Trial Starts Today for PurchasePro Founder
By Janet Patton, Lexington Herald-Leader, Ky.
Oct. 23–WASHINGTON — Lexington native Charles E. “Junior” Johnson is set to go on trial today in federal court in Alexandria, Va., for his role in the boom, then bust, of PurchasePro.com, one of the darlings of the dot-com market.
In the late 1990s, Johnson was hailed as a hero for making $200 million for Kentuckians who invested in his Las Vegas company. He gave millions to his hometown. But after the company he founded went bankrupt in September 2002, many investors lost big bucks.
In January 2005, Johnson, a tall, blond Kentuckian turned tech tycoon, was indicted by a federal grand jury on criminal conspiracy and fraud charges. He has pleaded not guilty and has remained free on a $100,000 bond. In the past, he has blamed rogue employees and said the Justice Department pursued him as part of a political agenda.
“I didn’t do anything wrong,” Johnson told The Washington Post in 2005.
Johnson and four other officials of PurchasePro and America Online Inc. are accused of concocting several secret business deals to prop up earnings of the companies by inflating revenues. They also are charged with lying to auditors and tampering with witnesses.
Johnson faces up to 20 years in prison for the conspiracy charge, as well as five years for each wire fraud charge. The government has also moved to seize Johnson’s multimillion-dollar Las Vegas home and the bank accounts and property of his co-defendants.
In 2005, then-U.S. Attorney Paul McNulty said that Johnson and the others had “swindled the investing public,” taking the company from a market capitalization of $1.2 billion to bankruptcy in just two years.
Yale Galanter, a Florida attorney who represented Johnson at the time, called him “a corporate American hero. … “
“He walked away with nothing,” he told the Las Vegas Review-Journal. “He walked away from the company with even less than he had.”
Since February, Johnson has been represented by Washington, D.C., attorney Preston Burton, whose previous high-profile clients include Monica Lewinsky and spy Aldrich Ames.
Neither Burton nor the U.S. attorney’s office would comment on the case.
Johnson, a former Lafayette High School and University of Cincinnati basketball star, owned a string of gyms and video stores in Kentucky when he started PurchasePro in Las Vegas in 1996. He claimed he’d never even used e-mail before he started the business.
Yet the company featured an online marketplace and sold software and “licenses” to buy and sell goods directly from one business to another. The “B2B” (business-to-business) market was hailed by Wall Street analysts, and on the day PurchasePro went public in September 1999 at $12 a share, the price more than doubled. Shares eventually were worth almost $350.
Johnson became a paper billionaire overnight and used a $100 million line of credit to buy a Las Vegas mansion, Armani suits and a private jet. In a city known for throwing money around, he developed a reputation for flamboyance, giving away Rolex watches at parties.
According to corporate legend, he developed the PurchasePro idea with the help of casino owner Steve Wynn, and Johnson claimed to have more than once made the company payroll at the blackjack tables.
Kentuckians had been among Johnson’s first financial backers and now they profited hugely as well, making more than $200 million off the sale of PurchasePro shares. At least five made more than $10 million each. Johnson gave more than $2 million to Lexington Catholic High School for a new gym.
But like a lot of dot-coms, PurchasePro never made a profit. In the schemes at the heart of the indictment, PurchasePro and AOL allegedly claimed false gains through a multimillion-dollar revenue swap, backdated contracts, faked financial records, and lies to auditors.
Johnson, who was chairman and chief executive officer of PurchasePro, was personally responsible for the AOL relationship, according to the indictment.
In March 2000, PurchasePro and AOL announced a potentially lucrative partnership, but by September the deal had failed to generate any revenue. So, according to the indictment, PurchasePro and AOL made a series of secret side deals to beef up the quarterly numbers for Wall Street.
AOL would buy $10 million in PurchasePro licenses, and PurchasePro would give AOL $30 million in stock warrants, with more than $100 million to come over six months. Both companies would claim the revenue.
Johnson publicly denied any “handshake deals,” and called PurchasePro’s practices “cutting-edge accounting.” PurchasePro projected first-quarter 2001 earnings of more than $42 million.
Behind the scenes, things between Johnson and AOL were apparently unraveling fast. In March, Johnson flew to New York and virtually lived in an AOL boardroom for two weeks while trying to sell licenses.
When that didn’t work, Johnson and the others allegedly promised would-be customers that they would not lose money — either AOL or PurchasePro would give them free advertising or buy more goods to make it up to them. According to court documents, more than a dozen companies, including Cisco, Hewlett-Packard, Homestore, Monster, Travelocity, Office Depot and Citibank, agreed.
But even that wasn’t enough. Johnson and the others secretly kept the quarter open to try to squeeze in more sales deals with backdated contracts, according to the indictment, with Johnson declaring in an e-mail: “The quarter ends when I say it ends, not when the calendar says it ends.”
“PurchasePro and my entire financial future does depend on this. In other words I will be wiped out otherwise,” he said in e-mail messages, according to the indictment. “My entire business life I have never felt this helpless or desperate.”
Yet he blamed AOL for the financial catastrophe: “This is ugly for one reason and that is AOL didn’t deliver their end of the deal.”
By April 2001, PurchasePro cut earnings to $29.8 million, then in May to $16 million. Johnson, who had collected a $2 million retention bonus, left the company and the board in May.
In September of 2002, PurchasePro filed for bankruptcy protection, claiming assets of nearly $42 million and debts of more than $20 million. thecompany, which was once valued at more than $1 billion, sold its assets to privately held Perfect Commerce of California for $2.638 million. Ironically, major hotel chains such as Starwood and Hilton needed PurchasePro so much that they resurrected the software themselves — sometimes by hiring programmers who had worked for PurchasePro.
Those who invested in PurchasePro while the revenue was being faked have reached a preliminary $24.2 million class-action settlement in U.S. District Court in Nevada.
Johnson himself apparently never sold any shares until his creditors forced him to sell almost half of them in March 2001 to pay off more than $32 million in debts.
Johnson now runs another business, a multilevel marketing company called NEXX, selling phone service, out of the former offices of PurchasePro.
Also facing trial are: PurchasePro’s senior vice president for marketing and network development, Christopher J. Benyo of Greer, S.C.; PurchasePro’s chief technology officer, Michael Kennedy of Morristown, N.J.; former AOL vice president for Netscape NetBusiness John Tuli of Weston, Mass.; and former AOL business affairs executive director Kent Wakeford of New York.
Former PurchasePro general counsel Scott Wiegand, who was indicted in 2005 with them, was acquitted by U.S. District Judge Walter Kelley last year.
A parallel civil complaint by the Securities and Exchange Commission has been stayed pending the outcome of the criminal trial.
Six other PurchasePro executives, including Berea native R. Geoffrey Layne, pleaded guilty to related charges in 2003 and 2004. In December 2004, Time Warner agreed to pay $510 million to settle federal charges related to PurchasePro. In exchange, prosecution was delayed, provided the company cooperates with investigators for two years. Time Warner acknowledged its conduct, but did not admit wrongdoing.
The trial is expected to last at least two months.
Herald-Leader news researcher Linda Niemi contributed to this report.
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