Ex-Peregrine execs hit with accounting fraud charges

The Department of Justice has charged eight former executives of software maker Peregrine Systems Inc., the company's former outside auditor and two of its outside business partners with conspiracy to commit a multi-billion dollar securities fraud.

At the same time, the Securities and Exchange Commission filed civil charges against six former Peregrine Systems executives, as well as the company's former outside auditor and two of its former outside business partners.

The DOJ indictment charges former Peregrine chief executive Stephen Gardner; former executive vice presidents for worldwide sales Douglas S. Powanda and Andrew Cahill Jr.; former vice president for Europe and emerging markets Jeremy Reeve Crook; former president and chief operating officer Gary Lenz; former senior vice president of alliances Joseph Reichner; former vice president of finance and chief accountant Berdj Rassam; former revenue manager Patrick Towle; former KPMG Consulting LLC managing director Larry Rodda; former president of Barnhill Management Corp. Michael Whitt; and former Arthur Andersen LLP audit partner Daniel Stulac, with conspiracy to commit securities fraud, securities fraud, wire fraud, bank fraud, and falsifying books and records.

The indictment alleges that, from March 1999 to May 2002, the executives conspired to deceive the public about Peregrine's true financial performance by improperly booking software license revenue on backdated, impaired or sham transactions; duped lenders into extending credit based on false financials and false accounts receivable; concealed a mountain of uncollectible accounts receivable by keeping bad debts associated with the deals off the books and writing them off as related to acquisitions; and used tricks such as manipulations of reserves and unsupported journal entries to boost the company's financial appearance.

From its initial public offering in 1997 through 2002, Peregrine met or exceeded analysts' revenue growth expectations for 17 consecutive quarters, sending its stock soaring, according to the indictment. In September 2002, Peregrine filed for federal bankruptcy protection, eventually canceling its common stock, leading to the loss of over $4 billion in shareholder equity.

"The indictment charges these defendants with a massive conspiracy that had at its core one corrupt goal: to hit the numbers quarter after quarter, no matter what," said U.S. Attorney General John Ashcroft. "The betrayal of the public trust alleged in this indictment extended from the chief executive officer who headed the scheme to the independent auditor who knowingly certified the company's false financial statements and allegedly made the continuing fraud possible."

In addition, the Department of Justice said that former Peregrine director of alliances Peter J. O'Brien pleaded guilty in early October to obstruction of justice charges. Three other Peregrine executives have already pled guilty in the investigation - former CFO Matthew C. Gless pled guilty to conspiracy and securities fraud; former sales vice president Steven S. Spitzer pled guilty to conspiracy to commit securities fraud; and former assistant treasurer Ilse Cappel pled guilty to conspiracy to commit bank fraud.

"The investing public must depend on the integrity of accounting professionals and company officers, and particularly on outside auditors, as a limiting check and balance on a corrupt company's ability to deceive the public," Deputy Attorney General James Comey said. "When an outside auditor conspires with company officials to deceive the public, the potential to cause harm is vast, as the billions of dollars of losses involved in this case amply demonstrate."

The SEC filed civil fraud and related charges against six former officers of Peregrine Systems Inc. who it said orchestrated and attempted to cover up the massive accounting fraud, as well as three others who it said were involved in the fraud. According to the commission's complaint, filed in San Diego District Court in early October, the six executives inflated the product revenue that Peregrine reported in its filings, covered up Peregrine's persistent failure to fulfill revenue forecasts, and, in some cases, made millions by unloading Peregrine stock.

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