PurchasePro hit by suit

Kevin Ferguson

Friday, April 27, 2001 | 11:33 a.m.

PurchasePro, a Las Vegas-based Internet company, was hit with a lawsuit Thursday by a disgruntled shareholder alleging fraud. And in a high-profile snub, an analyst with the investment firm that helped the company go public issued a rare "sell" rating on the stock.

Prudential Securities, which was the lead firm that managed PurchasePro's September 1999 initial public offering, dropped its rating on PurchasePro shares to "sell."

Also Thursday, Credit Suisse First Boston, which directed the company's secondary stock offering in February 2000, dropped its rating to "hold" from "buy."

This came hours after the company's conference call Thursday during which executives explained why the company badly missed analyst estimates for its first quarter earnings.

Analysts polled by Thomson Financial/First Call had predicted the company would report earnings of 8 cents per share in the quarter ending March 31. But PurchasePro reported a loss of 26 cents per share.

The company said that was because it had to defer as much as $10 million in revenue that came in during the last few days of the first quarter to the second quarter due to complex accounting issues.

Tim Getz, the Prudential analyst that gave PurchasePro stock a sell rating, wrote in a report that he was concerned about the company's "lack of sophistication," which he said led to PurchasePro's "inability to to decipher proper revenue and inproper revenue."

The company only warned of the revenue shortfall due to the accounting issues hours before Wednesday's scheduled release of its earnings. That report was later delayed until Thursday.

Most companies that expect a shortfall in quarterly earnings make an announcement weeks before the scheduled earnings announcement.

The Los Angeles law firm Weiss & Yourman on behalf of Edward Blosser and other PurchasePro investors filed a class action lawsuit Thursday in U.S. District Court in Las Vegas alleging the company's executives made numerous "positive" but false and misleading statements about the company's financial condition in the past eight months.

The statements in press releases "artificially inflated" the trading value of the company's stock, the suit alleges. The complaint alleges that PurchasePro's executives made these false statements to inflate the company's stock between July 19, 2000, to Thursday.

The lawsuit lists as defendants in the case PurchasePro; Charles Johnson Jr., chairman and chief executive; James Clough, a senior executive vice president; John Chiles, a member of the board of directors, and Christopher Carton, a former PurchasePro president. He has since left the company.

The lawsuit claims the executives artificially inflated the stock price by "misrepresenting material facts about the business, financial condition and accounting practices of the company."

PurchasePro spokesman Steve Stern said this morning the company had not been served with the lawsuit and therefore he had no comment.

But Johnson tried to assure investors on Thursday's conference call.

"While we recognize that our results are below expectations, we achieved a number of milestones in the quarter that are broadening our reach," Johnson said Thursday.

PurchasePro, which employs about 550 people, develops and manages marketplaces that allow business to buy and sell products on the Internet.

The lawsuit makes reference to various dates when the company's stock rose after certain news release were issued by PurchasePro about its growth potential.

"By Sept. 8, 2000, PurchasePro's stock had been artificially increased to $32.875, which was 70 percent from its closing price of $18.50 on Aug. 15, 2000. More over, Keith Jensen, director of investor relations at PurchasePro, stated that the company was 'very comfortable' with Wall Street's expectations for the quarter ending Sept. 30,' the lawsuit states.

In mid-day trading today, PurchasePro's shares were down 14 cents at $2.86 per share.

This is the second high-profile lawsuit filed against PurchasePro this year. In February, All Creative Technologies accused PurchasePro of racketeering in an alleged scheme to steal its business plan.

PurchasePro strongly denied the allegations and pointed out that Russell Pike, All Creative's principle who filed the suit, is in prison and has a criminal record including money laundering, writing bad checks, theft and forgery.

Scott Wiegand, PurchasePro's general counsel, said during Thursday's conference call the company had filed a motion to dismiss part of All Creative's complaint, which was denied the day before.