now sits in Wise County jail, where he is being held pending a hearing in which a prosecutor will ask that Stanley finally serve the prison sentence he received more than a decade ago.
From coast to coast, over a span of 15 years, wherever Stanley has gone, he has left behind a chorus of associates, acquaintances and former friends who call him the biggest scam artist they've ever met. What is less clear, however, is what drove him to deceive. There seem to be no fast cars, no summer cottages in the Hamptons and no fancy yachts that suggest Stanley ever pocketed any money from his scams.
For now, no one knows for sure if Stanley was simply good at concealing a fortune in ill-gotten gains or if the con artist simply lied and cheated out of sport and revenge. What is clear is that he believes he has done nothing wrong, sees great things in his future and, when he gets out of jail, plans to finish what he started at Pixelon.
"In running for my life, I found my life in technology," says Stanley, who likes to remind people of all he was able to accomplish at Pixelon without so much as a Social Security number. "When I'm operational again, whenever that will be, without the chains and limitations of being underground, I am going to build that network."
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