Lawsuit targets Vegas firm’s former execs

Kevin Rademacher

Tuesday, Oct. 21, 2003 | 11:09 a.m.

Legal filings Monday in U.S. District Court in Las Vegas accuse PurchasePro.com founder Charles "Junior" Johnson and other former executives and directors of securities violations, corporate waste and breach of fiduciary duty.

Gregory Garman, who represents the bankrupt Las Vegas technology company's estate, asked the court to allow a lawsuit included in the filing to take the place of three existing shareholder suits against the company.

The new lawsuit outlines a series of questionable transactions made by the company in 2000 and 2001.

"In short, defendants entered into illegitimate transactions and manipulated certain financial information to make it look like PurchasePro earned more revenue than it did," the lawsuit said.

Garman, an attorney with the Las Vegas law firm of Gordon & Silver Ltd., would not estimate the total damages sought in the lawsuit, but he said successful recovery could be enough to pay off creditors and make some payments to shareholders.

"I am optimistic that we will be able to pay our creditors in full and make some distribution to shareholders," he said.

In addition to Johnson and eight other named defendants, the list of defendants includes two notable former PurchasePro directors: Carol Harter, president of the University of Nevada Las Vegas and Martha Layne Collins, a former Kentucky governor.

Harter and Johnson could not be reached for comment this morning.

Among the transactions outlined in the lawsuit is a deal between PurchasePro and Broadvision. The suit claims that checks were swapped when the Las Vegas company bought $11.2 million of software from Broadvision, which in turn bought $5 million in software from PurchasePro.

"The $5 million was referenced as revenue for PurchasePro on PurchasePro's publicly filed accounting statements," the lawsuit said. "Then, PurchasePro booked the $11.2 million expense as an asset, despite the fact that PurchasePro never actually utilized the Broadvision software."

The lawsuit said similar deals were made with other companies, including well-publicized deals with America Online.

"PurchasePro developed strategic relationships with other businesses that were fraught with transactions involving PurchasePro giving away PurchasePro stock warrants as inducements to obtain revenue," the suit said.

The suit cited such deals with AOL, Gateway, Sprint Corp. and Office Depot.

The lawsuit said that while the relationship with AOL was initially legitimate, it quickly came apart.

"By the end of the first quarter of 2001, the legitimate business purpose was all but abandoned, and the relationship had deteriorated into nothing more than a seedy, desperate revenue-grab by the two companies," the lawsuit said.

The lawsuit said that as of June 2001, AOL had received an estimated $127 million in stock warrants and cash payments from PurchasePro. By the same date, PurchasePro had received about $43 million from the relationship, including revenue and advertising.

Other companies named in "sham agreements" include I-Storm, LawCommerce.com and Computer Associates.

The lawsuit also outlines "inexplicably reckless investments that resulted in zero value to PurchasePro, which amounted to gross waste of PurchasePro's corporate assets."

Those moves include a $3 million investment in Working Woman, a money losing company that had just bought $400,000 in PurchasePro software. A similar $1 million investment was made in Woosh! after that company bought $900,000 in PurchasePro software. In both cases, despite acquiring a major position in the companies, the lawsuit claims PurchasePro executives never demanded a seat on the board of those firms in an effort to protect the investment.

In another deal, PurchasePro invested $500,000 in ITravel and wrote off the investment the same month, the lawsuit said.

"We think this is the most accurate rendition of the events of PurchasePro that's ever come out," Garman said.

He added that pursuing the cases against the executives and directors who profited from the shady deals is a duty of the bankrupt company.

"The purpose of this lawsuit is simple: collect the amounts owed to us and our creditors," he said. "We are exercising our fiduciary duty to our creditors."

Also named in the lawsuit are Jeffrey Anderson and Scott Miller. In September both executives entered guilty pleas in a federal fraud investigation into PurchasePro.

PurchasePro was founded by Johnson in 1996. At its pinnacle the company employed more than 1,000 people and its stock traded as high as $395.94 (split-adjusted) in December 1999.

In May 2001, Johnson was ousted by the company's board of directors amid mounting accounting problems. A few months later, company executives were being questioned about dubious transactions.

PurchasePro filed for Chapter 11 bankruptcy protection in September 2002.

By the time the sale of PurchasePro 's assets to California-based Perfect Commerce was approved by a bankruptcy court judge in January, the company had about 70 employees. The assets of the company -- which carried a stock value of $3.2 billion in 2000 -- sold for about $2.5 million.