Rock stars, fast cars and 'Swedish Mafia': how gadget firm ate up £180m and crashed

The fleets of limousines and super-powered sports cars queuing in the Saturday night traffic signalled something special was going on at London's Park Lane Hotel. Inside, Sting and the Jamiroquai frontman Jay Kay were preparing to perform for an audience of A-list guests, happily glugging the free Cristal champagne. The rap stars Pharrell Williams and Busta Rhymes had been flown in from the United States for the occasion.

The organisers of the extravaganza, makers of a new handheld gaming device called Gizmondo, had spared no expense on the launch of their new product. But outward confidence was masking a fragile edifice.

Eleven months later Gizmondo was in liquidation, its reputation shredded by its association with a group of convicted criminals known as the " Swedish Mafia". More than £180m of investors' money had been spent in an orgy of corporate excess, bloated salaries and perks. There were fast cars, a private jet, a racehorse, and lawsuits. At the height of the spending, Gizmondo bought a modelling agency, ran a fleet of 120 Smart cars and retained an 80ft super yacht.

This week official receivers called a public meeting of the company's many creditors and began the process of clearing up the wreckage. But those owed money fear the company's assets amount to little more than the furniture at its Regent Street store. While there is no suggestion of illegality, observers have been left asking how a company, which promised to take on the gaming giants Sony and Nintendo, could have failed quite so spectacularly. One veteran industry source and former insider had this answer: "This was the worst case of corporate mismanagement and rape of a company and its investors that I have ever come across."

The Gizmondo story began in Jacksonville, Florida, when a former laminate flooring company, Tiger Telematics, diversified into the new technology. By November 2003 Tiger had acquired a UK-based subsidiary, Gametrac Europe Ltd, and was announcing plans for the "smallest, most feature-rich, mobile entertainment device on the market". Using a Microsoft operating system, it combined a handheld gaming console with GPS - allowing mobile multi-player use. There was also an MP3 player, a camera, phone and an e-mailer.

But the first signs of excessive spending were already in evidence. The fledgling Gametrac had signed a sponsorship deal with motor racing's Jordan.

Forced to change its name, and rapidly embroiled in a $3m (£1.7m) High Court battle with the Formula One team, Gizmondo was born in April 2004. According to a former adviser: "The company had a phenomenal burn rate and was continually scrabbling around seeking new investors." Gizmondo's managing director, the explosive Swede, Carl Freer, found hedge fund managers only too willing to climb aboard.

Alongside persistent takeover rumours, the device was expected to be in the shops in time for Christmas. But insiders were concerned, not least at the shortage of software to play on it, but at the ability to manufacture and deliver the console. Deadlines were missed and the global launch did not happen.

In March 2005, at the time of the Park Lane party, concern was mounting. In August as the company's new racehorse was cantering to a poor 14th in its first and only outing, Gizmondo's PR company Ogilvy Group began legal proceedings to recover $4.1m in unpaid bills. In September MTV began a $1.5m lawsuit.

Another former employee said: " There was no marketing strategy and the product never seemed to work properly."

That month the company revealed $210m losses - more than double that of 2003. The filings to US regulators also revealed Mr Freer received a salary and bonuses of $3.45m, including a car allowance of $115,662. Stefan Eriksson, an executive officer, collected $3.22m in pay and bonuses. Steve Carroll, the chief technology officer, drove a company car worth $231,324 on a more modest salary of $1.54m.

As investor confidence evaporated, the Swedish newspaper Aftonbladet reported that three Gizmondo executives, dubbed the "Swedish Mafia" , had criminal convictions. Among the men, all from the town of Uppsala, was Eriksson as well as Johan Enander, Gizmondo's "head of security" and a third man, Peter Uf.

Mr Freer and Mr Eriksson quit and Mr Carroll took charge. His partner Tamela Sainsbury was drafted in as company secretary. Despite a last-minute refinancing deal, Gizmondo met its end in the High Court.

One insider believes only 30,000 gadgets were ever manufactured - at a cost to investors of £6,000 each. Meanwhile, Gizmondo the racehorse is for sale. It is described as of "modest ability" and its trainer says he is open to offers - starting at £600.