U.S. SECURITIES AND EXCHANGE COMMISSION

Litigation Release No. 19029 / January 10, 2005

Accounting and Auditing Enforcement
Release No. 2165 / January 10, 2005

SECURITIES AND EXCHANGE COMMISSION v. CHARLES JOHNSON, JR., CHRIS BENYO, MICHAEL KENNEDY, JOHN TULI, AND KENT WAKEFORD, Civil Action No. 1:05 CV-0036-GK (D.D.C.)

COMMISSION CHARGES THREE FORMER PURCHASEPRO EXECUTIVES, INCLUDING FORMER CEO CHARLES JOHNSON, JR., AND TWO FORMER AOL EXECUTIVES IN A FRAUDULENT SCHEME TO INFLATE PURCHASEPRO'S REVENUES

ALL FIVE EXECUTIVES CRIMINALLY CHARGED WITH SECURITIES FRAUD BY UNITED STATES ATTORNEY'S OFFICE FOR THE EASTERN DISTRICT OF VIRGINIA

The Securities and Exchange Commission today submitted a civil complaint for filing in the United States District Court for the District of Columbia against PurchasePro's founder and former Chief Executive Officer, Charles Johnson, Jr., two other former executives of PurchasePro.com Inc. ("PurchasePro") - Chris Benyo and Michael Kennedy - and two former executive-level employees of America Online, Inc. ("AOL") - John Tuli and Kent Wakeford - for violations of the antifraud, books-and-records, internal accounting controls, periodic reporting and lying-to-auditors provisions of the federal securities laws. According to the complaint, the defendants participated in a fraudulent scheme to artificially inflate the reported and announced revenues of PurchasePro for the fourth quarter of 2000 ("Q4 2000") and first quarter of 2001 ("Q1 2001"). PurchasePro, a Las Vegas-based Internet company, is now known as Pro-After, Inc.

The Commission's complaint alleges that, beginning in Q4 2000 and continuing through April 2001, each defendant took knowing and deliberate steps designed to inflate PurchasePro's revenues in contravention of generally accepted accounting principles ("GAAP"). In particular, the complaint alleges that, Johnson: (i) fraudulently directed PurchasePro to issue $30 million in unearned performance warrants to AOL at the close of Q4 2000 in exchange for AOL's undisclosed promise to deliver revenue to PurchasePro in future quarters; (ii) entered into, and concealed the existence of, reciprocal contingent agreements that rendered it improper to recognize $3.92 million in revenue from three marketplace license sales to PurchasePro customers in Q4 2000; (iii) backdated or otherwise concealed the execution time of three contracts signed in Q2 2000 in order to improperly recognize $14.7 million in revenue from those agreements in Q1 2001; (iv) entered into, and concealed the existence of, reciprocal contingent agreements that rendered it improper to recognize $4.4 million in revenue from three marketplace license sales to PurchasePro customers in Q1 2001; and (v) created or caused the creation of an entirely fraudulent contract purportedly entered into with AOL (called a "Statement of Work"), thereby causing PurchasePro to improperly recognize an additional $3.65 million in Q1 2001 revenue.

The complaint further alleges that Benyo, PurchasePro's Senior Vice President for Marketing and Network Development, along with Kennedy, PurchasePro's Chief Technology Officer, also took steps to make it falsely appear that the Statement of Work agreement was executed during Q1 2001 when they knew, or were reckless in not knowing, that (i) revenue from the Statement of Work could not be properly recognized in Q1 2001 unless the contract had been signed and performance completed before the end of that quarter; (ii) that the Statement of Work had, in fact, been neither signed nor completed by the end of Q1 2001; and (iii) that PurchasePro nonetheless was going to include revenues from that contract in its Q1 2001 results.

Additionally, according to the complaint, Wakeford: (i) fabricated documents to create the false impression that PurchasePro received far more in referred third party business from AOL than it actually had, thereby causing PurchasePro to improperly issue $30 million in PurchasePro warrants to AOL that AOL had not actually earned; (ii) proposed the false Statement of Work contract to help inflate PurchasePro's Q1 2001 revenues; and (iii) took steps to backdate or otherwise make it falsely appear that a $3.7 million marketplace license sale agreement was executed within Q1 2001, when in fact the contract was not executed during that quarter. The complaint further alleges that Tuli, AOL's Vice-President of Business Development for NetScape, repeatedly confirmed (or caused others to confirm) to PurchasePro's auditors that the services described in the Statement of Work had been completed and accepted by AOL by the close of Q1 2001 - even though Tuli knew, or was reckless in not knowing, that those confirmations were false.

The complaint alleges that as a result of the foregoing conduct, PurchasePro's annual report on Form 10-K for fiscal year 2000 and quarterly report for Q1 2001 on Form 10-Q - as well as the company's public earnings announcements - contained material misstatements and omissions. As alleged in the complaint, PurchasePro's announced and reported revenues for Q4 2000 were artificially and materially overstated by over 11% . The complaint also alleges that the company issued a public earnings announcement for Q1 2001 that overstated revenues by 65% and subsequently filed a Form 10-Q for that quarter with the Commission that reported revenues that were artificially and materially inflated by 37%.

In addition, the complaint alleges that Johnson attempted to conceal his fraudulent conduct by destroying, or directing others to destroy, all documents pertaining to PurchasePro's dealings with AOL.

Based on these allegations, the Commission charged: (i) Johnson with violating Section 17(a) of the Securities Act of 1933 ("Securities Act"), Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 (the "Exchange Act") and Exchange Act Rules 10b-5, 13b2-1, and 13b2-2, and with aiding and abetting PurchasePro's violations of Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) and Rules 12b-20, 13a-1 and 13a-13 thereunder; (ii) Benyo with violating Exchange Act Section 13(b)(5) and Exchange Act Rules 13b2-1 and 13b2-2, and with aiding and abetting PurchasePro's violations of Exchange Act Sections 10(b), 13(b)(2)(A) and 13(b)(2)(B) and Exchange Act Rule 10b-5; (iii) Kennedy with aiding and abetting PurchasePro's violations of Exchange Act Sections 10(b), 13(b)(5), 13(b)(2)(A) and 13(b)(2)(B) and Exchange Act Rules 10b-5, 13b2-1, and 13b2-2; (iv) Tuli with aiding and abetting of PurchasePro's violations of Exchange Act Sections 10(b), 13(b)(5), 13(b)(2)(A) and 13(b)(2)(B) and Exchange Act Rules 10b-5, 13b2-1, and 13b2-2; and (v) Wakeford with aiding and abetting of PurchasePro's violations of Exchange Act Sections 10(b), 13(a), 13(b)(5), 13(b)(2)(A), and 13(b)(2)(B) and Exchange Act Rules 10b-5, 12b-20, 13a-1, 13a-13, 13b2-1 and 13b2-2.

The Commission seeks: (i) an injunction and civil penalty as to each defendant; (ii) disgorgement of all ill-gotten gains, with prejudgment interest thereon, as to Johnson, Benyo and Kennedy; and (iii) an order barring Johnson, Benyo, Kennedy, and Wakeford from acting as officers or directors of any public company.

Also today, in a related criminal proceeding, the United States Attorneys' office for the Eastern District of Virginia announced that each of these defendants has been indicted on criminal charges, including securities fraud and conspiracy to commit securities fraud, arising from the same facts and circumstances as those alleged in the Commission's complaint.

The Commission acknowledges the assistance of the United States Department of Justice, the United States Attorney's Office for the Eastern District of Virginia, and the Federal Bureau of Investigation in the investigation of this matter.

SEC Complaint in this matter

http://www.sec.gov/litigation/litreleases/lr19029.htm