U.S. v. Johnson, Criminal Action No. 1:05cr12.
| Decision Date | 15 May 2008 |
| Docket Number | Criminal Action No. 1:05cr12. |
| Citation | 553 F.Supp.2d 582 |
| Parties | UNITED STATES of America, v. Charles E. JOHNSON, Jr., Defendant. |
| Court | U.S. District Court — Eastern District of Virginia |
Yale L. Galanter, Esquire, Yale L. Galanter PA, Fort Lauderdale, FL, for Charles E. Johnson, Jr.
VERDICT AND OPINION
By Indictment returned on January 10, 2005, a Grand Jury sitting in the Eastern District of Virginia charged defendant Charles E. Johnson, Jr. a/k/a Junior Johnson ("Junior") with conspiracy to commit securities fraud, securities fraud and witness tampering. Junior's first trial ended abruptly after the Court granted his defense counsel leave to withdraw for ethical reasons. The United States subsequently filed an additional Criminal Information, charging Junior with attempting to obstruct an official proceeding—his first trial —by giving his counsel an altered e-mail to use as evidence. Junior waived a jury, consented to consolidation of the Indictment and Criminal Information, and the matter was tried to the Court.
After considering the evidence introduced during twelve days of testimony (including over 250 exhibits and numerous stipulations that attach transcripts from other proceedings) and carefully weighing the arguments of counsel, the Court FINDS Junior GUILTY of all charges against him. Pursuant to Fed.R.Crim.P. 23(c), the Court states below its specific findings of fact and addresses defense motions to dismiss the Indictment as a matter of law.1
Junior Johnson is the principal founder and former Chief Executive Officer of PurchasePro.com, Inc. ("PurchasePro" or the "Company"), a now-defunct internet company that specialized in business-to-business commerce ("B2B"). PurchasePro established and promoted virtual "marketplaces" in which buyers and sellers of goods could interact with one another. For example, Hilton Hotels—which was one of PurchasePro's largest clients— could use its marketplace to receive bids for towels, sheets and other goods used in running its hotels. Suppliers who did not previously have a relationship with Hilton could use the marketplace to become part of the hotel chain's supplier list. As originally conceived, such a B2B model allows sellers to find new customers and enables buyers to pay lower prices due to increased competition.
PurchasePro originally sold software to its customers and then charged them a monthly fee for access to PurchasePro's global marketplace. This was called a "subscription" model. In the summer of 2000, PurchasePro changed its business model to the sale of a one-time "marketplace license." The license model allowed users to create their own proprietary marketplaces using PurchasePro software as the engine. Licensees would also have access to PurchasePro's global marketplace. The licenses varied in price depending on the number of users that the buyer wished to grant access to its marketplace. In addition to a one-time license fee, PurchasePro charged its customers hosting and maintenance fees for administering their marketplaces on its computer network.
Junior and his co-founders started PurchasePro in 1996 with loans and investments from a group of individuals who lived in Junior's home state of Kentucky. After a couple of rocky years, and a second private placement, the Kentucky investors' faith in Junior was rewarded when PurchasePro successfully completed an initial public offering in September 1999. The IPO raised $48 million. PurchasePro's stock thereafter soared,2 and the Company raised another $250 million3 in a follow-on offering completed in February 2000. Although a number of PurchasePro's investors used the soaring stock price and various offerings to reap millions, of dollars in gains, Junior did not sell a single share of his stock. In fact, he purchased an additional $5 million worth of PurchasePro shares as part of the second stock offering. Junior ended up owning 26-27% of the Company.
Junior viewed his decision to retain PurchasePro shares as a public statement of faith in the future of the Company. In one of his many appearances on the CNBC business network, Junior announced that neither he nor any member of his executive team would sell a share of PurchasePro stock until the Company was profitable. Only one of the Company's Vice-Presidents violated this pledge, and Junior ostracized him from PurchasePro's day-to-day affairs.
However, the executives' pledge not to sell their PurchasePro stock was not a pledge to live the impecunious lives of struggling entrepreneurs. As the price of PurchasePro stock soared in 1999 and 2000, Junior and other members of management monetized their stock holdings by pledging them as security for loans. In connection with PurchasePro's secondary stock offering, Junior obtained a line of credit from Prudential Securities (the lead underwriter) in the amount of $50 million. He subsequently refinanced this loan with a line of credit from Zurich-based Credit Suisse in the maximum amount of $100 million (although he never actually borrowed this much). Other PurchasePro executives pledged their shares to banks as collateral for loans. For example, Executive Vice-President Geoff Layne pledged his shares to Bank One as collateral for a $3.2 million loan.
Although the $100 million to which Junior had access through Credit Suisse is an immense sum in absolute terms, neither party foresaw any difficulty of repayment. On March 17, 2000, when PurchasePro's stock closed at its yearly high of $75,875, Junior's holdings in the Company were worth over $1 billion. In addition, Credit Suisse imposed a high loan-to-value ratio. As a result, the value of Junior's stock would always have to be at least four times his loan balance. The loan agreement gave Credit Suisse the discretion to sell Junior's shares as necessary to maintain the loan to value ratio.
At the end of 2000, both PurchasePro and Junior appeared to be in great shape. PurchasePro had 542 employees, $86 million of cash in the bank and had just completed the fourth quarter with revenue far higher than analysts' consensus predictions and its first net profit. (GX-1.1). PurchasePro's stock finished the year at $17.50 per share. (DX-7000). While the stock price was down considerably from its high for the year, the Company still had a market capitalization of almost $1 billion. Junior's shares were worth over $236 million.
However, not all was at it appeared. Behind the curtain, customers seemed unwilling to pay substantial sums for a marketplace license until the concept became more heavily adopted by other businesses. In other words, PurchasePro faced a collective action problem. As a result, PurchasePro had to resort to reciprocal deals to generate much of the revenue booked in the fourth quarter. Known within the company as "Barney deals,"4 these transactions required PurchasePro to buy products and/or services from its customers in an amount equal to or greater than the price of the marketplace license. In essence, the companies were simply trading dollars. Businesses ordinarily have no incentive to do this because it does not result in any increase in net profit. However, gross revenue, not net profit, was the metric favored by Wall Street during the internet boom.
Securities analysts began questioning the "quality" of PurchasePro's revenue. Even more importantly, the company's auditor, Arthur Andersen & Co., had concluded that revenue from Barney deals could not be recognized at the time the marketplace license was sold. Recognition of sales revenue generated by Barney deals had to be deferred until PurchasePro performed its reciprocal obligation. To enforce this accounting decree, Arthur Andersen required PurchasePro executives to certify in writing that each marketplace license sale did not involve a reciprocal arrangement.
As it headed into the first quarter of 2001, PurchasePro had to change the way it made sales. The company counted on its relationship with America Online, Inc. ("AOL") to help it make this transition.
During the internet boom of the late 1990's and 2000, AOL was the pre-eminent company in cyberspace. Tens of millions of consumers accessed the internet through AOL, and the Company was just as dominant as an advertising medium. Numerous start-up companies sought a business relationship with AOL as a means of gaining credibility in the market.
Junior was one of those who sought to tie his Company's fortunes to the tail of the AOL comet. His timing was propitious. In late 1999, when he began negotiations with AOL, the internet giant was planning to introduce a small business website through its Netscape subsidiary. Numerous companies wanted to be part of this "NetBusiness" site because they envisioned it as a portal through which many new customers would gush. These small businesses would want access to B2B resources. AOL selected PurchasePro to provide this service.
AOL and PurchasePro ultimately agreed to co-develop a new generation of PurchasePro's marketplace technology, and to co-develop and market a co-branded marketplace. This relationship had three major contractual components:
*Technology Agreement dated March 15, 2000. AOL and PurchasePro agreed that each would contribute technology to the development alliance and co-manage the development of the new marketplace technology. PurchasePro further agreed to pay AOL $20 million in eight quarterly installments ($2.5 million each) beginning August 1, 2001. AOL was not obligated to contribute any money, but it promised to contribute programmers to the development alliance.
*Interactive Marketing Agreement dated March 15, 2000. AOL and PurchasePro agreed to market the...
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