New ‘derivative’ suit filed over PurchasePro debacle

Grace Leong

Friday, Aug. 10, 2001 | 11:01 a.m.

Another PurchasePro shareholder has filed a "derivative" lawsuit to force the Las Vegas company's liability insurance carriers to defend the company against some 28 securities class action lawsuits filed in recent months.

Designed to allow shareholders to protect the corporation when those charged with doing so are unable or unwilling, a derivative action is brought by shareholders who are motivated more by a desire to protect the company than to maximize recovery for themselves, said Darren Robbins, a San Diego attorney for PurchasePro shareholder Robert McGoodwin.

The defendants in the derivative lawsuits include founder Charles "Junior" Johnson, who quit in late May, and several other executives or board members: R. Todd Bradley, Martha Layne Collins, John Chiles, Carol Harter, Michael O'Brien, James Clough and Christopher Carton.

Derivative lawsuits are different from the 28 class action lawsuits filed against PurchasePro by disgruntled investors alleging, among other things, the company's executives sought to "maintain their lucrative positions and ill-gotten gains" by allegedly making false statements about PurchasePro's financial condition and business prospects to artificially inflate its stock price.

"The securities class actions involve stock purchasers, who have been defrauded and are seeking to maximize recovery from the company. These are individuals who may, for example, have bought the stock at say, $20 and sold it at $14, and are suing the company for the difference," Robbins said.

"But derivative actions seek to minimize harm to the company. We believe the defendants should pay for their own defense. They shouldn't cause PurchasePro to pay for the defense of the 28 lawsuits," he said.

The suit said shareholders are concerned "these revelations of violations of securities laws" have badly damaged and may continue to cast a pall over PurchasePro's corporate image and stock price.

"For at least the foreseeable future, PurchasePro will suffer from what is known as the 'liar's discount,' a term applied to stocks of companies that have been implicated in illegal behavior and have misled securities analysts and the investing public, such that PurchasePro's ability to raise equity capital on favorable terms in the future will be impaired," the suit said.

McGoodwin last week filed a derivative lawsuit against the company and its management in Clark County District Court. This is the third such suit filed since June 26.

Robbins said this is a pre-emptive strike against the company's insurance carriers that could "attempt to disclaim coverage under the 'active and deliberate dishonesty' exclusion or to negotiate a defense expense sharing allocation with PurchasePro that will be very unfavorable to PurchasePro."

"In order to properly prosecute this lawsuit, it would be necessary for the directors to sue themselves, (because they had allegedly operated in an inappropriate manner.) But this is, of course, something they are unwilling to do," Robbins said.

"Because many of the acts ... are in fact 'intentional acts,' the defendants may not be covered by PurchasePro's directors and officers' liability insurance. Under these circumstances, (asking them to sue themselves) will unreasonably delay the pursuit of legal remedies," the suit said.

PurchasePro, a software company, has seen its stock price plunge in the last year from $47.75 to under $1 this week. Its financial woes include a loss of $61.1 million for the second quarter ended June 30.