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PurchasePro.com Case: Trial
About "Lies and Cover-ups"

By John G. Edwards, Las Vegas Review-JournalMcClatchy-Tribune Business News

Oct. 25, 2006 ALEXANDRIA, VA. -- Charles "Junior" Johnson, founder and former chief executive officer of Las Vegas-based PurchasePro.com, played the central role in a scheme to cheat investors and cover up evidence of fraud and other crimes, a federal prosecutor told jurors Tuesday.

"Junior was a hands-on CEO there. He was intimately involved in the company's business," said Assistant U.S. Attorney Charles "Chuck" Connolly.

The prosecutor is seeking jury verdicts against three other defendants, but Connolly focused on Johnson's role in an alleged conspiracy to falsely inflate reported revenue for PurchasePro and keep the stock price up in early 2001.

"It is a case about lies and cover-ups," Connolly said.

Connolly said the jury would hear testimony that Johnson persuaded Jim Scholeff, a former PurchasePro sales manager, to destroy records related to a fraudulent scheme to use deals with America Online to boost PurchasePro's reported sales revenue.

Scholeff "shredded them. He burned them. He spread the ashes in the dirt of his yard" of his modest Las Vegas home, Connolly said during Tuesday's opening statements of the trial, which is expected to last two months.

Johnson then brought his own records over to Scholeff's house and they destroyed those, Connolly said.

Scholeff took out his personal computer and "smashed it with the hammer," the prosecutor said.

Preston Burton, Johnson's defense attorney, later told jurors that Scholeff lied about Johnson taking any documents to Scholeff's house for destruction.

Burton said Scholeff and Geoffrey Layne, a government witness who was executive vice president of PurchasePro, are lying and testifying for the prosecution to get shorter prison sentences. Layne and Scholeff have pleaded guilty to related charges in the PurchasePro criminal case.

"They are liars and cheaters, and we are going to demonstrate that to you," Burton said. "There was no conspiracy between these folks and Mr. Johnson."

Connolly, however, also said that Ed Kim, a senior vice president who has not been accused of a crime, would testify that Johnson told him to destroy Johnson's electronic messages and e-mails. Kim did as he was directed, although he knew there were other copies of Johnson's e-mails in the computer system, Connolly said.

Burton, however, said Johnson provided directors of PurchasePro with copies of the e-mails. "My client has retained thousands of e-mails in original format," Burton said. Asking Kim to destroy the e-mails "doesn't make sense," Burton countered in his opening statements.

At the time of the alleged crimes, Johnson was not earning a salary, Burton said. Johnson owned $1 billion in PurchasePro stock at one point, but he never sold any shares, Burton said.

Johnson did get a $100 million line of credit from Credit Suisse First Boston using his shares in PurchasePro as collateral.

Burton gave jurors a short recap of Johnson's life, then described how PurchasePro was formed.

"He went out to Las Vegas and befriended Steve Wynn (chief executive officer of Wynn Resorts) who's kind of the father of the Las Vegas renaissance," Burton said.

Wynn talked to Johnson about hotel-casinos' voracious demands for supplies, the attorney said. That led him and a computer science professor at the University of Nevada, Las Vegas who was not identified to develop software that created what Connolly described as "electronic malls" where businesses could shop for supplies with other businesses.

Johnson established PurchasePro with $1.8 million of his own money, Burton said. The company sold shares to the public in September 1999.

Burton said Johnson has given $5.8 million to charities, the National Black Chamber of Commerce and charities for children.

Connolly painted a darker picture of Johnson and PurchasePro. The Internet company, which was valued at more than $3 billion at one time before it was forced into bankruptcy in 2002, was unable to sell the Internet business purchase system to other businesses unless PurchasePro made the sales free to the buyers through side business deals, Connolly said.

Yet PurchasePro had a strategic partnership with AOL for marketing the software program. In return, AOL received warrants to buy PurchasePro shares for 1 cent each, making the warrants worth tens of millions of dollars at the current market prices for PurchasePro.

The prosecutor said that PurchasePro executives realized they were not going to meet sales projections for the first quarter of 2001 and feared the stock price would collapse.

Johnson began arguing and pleading with midlevel executives at America Online to buy PurchasePro's software in bulk as promised.

When the first quarter ended with lower-than-projected sales, Scholeff figured out how to backdate a fax machine at AOL's offices in New York to make the deals look like they happened before the end of the quarter, Connolly said. Documents were forged to show signatures of AOL executives, Connolly said.

Kent Wakeford, a co-defendant in the criminal case and former executive director in AOL's Business Affairs unit, worked closely with Johnson and PurchasePro, according to Connolly.

"I'm off to commit another crime," Scholeff said at one point, according to Connolly. "Kent Wakeford merely laughed."

Johnson told auditors at Arthur Andersen and the PurchasePro board that the company met its projected $42 million in sales revenue for the first three months of 2001. But Connolly said the transaction with AOL and other companies falsely inflated the revenue.

Christopher Beyno, former senior vice president of marketing at PurchasePro, and John Tuli, former vice president of AOL's NetBusiness unit, are being tried along with Johnson and Wakeford.

The trial resumes today .

The defendants face a maximum of 20 years in prison and a $250,000 fine for conspiracy and 10 years in prison and $1 million fine for securities fraud. The men are also charged individually with wire fraud and making false statements, which carry a maximum of five years in prison and a $250,000 fine.

Bloomberg News contributed to this report.

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Copyright (c) 2006, Las Vegas Review-Journal

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