PurchasePro Fraud May Expand AOL Inquiry

A ''major media company'' joined PurchasePro in secret side agreements. Also: CEOs have their say on employee satisfaction with benefits, while reporters say it with a boycott; change your auditor, expect a call from the PCAOB; and more.


A former finance executive and another key executive of PurchasePro.com Inc. pleaded guilty to criminal charges of fraud involving a “major media company,” the Justice Department said on Tuesday.

Scott H. Miller, the former controller and senior vice president of finance, pleaded guilty to impeding and obstructing a federal criminal investigation. Jeffrey R. Anderson, former senior vice president of sales and strategic development, pleaded guilty to conspiracy to commit wire fraud. The charges stemmed from their roles in a scheme to inflate PurchasePro’s sales revenue for the fourth quarter of 2000 and the first quarter of 2001.

PurchasePro, a Las Vegas-based Internet company now known as Pro-After Inc., was engaged in the sale of computer software, including a business-to-business “marketplace license.” This license allowed small and large businesses to buy and sell products on the Internet, to participate directly in PurchasePro’s own web-site-based marketplace, or to create their own branded marketplace using PurchasePro’s software.

Miller was charged with an obstruction-of-justice offense that was recently codified as part of the Sarbanes-Oxley Act, said the Justice Department.

The government accused Miller of failing to turn over PurchasePro-related documents in response to an SEC subpoena and lying to the SEC under oath about his production of the documents. In February 2003, according to the court documents, after being asked by the government to preserve any PurchasePro-related documents, he attempted to permanently delete the documents from his laptop and shredded paper copies of other documents “with the intent to impede, obstruct, and influence both a criminal investigation relating to PurchasePro and a formal investigation by the SEC.”

Anderson, other senior officers at PurchasePro, and an employee of a “major media company” in the United States conspired to falsely inflate the revenue that PurchasePro reported for the fourth quarter of 2000 and first quarter of 2001, said the Justice Department. A substantial amount of the reported revenue was earned from marketplace license sales — sales that were improperly recognized as revenue, added the department, because Anderson and the others had achieved the sales as a result of side agreements with the purchasers that had been kept secret from PurchasePro’s outside auditors and the investing public.

The government also noted that PurchasePro had a warrant agreement with the media company that allowed that company to “earn” a total of $30 million worth of PurchasePro warrants. In exchange for the warrants, at least half of which were earned when PurchasePro provided to the media company false credits for referrals, the media company agreed to reward PurchasePro with revenue in future quarters.

An employee of the media company and others then entered into secret side agreements with the media company’s partners and suppliers, resulting in their purchase of marketplace licenses in the first quarter of 2001, in an effort to help PurchasePro meet its revenue objectives, the government said.

The Justice Department did not name the “major media company.” However, The New York Times, citing “people involved in the investigation,” confirmed that the media company is AOL.

Last October, AOL Time Warner restated revenues downward by $190 million for the eight quarters ended June 30, 2002 stemming from advertising and commerce transactions at its America Online division. It is unclear whether that figure accounts for any agreements with PurchasePro.

A number of recently published reports have stated that the SEC and Justice Department have been investigating the America Online unit over its accounting for revenue from some advertising and commerce deals. PurchasePro and a number of companies, including Homestore Inc., were identified in those reports as possible targets of the probes. (Seven Homestore executives recently settled charges stemming from a financial fraud scheme, and three face additional criminal charges.)

In the PurchasePro case, Miller faces a maximum prison term of 20 years and a fine of up to $250,000. He has agreed to cooperate with the government’s ongoing investigation.

Anderson faces a maximum prison term of five years and a fine of up to $250,000. In addition, he has agreed to pay full restitution to the victims. Anderson has also agreed to cooperate with the government’s ongoing investigation.

Benefits Satisfaction, Part One: The View from the CEO

Chief executive officers from the fastest-growing companies concede that they rate their company’s health-care benefit plan higher than they rate their employees’ level of satisfaction with their plan, according to a new PricewaterhouseCoopers study.

Among what PwC classifies as “Trendsetter CEOs,” 36 percent rate their company’s health-care benefit plan as “excellent — above industry standards”; 46 percent describe it as “good — in line with industry standards”; and 15 percent say their plan is just “fair — below industry standards.”

Among those same CEOs, when rating their employees’ level of satisfaction with their plan, just 24 percent said “excellent,” 55 percent said “good,” and 16 percent said “fair.”

One reason for employee dissatisfaction, found the study, might be that only 43 percent of the CEOs reported that they regularly survey employees to obtain a better understanding of their needs. “It is surprising that more employee surveying is not done when it comes to this highly valued and quite expensive cost of doing business,” said Ron Bachman, a principal in PwC’s Human Resource Services group, in a statement.

In addition, just 20 percent of these CEOS use metrics when budgeting for their company’s health-care coverage, according to the survey; “percent of payroll” was the most common.

Other findings from the survey:

  • 95 percent of “Trendsetter” companies provide prescription drug coverage for their employees; 77 percent include dental care; 61 percent include eye care.
  • The surveyed CEOs reported that they budgeted an average of $4,860 per full-time employee for health-care coverage in 2003; the average is higher among service companies ($5,035) than among product companies ($4,660).

Benefits Satisfaction, Part Two: Boycott at Dow Jones

One group of employees that’s become disenchanted with their health-care benefits are the reporters for Dow Jones & Co. publications, including The Wall Street Journal.

This week they began a month-long boycott of voluntary appearances on CNBC. It seems that the Independent Association of Publishers’ Employees Local 1096, whose most recent contract with Dow Jones expired in April, is protesting the company’s proposal to introduce monthly premiums for health-care coverage and to raise co-payments and deductibles — a popular trend among employers for the past decade.

“These actions [are] in response to the management’s attempts to impose sweeping cutbacks in employee health-care benefits during the current round of contract talks,” the union said in a statement.

While most companies are bracing for a hike in health-insurance premiums of another 14 percent or so for 2004, federal workers and retirees figure to fare much better. Their premiums are expected to rise next year by an average of only 10.6 percent, according to the Bush Administration.

Premiums for health maintenance organizations will increase an average of 9.9 percent next year, while federal workers in fee-for-service plans will see an average increase of 10.7 percent, the government added.

Change Your Auditor, Expect a Call from the PCAOB

A board member of the Public Company Accounting Oversight Board warned that the newly created regulator will launch an investigation whenever companies fire their auditors.

“Whenever you see a change in auditor, the Public Company Accounting Oversight Board is going to look into it,” Charles D. Niemeier told a panel at the Directors’ Institute on Corporate Governance, according to the Associated Press. The event was sponsored by the Practising Law Institute and the American Management Association.

Board audit committees need to ask tough questions whenever management attempts to change its auditor, said Niemeier, according to the published account of the speech.

The big issue, of course, would crop up when a company fires auditors who are reluctant to support top management when it wants to improperly “push the accounting envelope.” Until recently, added Niemeier, audit committees were too willing to go along with such midstream auditor switches.

Niemeier concedes that sometimes management and auditor disagree over technical issues. However, he added, “there are plenty of times [companies] wanted to change auditors because they weren’t being given the answer they wanted.”

The Sarbanes-Oxley Act, which created the PCAOB, also requires audit committees to take direct responsibility for the appointment, compensation, and oversight of the company’s independent auditors, who must report directly to the audit committee.

Short Takes

  • Dana Corp. Tuesday announced the sudden and unexpected passing Monday evening of its chairman and chief executive officer, Joseph M. Magliochetti. He had been hospitalized since earlier in the month due to pancreatitis.
  • Sara Lee Corp. more the doubled the 2003 bonus of chief financial officer L.M. (Theo) de Kool, to nearly $840,000. Altogether, he took home more than $2.1 million, including realized gains from exercised stock options and the value of his restricted stock award.
  • Sean Harrigan, president of the board of administration of the California Public Employees Retirement System (CalPERS), called for an “overhaul” of governance at the New York Stock Exchange. “The board ought to be significantly smaller,” he said in a conference call with reporters. “Half of the seats on the board ought to be held by investors.”

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