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raw/aaer/2005/AAER-2165.txt
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Litigation Releases
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U.S. SECURITIES AND EXCHANGE COMMISSION
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Litigation Release No. 19029 / January 10, 2005
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Release No. 2165 / January 10, 2005
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SECURITIES AND EXCHANGE COMMISSION
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The
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The Commission's complaint alleges that, beginning in Q4 2000 and continuing through April 2001, each defendant took knowing and deliberate steps designed to inflate PurchasePro's revenues in contravention of generally accepted accounting principles ("GAAP"). In particular, the complaint alleges that, Johnson: (i) fraudulently directed PurchasePro to issue $30 million in unearned performance warrants to AOL at the close of Q4 2000 in exchange for AOL's undisclosed promise to deliver revenue to PurchasePro in future quarters; (ii) entered into, and concealed the existence of, reciprocal contingent agreements that rendered it improper to recognize $3.92 million in revenue from three marketplace license sales to PurchasePro customers in Q4 2000; (iii) backdated or otherwise concealed the execution time of three contracts signed in Q2 2000 in order to improperly recognize $14.7 million in revenue from those agreements in Q1 2001; (iv) entered into, and concealed the existence of, reciprocal contingent agreements that rendered it improper to recognize $4.4 million in revenue from three marketplace license sales to PurchasePro customers in Q1 2001; and (v) created or caused the creation of an entirely fraudulent contract purportedly entered into with AOL (called a "Statement of Work"), thereby causing PurchasePro to improperly recognize an additional $3.65 million in Q1 2001 revenue.
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The complaint further alleges that Benyo, PurchasePro's Senior Vice President for Marketing and Network Development, along with Kennedy, PurchasePro's Chief Technology Officer, also took steps to make it falsely appear that the Statement of Work agreement was executed during Q1 2001 when they knew, or were reckless in not knowing, that (i) revenue from the Statement of Work could not be properly recognized in Q1 2001 unless the contract had been signed and performance completed before the end of that quarter; (ii) that the Statement of Work had, in fact, been neither signed nor completed by the end of Q1 2001; and (iii) that PurchasePro nonetheless was going to include revenues from that contract in its Q1 2001 results.
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Additionally, according to the complaint, Wakeford: (i) fabricated documents to create the false impression that PurchasePro received far more in referred third party business from AOL than it actually had, thereby causing PurchasePro to improperly issue $30 million in PurchasePro warrants to AOL that AOL had not actually earned; (ii) proposed the false Statement of Work contract to help inflate PurchasePro's Q1 2001 revenues; and (iii) took steps to backdate or otherwise make it falsely appear that a $3.7 million marketplace license sale agreement was executed within Q1 2001, when in fact the contract was not executed during that quarter. The complaint further alleges that Tuli, AOL's Vice-President of Business Development for NetScape, repeatedly confirmed (or caused others to confirm) to PurchasePro's auditors that the services described in the Statement of Work had been completed and accepted by AOL by the close of Q1 2001 - even though Tuli knew, or was reckless in not knowing, that those confirmations were false.
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The complaint alleges that as a result of the foregoing conduct, PurchasePro's annual report on Form 10-K for fiscal year 2000 and quarterly report for Q1 2001 on Form 10-Q - as well as the company's public earnings announcements - contained material misstatements and omissions. As alleged in the complaint, PurchasePro's announced and reported revenues for Q4 2000 were artificially and materially overstated by over 11% . The complaint also alleges that the company issued a public earnings announcement for Q1 2001 that overstated revenues by 65% and subsequently filed a Form 10-Q for that quarter with the Commission that reported revenues that were artificially and materially inflated by 37%.
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Based on these allegations, the Commission charged: (i) Johnson with violating Section 17(a) of the Securities Act of 1933 ("Securities Act"), Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 (the "Exchange Act") and Exchange Act Rules 10b-5, 13b2-1, and 13b2-2, and with aiding and abetting PurchasePro's violations of Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) and Rules 12b-20, 13a-1 and 13a-13 thereunder; (ii) Benyo with violating Exchange Act Section 13(b)(5) and Exchange Act Rules 13b2-1 and 13b2-2, and with aiding and abetting PurchasePro's violations of Exchange Act Sections 10(b), 13(b)(2)(A) and 13(b)(2)(B) and Exchange Act Rule 10b-5; (iii) Kennedy with aiding and abetting PurchasePro's violations of Exchange Act Sections 10(b), 13(b)(5), 13(b)(2)(A) and 13(b)(2)(B) and Exchange Act Rules 10b-5, 13b2-1, and 13b2-2; (iv) Tuli with aiding and abetting of PurchasePro's violations of Exchange Act Sections 10(b), 13(b)(5), 13(b)(2)(A) and 13(b)(2)(B) and Exchange Act Rules 10b-5, 13b2-1, and 13b2-2; and (v) Wakeford with aiding and abetting of PurchasePro's violations of Exchange Act Sections 10(b), 13(a), 13(b)(5), 13(b)(2)(A), and 13(b)(2)(B) and Exchange Act Rules 10b-5, 12b-20, 13a-1, 13a-13, 13b2-1 and 13b2-2.
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The Commission seeks: (i) an injunction and civil penalty as to each defendant; (ii) disgorgement of all ill-gotten gains, with prejudgment interest thereon, as to Johnson, Benyo and Kennedy; and (iii) an order barring Johnson, Benyo, Kennedy, and Wakeford from acting as officers or directors of any public company.
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Also today, in a related criminal proceeding, the United States Attorneys' office for the Eastern District of Virginia announced that each of these defendants has been indicted on criminal charges, including securities fraud and conspiracy to commit securities fraud, arising from the same facts and circumstances as those alleged in the Commission's complaint.
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The Commission acknowledges the assistance of the United States Department of Justice, the United States Attorney's Office for the Eastern District of Virginia, and the Federal Bureau of Investigation in the investigation of this matter.
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SEC Complaint in this matter
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SEC.gov | Lines Overseas Management, Ltd., and Scott Lines
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Litigation Releases
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Lines Overseas Management, Ltd., and Scott Lines
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Lines Overseas Management, Ltd., and Scott Lines
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LITIGATION RELEASE NO. 19030 / January 10, 2005
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SECURITIES AND EXCHANGE COMMISSION V. LINES OVERSEAS MANAGEMENT, LTD., AND SCOTT LINES , Misc. Action No. 1:04 MC 302 (D.D.C.)
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LINES OVERSEAS MANAGEMENT, LTD. AND ITS MANAGING DIRECTOR, SCOTT LINES, ORDERED TO COMPLY WITH SEC SUBPOENAS
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The Securities and Exchange Commission today announced that, on January 7, 2005, Magistrate Judge Alan Kay of the U.S. District Court for the District of Columbia ordered Lines Overseas Management, Ltd. ("LOM"), a Bermuda-based financial services firm, and its Managing Director, Scott Lines, to comply with four subpoenas issued and served on Scott Lines by the Commission in connection with two separate investigations. LOM and Lines, a Bermuda resident, had refused to produce documents and appear for testimony as directed by the four subpoenas. On June 10, 2004, the Commission filed the above-mentioned subpoena enforcement action seeking a court order requiring LOM and Lines to comply with the subpoenas.
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The Commission had issued the subpoenas in connection with two separate investigations into possible fraud, market manipulation, and reporting violations in the securities of three U.S. public companies: Sedona Software Solutions, Inc. ("Sedona"), SHEP Technologies, Inc. ("SHEP"), and Hienergy Technologies, Inc. ("Hienergy"). The Commission's investigations have revealed that certain individuals engaged in extensive trading in the securities of Hienergy, Sedona, and SHEP through accounts at LOM in Bermuda, the Bahamas, and the Cayman Islands. The Commission alleged that the subpoenaed documents and testimony were relevant to matters under investigation and were within the scope of the Commission's investigative authority. The subpoenas were served on Scott Lines on April 20, 2004 while he was in the United States.
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The Court ordered LOM and Lines to comply with the document subpoenas by no later than February 14, 2005. Lines was ordered to appear for testimony in Washington, D.C. within 20 days of the Commission's receipt of the document production. The Court found that it possessed personal jurisdiction over LOM and Lines, and rejected LOM's contention that the confidentiality laws of Bermuda, the Bahamas, and the Cayman Islands precluded the firm from complying with the Commission's subpoenas.
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