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Colorful case … defendant guilty

Kelley’s last opinion covers 107 pages

“Barney deals.” “Rednecking.” Re-programming the dates on fax machines. Deleting e-mails. Slipping altered documents to an attorney during trial.

As recounted by U.S. District Judge Walter D. Kelley Jr., those are some of the colorful details in the effort of Charles E. Johnson Jr. to “make the numbers” and save PurchasePro.Com, the Internet-based company that met the fate of many other once-hot businesses when the dot-com bubble burst.

Kelley describes the demise of PurchasePro and the criminality of Johnson and others in U.S. v. Johnson, (VLW 008-3-181), a 107-page opinion in which he finds him guilty of conspiracy to commit securities fraud, securities fraud, witness tampering and attempting to obstruct an official proceeding.

The conviction also salvaged a major embarrassment for federal prosecutors. A jury in Alexandria acquitted three co-defendants last year after a three-month trial. Before that verdict, Kelley declared a mistrial for Johnson and removed him from the trial for reasons that remained secret until his retrial before Kelley.

The reasons – giving his attorneys altered documents during the trial to submit as evidence – added to the woes of Johnson, known as Junior. That episode required his attorneys to withdraw from representing Johnson and was the basis for the charge of attempting to obstruct a proceeding.

As a founder of PurchasePro and the owner of more than a quarter of its stock, Johnson was at one time worth more than a billion dollars. The company specialized in business-to-business commerce (B2B) and established and promoted what it called virtual marketplaces.

The company sold software that allowed companies to receive bids for supplies or services and thereby increase the competition among sellers to provide them.

As part of that effort, it entered into a partnership with America Online in 2000 to promote the concept.

In the fourth quarter of 2000, the company had 542 employees and $86 million in the bank, performance that exceeded analysts’ expectations and produced its first net profit. That performance and the relationship with AOL led Johnson to project that it would have $50 million in revenue in the first quarter of 2001.

Some of those revenues were illusory, Kelley wrote, including a number of what PurchasePro called “Barney deals,” an allusion to the purple dinosaur and the verse “I love you, you love me, we’re a happy family.”

The transactions required Purchase-Pro to buy products and services from its customers in an amount equal to or greater than the price of the marketplace license the customers received from PurchasePro. Kelley explained that such deals usually make little business sense because there is no net profit, but investors were looking at gross revenue, not profit, as a measure of value when the dot-com bubble was at its broadest diameter.

By this time, however, analysts were beginning to question the quality of the revenue of companies such as PurchasePro, and its auditor started refusing to recognize such reciprocal arrangements as revenue.

When it became apparent that AOL was not selling PurhcasePro licenses at a rate that would allow it to come close to meeting the revenue projection, Johnson began, in a term used by PurchasePro principals, to “redneck” AOL sales officials – to “put a lot of pressure on somebody, basically pestering them into doing something you want.”

Sales were still so weak that at the end of March that Johnson pressured two subordinates, the company’s executive vice president, Geoff Layne, and James Sholeff, a vice president, to find ways to shift second-quarter revenue into the first quarter, Kelley found.

They testified that the pressure led to deletion or alteration of e-mails, forged and backdated documents and efforts to “authenticate” those documents by reprogramming fax machines so that the documents would have erroneous dates on them.

Those efforts to fabricate revenue for the first quarter between the end of the quarter and the date in April that the company had to release its figures were only partially successful. The company reported less than $30 million in revenue in April and acknowledged a month later that the revenue was little more than $16 million. The government contended at trial that even that amount was inflated by more than $7.5 million.

By the time of the May financial report, Johnson had been fired and Layne and Sholeff had been placed on leave. Johnson did not go quietly. He told a PurchasePro executive that he believed had been disloyal to him, “Every dog has his day, and I’ve got nothing but time now. I’ll get you back someday for what you did to me, and you’ll never know when. I want you to think about that every day.”

The company filed for bankruptcy in 2002 and went out of business.

The credibility of Layne and Sholeff was the key issue in the Johnson trial, Kelley said in acknowledging “that they did come before the court with an unblemished record of veracity.” Both lied to other PurchasePro executives, to attorneys retained by its board to investigate allegations of misconduct and to the Securities and Exchange Commission, and Layne lied to prosecutors and the FBI as well. Sholeff pleaded guilty to perjury and Layne pleaded guilty to securities fraud.

But Kelley said he found their testimony credible because other witnesses corroborated much of it. Moreover, “Junior’s consciousness of guilt is evidenced by his attempts to destroy e-mails, the actual destruction of other documents at his direction and alteration of evidence in this case,” Kelley wrote.

Even more telling was the “long standing relationship with and personally loyalty to Junior” that Layne and Sholeff had, Kelley said. “They would not have taken Junior’s company for a joy ride. Even if they had tried they would not have gotten very far. All witnesses agreed that Junior was a very ‘hands on’ CEO who knew everything that occurred at the company.”

The day after issuing the opinion, Kelley left the federal bench to join the Washington office of Jones Day.

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