PurchasePro founder charged

Kevin Rademacher

Tuesday, Jan. 11, 2005 | 11:14 a.m.

More than two years after the once high-flying Las Vegas technology company PurchasePro.com Inc. fell into bankruptcy, the company's founder and former chief executive, Charles E. "Junior" Johnson, has been indicted on 13 charges, including conspiracy, securities fraud, wire fraud and obstruction of justice.

Also charged on Monday are Christopher J. Benyo, PurchasePro's former senior vice president of marketing; Joseph Michael Kennedy, PurchasePro's former senior vice president and chief technology officer; and Scott E. Wiegand, PurchasePro's former senior vice president and general counsel.

Charges also were brought against Kent D. Wakeford, former executive director of Business Affairs at America Online Inc.; and John P. Tuli, former vice president for NetBusiness at AOL.

The 49-page indictment alleges that the defendants "unlawfully and knowingly did combine, conspire, confederate and agree together" to inflate revenue for both companies.

The new charges bring to 10 the number of former PurchasePro executives named by federal authorities as being involved in widespread fraud at the Las Vegas company.

"The indictment tells their story," said Paul McNulty, U.S. attorney for the Eastern District of Virginia. "That story is of a rather wide pattern of deception, false statements and concealment of the truth."

Yale Galanter, a Miami attorney representing Johnson, disputed the allegations.

"Charles Johnson is a corporate American hero," he said. "Junior walked away with nothing. His net worth when he ended this deal was worse off than when he started ... He put every dime he had back into the company."

Additionally, Galanter said it would have been impossible for Johnson to execute a conspiracy with co-defendants who had become his adversaries as PurchasePro started to crumble.

"The people he was allegedly conspiring with were his worst enemies," he said. "These are the same individuals that forced him out of the company. That will all come out in the wash ... They are throwing a lot of mud against the wall to see what sticks."

Johnson and the other defendants were expected to voluntarily surrender to authorities and make an initial court appearance in Alexandria, Va., this morning.

McNulty said Monday's indictments were bolstered by a series of plea agreements with six other PurchasePro executives and a settlement reached with Time Warner, AOL's parent company.

Federal authorities for three years have been investigating questionable transactions between PurchasePro and AOL. In December attorneys for the Justice Department announced that it had reached a deal with Time Warner that would secure the company's cooperation into investigations into individuals involved in the deals and the payment of $210 million in restitution and fines.

"That settlement included their cooperation and the release of new information," McNulty said. "A number of factors came together in this complaint."

In addition to the indictment brought by the Justice Department, the Securities and Exchange Commission also filed a civil action against Johnson, Wakeford, Tuli, Benyo and Kennedy.

At its pinnacle, PurchasePro, an e-commerce software company founded by Johnson in 1996, employed about 1,000 people, and its stock traded as as high as $188 a share, split-adjusted, in December 1999.

By May 2001, Johnson had been ousted by the company's board of directors amid mounting accounting problems. PurchasePro declared bankruptcy in September 2002, and when the sale of the company's assets to California-based Perfect Commerce was approved by a judge in January 2003, the number of employees had dwindled to about 70. The assets of the company -- which carried a stock value of more than $1 billion in 2000 -- sold for about $2.5 million.

The new indictment alleges that the defendants employed a variety of methods to inflate PurchasePro's publicly announced and reported revenue. Those means included secret, undisclosed side deals, forged contracts, booking revenue after the quarter had closed by back-dating contracts, engaging in "revenue swaps" based on transactions solely designed to inflate revenue, making false statements to internal and external auditors and engaging concealing linked transactions, the complaint alleged.

Specifically, the complaint alleges that a deal between AOL and PurchasePro swapped $45 million in revenue in the first quarter of 2001. As part of that scheme, Johnson spent weeks at AOL's offices in New York with Wakeford attempting to sell PurchasePro licenses to AOL customers and partners, the complaint said.

"When the licenses could not be sold, Johnson, Wakeford, Tuli and Benyo and others made and caused others to make side deals, undocumented guarantees and oral promises to assure purchasers that they would not suffer financially by making a marketplace license purchase from PurchasePro," the complaint said.

Those side deals included advertising swaps, reciprocal product purchases and future payment reductions, the complaint said. The side deals, however, were not recorded in contract documents or reported to auditors.

If convicted, the complaint demands that each defendant be required to forfeit at least $2.3 million, "representing the amount of proceeds obtained as a result of the conspiracy."

The complaint seeks the forfeiture of Johnson's home at 8801 Palm Greens Court in Las Vegas, Scott Wiegand's home at 912 Cypress Ridge Lane in Las Vegas as well as a Vanguard investment account, the funds in Merrill Lynch, Bank of America and Fidelity MML Investors Services Inc. accounts controlled by Kennedy, and Benyo's home in South Carolina, two investment accounts and a 2001 Porsche Boxster.

Galanter insisted that Johnson made no profits from his involvement with PurchasePro since he put all of his funds back into the company, including a mortgage on his Las Vegas home.

"Tell us where it's at," he said.

The indictments are being watched closely by Greg Garman, a Las Vegas attorney representing the bankruptcy estate of PurchasePro. He has been attempting to recover money owed to the estate by executives and business partners, possibly including Time Warner.

Monday afternoon he said it was uncertain the effect the new legal action would have in the bankruptcy case.

"It's difficult to tell what the impact will be, but it certainly bolsters the belief that some misconduct occurred," he said. "Every time that there is an indictment we discover new facts that were previously unknown to us."