9 January 2004 – LAWFUEL – Best for law news – The Securities and Exchange Commission today submitted a civil complaint for
filing in the United States District Court for the District of Columbia
against PurchasePro’s founder and former Chief Executive Officer, Charles
Johnson, Jr., two other former executives of PurchasePro.com Inc.
(“PurchasePro”) – Chris Benyo and Michael Kennedy – and two former
executive-level employees of America Online, Inc. (“AOL”) – John Tuli and
Kent Wakeford – for violations of the antifraud, books-and-records, internal
accounting controls, periodic reporting and lying-to-auditors provisions of
the federal securities laws. According to the complaint, the defendants
participated in a fraudulent scheme to artificially inflate the reported and
announced revenues of PurchasePro for the fourth quarter of 2000 (“Q4 2000”)
and first quarter of 2001 (“Q1 2001”). PurchasePro, a Las Vegas-based
Internet company, is now known as Pro-After, Inc.
The Commission’s complaint alleges that, beginning in Q4 2000 and continuing
through April 2001, each defendant took knowing and deliberate steps
designed to inflate PurchasePro’s revenues in contravention of generally
accepted accounting principles (“GAAP”). In particular, the complaint
alleges that, Johnson: (i) fraudulently directed PurchasePro to issue $30
million in unearned performance warrants to AOL at the close of Q4 2000 in
exchange for AOL’s undisclosed promise to deliver revenue to PurchasePro in
future quarters; (ii) entered into, and concealed the existence of,
reciprocal contingent agreements that rendered it improper to recognize
$3.92 million in revenue from three marketplace license sales to PurchasePro
customers in Q4 2000; (iii) backdated or otherwise concealed the execution
time of three contracts signed in Q2 2000 in order to improperly recognize
$14.7 million in revenue from those agreements in Q1 2001; (iv) entered
into, and concealed the existence of, reciprocal contingent agreements that
rendered it improper to recognize $4.4 million in revenue from three
marketplace license sales to PurchasePro customers in Q1 2001; and (v)
created or caused the creation of an entirely fraudulent contract
purportedly entered into with AOL (called a “Statement of Work”), thereby
causing PurchasePro to improperly recognize an additional $3.65 million in
Q1 2001 revenue.
The complaint further alleges that Benyo, PurchasePro’s Senior Vice
President for Marketing and Network Development, along with Kennedy,
PurchasePro’s Chief Technology Officer, also took steps to make it falsely
appear that the Statement of Work agreement was executed during Q1 2001 when
they knew, or were reckless in not knowing, that (i) revenue from the
Statement of Work could not be properly recognized in Q1 2001 unless the
contract had been signed and performance completed before the end of that
quarter; (ii) that the Statement of Work had, in fact, been neither signed
nor completed by the end of Q1 2001; and (iii) that PurchasePro nonetheless
was going to include revenues from that contract in its Q1 2001 results.
Additionally, according to the complaint, Wakeford: (i) fabricated documents
to create the false impression that PurchasePro received far more in
referred third party business from AOL than it actually had, thereby causing
PurchasePro to improperly issue $30 million in PurchasePro warrants to AOL
that AOL had not actually earned; (ii) proposed the false Statement of Work
contract to help inflate PurchasePro’s Q1 2001 revenues; and (iii) took
steps to backdate or otherwise make it falsely appear that a $3.7 million
marketplace license sale agreement was executed within Q1 2001, when in fact
the contract was not executed during that quarter. The complaint further
alleges that Tuli, AOL’s Vice-President of Business Development for
NetScape, repeatedly confirmed (or caused others to confirm) to
PurchasePro’s auditors that the services described in the Statement of Work
had been completed and accepted by AOL by the close of Q1 2001 – even though
Tuli knew, or was reckless in not knowing, that those confirmations were
false.
The complaint alleges that as a result of the foregoing conduct,
PurchasePro’s annual report on Form 10-K for fiscal year 2000 and quarterly
report for Q1 2001 on Form 10-Q – as well as the company’s public earnings
announcements – contained material misstatements and omissions. As alleged
in the complaint, PurchasePro’s announced and reported revenues for Q4 2000
were artificially and materially overstated by over 11% . The complaint
also alleges that the company issued a public earnings announcement for Q1
2001 that overstated revenues by 65% and subsequently filed a Form 10-Q for
that quarter with the Commission that reported revenues that were
artificially and materially inflated by 37%.
In addition, the complaint alleges that Johnson attempted to conceal his
fraudulent conduct by destroying, or directing others to destroy, all
documents pertaining to PurchasePro’s dealings with AOL.
Based on these allegations, the Commission charged: (i) Johnson with
violating Section 17(a) of the Securities Act of 1933 (“Securities Act”),
Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 (the
“Exchange Act”) and Exchange Act Rules 10b-5, 13b2-1, and 13b2-2, and with
aiding and abetting PurchasePro’s violations of Exchange Act Sections 13(a),
13(b)(2)(A) and 13(b)(2)(B) and Rules 12b-20, 13a-1 and 13a-13 thereunder;
(ii) Benyo with violating Exchange Act Section 13(b)(5) and Exchange Act
Rules 13b2-1 and 13b2-2, and with aiding and abetting PurchasePro’s
violations of Exchange Act Sections 10(b), 13(b)(2)(A) and 13(b)(2)(B) and
Exchange Act Rule 10b-5; (iii) Kennedy with aiding and abetting
PurchasePro’s violations of Exchange Act Sections 10(b), 13(b)(5),
13(b)(2)(A) and 13(b)(2)(B) and Exchange Act Rules 10b-5, 13b2-1, and
13b2-2; (iv) Tuli with aiding and abetting of PurchasePro’s violations of
Exchange Act Sections 10(b), 13(b)(5), 13(b)(2)(A) and 13(b)(2)(B) and
Exchange Act Rules 10b-5, 13b2-1, and 13b2-2; and (v) Wakeford with aiding
and abetting of PurchasePro’s violations of Exchange Act Sections 10(b),
13(a), 13(b)(5), 13(b)(2)(A), and 13(b)(2)(B) and Exchange Act Rules 10b-5,
12b-20, 13a-1, 13a-13, 13b2-1 and 13b2-2.
The Commission seeks: (i) an injunction and civil penalty as to each
defendant; (ii) disgorgement of all ill-gotten gains, with prejudgment
interest thereon, as to Johnson, Benyo and Kennedy; and (iii) an order
barring Johnson, Benyo, Kennedy, and Wakeford from acting as officers or
directors of any public company.
Also today, in a related criminal proceeding, the United States Attorneys’
office for the Eastern District of Virginia announced that each of these
defendants has been indicted on criminal charges, including securities fraud
and conspiracy to commit securities fraud, arising from the same facts and
circumstances as those alleged in the Commission’s complaint.
The Commission acknowledges the assistance of the United States
Department of Justice, the United States Attorney’s Office for the Eastern
District of Virginia, and the Federal Bureau of Investigation in the
investigation of this matter.
