Pixelon issues sweeping layoffs after founder's arrest

The San Juan Capistrano, Calif.-based company has come upon tough times after its founder spent more than $12 million on an over-the-top Las Vegas launch party last fall shortly before admitting he was a fugitive of the law.

Michael Fenne, as the founder was known, surrendered to Virginia authorities last month on charges that he bilked about $1 million from elderly investors in the late 1980s. Fenne, it turned out, was a convicted embezzler named David Stanley. He is in jail awaiting trial on a probation violation in Wise County, Va., authorities said.

If Pixelon was beset with problems before, publicity of the arrest combined with the wild spending on the glitzy party undoubtedly propelled its downfall, said Russell Reeder, the company's vice president of product development.

"There were so many things, but the very bad news about the founder caused some investors who were prepared to back up the company to pull out," Reeder said.

Creditors are seeking involuntary bankruptcy of the company to force some kind of payment.

Yesterday, the company's remaining 55 employees, including Reeder's son, Richard, were called into a conference room and told they were being laid off.

Founded in 1998, Pixelon promised to deliver crisp audio and video clips over the Internet. Advanced Equities of Chicago raised about $30 million to fund the company. Other deals with Sprint and UUNet seemed to set Pixelon on the right course.

Eventually, however, it became clear that the streaming software was not up to the task of providing live broadcasts over the Internet.

After Stanley's arrest, PricewaterhouseCoopers was called in to do an audit of the company to determine, among other things, if embezzlement had occurred. The audit came up clean.

The senior Reeder and five other managers will continue to work without pay on a restructuring plan that includes filing for Chapter 11 protection while it reorganizes. Hope for survival remains high, Reeder said.