At PurchasePro, Wondering What's Beyond the Numbers

Investors will soon see PurchasePro.com's (PPRO Quote) fourth-quarter numbers. But the sight isn't likely to make them forget the questions raised about the business-to-business software firm during the past week.

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PurchasePro Takes a Pounding

Plugging Into This Week's Barron's Effect

PurchasePro's stock fell 42% last week after three pieces of bad news: A critical article in Barron's questioned management's experience and the company's accounting practices; the company's underwriter downgraded the stock over concerns about growth; and the company and its top executive were named in a racketeering lawsuit.

For its part, PurchasePro issued press releases refuting the article and the claims in the lawsuit. But the company's denials shed little light on CEO Charles Johnson Jr.'s relationship with the failed businessman and convicted money-launderer Russell Pike, who is now suing him and the company from the confines of a federal prison camp near Area 51 in the Nevada desert. As PurchasePro holds an earnings conference call Monday afternoon, investors and analysts are likely to be asking whether Johnson's role in a failed business venture with Pike went beyond that of investor and, if so, whether he should have acknowledged it. The stock was rallying Monday, rising $1.69, or 12%, to $16.19.

The Dispute

The lawsuit, filed by the Las Vegas law firms of Campbell & Williams and Harrison Kemp & Jones Feb. 6 in Clark County District Court, alleges that Johnson and PurchasePro co-founder Ranel Erickson stole All Creative Technologies' business plan before launching PurchasePro in 1996. Pike is listed as the only corporate officer for All Creative. During that same period, Pike filed for Chapter 7 personal bankruptcy, according to court records.

Johnson said he invested in All Creative. A news report pegged that investment at $250,000. But beyond saying that Pike's lawsuit is without merit and that the company will defend itself vigorously, PurchasePro, which said Johnson lost his investment in Pike's company, wouldn't outline Johnson's relationship with Pike or that relationship's genesis.

All Creative, which is still incorporated but apparently is not active, published CD-ROM guides to hotel-industry vendors and their products, according to a 1995 press release. PurchasePro, which got its start serving the hotel and casino industry in Las Vegas, has been described as an "electronic yellow pages" for buyers and suppliers on the Internet.

Johnson wouldn't comment for this story, other than to reiterate the company's line that the lawsuit is baseless. But in an interview, PurchasePro's attorneys disputed the claim that PurchasePro stole All Creative's business plan.

"One thing we can say is that PurchasePro was not the idea of Russell Pike," said Bryan Williams, a partner at Las Vegas-based Sklar Warren Conway & Williams. But according to Johnson's hometown newspaper, the Lexington (Ky.) Herald-Leader, Johnson said during an interview last August that All Creative's "concept and the idea it was based upon was still very interesting to me. I guess it's an example of turning lemons into lemonade."

Pike's attorneys didn't return phone calls seeking comment for this story, and officials at the federal minimum security prison camp at Nellis Air Force Base, where Pike is serving a five-year sentence, wouldn't make him available, citing prison rules.

Pike went to prison after pleading guilty in fall 1998 to charges of money laundering at another company he ran, Advanced Cart Technology, which made casino floor carts. It is not clear whether there was a connection between Advanced Cart Technology and All Creative Technologies beyond Pike's involvement with each. The indictment and plea agreement for that case said Pike inflated the firm's accounts receivable, or money owed to the firm by its customers, to use as collateral for more than $2 million in loans from PriMerit bank. The indictment alleged Pike intended to use that money for gambling activities.

Who Was Where

Pike's suit says Johnson and Erickson worked at All Creative as vice president of corporate development and chief technology officer, respectively. It alleges that PurchasePro violated securities regulations by not disclosing that work history in PurchasePro's filings for its initial public offering in 1999. PurchasePro's lawyers say the company complied with all disclosure requirements in its S1.

Securities lawyers unconnected to this case say that Securities and Exchange Commission regulations require corporate officers to disclose their past five years' work experience when taking a company public. Part of the purpose of this regulation, lawyers say, is to prevent executives from masking the past.

"You're supposed to disclose where you've been for the past five years," said Steve Bochner, a partner who practices securities law at Wilson Sonsini Goodrich & Rosati in Silicon Valley. "You're supposed to disclose, and you have liability for not disclosing, any information that a reasonable investor would consider important for making a business decision." (Bochner's firm hasn't done work for either All Creative or PurchasePro.)

While PurchasePro's attorneys disputed that the concept behind PurchasePro came from Pike, they would not answer directly whether Johnson worked at All Creative.

"There's an allegation that he worked for it," said Williams. "But that's something that I can't go into. That relates directly to the litigation."

Erickson, the PurchasePro co-founder who is no longer at the company and who has threatened his own lawsuit against PurchasePro, said that he and Johnson were at All Creative, though he wouldn't elaborate on what the pair did there.

"We were both physically there, but not in the way the suit says," Erickson says. "I was not the chief technology officer, I was a contract employee. ... I know that everything they're saying about Junior is wrong." Erickson, citing the advice of lawyers, declined to comment further.

Johnson's biography in PurchasePro's SEC filings says Johnson owed a safety and security company prior to founding PurchasePro and that he currently owns video stores in Cincinnati. It also says he founded and is chief executive of another casino cart company, Cart-It & Cabinetry.

There are other connections, albeit vague ones, between PurchasePro and All Creative. For instance, in 1995, Hotel & Motel Management, a publication of Advanstar Communications, issued a press release indicating it was a customer of All Creative. Advanstar later became a strategic partner with and investor in PurchasePro.com. Pike's suit claims that All Creative had a licensing and marketing agreement with Advanstar that Johnson and Erickson stole.

Last week, Wall Street analysts said that the lawsuit doesn't change PurchasePro's fundamental investment story. But Tim Getz, the Prudential analyst who downgraded the stock, cautioned that "this case may cause a diversion in management's time, which further increases the execution risk and subjects them to more headline risk."