Skip to main content

Updated from 2/08/01

Have you ever had one of




just did. After a scathing article in


, an analyst's downgrade and news of a racketeering lawsuit, its stock lost 42% of its value this week.

On Thursday,

Prudential Securities

, which underwrote the company's initial public offering, lowered its rating on the stock to accumulate from strong buy, citing lower-than-expected activity on PurchasePro's network of electronic exchanges on the Internet.

Then the Las Vegas-based PurchasePro issued a release saying that a suit filed against it alleging it was founded on a stolen business plan is "without merit and that the company will defend the suit vigorously."

The stock closed at $14.50 Friday, down 88 cents, or 5.7%. That fall came after the


story sent the stock sliding 14.4% on Monday, and the downgrade and lawsuit combined for a nearly 20% drop Thursday.

Scroll to Continue

TheStreet Recommends

Prudential analyst Tim Getz said in an interview Thursday that he downgraded the stock because "suppliers aren't getting as many sales leads as they hoped. Based on my channel checks, adoption rates aren't as high as we expected."

The suit, filed on behalf of

All Creative Technologies

, alleges that PurchasePro CEO Charles E. Johnson Jr. stole that firm's business plan before launching PurchasePro in 1996.

It also says Johnson violated federal regulations by failing to disclose he was vice president of corporate development for All Creative Technologies in PurchasePro's IPO. There is no mention of All Creative Technologies in PurchasePro's initial IPO filing, on record with the

Securities and Exchange Commission


In a statement, PurchasePro said All Creative has no operations, and that its majority shareholder and principal officer, Russell Pike, has been convicted of numerous crimes. Pike is currently serving a sentence for money laundering in the minimum-security federal prison camp at

Nellis Air Force Base


North Las Vegas, prison officials there confirmed. He is currently set for release in 2003. Calls to attorneys for All Creative, which lists Pike as president, secretary and treasurer, were not returned.

PurchasePro's statement also said Johnson invested in All Creative and lost his entire investment, but didn't address whether Johnson worked for All Creative.

According to the

Nevada Secretary of State's

office, All Creative Technologies' status as a corporation in good standing was revoked Jan. 1,1997, and reinstated Dec. 29, 1999. Its status was revoked again on Jan. 1, 2001, and reinstated Jan. 19, 2001. "In good standing" basically means that a company has kept its incorporation documents up to date.

In the months before the


article, which questioned company financial practices,



about PurchasePro's numbers. After its third-quarter results, for instance, there were questions about its huge jump in accounts receivable, a big drop in its recurring revenue, a $7 million expense the company didn't record, and doubts about PurchasePro's claim that it didn't have to spend any cash during the quarter. The company has defended its practices.

One issue raised by the Barron's article was that a subscription agreement between

Office Depot

(ODP) - Get The ODP Corporation Report

and PurchasePro had expired. Thursday evening, Office Depot issued a press release stating that it had expected that agreement to expire, and that it "remains committed to working with, and has integrated its services throughout in its e-commerce, catalog and retail store offerings to small business customers."

Analysts said they expect PurchasePro to report strong fourth-quarter results Monday, when the company is scheduled to hold its quarterly conference call.

"The numbers are going to be good and guidance is going to be good," said Ian Toll, an analyst at

Credit Suisse First Boston

, who rates PurchasePro a strong buy. Referring to the controversy surrounding the stock, he said, "This is the way it's always been for this company." (Toll's firm has done underwriting for PurchasePro.)

Robert Johnson, an analyst with


, says downgrades and lawsuits aside, things should still be on track at the company.

"From an operations standpoint, nothing's really changed," Johnson said. "But all this stuff has sort of floated up to the top, and that's what people are looking at." He rates the stock a strong buy. His firm hasn't done banking for the company.

Patrick Walravens, an analyst with

Lehman Brothers

who rates PurchasePro strong buy, said PurchasePro isn't for the conservative investor.

"This probably is not the right stock for your grandmother. It's very volatile, and they've still got to prove they can drive usage. But they've got a great underlying business model, and their partnerships provide them with a very significant growth opportunity," Walravens said. (His firm hasn't done underwriting for the company.)

"This has been a rough week for them, a very rough week," he said.