Peregrine Trial – End of January to February 1st
Comments by Bob Grimes and Dana Grimes
January 23, 2008
Having previously pled guilty to Conspiracy to Commit Securities Fraud and Wire Fraud, Larry Rodda was sentenced today. Mr. Rodda’s family was present in the courtroom. Attorney Craig Allison appeared on his behalf, and AUSA Eric Beste appeared on behalf of the Office of the U.S. Attorney.
Judge Whelan sentenced Mr. Rodda to six months in the custody of the Bureau of Prisons with a recommendation of federal prison camp, followed by six months of house arrest. The Government and federal probation agreed that Mr. Rodda was less culpable and more cooperative than co-defendant Michael Whitt, who pled guilty to a different statute but for similar conduct. The Government stated in its sentencing documents that it appropriately recognizes what the probation department also noted that “inequity would result were the Sentencing Guidelines to be rigidly applied to calculate a higher sentence in Rodda’s case than in Whitt’s.”
AUSA Beste did not present an argument at sentencing, but rather submitted on the Government’s Sentencing Memorandum, which recommended an adjusted offense level of 15, and a sentence of one year and one day in custody (which is exactly what the Government recommended for Mr. Whitt). Mr. Rodda received a 7 level downward departure for his substantial assistance to the Government. Without this departure, he probably would have received a sentence in the guideline range of 30-37 months.
Judge Whelan granted Mr. Rodda’s request – which was not opposed by the Government – to stay the immediate execution of sentence and order a surrender date four weeks hence.
Mr. Rodda was not a Peregrine employee; he was a principal at KPMG. He did not work in the KPMG accounting department, and maintains that he reasonably believed Peregrine to be a successful company. In his plea agreement, Rodda admitted that he signed license agreements with Defendants Steven Spitzer and Douglas Powanda that purported to obligate KPMG to purchase software from Peregrine.
Attorneys Gene Iredale and Mike Attanasio were present at Mr. Rodda’s sentencing. Mr. Iredale, who successfully defended Joe Reichner in the first trial, may be substituting in to defend Patrick Towle in the re-trial. It is our understanding that the Government will oppose Mr. Iredale’s replacing Mr. Towle’s current counsel, Kate Thickstun (formerly Kate Leff).
January 29, 2008 – 9:00 a.m. to 4:00 p.m.
The jury panel, consisting of 60 people, was examined by the court and counsel. The voir dire of the jury panel will continue tomorrow at 9:00 a.m. It is likely that the prosecution’s opening statement will begin tomorrow afternoon. The court’s schedule will be 9:00 a.m. to 12:00 p.m. and 1:00 p.m. to 3:30 p.m. on Tuesdays, Wednesdays and Thursdays. The schedule for Fridays will be from 9:00 a.m. to 1:00 p.m., and the trial will not be in session on Mondays. The Government’s time estimate for this re-trial is four weeks, but the jury panel has been screened for availability through mid-March.
The two defendants in this trial, Dan Stulac and Patrick Towle, were present with their counsel, Mike Attanasio and Kate Thickstun (formally Kate Leff), respectively. AUSA’s Eric Beste and Bill Narus will be appearing throughout this trial on behalf of the Government.
Yesterday, Judge Whelan granted the Government’s motion to continue the hearing on Attorney Robert Brewer’s motion to sever Richard Nelson’s trial from the remaining defendants, Jeremy Crook, Eric Deller and “any of the original defendants who may face re-re-trial if the jury once again is hung.” Attorney Brewer argued that Mr. Nelson faces a danger of being convicted due to spill-over evidence presented against the co-defendants who were involved in sales and auditing. Mr. Nelson was Peregrine’s corporate counsel.
AUSA Eric Beste was accompanied by AUSA Faith Devine. They will be representing the Government during the re-trial of these two defendants.
January 30, 2008 – 9:00 a.m. to 4:30 p.m.
After another full day of voir dire of increasingly restless prospective jurors, a 12-person jury panel was selected. Many prospective jurors were thanked and excused by Judge Whelan because of their knowledge of the previous trial. The dominant themes of the defense voir dire were the presumption of innocence and the prosecution’s burden of proof beyond a reasonable doubt. The defense also asked the jury if it could consider the possibility that the people who were guilty of the fraud at Peregrine had already pled guilty, and that the remaining defendants on trial are not guilty.
AUSA Eric Beste emphasized the necessity of basing a verdict on evidence and not sympathy. Prior to questioning by the lawyers, the prospective jurors had provided information regarding their backgrounds, including family history and work history. The lawyers made further inquiries of individual jurors regarding aspects of those jurors’ life experiences that the lawyers believed were significant. One question that defense counsel kept returning to with prospective jurors was “Do you believe white-collar criminals get off too easy?” A second question was “Do you believe there to be a lot of conspiracies in the business world?” A number of prospective jurors responded affirmatively to both of those questions. After one particularly colorful prospective juror indicated that he was “eager to see what kind of guys the prosecutor cut a deal with,” he was thanked and excused by the Government.
Even though the 12 trial jurors have been selected, tomorrow there will be additional voir dire to select three alternate jurors. Opening statements by both sides will follow. The Government has announced that its first two witnesses will be Bob Austrian and Edward Weinstein; the latter is an expert in accounting. In this re-trial there will probably be much more expert testimony regarding generally accepted accounting principles.
In the first trial, which lasted three months, there was a great deal of testimony regarding practices of the sales staff at Peregrine. This re-trial, which has a time estimate of only four weeks, will be much more focused on accounting practices. Defendant Patrick Towle was Peregrine’s Revenue Accounting Manager from November 1999 through November 2002, and was one of those responsible for determining whether license revenue from domestic contracts could be booked, and for consolidating revenue figures. Defendant Daniel Stulac was previously an accountant at the Arthur Andersen accounting firm, and was the Senior Accountant or Engagement Partner for the audits of Peregrine’s financial statements during Peregrine’s fiscal years 1999, 2000, and 2001. None of the defendants charged with fraud on the sales side of Peregrine are involved in this trial.
January 31, 2008 – 9:40 a.m. to 3:30 p.m.
Three alternate jurors were selected and sworn in this morning. Judge Whelan admonished the jury, consisting of nine women and three men, not to conduct any independent investigation in this case, and not to listen to news or internet reports on or discuss the trial until deliberations. Before excusing the jury for the morning recess, Judge Whelan read the jury instruction on the burden of proof beyond a reasonable doubt, noting that because it is such an important concept, he wanted the jurors to begin with it in mind.
AUSA Bill Narus delivered the opening statement for the Government with confidence and clarity. He said there are two ways that Stulac participated in the fraud: he lied to the public about Peregrine and he overruled and silenced a German auditor. AUSA Narus said that as an independent auditor of Peregrine, Stulac was in the role of a “corporate cop,” whose job was to protect the public. He also told the jury that they would hear from a former Arthur Andersen lawyer. This lawyer, according to the Government, will testify that Stulac told him that what Peregrine was doing was wrong, and that this knowledge gave Stulac a sick feeling to his stomach. AUSA Narus argued Dan Stulac was motivated by a desire to work for Peregrine, and that Mary Lou O’Keefe will testify to that effect. The Government also stated that there was a potential for tremendous profits by these defendants, but that that potential was not realized because the fraud was exposed.
AUSA Narus said there were likewise two ways Patrick Towle participated in the fraud: by leaving the quarter open to recognize revenue improperly, and by calling things revenue that had no business being called revenue. Both the Government and defense counsel explained generally accepted accounting principles and the types of business Peregrine was engaged in, including direct sales and channel sales. AUSA Narus said that Towle’s job was to gather the sales contracts as they came in, and then determine if the sale was within the quarter and if collection was probable. If the answer to either of those questions was no, the contract amount could not be recognized as revenue. The theory of the Government is that, through accounting tricks, Towle improperly raised the revenue to meet Wall Street’s expectations, thus keeping the stock price of Peregrine inflated.
AUSA Narus stated that Matt Gless told Stulac in a meeting that they were going to call $26.5 million in uncollectible accounts receivable an “acquisition expense.” AUSA Narus stated that Stulac knew this was improper, but he went along with it. AUSA Narus gave examples of specific deals in which Stulac concealed liabilities. He supported his argument with bullets on a PowerPoint presentation.
Daniel Stulac’s attorney, Mike Attanasio, began his opening statement by drawing a large zero and dollar sign on a pad of butcher paper and explaining that the fraud at Peregrine was worth millions of dollars, and not one dollar was made by Stulac. He reminded jurors throughout his opening statement to “follow the money,” because that inevitably is the motive. Attorney Attanasio provided the example that in a period of ten days between February 15 and 25, 2000 (before Stulac was managing the Peregrine account), Matt Gless, the CFO of Peregrine, grossed $3.1 million by exercising his stock options. During those same ten days, Steve Gardner, Peregrine’s CEO, made $11 million – more than a million dollars a day. He argued that Gardner and Gless were the architects of the fraud, and now they are pointing their fingers at the little guys in an attempt to get a better Government recommendation at sentencing. He noted that Gless pled guilty in 2003 and has not yet been sentenced nor has he spent a day in jail – he argued that the reason for that is that Gless is going to come into court and testify, and then hope for a good recommendation.
At this point, Attorney Attanasio, who had so far been behaving in his usual conversational and charming manner toward the jury, became more serious. With the perfect amount of gravitas and sincerity in his voice, he referred to the stock collapse of Peregrine and stated “the prosecution told you that these two guys didn’t lose anything.” He paused, then looked at his client and said, “Mr. Stulac now lives in the basement of the home he grew up in.”
He then disputed the notion that an auditor is a “corporate cop,” arguing that cops search through trash and serve subpoenas, and auditors must by definition rely on the information they are provided; garbage-in, garbage-out. He went into great detail about the timeline of the fraud at Peregrine, and used a graph indicating that Stulac’s one-year tenure was short, and that the more seasoned Arthur Andersen partners who worked on the Peregrine account before and after him had likewise failed to catch the “collusive fraud,” because that type of fraud is designed to slip pass auditors.
Kate Thickstun, who is representing Patrick Towle, went into great detail regarding Patrick Towle’s position at Peregrine, and emphasized that he was a young accountant with the ink not yet dry on his CPA. She argued that he was extremely busy at Peregrine, and was unwittingly used by the “inner circle” of the fraud perpetrators (which consisted of Andy Cahill, Doug Powanda, Jeremy Crook, Matt Gless and Steve Gardner).
February 1, 2008 – 9:00 a.m. to 1:00 p.m.
The Government is using a very different strategy in this retrial of Stulac and Towle. In the first trial, the first several witnesses testified regarding the rise of Peregrine stock at certain times – particularly after press releases and public filings – and then its ultimate decline. In his cross-examination of one of these witnesses, Attorney Gene Iredale pointed out that market forces during that period caused many stocks to lose money, and that the NASDQ went from 5,132 on March 10, 2000 to a low of 1,100 at the end of 2002. (Iredale successfully defended Joseph Reichner in the first trial, and Patrick Towle attempted to retain Iredale for Towle’s retrial, but the Government persuaded the court that there was an unwaivable conflict of interest, so Iredale will remain on the sidelines during this retrial.) Very early in the first trial, the prosecution called cooperating co-defendant Douglas Powanda, who testified for five days regarding the fraudulent practices that he participated in as vice president of sales (and related positions). In this retrial, the Government has elected to start its case with expert testimony regarding accounting principles. Today’s witness, Edward Weinstein, testified on this topic.
Edward Weinstein was called to the stand this morning by AUSA Eric Beste, who conducted the direct examination. Mr. Weinstein detailed his long career as a CPA for Deloitte & Touche, one of the “Big Four” accounting firms, along with PricewaterhouseCoopers, Ernst & Young, and KPMG. (Deloitte & Touche used to be one of the “Big Five” accounting firms, along with Arthur Andersen.) On direct, Mr. Weinstein was presented as a highly qualified, credible expert in accounting. Wearing a nice suit and charging the Government $525 per hour, Mr. Weinstein explained numerous accounting principles, the purpose of financial statements and rules such as Generally Accepted Accounting Principles (GAAP). He also explained where bad debts are usually found in a balance sheet. He explained the concept of “revenue” in great detail, noting that the two requirements of revenue recognition are that it is earned before the “cut-off” period, and that it is recognizable in accordance with the accounting rules. He also testified that an auditor must maintain independence, objectivity and integrity, and that shareholders depend upon audited financial records accurately reflecting the financial situation of a company.
Using a detailed PowerPoint presentation involving a fictional shoe supply company as an example, Mr. Weinstein opined that “contingent sales” do not allow for revenue recognition, and that even if it is a side deal that makes a particular sale contingent, there might be signs an auditor would notice alerting him to the possibility that it might be an uncollectible account. AUSA Beste elicited from the expert an explanation of the warning signs for “channel stuffing,” as well as his opinion that “extended payment terms” should make auditors suspicious of their client. Jurors, some of whom took notes, appeared attentive to the fairly technical expert testimony. One juror even tried to ask the expert her own question; the court explained that this was not possible.
Mr. Weinstein testified regarding various standards and rules in the accounting and auditing fields. He stated that one such rule for auditing a software company mandates that there must be persuasive evidence of an agreement, a delivery, a fixed and agreeable fee, and probable collection in order to recognize revenue.
After the jury was excused for the day, Attorney Attanasio expressed to the court his concern that they might mistakenly believe that audit malpractice is a criminal offense. He asked Judge Whelan to read a jury instruction before further testimony Tuesday, explaining that the standards discussed by Mr. Weinstein are not the laws Mr. Stulac is accused of violating, and that GAAP are not found within a criminal statute. A few times during direct examination, Judge Whelan sustained Attorney Attanasio’s objections that Mr. Weinstein was testifying about facts relating to Peregrine, and argued that that subject was outside of the scope of his expertise. The Government’s position is that GAAP violations are relevant as evidence of intent. Judge Whelan agreed to read a cautionary instruction to the jury indicating that Mr. Weinstein’s testimony is to be used for the purpose of outlining accounting in general, and it is not to be regarded by the jurors as a comment on anything that happened in this particular case.
Testimony resumes Tuesday morning.