Boston techies buzzing about start-up scandal

The lawsuit that has the Boston tech community buzzing involves a certain amount of irony: accusations of financial impropriety at an online payments start-up. Filed the day after Christmas, the suit accuses David Solomont of diverting more than $1 million of the money that was invested in PLEJ, a company he cofounded in 2002 with former Lycos executive Jason Pavona. For a time, Solomont served as chief executive of PLEJ, which is headquartered in Chestnut Hill. Documents allege that Solomont misappropriated $120,000 in salary funds and $437,500 in real estate and office expenses. An additional $439,000 also disappeared from PLEJ's ledgers, according to the suit.

The numbers are tiny when compared to a Tyco-size scandal; L. Dennis Kozlowski couldn't have bought a decent doormat for $1 million. But they're a big deal for a start-up that has only raised a total of $2.5 million. And David Solomont is a prominent figure in the local software industry, an entrepreneur who helped start the Massachusetts Software Council and for a time served as its chairman. Solomont was also a founder and co-managing director of CommonAngels, an influential group of individual technology investors (or "angels") who meet once a month to evaluate start-ups in need of funding.

The lawsuit suggests that Solomont, like many other angel investors, may have been running low on cash. Angels, even more than venture capitalists, feel the pain when companies they've invested in shut down or require additional infusions of money to reach profitability. That's been a common circumstance over the last four years.

"For reasons to be discovered," the suit says, "Solomont has become overextended, and is robbing Peter to pay Paul."

Earlier in 2003, Solomont was sued by Citizens Bank for defaulting on a $500,000 note. He was ordered to pay the bank $564,000 in September. Another lawsuit against Solomont, filed by a payroll services company, was settled in November.

"The parties are talking," says Kevin Peters, the attorney at Todd & Weld who is representing PLEJ. "They would like to see a resolution. But unless we can come to some agreement, PLEJ has no choice but to litigate."

Solomont's friends were surprised by the trifecta of lawsuits.

"This is something of a shock," says Paul Egerman, an entrepreneur who founded CommonAngels with Solomont but is no longer directly involved with the group. "But I have no reason to believe that he did anything wrong at all."

PLEJ asked for Solomont's resignation in December, and he has resigned from his position at CommonAngels as well.

Solomont says he is focusing all of his energy these days on a New York company called Candide Media Works, where he serves as chairman. The company builds companion websites for films and TV shows.

Of the PLEJ suit, he says: "There's no story there. We're making progress [toward a settlement] and there's nothing else to say."

The dust kicked up by the PLEJ lawsuit has created a temporary cloud over CommonAngels. The Lexington group has led a national effort to make angel investing more of a structured, formal process, and CommonAngels managing director James Geshwiler serves as the chairman of a recently formed angel investing group called the Angel Capital Association.

Problems with Solomont's involvement in CommonAngels started to pop up last spring, when he took a paid staff position as the group's co-managing director. (Previously, only Geshwiler had held that title, and Solomont had been the group's chairman.)

Solomont began pushing for the group to raise a standing $30 million investment fund and raise membership dues -- moves some members resisted. Several members also questioned whether it was wise for Solomont, now a paid staff member, to be overseeing CommonAngels's investment in PLEJ, the payments company he had cofounded.

"There's the potential for a conflict of interest," says Howard Anderson, a CommonAngels member and the managing director of YankeeTek Ventures in Cambridge.

"Most of us have run public companies before, and understand issues of governance quite well," says Steve Levy, who was elected last month to succeed Solomont as the chairman of CommonAngels's board. "We'll look at everything in that respect." Levy is the former chairman of BBN Corp.

Geshwiler said the plans to raise $30 million from institutional investors for a CommonAngels fund are on hold.

"We started to do that in September, and I stopped in mid-December," he says. "I wasn't going to be raising money when the leadership of CommonAngels was in doubt."

Geshwiler says the group will reassess whether it will continue with the fund-raising, and how large the fund should be.

Would Solomont be welcome back to CommonAngels if he is exonerated -- or if the lawsuit is settled?

"I really don't want to speculate on what the board would say or I would say," Levy says.

"They'll wish him well," predicts Anderson. "But they'll do it from afar."

CommonAngels will try to get back to business tomorrow, at its February meeting.

Talking points ScanSoft is looking for a new name, and a new home.

The last time the Peabody-based software company showed up in this column, in late 2002, it was raising money to go on a shopping spree.

Since then, ScanSoft has bought three companies in the speech-recognition business, including Boston-based SpeechWorks International for $132 million.

Those acquisitions, along with earlier purchases of assets from Lernout & Hauspie and Royal Philips Electronics, have transformed ScanSoft from a company that primarily sold imaging and scanning products into one of the biggest players in the speech-recognition business.

Today, about two-thirds of the company's revenues come from speech products. (ScanSoft is the largest software company in Massachusetts that sells products that consumers can actually purchase directly -- like its Dragon NaturallySpeaking dictation software, which allows users to talk to their PCs instead of typing.)

Now, the company is looking for a name that will better describe its business (SpeechScan?), and a location where it can consolidate its 300 Massachusetts employees who now work in ScanSoft offices in Peabody, Waltham, and Boston. Both the move and the rebranding should happen before the end of this year, said ScanSoft president Stuart Patterson.

The big question about ScanSoft's future: How well will it integrate all of its purchases? The company intends to sell three different speech products: PC-based speech-recognition software, like its Dragon NaturallySpeaking line; speech software that will be embedded in cars, cellphones, and other digital devices that will understand spoken commands; and speech software that will operate on phone systems, as when you call Amtrak's reservation line and can request an itinerary without punching buttons.

One analyst, Walt Tetschner of Voice Information Associates in Concord, wonders whether ScanSoft has been ruthless enough about killing off some of its speech products.

"You have to make the hard decisions to say, `We can't keep nursing multiple products.' You have to put all your wood behind a few arrows, and it isn't obvious that they've done that," he says.

I also wonder whether some consolidation of international offices wouldn't be in order. Does a 900-person company really need a European headquarters in Belgium, and two separate outposts right next door in Germany?

I'm always skeptical about companies that try to grow rapidly through acquisition. But we'll see whether Patterson and ScanSoft CEO Paul Ricci can beat the odds on Feb. 26, when the company announces its fourth-quarter earnings.

There are conflicting indications about what the news will be. At the time of the SpeechWorks acquisition last year, Ricci predicted the company's 2004 revenues would exceed $200 million. But in November, he was less optimistic, saying the company would earn $170 million to $190 million this year.

The signals shifted earlier this month, when ScanSoft said its fourth-quarter results would exceed previous projections.

Said ScanSoft spokesman Richard Mack: the $170 million to $190 million estimate was "a consequence of us being more cautious about the business before we saw what the fourth-quarter performance was going to be -- which was quite exceptional."

Scott Kirsner is a contributing editor at Fast Company. He can be reached at skirsner@verizon.net.