Peregrine Trial – Week 10
Comments by Bob Grimes
June 12, 2007 – 8:30 a.m. to 3:15 p.m.
WITNESS STEPHEN GARDNER (continued)
On direct examination, AUSA Beste asked Gardner questions that emphasized that Peregrine’s problems with getting some transactions to close before the quarter’s end were always discussed at management forecast meetings. Peregrine executives usually in attendance at the forecast meetings were Gardner, Gless, Cahill, Powanda, Lenz, Reichner and Vancheeswaran.
AUSA Eric Beste put forecast meeting charts into evidence. These forecast charts listed Peregrine deals that were pending and also listed “red” deals. The deals on the chart in red ink were problem deals. For example, one red deal was a contract between Peregrine and KPMG/Citibank. According to Gardner, Peregrine had booked $7-$8 million with KPMG on this contract, but ended up only having a $3 million deal with Citibank. Gardner testified that his recollection is that Peregrine was left with approximately $4.2 million to burn on this contract. Steve Gardner testified that his general recollection is that Gless talked about these red deals at forecast meetings when Gary Lenz and Joe Reichner were present.
Gardner testified that he had discussions with Lenz to the effect that barter transactions were looked at with suspicion by financial analysts, and therefore it was Gardner’s policy to try not to disclose Peregrine’s barter transactions. AUSA Beste introduced an e-mail into evidence that Lenz wrote to Gardner, asking if Peregrine was going to disclose that Peregrine’s contract with New Era Networks was a reciprocal deal. Gardner responded to Lenz’s e-mail, stating that the “LAST” thing we want to do is disclose the reciprocal nature of the transaction.
Steve Gardner testified about a Peregrine deal with British Telecom (BT). The BT deal, which seemed to be a sure thing in September 2000, would have been the largest deal Peregrine had ever had at that time. The contract was for $15-$16 million. Gardner testified that the dream deal with BT turned into a nightmare and was never finalized. In 2001, when Lenz was executive VP in charge of Xanadu, Gardner said that he explained to Lenz that BT could be a problem customer. BT was a potential customer for the new Peregrine product Xanadu, which Gary Lenz was responsible for promoting and developing. Gardner told Lenz to be skeptical when dealing with BT.
Gardner made a Freudian slip and spoke about the time difference between Britain and California by referring to his time zone as “Rancho Santa Fe time.” Don’t we all want to live in that time zone?
Gardner testified that he exercised his Peregrine stock options in March 1999 for $2.5 million, in August 1999 for $3 million, and over a four to five day period in February 2000 he exercised over $11 million worth of his stock options. Gardner testified that around July and August of 2001, he could have exercised $20-30 million in additional options but he chose not to because he had plenty of money and believed that “Peregrine would get out of the hole we were digging” and the stock would be worth a lot of money some day.
Steve Gardner testified that in early 2001, Los Angeles County was considering entering into a contract with Peregrine. Peregrine was disappointed when the deal did not close at the end of the March 31, 2001 quarter. Gardner said that Lenz suggested taking the contract to FMI. According to Gardner, both he and Lenz knew that FMI was a small company and could never afford to pay on the contract. Gardner said that despite his reservations, he told Lenz to go ahead and try to get FMI to sign as a partner for the LA County contract. Lenz was successful in getting FMI to sign. To the best of his knowledge today, Gardner says he does not think the LA County contract was ever finalized.
Steve Gardner described himself as being disappointed in Gary Lenz’s performance at Peregrine. Gardner moved Lenz from the COO position to head of the Peregrine Alliances and Integrated Solutions Group (ISG). Later, Lenz’s duties became further narrowed and he was named Executive VP of Xanadu.
Gardner said that the Peregrine management representation letters that he signed were not accurate but he had no reason to believe that AA knew they were false. Gardner said that an incident that occurred around June 2001 led him to wonder if Dan Stulac knew of Peregrine’s practice of keeping its books open past the end of quarters. Gardner said that when he asked Stulac how the audit was going, Stulac replied that he had found a couple of “troublesome” items. Stulac told Gardner that he found a handful of contracts dated in one quarter that had been booked in a previous quarter. Gardner said that Stulac was calm and never said anything more.
Peregrine stopped its practice of keeping the books open after September 11, 2001. Gardner testified that there was no point in it since Peregrine couldn’t meet its numbers anyway because business was so bad. Peregrine downsized after September 11, 2001 and Reichner was assigned to work for Cahill. According to Gardner, Reichner and Cahill did not like each other and did not work well together. Gardner testified that Joe Reichner held Andrew Cahill responsible for creating a lot of the “burn” that everyone at Peregrine was trying to get rid of. Gardner’s testimony portrays Reichner as being tempermental.
June 13, 2007 – 8:30 a.m. to 3:15 p.m.
Steve Gardner continued his direct examination under the questioning of AUSA Eric Beste. He testified regarding the 30-day right of return that Peregrine began to include in contracts with some customers in 2000. CFO David Farley told Gardner that someone at AA told Farley that this was acceptable. In April of 2000, AA accountants Bigelow and Stulac said that the 30-day out clause was acceptable, but only if it was done in all contracts. Gardner felt that it should not be used in all contracts, because this could create greater risk with some customers. Either Bigelow or Stulac (Gardner was not sure which one) said that from a business perspective it might create more risk, but from an accounting perspective, it was better to have uniformity on this policy. Bigelow said he was going to think more on this topic and get back to Gardner, but Gardner never heard back from him on this subject. Peregrine continued to include the 30-day out clause in some contracts, usually involving over $1 million in software sales. In the BT deal (which Gardner testified about at length yesterday), the 30-day out clause proved very unfavorable to Peregrine when it was exercised by BT.
Gardner testified regarding an e-mail from Joe Reichner to Gary Lenz and others summarizing sources of income for the quarter ending March 31, 2001. It included a table of sources of revenue. There was a note that KPMG had taken paper in the amount of $5 million on a contract where Honeywell/Boeing was the end-user. Reichner and O’Brien were referenced on this transaction. Gardner said that Peregrine still had the obligation to sell to the end-user in this transaction, and KPMG was not going to pay Peregrine until the end-user paid.
Gardner was dissatisfied with the performance of Lenz, and fired Lenz on January 3, 2002. Lenz protested that he still believed that the Xanadu project to which he had been assigned was going to be successful, but Gardner would not change his mind. Gardner and Lenz ended up agreeing on a severance package for Lenz that was consistent with the offer letter Lenz received when he was hired by Peregrine. As a courtesy to Lenz, his firing was described as a move to the Office of the Chairman. Shortly afterwards, Joe Reichner was fired by Andy Cahill. Reichner talked to Gardner about this and said that he understood that Gardner had to choose between Cahill and Reichner, but he was disappointed that Gardner had chosen to stay with Cahill.
AUSA Beste asked Gardner if he feared that either Lenz or Reichner would report any wrongdoings at Peregrine to the SEC or any other authorities. Gardner said that he could see no upside for either of them to report anything to the authorities, as they had been at the same meetings that Gardner had attended. Neither Reichner nor Lenz threatened to report any improprieties to the authorities.
In late April of 2002, as it was clear that his actions at Peregrine were going to be scrutinized, Gardner purchased a program called “Window Washer” and attempted to remove all information more than one year old related to Peregrine that was on his computer. His excuse was going to be that this was in compliance with a document retention policy, but he admitted that he really was trying to cover up evidence of his own wrongdoing.
At 10:15 a.m., cross-examination began, after more than four court days of direct testimony. Attorney Gene Iredale conducted the cross-examination. Iredale is a very experienced trial lawyer, with a flair for drama, and the audience area of Judge Whelan’s courtroom was almost entirely full as the cross-examination began.
Iredale began by going over the plea agreement that Gardner signed with the Government in March of 2007, just before Gardner had been scheduled to go to trial with the present co-defendants. Without the plea agreement lid of 20 years, the federal sentencing guidelines would have called for a suggested sentence for Gardner of 360 months to life. The only chance that Gardner has of receiving a sentence of less than 20 years is by providing assistance to the Government in the prosecution of defendants who have not already pled guilty.
Gardner is much heavier now than he was in the video clips that we had seen of him conducting meetings during 2000 and 2001. The gravity of his situation clearly is weighing upon him. However, he remains articulate and able to present his points with authority. He does not appear evasive or defensive, as several previous witnesses appeared. Under Iredale’s effective cross-examination, Gardner freely admitted most of Iredale’s points, but disputed some points.
After pleading guilty on March 13, 2007 and before his testimony today, Gardner had 13 meetings with the Government. Iredale repeatedly pointed out that no notes were taken during these meetings (which probably totaled over 50 hours of interviews) by AUSA Beste or the agents or Gardner’s three attorneys from Washington, D.C. Iredale implied that no notes were taken to avoid creating reports with which Gardner could be impeached if his testimony at trial varied from his interviews with the Government.
Iredale played a number of film clips (perhaps 20) depicting a slimmer, confident CEO Gardner at various meetings of Peregrine employees and salespeople. Gardner admitted that many of the statements that he made in these film clips regarding the revenue and growth of Peregrine were lies. From his testimony, it appeared that Peregrine was growing, but that Gardner felt compelled to exaggerate revenue and earnings to continue to meet or beat the quarterly earnings estimates of the analysts.
Gardner admitted that he lied to the SEC, to the public, to Peregrine’s employees, and to the Peregrine Board, including Board Chairman John Moores. Iredale implied, with a number of different lines of questioning, that since Gardner lied to protect himself in business-related matters, that he would do so under oath in this trial if his only hope for a sentence that would allow him someday to get out of prison and have a life would be to allocate blame on other people at Peregrine.
Cross-examination will continue tomorrow at 9:30 a.m. (an hour later than the normal starting time).
June 14, 2007 – 9:30 a.m. to 2:30 p.m.
WITNESS STEPHEN GARDNER (continued)
Attorney Gene Iredale introduced a fax of the menu of the Tommy Bahama Tropical Café in Palm Desert, where Peregrine held an executive retreat dinner on May 3, 2001. Steve Gardner testified at this trial, on June 12, 2007, that Joe Reichner made a reference to a small hot dog type of appetizer at the cocktail party preceding the dinner at Tommy Bahama. According to Gardner, Reichner walked up to him at the party and said something like, “I guess this is a wienerschnizel”. Gardner testified that he felt that was an odd comment for Joe Reichner to make in that setting because it was indiscreet. Gardner said that it was his understanding at the time that Reichner was referring to “wienerschnizel deals”, which were sham deals that Peregrine sometimes entered into with Berndt Wien of Netcom. Iredale pointed out that there is not any type of hot dog appetizer listed in the menu from Tommy Bahama for the Peregrine dinner on May 3, 2001. Iredale also noted that hot dogs would not be consistent with the Caribbean theme of all the food that is offered at Tommy Bahama Café. Attorney Gene Iredale accused Gardner of making up this story in order to gain favor from the Government by helping them in their case against Joe Reichner. The witness denied this accusation.
Attorney Iredale turned his attention to Steve Gardner’s financial motivation to commit fraud as CEO of Peregrine. Iredale put Gardner’s Restricted Stock Agreement with Peregrine into evidence. This agreement granted 50,000 shares of Peregrine stock to Steve Gardner if he achieved certain Earnings Per Share (EPS) target numbers. If Peregrine stock reached or exceeded the listed EPS target number within the specified time period, Gardner would receive a specified amount of Peregrine stock.
Gardner was required to fill out and sign a document referred to as Form 144, when he sold Peregrine stock due to his position at Peregrine. Attorney Iredale highlighted language in Form 144 that says that the signer promises that he does not know of any material adverse information regarding operations of the company, that has not been publicly disclosed. Gardner admitted that he violated this clause because he did have insider knowledge regarding Peregrine stock each time that he sold it. Iredale noted that Form 144 has a sentence near the signature line saying that any intentional misstatement or omission of fact constitutes a federal criminal violation. Gardner eventually admitted that he had committed a federal criminal violation by signing the forms.
Iredale went over Gardner’s testimony to the SEC on June 19, 2001 regarding the Peregrine/Critical Path transaction. Gardner admits that he gave false statements in his June 19, 2001 SEC deposition regarding the Critical Path matter. Iredale illustrated that in the transcript of Gardner’s SEC deposition, prior to telling a lie, he often referred to the concept of honesty. For example, Gardner would say “I can’t honestly say that I did…” and then he would proceed to tell a lie.
Steve Gardner admits telling lies to former U.S. Attorney, Chuck La Bella. Peregrine’s Board of Directors hired Chuck La Bella to investigate the Critical Path matter. Gardner also admits that he did not tell everything that he knew about Peregrine’s transaction with Critical Path to Peregrine’s in-house counsel, Richard Nelson and Eric Deller.
Gene Iredale introduced an e-mail into evidence, dated November 11, 2000 that was written by Matt Gless and sent to Cahill and Gardner. The e-mail was not copied to anyone else. The e-mail listed several shady Peregrine deals and said, “we must close these deals this quarter or risk exposure.” The deals Gless listed were KPMG/Morgan Stanley, Divas, Hyperion, FrontRange, KPMG/Avnet and KPMG/Citigroup. Gardner said that Joe Reichner was not involved in any of the deals listed in Gless’s e-mail.
Gardner testified that at a Peregrine meeting in November 2000, someone (who he thinks may have been Reichner) asked Gardner why Peregrine didn’t just sue KPMG because KPMG owed Peregrine so much money and they were not paying their debt. Gardner testified that he replied that Peregrine could not afford to sue KPMG because Peregrine could not afford to alienate such an important business partner. Iredale made Gardner admit that the true answer was that Peregrine had a secret understanding with KPMG that they did not have an obligation to pay on many contracts with Peregrine.
June 15, 2007 – 8:30 a.m. to 1:30 p.m.
Attorney Gene Iredale continued his cross-examination of former Peregrine CEO Steve Gardner, for the third day. Gardner testified that early in 2001, Bill Richardson became a member of the Peregrine board, upon Gardner’s recommendation. Richardson is married to the sister of Gardner’s wife. Iredale elicited from Gardner that he had concealed the financial irregularities that he had been engaging in at Peregrine from Richardson, just as he had concealed them from John Moores and the rest of the Board. Iredale asked Gardner if he realized that if Peregrine collapsed he would damage the reputations of the members of the board and others in the company, and Gardner acknowledged that it would. The fact that Richardson is Governor of New Mexico and a candidate for President of the United States did not expressly come into evidence, but it was clear that he is someone who has a lot to lose from bad publicity. The fact that Gardner would put someone with whom he is related on the board appears to be some indication of the strength of Gardner’s belief that Peregrine would continue to succeed, and that his improprieties would not be discovered. Iredale asked Gardner if he had lied to Joe Reichner just as he lied to Richardson, and Gardner denied that.
Iredale took Gardner through a number of transactions, both legitimate and not legitimate. Gardner is very good at describing the details and subtleties of complicated corporate transactions. Reichner was not involved in any of these transactions. Peregrine had many important corporate customers, as well as customers in the federal government, including the IRS and FBI. Iredale showed several film clips of interviews given by Gardner in front of investors, in which Gardner was being questioned by Tim Dolan. Dolan was a very influential analyst of software stocks, and Gardner persuaded him and many investors that Peregrine was going to continue to grow and prosper. Gardner testified that in spite of the fraudulent entries in Peregrine books for which he was responsible, he still believed that Peregrine would continue to succeed.
Iredale put into evidence a press release from June 18, 2001, in which it was announced that Steve Gardner had received the Ernst & Young award as Entrepreneur of the Year. He had Gardner himself read the press release. It stated that Gardner had been selected from a field of 80 nominees, and that he had taken Peregrine from a $35 million company in 1997 to a company with $565 million of revenue in 2001. The customers of Peregrine included 92% of the Fortune 500 companies. Iredale is using the press releases and films of Gardner’s presentations to show the atmosphere that Joe Reichner and the other defendants in this case experienced while they were working at Peregrine.
Iredale engaged in a heated cross-examination of Gardner regarding the firing of Reichner, which he tied in with the firing of another Peregrine employee named Ron Hall. The audience section of the courtroom was still almost full, and many of the spectators appeared to be young lawyers and law students. What they saw was an example of advanced cross-examination techniques by an extremely skilled cross-examiner, examining a very smart CEO in an important case. Iredale raises his voice and uses emotion, but has his cross-examination well prepared, complete with e-mails and other exhibits. Gardner is calm, but is very poised and very sharp. Gardner described meetings with Reichner that occurred in November and December of 2001, in which Andy Cahill was also involved. Gardner disputed Iredale’s characterization that Joe Reichner was fired because of his strong opposition to improper revenue recognition by Cahill. However, Gardner acknowledged that there had been strong disagreements between Reichner and Cahill on a number of topics, and that these had included the issue of whether certain sales were going to be credited towards previous channel sales as opposed to being recorded as new revenue. Gardner also acknowledged that Reichner had said that some of Cahill’s practices would be viewed as illegal by the SEC. Approximately three weeks after the last argument on these topics, Reichner was fired by Cahill, with Gardner’s consent. Reichner’s firing occurred on January 3, 2002. This was very close to the same time that Gardner fired Gary Lenz.
Iredale then took Gardner through a series of events also involving a disclosure of improprieties, and the firing of a Peregrine employee. In October of 2001, an anonymous Peregrine employee sent an e-mail to John Moores, among others. The e-mail stated that some of Peregrine’s business dealings in Australia were improper or fraudulent, and the company needed to change the way they did business. Gardner was very upset that information of this sort had been sent to Moores. He apparently told Moores that it was not true, and even under cross-examination by Iredale, Gardner insisted that the specific accusations in this e-mail were not true to his knowledge. Gardner decided it was important to find out which Peregrine employee had leaked this information to Moores. Hall was fired three weeks later. Iredale drew parallels between the fact that Reichner (and Lenz) were fired three weeks after Reichner’s statement to Gardner that Cahill was conducting business in violation of SEC rules, and the firing of Ron Hall three weeks after his anonymous e-mail tip to John Moores.
Iredale put into evidence an e-mail from Gardner to Mary Lou O’Keefe of January 1, 2002. It said that he had made his decision to move on Gary Lenz, and that Andy Cahill also wants to move on Joe Reichner. Within a few days, they both had been fired.
It was probably not an accident that Iredale concluded the week’s testimony by showing Gardner another e-mail he sent on the same day, January 1, 2002. In this e-mail to Matt Gless, Gardner said that he supported Doug Powanda taking the interim role in running Xanadu (replacing Gary Lenz). Gardner told Gless that he thought he could persuade Powanda to report to Cahill while he did the job. Gardner was somewhat sentimental in this e-mail of January 1, in which he mentioned a medical procedure he was going to undergo the next day. He expected the procedure to go well, but said that if something “takes me out” for a while, he recommended Andy Cahill for his position. He thanked Gless for a wonderful job, and told him “I can’t imagine trying to steer this ship without you.” Eleven people have pled guilty in this case to date, but Gardner, Gless, Powanda and Cahill are the top four conspirators. During cross-examination this afternoon, Iredale has presented the defense argument that there was collusive fraud of the top management at Peregrine, which could not be detected by the SEC, the auditors, the board, the public, or the defendants in this trial.
Iredale told Judge Whelan that when the trial resumes Tuesday morning at 8:30, he has about 45 minutes of additional cross-examination. At that time, Gardner will be cross-examined by the lawyers for the other defendants, and then there will be re-direct examination by AUSA Beste.