November 15, 2008 - 10:00 pm
ALEXANDRIA, Va. — A flashy Las Vegas entrepreneur who became a billionaire at the height of the dot-com bubble was sentenced Friday to nine years in prison for stock fraud, capping a seven-year investigation that led to seven convictions.
The sentence meted out to Charles E. “Junior” Johnson, founder and CEO of now-defunct PurchasePro Inc., was significantly less than that sought by federal prosecutors, who had recommended he spend between 16 and 171/2 years behind bars for defrauding investors in his now defunct software company in 2001.
U.S. District Judge Liam O’Grady ruled that because Johnson’s crimes occurred more than seven years ago, he should be sentenced under older federal guidelines calling for a lesser sentence. Sentencing guidelines are not binding on judges, but frequently serve as a benchmark for their decisions.
Former associates of Johnson expressed varied reactions.
Edward Kim, former senior vice president of operations and the only senior officer not indicted, testified for the prosecution in several PurchasePro criminal trials.
“I feel no joy today,” Kim said. “I’m relieved that it’s over, and I’m sad for the people who lived with this. There’s no one who came out of this unharmed.”
“You can give Junior credit for a lot of early success” at PurchasePro, Kim said. “But if you do that, you also have to give him blame for it also being destroyed.” With good leadership and without the fraud, PurchasePro could have continued as a viable business, Kim said.
“I’m glad this case is over. I’m surprised he got as heavy a sentence as he did,” said Mary Alyce Smith, former director of human resources at PurchasePro. She said Johnson treated employees well.
“In his heart, Junior was a good guy. He just made a lot of bad choices,” Smith said. “He did some very unwise things, and now he’s paying for it and that’s the way it is.”
Johnson was convicted in May of stock fraud, witness tampering and obstruction of justice.
Prosecutors said Johnson was the ringleader of a scheme to falsely inflate PurchasePro’s revenue in the first three months of 2001, as the high-tech economy was in freefall. Seven people were convicted in a long-running investigation, which also exposed improper accounting practices at America Online, which had been PurchasePro’s business partner.
Prosecutors said he orchestrated efforts in the first quarter of 2001 to inflate the company’s revenue to meet the expectations of Wall Street analysts. The scheme, authorities said, included falsified and backdated contracts, and secret side deals with AOL, which had a marketing partnership with PurchasePro.
PurchasePro relied heavily on its partnership with AOL to sell its core product, a “marketplace license” and software that supposedly facilitated business-to-business commerce. But AOL could only sell the licenses by relying on the side deals in which PurchasePro agreed to buy equal amounts of goods and services from companies willing to buy from PurchasePro.
In all, seven PurchasePro employees, including Johnson, were convicted. Four others, including two midlevel executives at AOL, were acquitted of all charges.
While nobody at AOL was convicted of fraud, the company as a whole paid a $210 million fine in 2004 to settle criminal charges that it had aided and abetted stock fraud at PurchasePro.
At one point, when Purchase Pro was a Wall Street darling, Johnson owned shares worth about $1.2 billion.
At its peak, PurchasePro had 1,000 workers in Las Vegas.
Johnson also was convicted of obstruction of justice for trying, unsuccessfully, to sneak fabricated e-mails into evidence at his trial. His previous lawyers caught him and resigned from the case, resulting in a mistrial. Johnson was subsequently convicted at retrial.
His lawyer said he has filed notice of appeal to preserve Johnson’s legal options and the defense will decide later whether to appeal the conviction, sentence or both.
Review-Journal writer John G. Edwards contributed to this report.