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Securities and Exchange Comm'n v. Johnson

May 23, 2007

SECURITIES AND EXCHANGE COMM'N, PLAINTIFF,
v.
CHARLES JOHNSON, JR., ET AL., DEFENDANTS.



The opinion of the court was delivered by: Gladys Kessler United States District Judge

MEMORANDUM OPINION

Plaintiff Securities and Exchange Commission ("SEC") brings this action against five individual Defendants alleging a fraudulent scheme to materially and improperly inflate the announced and reported revenues of PurchasePro.com, Inc. ("PurchasePro").*fn1 This matter is before the Court on Defendant Christopher Benyo's Motion for Summary Judgment. Upon consideration of the Motion, Opposition, Reply, Surreply, and the entire record herein, and for the reasons stated below, Defendant's Motion for Summary Judgment [Dkt. No. 82] is denied.

I. BACKGROUND

Defendants in this case are former executive-level employees of PurchasePro, a Nevada corporation, and America Online, Inc. ("AOL"). The SEC alleges that between November 2000 and June 2001, Defendants participated in a scheme to commit securities fraud. The alleged purpose of the scheme was to improperly inflate PurchasePro's reported revenues and to otherwise misrepresent PurchasePro's business activities for the last quarter of 2000 and the first quarter of 2001.

The SEC claims that to accomplish this purpose, Defendants engaged in a series of transactions in which PurchasePro sold software licenses to third-party companies in exchange for PurchasePro's promises to invest in those companies at a later date. Defendants then allegedly reported the income from the license sales in PurchasePro's Form 10-K for 2000, filed with the SEC on April 2, 2001, without disclosing the contingent side agreements. Defendants also allegedly back-dated sale documentation so that revenue would be recognized in the fourth quarter of 2000 and the first quarter of 2001, although that revenue was not actually earned in those quarters. The SEC claims that PurchasePro improperly included those back-dated transactions in revenue information reported in an April 26, 2001 national press release, an April 26, 2001 conference call, and in PurchasePro's Form 10-Q for the first quarter of 2001, which it filed with the SEC on May 29, 2001.

Defendant Christopher Benyo ("Benyo") was PurchasePro's Senior Vice President for Marketing and Network Development during the relevant period. He currently resides in Greer, South Carolina. The SEC alleges that Benyo violated four sections of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. § 78a et seq. Specifically, the SEC alleges that Benyo aided and abetted PurchasePro's violations of Exchange Act Section 10(b), 15 U.S.C. § 78j(b), and Rule 10b-5 (Count III); falsified books and records and circumvented internal controls in violation of Exchange Act Section 13(b)(5), 15 U.S.C. § 78m(b)(5), and Rule 13b2-1 (Count IV); misled an accountant or auditor in violation of Exchange Act Rule 13b2-2 (Count VI); and aided and abetted PurchasePro's violations of Exchange Act Sections 13(b)(2)(A) and (B), 15 U.S.C. § 78m(b)(2)(A) and (B), by falsifying books and records (Count IX).

Specifically, the SEC alleges that Benyo participated in the creation of a fraudulent Statement of Work that purported to reflect a project to be performed by PurchasePro for AOL in the first quarter of 2001. The Statement of Work was executed after the close of the quarter and was back-dated to mislead investors.

The SEC alleges that Benyo was involved in concealing the fact that PurchasePro never completed the project documented in the Statement of Work. Benyo allegedly proposed the creation of an internet hyperlink designed to generate the false appearance, for the benefit of PurchasePro's auditors, that the services described in the Statement of Work had actually been performed. PurchasePro included $3.65 million in revenue from this contract in its April 26, 2001 earnings announcement, but did not include it in the revenue figure reported in the Form 10-Q filed with the SEC on May 29, 2001 because the auditors subsequently became aware of information raising concerns about the authenticity of the contract. The SEC alleges that as a result of his participation in the scheme to inflate PurchasePro's reported revenue, Benyo received a bonus payment of $100,000.

Benyo has moved for Summary Judgment on the ground that venue is not proper in the District of Columbia because the events giving rise to the claims against him occurred only in Nevada.*fn2

II. Defendant's Motion Is Denied Because Venue Is Proper in the District of Columbia Under the Co-Conspirator Venue Theory

Under the Exchange Act, venue is proper "in the district wherein any act or transaction constituting the violation occurred . . . or in the district wherein the defendant is found or is an inhabitant or transacts business. . . ." 15 U.S.C. § 78aa. It is well-settled that the filing of documents with the SEC has a locus in the District of Columbia and establishes venue here. See SEC v. Savoy Indus., Inc., 587 F.2d 1149, 1154 (D.C. Cir. 1978)("[T]he act of filing has a locus in the District of Columbia."); SEC v. Daly, No. 05-55, slip op. at 4 (D.D.C. Feb. 11, 2006) (in aiding and abetting case, "the act of filing documents with the SEC has a locus in the District of Columbia"); SEC v. Ernst & Young, 775 F. Supp. 411, 413 (D.D.C. 1991).

"Without question, the intent of the venue and jurisdiction provisions of the securities laws is to grant potential plaintiffs liberal choice in their selection of a forum . . . ." Sec. Investor Prot. Corp. v. Vigman, 764 F.2d 1309, 1317 (9th Cir. 1985) (internal citations omitted). Accordingly, in securities fraud cases involving multiple defendants acting in multiple districts, courts apply the co-conspirator theory of venue. See SEC v. Diversified Indus., 465 F. Supp. 104, 111 (D.D.C. 1979); Hilgeman v. Nat'l Ins. Co. of America, 547 F.2d 298 (5th Cir. 1977); Wyndham Associates v. Bintliff, 398 F.2d 614 (2d Cir. 1968), cert. denied, 393 U.S. 977 (1968); see also 15 Charles A. Wright, Arthur R. Miller & Edward H. Cooper, Federal Practice and Procedure § 3824 (3d Ed. 2007).

The co-conspirator venue theory provides that "in multi-defendant and multi-forum securities fraud actions any act committed material to and in furtherance of an alleged fraudulent scheme will satisfy the venue requirement of the Exchange Act as to all defendants wherever the defendants are found." SEC v. Nat'l Student Marketing Corp., 360 F. Supp. 284, 292 (D.D.C. 1973); see also Diversified Indus., 465 F. Supp. at 111 ("The co-conspirator venue theory, in essence, provides: '[A]ny allegation of a securities act violation is sufficient for venue purposes even as to a defendant who did not commit an act within the district if that defendant is in league with a defendant who did act within the district.'")(internal quotation omitted).

The co-conspirator venue theory serves the important purpose of "joining all defendants in one action, thereby avoiding duplicitous litigation and inconsistent results." Vigman, 764 F.2d at 1317, and supports "[t]he strong policy favoring the ...


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