Cybernet 2000

[Recaredo Latreche]

Theman on the line was Barton Watson, CEO of The CyberNet Group in Grand Rapids, Mich., one of the largest solution providers in America and No. 110 on the 2004 VARBusiness 500 list. He called 911 just after midnight on November 24 last fall. Watson matter-of-factly told the dispatcher in a slow, meandering voice that he had a 20-gauge shotgun pointed at his head, and that he intended to commit suicide.

When the dispatcher asked Watson why he wanted to kill himself, the chief executive explained with a sense of twisted pride that he was "the missing CEO" of The CyberNet Group. Less than a week earlier, federal agents from the FBI, IRS and U.S. Postal Inspectors Office had raided the company's headquarters as part of a sweeping fraud investigation regarding CyberNet's business practices and financial records. The authorities, executing warrants in conjunction with the U.S. Attorney's Office, seized computers, servers, business records, digital files and other items.

Watson, who was not arrested during the raid, was now barricaded inside his million-dollar estate, armed and suicidal. The police responded to the 911 call and surrounded Watson's expensive home in the posh Ada Township in the nearby suburb of Kent County. Over an extended conversation, the dispatcher repeatedly pleaded with the 44-year-old chief executive to put the gun down and surrender to police. "No, it's a little late for that," Watson replied, intoxicated from expensive wine, including a $700 bottle of La Tache 1997. A few hours later, authorities heard several gunshots inside the house. After entering the house shortly after 9 a.m., police discovered Watson's body in an upstairs bedroom. He had died of a self-inflicted gunshot wound, just one day before Thanksgiving, 2004.

In the days and weeks that followed, Watson was revealed to be the chief architect of a massive scheme that defrauded millions of dollars from banks and creditors. CyberNet, it turned out, was not the $300 million IT services powerhouse that many employees, customers and industry watchers, including this publication, believed it was. Authorities now say the company was little more than a tool used by a handful of people to ensure their opulent lifestyles through an intricate web of lies, fraud and corruption. The company was an immense engine of criminal activity, and its fuel was the greed of Watson and his cohorts. This is the inside story of CyberNet.

It's March, and CyberNet's headquarters is still bristling with activity and filled with people. Nearly four months to the day after its chief executive took his own life and the company collapsed, the offices are crowded once again: This week, under the direction of bankruptcy court, CyberNet's assets are being auctioned off to the highest bidders in an effort to return some funds to the company's cheated creditors. People from all over Michigan have come to find bargains, but many have also come to see the inside of the extravagant offices and gawk at the jaw-dropping riches, which have become legendary, if not infamous.

The building, located on a modest street in downtown Grand Rapids, is like any other building in the area: an aging, five-floor brick structure with a faded exterior. Inside, however, is an entirely different world that is out of place with the rest of the small, Midwestern city with a population of approximately 200,000 people. CyberNet's offices are the epitome of opulence; the office equipment and furnishings are first-rate and include such high-end brands as Herman Miller. The fifth-floor executive offices feature fine cherry-wood paneling and hardwood floors, as well as fireplaces. Then there is the wine cellar located in the basement, worth more than $100,000 and featuring such bottles as a 1997 Harlan Estate Cabernet Sauvignon priced at $1,354 and a 1989 Leoville Barton worth $1,000. Some claim that Watson's desk, allegedly made of a rare Cuban mahogany, is worth almost as much as the wine collection.

On paper, The CyberNet Group appeared to be every bit as rich as the rare, vintage bottles in its basement. The company's promotional and marketing materials claim sales from between $200 million to $300 million, while proudly displaying its VARBusiness 500 membership. CyberNet claimed $321.2 million in revenue for 2003 and boasted a client list that would make any VAR envious: ExxonMobil, Citibank, Boeing, Merrill Lynch, Blue Cross and Blue Shield, and Dupont, among other blue-chip enterprises. CyberNet also said it had more than 400 employees worldwide, with offices in the United Kingdom, Australia, South Africa, Hong Kong and other locations.

Employees tell a different story, however. Sitting in their old offices near enormous company banners that read, "Hype or Results? The Choice Is Yours," they reminisce about their now-deceased boss and the revelations around the business for which they used to work. "We had a lot of good people here," says Paul Curtis, now a director of systems engineering at SourcIT, a solution provider also based in Grand Rapids. "We did real work and had some big clients, but we were never a $200 or $300 million company. We were only about a $10 or $20 million company."

Curtis has joined several former colleagues at CyberNet's headquarters to view the auction items, which include everything from servers to a Segway and luxury automobiles. For many, it's the first time they've been back inside the offices since the raid. Rob King remembers coming to work that day and finding the doors locked and the building covered with federal agents. "We had no idea what was going on when we walked up that day and the doors were closed," says King, who now works with Curtis at SourcIT. "Some of the executives were telling us not to worry, that it was nothing, but we never got our last paychecks."

For most of the 100 or so displaced CyberNet employees, it's likely they never will get that last paycheck. That's because approximately 70 banks and creditors have made claims against the now-defunct solution provider for allegedly committing fraud to obtain sizeable loans and leasing agreements. By the end of the week, when the auction is complete and all of CyberNet's extravagant items are sold off, it will only net about $1.1 million total and hardly make a dent in the claims against Watson's company, which at press time had surpassed $100 million. "A lot of us knew something was wrong," says Sean McTaggart, a former CyberNet executive who now runs his own company, Triline Solutions, "but we just couldn't put our finger on exactly what it was."

In the aftermath of Watson's suicide, however, the smoke began to clear. According to FBI documents and courtroom records, Watson and several top executives, including his wife Krista, president James Horton, vice president Jonathan Mast and Watson's personal assistant, Paul Wright, were allegedly involved in a massive conspiracy of fraud by using phony collateral and documents, including fraudulent tax returns, accounts receivable and other financial statements, to secure lines of credit and leasing agreements. In an apparent Ponzi scheme, the affidavit states, Watson--and his inner circle--fraudulently obtained new loans to pay off old loans in a seemingly endless cycle.

According to the people who knew him, Watson was driven by a desire to be wealthy and powerful. James Cameron, a prosecutor for the Attorney General's Office in Maine, grew up with Watson in the blue-collar town of Belding, Mich., and recalls how his former friend worshiped wealth.

"He was attracted to wealth like a moth to a flame," says Cameron, who is currently writing a book on CyberNet and its late chief executive. "He knew from the very beginning that he wanted to be an entrepreneur."

Early on, it appeared he would achieve that goal, as Watson's life was marked by enormous potential. A straight-A student, Watson was extremely intelligent and reportedly scored above 150 on an I.Q. test. He eventually graduated as valedictorian of Belding High School. He also stood out. Sources familiar with his childhood say Watson, the son of a liquor storeowner, would attend classes in grade school dressed in a suit and carrying a briefcase, only to be ridiculed by classmates. Later, he would claim he earned an M.B.A. from Stanford University and attended a prep school far away from his modest hometown.

An FBI affidavit for a seizure warrant obtained by VARBusiness sheds some light on the shady past of CyberNet's late chief executive. According to the documents, the FBI first investigated Watson in 1986 as the subject of a fraud probe. During his career as a stockbroker with E.F. Hutton in Washington, D.C., in the 1980s, Watson convinced an investor to put money into a company called Interstate Consolidated Investments (ICI). The unnamed investor cut a check for $10,000 payable to ICI, but the funds were never invested in the company. Why? ICI did not exist. Authorities discovered Watson himself was listed as the president of ICI, and his mother, Geraldine Watson, as vice president. The company's address wasn't located within a capital office building or business park but in Watson's apartment.

In 1987, Watson pled guilty to mail fraud after investigators determined he had swindled the unnamed investor as well as others and used the money for his personal expenses. He was sentenced to three years in prison, serving just under 24 months at Allenwood Federal Prison in Pennsylvania before being paroled, and fined $230,000. During the course of the investigation, the FBI interviewed Dan Roland, a co-worker at E.F. Hutton, who described Watson as "a high flyer" and "a very smart man."

John Straayer, co-founder of the company that would become The CyberNet Group, says he had no idea about Watson's troubles when he met him just a short time after he was released from prison. "He was very intelligent," Straayer says, "and we were young and ambitious." Straayer decided to start a business with his acquaintance in 1989 called WS Services: Watson-Straayer Services.

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