Purchasepro.Com, Inc. Securities Litigation 01-CV-0483-Second

ORIGINAL 1 Kevin J . Yourman Vahn Alexander 2 Jennifer R. Liakos WEISS & YOURMAN ~rC~LVED 3 10?40 Wilshire Boulevard FILFI] "'"~ SERIF-~ ~~ D 24 , Floor 4~ ES Of RECOR 4 Los An eles CA 90024 ~p{ NSElIPAR Tel: (3 m) 2d8-2800 5 Nadeem Faruq i AP B D 6 Shane T . Rowley Antonio Vozzol o 7 FARUQI &ARUQI, LLP CLERK RI 1SiR CEPL1 320 East 39 Street ~ 8 New York, NY 10016 Tel: (212) 983-9330 9 Co-Lead Counselfor the Class 10 William H. Stoddard 11 G . Mark Albright C . Adam Buck 12 , WARNICK A BRIGHI STODDARD 13 801 S. Rancho Drive Quail Park Suite D-4 14 Las Vegas, NV 89106 Tel : (7(T2) 384-711 1 15 Liaison Counsel for the Class 16 17 18 UNITED STATES DISTRICT COURT 19 DISTRICT OF NEVAD A 20 21 In Re PURCHASEPRO.COM, INC Master File No . : CV-S-0I-0483-JLQ 22 SECURITIES LITIGATIO N 23 CLASS ACTION THIS DOCUMENT RELATES TO : 24 SECOND AMENDED CONSOLIDATED CLASS ACTION 25 COMPLAINT 26 27 Plaintiffs Demand A Trial By Turn 28 213 1 TABLE OF CONTENTS 2 3 1 . SUMMARY OF THE ACTION . 2 4 II. JURISDICTION AND VENUE . 1 0 5 III . PARTIES . 1 0 6 IV. PURCHASEPRO 'S FRAUDULENT RECOGNITION OF REVENUE . 1 9 7 A. False And Misleading Revenue Recognized From Sham Transactions . 2 1 8 1 . Warrant-For-Revenue Transactions . 2 1 9 2 . Warrant Agreement With AOL . 22 10 3 . Warrant Agreement With Gateway . 2 6 11 4 . Importance of Warrant-For-Revenue Transactions . 2 7 1 2 5 . The Ad Swap . 2 9 13 6 . The Statement Of Work Between AOL And PurchasePro . 3 0 1 4 B . False And Misleadin g Revenue Recognition On Round Trip 15 Transactions In The Sale Of Purchase-Pro ' s Marketplace Software Licenses . 3 1 1 6 1 . Third Quarter 2000 Round Trip Transactions . 3 3 17 a. The I-Storm Transaction . 3 3 1 8 b . The LawCommerce Transaction . 3 3 19 c. The Computer Associates Transaction . 3 3 20 d. The Working Woman Transaction . 34 21 e. The InsureZone Transaction (Part 1) . 34 22 2 . Fourth Quarter 2000 Round Trip Transactions . 36 23 a. The Broad Vision Transaction . 36 24 b . The Thread. com Transaction . 36 25 c. The ProfitScape.com Transaction . 37 26 d. The V-Twin Holdings Transaction . 3 8 27 e. The Woosh! Transaction . 3 8 28 i 3 . First Quarter 2001 Round Trip Transactions . 3 9 2 a. The Chinadotcom Transaction . 3 9 3 b . The Bigstep, Inc . Transaction . 40 4 c. The Future Media Products Transaction . 40 d. The InsureZone Transaction (Part 2) . 4 1 61 e. The Homestore . com Transaction . 43 7 f. The BizPro Link. com Transactions . 44 8 C . False And Misleading Revenue Recognition Through Th e Overstatement Of Subscripti on Revenues . 45 9 D. Understatement Of Required Allowance For Doubtful Accounts . 48 10 E . False And Misleading Revenue Recognition Through Back Datin g 11 Of Key Contracts . 49 12 F. False And Misleading Revenue Recognition On Futur e Maintenance And Hosting . 5 1 13 G. False And Misleading Revenue Recognition On Marketplace 14 Software Licenses For Non-Functional Software . 5 2 15 V . INFORMATION PROVIDED BY FORMER EMPLOYEES OF PURCHASEPRO . 54 16 Former Employee 1 . 54 17 Former Employee 2 . 5 9 18 Former Employee 3 . 6 0 19 Former Employee 4 . 62 20 Former Employee 5 . 64 21 Former Employee 6 . 66 22 Former Employee 7 . 7 1 23 Former Employee 8 . 72 24 Former Employee 9 . 74 25 Former Employee 10 . 76 26 Former Employee 11 . 7 8 27 Former Employee 12 . 80 28 Former Employee 13 . 83 ii 1 VI . DEFENDANTS' FALSE AND MISLEADING STATEMENTS . 87 2 VII. PURCHASEPRO'S TRUE FINANCIAL CONDITION BEGINS T O EMERGE . 146 3 VIII . POST CLASS PERIOD NEWS . 15 4 4 IX. DEFENDANTS' SCIENTER . 165 5 A. PurchasePro Defendants ' Scienter . 165 6 1 . PurchasePro Defendants ' Insider Loans . 170 7 2 . PurchasePro Defendants' Insider Trading . 174 8 B . Scienter Of AOL Defendants . 17 5 9 X . VIOLATIONS OF GAAP AND SEC REGULATIONS . 177 1 0 XL DEFENDANTS FAILED TO ACT IN ACCORDANCE WITH GAA P 11 AND RELATED ACCOUNTING GUIDELINES . 182 12 XII . CLASS ACTION ALLEGATIONS . 183 13 XIII, STATUTORY SAFE HARBOR . 185 1 4 XIV. RELIANCE ALLEGATIONS FRAUD-ON-THE-MARKE T DOCTRINE . 186 15 XV. COUNTS . 18 7 16 XVI . PRAYER FOR RELIEF . 189 17 XVII . JURY DEMAND . 18 9 18 1 9 20 2 1 22 23 24 25 26 27 28 iii 1 Plaintiffs, as and for their second amended consolidated complaint, allege th e 2 following upon personal knowledge as to themselves and their own acts, and upon 3 information and belief as to all other matters . Plaintiffs' information and belief i s 4 based on the investigation conducted by plaintiffs' attorneys, including : (a) a review 5 of articles, books, press releases and public filings concerning PurchasePro .com, Inc. 6 ("PurchasePro" or the "Company"); (b) a review of articles, books, press releases 7 and public filings concerning Time Warner, Inc., AOL Time Warner, Inc ., and 8 America On-Line, Inc.; (c) a review of certain internal Company documents 9 including e-mails, drafts of press releases, and contracts with customers ; (d) 10 interviews with numerous witnesses, including 13 former employees ofPurchasePro 1 1 that were in managerial, executive, accounting and bookkeeping positions which 12 gave them personal knowledge of the matters set forth herein; (e) interviews with 13 PurchasePro customers and/or their legal representatives ; (f) a review of certain 14 public documents filed by the Department of Justice ("DOJ") and the Securities 15 Exchange Commission ("SEC") which led to the criminal convictions of defendant 16 Scott H. Miller, PurchasePro's Chief Accounting Officer, and defendant Jeffrey R . 17 Anderson, PurchasePro's former Senior Vice President of Sales and Strategic 18 Development; (g) a review of certain public documents filed by Pro-After, Inc . 1.9 ("Pro-After"), PurchasePro's successor and the debtor in possession concerning the 20 Company's bankruptcy proceedings ; and (h) a review of numerous lawsuits naming 21 PurchasePro and/or certain of the individual defendants, together with the discovery 22 in those actions, including deposition testimony and statements filed pursuant to 23 Rule 26 of the Federal Rules of Civil Procedure . In addition to all of the foregoing, 24 plaintiffs believe that further evidentiary support will exist for the allegations set 25 forth after a reasonable opportunity for discovery . 26 27 28 1 1 1. SUMMARY OF THE ACTIO N 2 1 . This is a consolidated class action on behalf of all purchasers of th e 3 I securities of PurchasePro (including those individuals who acquired thei r 4 PurchasePro securities in exchange for shares, ADRs, or options in other companies 5 that were acquired by the Company) (the "Class") between March 23, 2000, and 6 May 21, 2001, inclusive (the "Class Period") . This action seeks remedies under the 7 Securities Exchange Act of 1934 (the "Exchange Act") . Defendants include : Charles 8 E . Johnson, Jr., Christopher J. Benyo, Christopher Carton, John G . Chiles, James P . 9 Clough, Shawn P . McGhee, Scott H . Miller, Richard T . Moskal, and Jeffrey R . 10 Anderson (collectively, the "PurchasePro Defendants") . Defendants also include : 11 AOL Time Warner, Inc., America On-Line, Inc ., Robert W . Pittman, David Colburn, 12 Eric Keller, and Myer Berlow (collectively, the "AOL Defendants") . The 13 PurchasePro Defendants and the AOL Defendants may be referred to collectively 14 herein as "Defendants ." Furthermore, while PurchasePro is named as a defendan t 15 in this action, all claims against PurchasePro are subject to the automatic sta y 16 provisions of the Bankruptcy Rules, following its filing for bankruptcy protection 17 on or about September 11, 2002 . 18 2. Founded in 1996 by defendant Charles E . Johnson, Jr. ("Johnson" or 1.9 "Junior"), PurchasePro purportedto be abusiness-to-business c-commerce software 20 company that connected more than 140,000 businesses . The Company went public 21 in September 1999 with an initial asking price of $12 .00 per share . Through a series 22 of brazen misrepresentations, PurchasePro quickly captivated Wall Street investors, 23 sending its stock price to a high of over $60 per share during the Class Period .' 24 However, the meteoric rise of PurchasePro was not the result of a successful and 25 sustainable business model, nor the result of mere irrational exuberance . Rather, as 26 discussed in greater detail below, the Company was founded on little more tha n 27 28 ' All stock prices have been adjusted , when necessary, to account for a 2-for-1 stock split which occurred on or about October 13, 2000 . 2 fraud and deception . 3 . On January 10, 2000, America On-Line, Inc . ("AOL") announced an 3 unprecedented $1 12 billion all stock tender offer for Time Warner, Inc . (the "Tender 4 Offer") .' Even though the Tender Offer contained no dissolution clause that would 5 be triggered if either company's stock fell below certain values, former employees 6 have repeatedly stated that if AOL failed to meet its projected earnings and revenue 7 targets, Time Warner, Inc .'s shareholders would begin a campaign to terminate the 8 Tender Offer. Thus, both former and current employees of AOL have stated that the 9 $112 billion Tender Offer highly motivated company executives to meet AOL's 10 revenue targets. In order to accomplish this task, AOL used a plethora of 11 "creatively" structured "deals" with companies such as PurchasePro to bolster 12 AOL's financial reports. However, many of these "transactions " were without 13 substance . In fact, one transaction with PurchasePro was nothing more than pure 14 "science fiction," according to defendant David Colburn .

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