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PurchasePro CEO guilty, faces prison

Charles "Junior" Johnson, the Las Vegas entrepreneur who once relied on winnings at blackjack to make payroll and later became a dot-com billionaire, was found guilty Thursday of conspiracy to commit securities fraud, securities fraud, witness tampering and obstruction of a court proceeding and faces a double-digit prison term.

U.S. District Judge Walter Kelley Jr. rendered the guilty verdicts in a 107-page order filed in an Alexandria, Va., court that outlined the rise and fall of Johnson, the founding CEO of PurchasePro.com.

PurchasePro sold business software for online auctions. Clients, including Hilton Hotels and The Mirage, used the software to take bids for supplies on the Internet. When the business strategy stumbled, the judge said, Johnson resorted to fraud in an effort to convince investors that the company was thriving.

"He’s definitely going to prison," said Miami defense attorney Yale Galanter. "There’s no shot at probation when you get convicted of these charges."

Another defense attorney, who spoke on condition of anonymity, predicted the prison term would be for 10 years or longer.

Galanter said he and Johnson haven’t decided whether to appeal the verdicts.

"Obviously, we were hoping for a different result. Obviously, we disagree with the conclusions. We certainly do respect Judge Kelley, and we know how much work and effort he put into the decision," Galanter said.

Chuck Rosenberg, a U.S. attorney in Alexandria, called the verdict an important victory against corporate fraud.

"Mr. Johnson tried to manipulate the system for his own gain at the expense of the investing public and now will be appropriately punished," he said.

At Johnson’s request, Kelley agreed to try Johnson without a jury late last year.

While several defendants pleaded guilty and served prison sentences, all the other PurchasePro and AOL managers charged in the case were found not guilty in trials over which Kelley presided.

Johnson co-founded PurchasePro in Las Vegas in 1996. The company raised $48 million in an initial public offering of stock in September 1999 at the height of the dot-com stock boom. PurchasePro sold $250 million in additional shares in February 2000.

The company’s woes stemmed from Johnson’s efforts to satisfy investors with sales revenue growth at the company. The judge concluded that Johnson conspired to falsely report revenues for the first quarter of 2001.

As the quarter neared an end, Johnson’s stock holdings were worth more than $1 billion. The CEO didn’t sell his shares, but he used them as collateral for a $100 million line of credit from Credit Suisse.

Although Johnson tapped only a fraction of that amount, the stock’s declining price caused the securities firm to sell his stock holdings to satisfy the debt.

Like several startup Internet companies, PurchasePro "sought to tie the company’s fortunes to the tail of the AOL comet," the judge said.

AOL and PurchasePro agreed to a joint marketing agreement and PurchasePro gave AOL warrants to buy PurchasePro shares at $63 a share. AOL agreed to post PurchasePro’s logo on an Internet network to boost the Las Vegas company’s sales. When that didn’t work, AOL agreed to resell PurchasePro’s product, which resulted in some sham deals in which buyers’ were compensated for buying the software product.

Johnson is accused of orchestrating a campaign to back-date and forge documents and to add contracts to revenue after the end of the quarter, according to the judge’s order.

At the time, Johnson told executives at PurchasePro: "The quarter ends when I say it ends, not when the calendar says it ends."

The CEO told co-conspirators to lie to government investigators, according to the guilty verdict.

Johnson compounded his problems at a jury trial with three other defendants in late 2006.

The defendant and his wife, Haley, spoke freely with news reporters about the trial. He took a reporter to lunch and to a popular night spot to argue that he was innocent.

Johnson also presented his attorney Preston Burton with a forged e-mail document to use in the trial, according to the verdict. After learning of the forgery, Burton was allowed to withdraw as Johnson’s attorney. Kennedy declared a mistrial for Johnson and continued the trial for the remaining three, who were found innocent.

Kennedy is resigning from federal court to return to private law practice, effective today, and another judge will sentence Johnson.

Johnson could not be reached for comment.

Some former associates at PurchasePro were sympathetic, while others were pleased with the guilty verdict.

"Junior was basically a nice guy," said Mary Alyce Smith, former vice president of human resources at PurchasePro. "When you stop following the sound business practices and principles that made you successful in the first place, then you get into trouble and maybe you have to pay for that even if you’re a nice guy."

Told of the guilty plea, Shirley Lizotte, former manager of documentation and knowledge management at PurchasePro, said: "Wow, wow." Lizotte said she sympathized for Johnson.

She recalled the enthusiasm and support Johnson gave employees before the company went public. Once, Johnson used his cash to win enough playing blackjack to make payroll, Lizotte said.

Steve Stern, PurchasePro’s public relations director, said he was satisfied with the judge’s verdict.

"I’m pleased that this long PurchasePro odyssey has finally concluded and that justice has been done," he said.

Several senior officers at PurchasePro declined to comment.

Greg Garman, the bankruptcy attorney representing the PurchasePro estate, said he is seeking a judgment against one former PurchasePro business partner, Gateway Computers. U.S. District Judge Kent Dawson issued a summary judgment for PurchasePro, which the defendants’ attorneys are challenging.

Garman said doesn’t expect Johnson’s conviction to affect claims that Gateway broke contracts with PurchasePro. Already, 83 percent of the unsecured claims have been paid, he said.

Contact reporter John G. Edwards at jedwards@reviewjournal.com or 702-383-0420.

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