Accounting & Tax

Six Indictments in AOL-PurchasePro Deals

The individuals were accused of engaging in a scheme to artificially inflate revenue reported to the SEC through secret side deals, back-dated cont...
Stephen TaubJanuary 12, 2005

Four former executives of PurchasePro and two former executives of America Online Inc. were indicted on federal criminal securities violations stemming from deals between the two companies just as the Internet bubble was popping.

The six individuals were accused of engaging in a scheme to artificially inflate revenue reported to the Securities and Exchange Commission through secret side deals, back-dated contracts, and revenue swaps, according to Reuters.

Charges of conspiracy, securities fraud, obstruction of justice, and wire fraud were brought against PurchasePro founder and former chief executive officer Charles Johnson Jr., former PurchasePro executives Chris Benyo, Michael Kennedy, and Scott Wiegand, and former AOL executives John Tuli and Kent Wakeford. The SEC also filed civil charges against five of the six individuals — excepting Wiegand — alleging that they participated in a fraudulent scheme to artificially inflate PurchasePro’s revenues in the fourth quarter of 2000 and the first quarter of 2001.

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PurchasePro filed for bankruptcy in September 2002 and is now known as Pro-After Inc.

The six individuals forged contracts, lied to the public, and destroyed documents during the investigation, U.S. Attorney Paul McNulty reportedly told a news conference. “When you summarize it, it’s a story of trying to create the appearance of success in business that’s just not there.” Asked if there would be further indictments, McNulty reportedly added that “this is a very active and ongoing investigation.”

The two former AOL executives were instrumental in creating Netscape NetBusiness, a B2B online marketplace co-developed by AOL and PurchasePro, according to The Wall Street Journal, citing a person familiar with the two executives.

The government alleges that Johnson, PurchasePro’s chief executive, sent AOL’s Wakeford an email complaining that the deal was hurting PurchasePro, according to the Journal. He wrote that he had paid or “enabled AOL to recognize 120-plus million dollars…and now the rules are changing and I am left holding the bag….I pray this can be resolved because I enjoy the relationship and that is why I sold my soul,” according to the paper. AOL benefited from PurchasePro ‘s success, the paper added, partly because it owned stock warrants in the company, which it used to earn tens of millions of dollars in 2000 and 2001.

Last month Time Warner settled related charges with the SEC and the Department of Justice. At the time AOL accepted responsibility for conduct of its employees that led to the criminal violations and agreed to cooperate fully with the Justice Department in its investigation of those individuals. As part of the deal, the DOJ agreed to hold off prosecution of the company for 24 months, after which time it will dismiss charges if AOL has followed the terms of the deal.