UNITED STATES DISTRICT COURT
Securities and Exchange Commission,
JEFFREY R. ANDERSON,
Plaintiff Securities and Exchange Commission (the "SEC") alleges:
1. This Court has jurisdiction over this action pursuant to Sections 21(d), 21(e), and 27 [15 U.S.C. §§ 78u(d), 78u(e), and 78aa]. The defendant directly or indirectly used the means or instrumentalities of interstate commerce, or of the mails, or of the facilities of a national securities exchange, in connection with the transactions, acts, omissions, practices, and courses of business described herein.
2. Jeffrey R. Anderson, age 36, resides in Plano, Texas and was Senior Vice President of Sales and Strategic Development at PurchasePro.com, Inc. during the period relevant to the conduct described herein and continuing until November 2001.
3. During the relevant period, PurchasePro was a Nevada corporation, headquartered in Las Vegas, that provided Internet business-to-business electronic-commerce software and services. PurchasePro's common stock was registered with the Commission pursuant to Exchange Act Section 12(g) and traded on the Nasdaq National Market. The company filed a voluntary Chapter 11 bankruptcy petition in September 2002, and has operated as a debtor-in-possession since then. In January 2003, the company changed its name to Pro-After, Inc. and, with the bankruptcy court's approval, sold substantially all of its assets to a privately held company called Perfect Commerce, Inc.
4. As PurchasePro's Senior Vice President of Sales and Strategic Development during the relevant period, defendant Anderson was responsible for, among other things, supervising PurchasePro's sales force, managing relationships with "strategic partners," calculating and projecting revenue from sales of PurchasePro's primary product (a business-to-business "marketplace license"), and executing written confirmations to PurchasePro's auditors that the company's sales were not subject to undisclosed side agreements or other obligations that would preclude revenue recognition.
5. From October 2000 through April 2001, Anderson knowingly or recklessly participated in a series of acts and transactions designed to inflate PurchasePro's revenues in contravention of generally accepted accounting principles ("GAAP"). In particular, he negotiated or otherwise had reason to know about side agreements with several customers that induced them to buy marketplace licenses from PurchasePro during both the fourth quarter of PurchasePro's 2000 fiscal year ("Q4 2000") and the first quarter of its 2001 fiscal year ("Q1 2001"), and thereby materially inflated PurchasePro's publicly announced and reported revenues for those quarters.
6. The side agreements generally involved one or more of the following: (i) a commitment that PurchasePro would buy product from the customer in an amount at least equal to what the customer was buying from PurchasePro; (ii) a commitment that PurchasePro would provide on-line advertising for the customer; (iii) a commitment that PurchasePro would make an investment in the customer's business; or (iv) a commitment that PurchasePro (or in some cases, its most significant "strategic partner") would in some other manner indirectly reimburse the customer for all or part of its payment obligation to PurchasePro. Set forth below are specific examples of transactions from which PurchasePro, with Anderson's knowledge, improperly recorded revenue despite the existence of side agreements that precluded revenue recognition under GAAP:
(a) During Q4 2000, a clothing company called TheThread.com, LLC bought a marketplace license from PurchasePro for approximately $720,000 after Anderson participated in the negotiation of a side agreement committing PurchasePro to invest $250,000 in TheThread's next round of financing, money it would need to have any chance of paying PurchasePro; ultimately, TheThread failed to pay for the marketplace license.
(b) Also during Q4 2000, a payment solutions company called ProfitScape.com, Inc. bought two marketplace licenses from PurchasePro for approximately $1.1 million each after PurchasePro lent $1 million to ProfitScape (at first directly and then indirectly through a substitution of lenders), money it needed in order to pay for at least one of the licenses.
(c) Also during Q4 2000, a motorcycle company called V-Twin Holdings, Inc. bought a marketplace license from PurchasePro for approximately $1.1 million after another PurchasePro officer agreed make an investment in V-Twin Holdings.
(d) During Q1 2001, an Internet website company called Bigstep, Inc. bought a marketplace license from PurchasePro for approximately $1.1 million after PurchasePro entered into a side agreement to purchase goods and services from Bigstep.
(e) Also in Q1 2001, an internet insurance company called InsureZone, Inc. bought a marketplace license from PurchasePro for approximately $180,000 after PurchasePro agreed, in essence, to forgive a $180,000 debt that InsureZone already owed to PurchasePro. In effect, Anderson and others at PurchasePro agreed to reclassify InsureZone's old debt of $180,000 as a new marketplace software license purchase, thereby improperly causing PurchasePro to recognize this $180,000 as revenue in Q1 2001.
(f) Also during Q1 2001, PurchasePro's most important strategic partner, America Online, Inc. ("AOL") assisted PurchasePro in selling its marketplace licenses to AOL's partners and suppliers through the use of side agreements in which AOL effectively reimbursed the buyer in whole or in part for the cost of the marketplace license.
7. Anderson concealed these side agreements from PurchasePro's auditors, and falsely represented to PurchasePro's auditors that there were no such side agreements, because he knew that the auditors would prohibit PurchasePro from recognizing the revenue if they knew about the side agreements.
8. In addition to participating in the inflation of PurchasePro's revenues through side agreements, Anderson knowingly falsified PurchasePro's accounting books and records and thereby caused PurchasePro to overstate the amount of revenue that was referred to it by its most important strategic partner, AOL. In November 2000, as part of an overall restructuring of several agreements between PurchasePro and AOL, the two companies entered into an amended warrant agreement that would entitle AOL to earn up to 3 million PurchasePro warrants by referring to PurchasePro third-party buyers of PurchasePro's marketplace licenses. Under an agreed-upon formula entitling AOL to $3 worth of warrants for every $1 in sales it referred to PurchasePro, AOL could earn a maximum of $30 million in warrants in Q4 2000 in exchange for referring $10 million or more of recognized revenue to PurchasePro. In Q4 2000, AOL failed to refer $10 million of revenue, and thus did not earn its maximum allowable amount of warrants for the quarter. Despite knowing this, Anderson and others at PurchasePro credited AOL with "earning" $30 million worth of warrants by falsely attributing to AOL at least $5 million in sales that AOL actually had no role in referring to PurchasePro. In inflating the revenue referrals credited to AOL in Q4 2000, and in order to conceal the truth from PurchasePro's auditors, Anderson directed a subordinate to create an inaccurate spreadsheet as support for the inflated AOL referrals.
9. Ultimately, PurchasePro's annual report on Form 10-K filed with the Commission on April 2, 2001, falsely stated that AOL had referred $10.5 million in third-party sales to PurchasePro during Q4 2000, which Anderson knew was at least twice as much as AOL had actually referred. Given the importance of PurchasePro's strategic relationship with AOL (in terms of both the amount of revenue derived from the relationship and PurchasePro's desire to be perceived as a leader in the Internet business-to-business industry), this overstatement of sales referrals from AOL was highly material to investors.
10. During Q1 2001, Anderson also participated in PurchasePro's improper recognition of $3.7 million in revenue from a purported agreement with AOL called a "Statement of Work." As Anderson knew or was reckless in not knowing, revenue recognition from the Statement of Work was improper under GAAP because, among other things, the parties never reached an agreement with respect to the services at issue, and because the services were not performed as stated in the agreement. The $3.7 million in revenue improperly recognized from the Statement of Work constituted a material portion of the $29.8 million in total Q1 2001 revenues publicly announced by PurchasePro in a press release it issued on April 26, 2001 and during a conference call with Wall Street analysts later that day.
11. In April 2001, Anderson was paid a $100,000 retention bonus by PurchasePro.
12. In April 2001, Anderson attempted to conceal his conduct, with the assistance of a senior officer, by requesting that a member of PurchasePro's technology department delete his e-mail messages relating to the first week of April 2001. Anderson's "public" e-mail files were deleted in accordance with his request, but the e-mails were nevertheless preserved on PurchasePro's backup system.
13. Paragraphs 1 through 12 are realleged and incorporated by reference.
14. By engaging in the foregoing conduct, defendant Anderson violated Exchange Act Section 10(b) [15 U.S.C. § 78j(b)] and Exchange Act Rule 10b-5 [17 C.F.R. § 240.10b-5].
15. Paragraphs 1 through 14 are realleged and incorporated by reference.
16. By engaging in the foregoing conduct, Anderson violated Exchange Act Section 13(b)(5) [15 U.S.C. § 78m(b)(5)].
17. Paragraphs 1 through 16 are realleged and incorporated by reference.
18. By engaging in the foregoing conduct, Anderson violated Exchange Act Rule 13b2-1 [17 C.F.R. § 240.13b2-1].
19. Paragraphs 1 through 18 are realleged and incorporated by reference.
20. By engaging in the foregoing conduct, Anderson violated Exchange Act Rule 13b2-2 [17 C.F.R. § 240.13b2-2].
21. Paragraphs 1 through 20 are realleged and incorporated by reference.
22. By engaging in the foregoing conduct, Anderson aided and abetted PurchasePro's violations of Exchange Act Section 13(a) [15 U.S.C. § 78m(a)] and Exchange Act Rule 13a-1 [17 C.F.R. § 240.13a-1].
WHEREFORE, plaintiff SEC respectfully requests that this Court enter a judgment that:
(i) permanently enjoins Anderson from violating Exchange Act Sections 10(b) and 13(b)(5) [15 U.S.C. §§ 78j(b) and 78m(b)(5)] and Exchange Act Rules 10b-5, 13b2-1, and 13b2-2 [17 C.F.R. §§ 240.10b-5, 240.13b2-1, and 240.13b2-2], and from aiding and abetting violations of Exchange Act Section 13(a) [15 U.S.C. § 78m(a)] and Exchange Act Rule 13a-1 [17 C.F.R. § 240.13a-1];
(ii) permanently bars Anderson from acting as an officer or director of any public company pursuant to Exchange Act Section 21(d)(2) [15 U.S.C. § 78u(d)(2)];
(iii) orders Anderson to disgorge, with prejudgment interest, any and all bonuses and other illicit benefits he received as a result of the conduct described herein;
(iv) orders Anderson to pay civil penalties pursuant to Exchange Act Section 21(d)(3) [15 U.S.C. § 78u(d)(3)]; and
(v) grants such other relief as the Court deems just or appropriate.
Andrew B. Stevens
(202) 942-9630 (fax)
Paul R. Berger
Russell G. Ryan
C. Hunter Wiggins
SECURITIES AND EXCHANGE
450 5th Street, N.W.
Washington, D.C. 20549-0911
Attorneys for Plaintiff
Paul J. McNulty
United States Attorney
U.S. ATTORNEY'S OFFICE
EASTERN DISTRICT OF VIRGINIA
Paula P. Newett
Assistant U.S. Attorney
Dated: September 23, 2003
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