Settlement doesn’t assure PurchasePro shareholders relief

Kevin Rademacher

Tuesday, Feb. 8, 2005 | 10:53 a.m.

Shareholders of PurchasePro.com Inc. looking for a piece of a massive restitution fund established in a settlement between federal authorities and Time Warner Inc. will have to go through the New York-based media giant.

When the settlement -- which involved questionable deals between Time Warner subsidiary America Online and Las Vegas-based PurchasePro -- was announced in December by U.S. Justice Department attorneys, the total of $210 million in restitution and fines was touted as a strong deterrent against securities fraud.

"This deferred prosecution agreement did not come cheap for AOL," James Comey, deputy U.S. Attorney General, said in December. "We have balanced our concern for the innocent parties against the important need to send a strong deterrent message and to protect the rights of victims."

Of that $210 million, $150 million was ordered to be deposited into a compensation and settlement fund. Another $60 million was to be paid as a penalty.

Time Warner itself, however, will determine the fate of the $150 million, documents filed by the company with the Securities and Exchange Commission indicate.

The Dec. 15 filing said that the company will "pay into a compensation and settlement fund $150 (million), which includes $30 (million) for the (PurchasePro) transactions."

The filing also said the fund is to be established "under its direction and control and used for either the settlement of shareholder securities law litigation or for the purpose of any compensation fund established by any federal or state agency, related to or arising from the (PurchasePro) transactions."

The restrictions on the fund appear limited to barring the use of the money for paying attorney fees or "monetary penalties imposed by the SEC or any law enforcement agency."

When asked if the language in the filing correctly indicates that Time Warner will control fate the compensation fund, Charles Connolly, assistant U.S. attorney for the Eastern District of Virginia, said it was an accurate interpretation.

"That seems like a fair reading of it," he said, referring additional questions to justice department spokesman Frank Shults.

Shults said he did not know if agreements allowing companies to determine how such a fund is spent was common in similar cases.

"In terms of how common a practice this is, I can't comment on that," he said.

Robert Lawless, a professor of corporate law at the UNLV Boyd School of Law, described the arrangement as "odd."

"That's a new one on me," he said.

Lawless said the language in the SEC filing is difficult to decipher.

"The most benign interpretation would be that they can control the investment of the fund, the bank, things like that," he said. "It's just not clear who gets control."

The Time Warner filing does spell out that, if the $150 million in the fund is not spent within three years, it will be transferred to the U.S. Treasury. While the settlement agreement also requires that an independent monitor be appointed for the purposes reviewing Time Warner's compliance, the monitor does not have specific duties related to the fund.

Greg Garman, an attorney handling the bankruptcy proceedings of the PurchasePro estate, said he will continue to pursue recovery from Time Warner, based on AOL's deals. In fact, a series of indictments that followed the Time Warner settlement -- including that of former PurchasePro founder Chief Executive Charles E. "Junior" Johnson -- led Garman to submit a revised complaint against Time Warner in U.S. District Court in Las Vegas.

The complaint -- which charges fraudulent transfer and unjust enrichment -- is six pages longer that the original nine-page complaint filed in September.

Garman said that the details spelled out in the indictments of Johnson and three other top PurchasePro executives, furthered the case of PurchasePro's estate, which is seeking to recover enough money to pay off the failed company's creditors and possibly shareholders. The estate's case also has been bolstered by statements of fact entered into by Time Warner, former AOL executives and six former PurchasePro executives who have plead guilty for various charges involving questionable business practices.

"It's certainly a more detailed complaint at this point," said Garman. "Every time new indictments come down it assists our case."

In addition to Time Warner, the estate of PurchasePro -- know now as Pro-After Inc. -- has claims against Johnson, former officers and directors, AdvancStar Communications Inc. and an arbitration case with Gateway Companies Inc.