U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 18999 / December 15 2004
Accounting and Auditing Enforcement
Release No. 2152 / December 15, 2004
SECURITIES AND EXCHANGE COMMISSION v. R. GEOFFREY LAYNE, JAMES S. SHOLEFF, DALE BOETH, AND SHAWN MCGHEE, Civil Action No. 04-1500 (E.D. Va.)
FOUR FORMER PURCHASEPRO EXECUTIVES SETTLE FINANCIAL FRAUD CASE WITH SEC
THE FORMER PURCHASEPRO EXECUTIVES ALSO AGREE TO ENTER GUILTY PLEAS TO RELATED FEDERAL CRIMINAL CHARGES
The Securities and Exchange Commission today filed a settled civil injunctive action in the United States District Court for the Eastern District of Virginia against four former executives of PurchasePro.com, Inc. for violations of the antifraud, books-and-records, internal accounting controls, periodic reporting and lying-to-auditors provisions of the federal securities laws. According to the complaint, the defendants-R. Geoffrey Layne, James S. Sholeff, Dale Boeth, and Shawn McGhee-participated in a fraudulent scheme to artificially inflate the first quarter 2001 ("Q1 2001") revenues of PurchasePro.com, Inc., a Las Vegas-based Internet company now known as Pro-After, Inc. All four individuals, who were officers or senior employees of PurchasePro, settled the charges without admitting or denying the Commission's allegations.
The Commission's complaint alleges that in Q1 2001 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, Layne, while serving as PurchasePro's Executive Vice President, (i) entered into, and concealed the existence of, reciprocal agreements that rendered it improper to recognize $1 million in revenue from two marketplace license sales to PurchasePro customers; and (ii) took steps to make it falsely appear that a purported "Statement of Work" contract between PurchasePro and AOL, valued at $3.65 million, was executed during Q1 2001, when in fact it was never properly executed. The complaint further alleges that Boeth, PurchasePro's Senior Vice President of Consulting Services, and Sholeff, a PurchasePro Vice President, also took steps to make it falsely appear that the Statement of Work agreement was executed during Q1 2001, and that Sholeff took similar steps with respect to a $3.7 million marketplace license sale. According to the complaint, McGhee, PurchasePro's Chief Operating Officer during the relevant period, took steps to (i) make it falsely appear that a $3.5 million marketplace license sale had been entered into during Q1 2001; and (ii) conceal the existence of reciprocal agreements that rendered it improper to recognize any revenue from that sale. Each of these transactions had a misleading impact on the revenues announced and reported by PurchasePro. As reflected in the complaint, by including these transactions, PurchasePro artificially and materially inflated its publicly announced revenues by at least 34% and its reported revenues by over 37%.
In addition, the complaint alleges that, during April 2001, Layne and Sholeff attempted to conceal their conduct by destroying certain documents. In particular, the complaint alleges that Sholeff and Layne deleted, or requested others to delete, their AOL-related emails, and that Sholeff shredded all of his AOL related documents and destroyed his laptop. The complaint further alleges that in February 2002, Layne and Sholeff lied to the Commission staff during testimony in order to conceal their fraudulent conduct. Finally, the complaint alleges that in April 2001, PurchasePro paid Layne a $200,000 retention bonus and that at or about the same time, PurchasePro paid Boeth a total of $150,000 in retention bonuses.
Based on these factual allegations, the Commission charged: (i) Layne and McGhee with violating Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 ("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 of Exchange Act Rules 12b-20 and 13a-13; (ii) Sholeff with violating Exchange Act Sections 10(b) and 13(b)(5) and Exchange Act Rules 10b-5 and 13b2-1, and with aiding and abetting PurchasePro's violations of Exchange Act Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B), and of Exchange Act Rules 12b-20 and 13a-13; and (iii) Boeth with violating Exchange Act Sections 10(b) and 13(b)(5) and Exchange Act Rules 10b-5, 13b2-1 and 13b2-2. Without admitting or denying the Commission's allegations, each defendant consented to final judgments that would permanently enjoin each of them from violating the foregoing securities law provisions, and that would: (i) in the case of Layne, permanently bar him from acting as an officer or director of any public company, and order Layne to pay disgorgement of $200,000 plus prejudgment interest; (ii) in the case of Sholeff, permanently bar him from acting as an officer or director of any public company, and order Sholeff to pay a $35,000 civil penalty; (iii) in the case of Boeth, permanently bar him from acting as an officer or director of any public company, and order Boeth to pay disgorgement of $150,000 plus prejudgment interest, but waive payment, and not impose a civil penalty, based on Boeth's demonstrated inability to pay; and (iv) in the case of McGhee, bar him for five years from serving as an officer or director of any public company. The final judgment against Layne permits him to offset his payment of disgorgement by the corresponding amount of any restitution he pays in connection with the parallel criminal proceeding described below; while the final judgment against Sholeff permits him to offset his payment of civil penalties by the corresponding amount of any criminal fine he pays in connection with that same parallel criminal proceeding. The final judgments are subject to the approval of the United States District Court.
Also today, in a related criminal proceeding, the United States Attorneys' office for the Eastern District of Virginia announced that Layne, McGhee, Boeth and Sholeff have each agreed to plead guilty to single felony counts arising from the same circumstances as the Commission's complaint. In particular, Layne will plead to a single felony count of securities fraud; McGhee and Boeth will each plead to a single felony count of conspiracy to commit securities fraud; and Sholeff will plead to a single felony count of perjury arising from false statements that Sholeff made to the SEC staff during the investigation.
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.
The Commission's investigation is continuing.
SEC Complaint in this matter