Peregrine Trial – Week 12
Comments by Bob Grimes
June 26, 2007 – 8:30 a.m. to 3:15 p.m.
WITNESS BERDJ RASSAM
Berdj (BJ) Rassam was hired as the Controller at Peregrine in November 2000, and was promoted to VP of Finance and Chief Accounting Officer in September 2001. BJ Rassam testified about CPA Patrick Towle’s duties as Peregrine’s Revenue Accounting Manager. Defendant Patrick Towle was responsible for reviewing Peregrine’s sales transactions, and for determining Peregrine’s worldwide revenue recognition.
BJ Rassam said that Peregrine was a dysfunctional mess when he started working there in November of 2000. He testified that Peregrine’s departments did not work well together and the necessary quality controls for such a large company were not in place.
Rassam testified that in early 2002 Rassam talked to Towle about booking a KPMG deal that Towle knew was uncollectible. BJ said that Towle told him that he regretted booking the deal but Matt Gless made him do it.
AUSA Bhandari introduced documents that showed that the December 31, 2000 Channel Gross Basis Due report given to the outside auditors was incorrect because Peregrine was hiding the large amount of channel balances owed to Peregrine. Peregrine’s internal channel report contained correct figures. BJ Rassam testified that around March of 2001, he told Patrick Towle not to give channel reports to outside auditors that had different information than Peregrine’s internal channel reports. Rassam’s testimony is that Towle agreed to this. AUSA Bhandari introduced a March 31, 2001 channel report that was faxed on April 23, 2001 which, once again, contained false information for the outside auditors.
Rassam admitted that around March or April of 2001 (after working at Peregrine for about five months), he and Gless talked about a scheme to write off accounts receivable as acquisition costs to hide the accounts receivable from “The Street”. It is Rassam’s testimony that both Towle and Stulac knew about this illegal write-off. Rassam testifies that it was Stulac’s idea to characterize some accounts receivable as being Remedy purchase accrual when they actually had nothing to do with Peregrine’s purchase of Remedy.
BJ Rassam also implicated Daniel Stulac in his testimony today regarding the inaccurate channel reports. AUSA Bhandari introduced an e-mail chain between Steve Trubiano and BJ Rassam which states that Dan Stulac was told that AA was receiving bogus channel reports from Towle. Rassam testified that he told Dan Stulac and Nevanna Sacks that one particular channel report given to AA was off by $100 million. Rassam said that Stulac replied “I knew that.”
Rassam, who has pled guilty to one count of Securities Fraud due to his involvement in fraudulent schemes at Peregrine, testified that he was disgusted with himself. He characterized himself as someone who kept trying to “clean things up” while he worked at Peregrine.
Defense Attorney Attanasio introduced a September 14, 2001 e-mail from BJ Rassam to BJ Rassam! In this e-mail, Rassam writes to himself that Matt Gless told him not to give certain Peregrine financial information to Kate Patterson. (Ms. Patterson was responsible for disseminating Peregrine’s financial information to the public.) Rassam says that Matt Gless told him that he had a big knife. Rassam writes that Gless “(t)hreatens to cut me up if I tell this information to K.P.” Rassam testified that he was not sure at the time if he should take this threat by Matt Gless seriously, so he wrote the e-mail and put it in a file.
Attorney Attanasio asked questions that illustrated that Rassam was highly motivated to make money while he worked at Peregrine. Rassam wrote e-mails that talked about how much money he was making at Peregrine. Attanasio demonstrated that Rassam was rewarded with bonuses for his participation in Gless’s fraudulent schemes. We have already heard testimony from Mary Lou O’Keefe regarding what she considered to be excessive bonuses for BJ Rassam. Attanasio displayed a February 22, 2001 e-mail chain between Mary Lou O’Keefe and Steve Gardner in which O’Keefe opposes giving Rassam another bonus. Gardner writes back that he respectfully disagrees with O’Keefe because Peregrine needs Rassam. Gardner writes that Rassam is the only possible back-up for Gless.
Attorney Attanasio also pointed out that Rassam has much to gain from his cooperation with the Government. By helping to implicate Towle and Stulac, Rassam could possibly shave time off his impending sentence.
June 27, 2007 – 8:30 a.m. to 3:15 p.m.
WITNESS BERDJ RASSAM (continued)
Mike Attanasio continued his cross-examination of former Peregrine Controller, BJ Rassam. Attanasio has been assisted throughout this trial by his associate Aaron Arnzen, who is a CPA as well as an attorney. In his cross-examination of previous witnesses in this trial who have been CPA’s, Attanasio has shown a masterful understanding of accounting principals. He continued to demonstrate this mastery today.
Attanasio introduced an e-mail from Gless to Rassam in which Gless told him that they should be careful on how they communicated regarding revenue recognition, and that e-mail may not be the appropriate means of communication. Rassam admitted that Gless appeared not to want to leave a trail.
Rassam appears to have sincerely wanted to change some of the improper revenue recognition practices of the sales staff, and he testified that Stulac supported the idea of having improved policies. He mentioned that of the three AA engagement partners at Peregrine (Bigelow, Stulac, and Baldwin), Stulac was the least experienced, and that he should have had more help.
Yesterday Rassam testified that Stulac knew about an illegal scheme to write-off the accounts receivable as acquisition costs. Attanasio demonstrated that when Rassam was interviewed by Latham & Watkins in June of 2002, he did not mention Stulac as being involved in these illegal write-offs. Rassam also did not mention Stulac’s involvement in these illegal write-offs during a debriefing with FBI Agent Bridget Cook in February of 2007, although the debriefing went on over a period of several hours, and included the topic of these write-offs. Rassam told Attanasio that he had mentioned Stulac’s involvement to the FBI at a later date.
In November of 2001 Matt Gless learned that the problems with side letters in Europe were much worse than had previously been known. It was decided that there would be changes in the revenue recognition policy in Europe, and that the person most responsible for these side letters (Jerry Crook) should be fired. Stulac was advised that these corrective measures would be taken.
On December 6, 2001, Peregrine’s CFO in Europe sent an e-mail to Gless and Rassam, which included a list of transactions where there had been problematic side letters. This was not given to Stulac or anyone else at AA. Rassam was aware that Gless wanted to mislead AA regarding channel sales. On March 25, 2001, Gless sent Rassam an e-mail telling Rassam not to provide channel burn information to the auditors.
Rassam had access to an R-Drive which contained confidential information regarding questionable channel sales at Peregrine in excess of $100 million. The actual amount of questionable channel sales was probably higher, but the $100 million amount could be demonstrated from the R-Drive. This information on the R-Drive was known as the channel burn report. However, Stulac and his AA engagement team were given information on only $40 million of channel sales. Yesterday Rassam testified that he verbally told Stulac about improper channel sales, but today he admitted that he never provided Stulac with the channel sales information from the R-Drive, or the e-mails which showed the true extent of the channel sales problems.
Attorney Kate Leff asked Rassam questions regarding Rassam’s position at Peregrine compared to the position of Patrick Towle. Rassam was higher in the financial decision making process than Towle, and Gless was at the top of financial decision making. Both Rassam and Towle were involved in setting and enforcing policies regarding revenue, and Towle made many suggestions on how to improve policies in this area.
WITNESS ANDREW COTTON
Andrew Cotton testified this morning out of order, before Rassam’s testimony continued. Cotton was a partner at Ernst & Young, with a specialty in auditing technology companies. He was the engagement partner for Ernst & Young at Remedy during a 2001 acquisition of Remedy by Peregrine. AUSA Sanjay Bhandari elicited from Cotton the testimony that no one at Ernst & Young reviewed the internal work papers of Remedy during the acquisition. Cotton also testified that Remedy had different revenue recognition policies than Peregrine regarding the length of time of payment, but that this did not necessarily mean that either policy was unacceptable under generally accepted accounting procedures.
Attorney Aaron Arnzen cross-examined Cotton. He demonstrated that Ernst & Young had obtained press releases and public filings regarding Peregrine. Furthermore, Peregrine CFO Gless had made a PowerPoint presentation to Cotton regarding Peregrine’s financial condition prior to the 2001 acquisition of Remedy by Peregrine. Gless had assured Cotton that this financial information was correct. As CFO, Gless was the top financial person at Peregrine, and Ernst & Young relied heavily on Gless’ representations. Matters of revenue recognition were under the control of a structure that reported to the CFO.
June 28, 2007 – 8:30 a.m. to 1:30 p.m.
WITNESS BERDJ RASSAM (continued)
AUSA Sanjay Bhandari took Rassam on re-direct examination, to address areas that had been subject to cross-examination by the defense. Rassam testified that although Patrick Towle reported to Rassam (along with 200 other Peregrine employees), Towle and his team were more involved in making the day-to-day decisions on revenue recognition than Rassam was.
The defense had established that “burn cleaning” of channel inventory can be appropriate under some circumstances. Rassam testified, on re-direct, that improper burn cleaning occurs when new revenue from an unrelated transaction is applied to wash out, or clean, a channel transaction which had been previously booked. This was the case with an IBM transaction which was the subject of previous testimony. Rassam testified that the question of applying revenue to previous transactions can be a complicated one, in some circumstances.
In cross-examining Rassam regarding Dan Stulac’s knowledge of improper write-offs, Mike Attanasio had pointed out that the written evidence of improper write-offs and improper channel inventory was never given to Stulac, and that there was nothing in writing to support Rassam’s testimony on these topics. AUSA Bhandari introduced into evidence handwritten notes from Nevana Sacks which Rassam said confirmed a conversation he had with Stulac (with Sacks present) in which reserves were improperly used to make the quarter. Attanasio came back to this exhibit on re-cross, to point out that Sacks’ notes do not in themselves refer to anything illegal, and in some circumstances reserves can be properly used for the quarter.
On cross-examination of Rassam, the defense had gone into great detail about the amount of money that Rassam was making at Peregrine, and the fact that Matt Gless arranged to have Rassam receive large bonuses, apparently for going along with Gless’s illegal financial schemes. On re-direct, AUSA Bhandari asked Rassam if the reason that he committed illegal acts at Peregrine was because of the money that he was getting paid. Rassam contemplated this question for quite some time, and then broke down. He lowered his head, with his right hand on his forehead, and the courtroom was silent. When Rassam answered Bhandari’s question, he did so in a broken voice. He testified that he had not committed the illegal acts for the money. He did so because he was trying to make a positive change at Peregrine. Matt Gless told him that he had to take certain illegal actions, and Rassam went along with them, because he thought they were shortcuts to correcting the problems at Peregrine. He said that he had gone along knowing that these things were illegal, which made him guilty, and that that is why he pled guilty.
On re-cross, Gene Iredale pointed out that in Rassam’s plea agreement the Government had sole discretion in determining whether his testimony was truthful, and the Defense had no input on this point. Iredale asked questions regarding how important it was for Rassam to try to stay out of prison, a place where he would have no family and few friends, implying that Rassam would provide false testimony against others to reduce his prison sentence. He could get up to 10 years.
WITNESS DON WEEKS
Don Weeks testified under direct examination of AUSA Eric Beste. Weeks was an experienced auditor with AA and worked on the Peregrine engagement as concurring partner beginning in September of 2001. Weeks testified that during the transition of Dan Stulac to Ross Baldwin as engagement partner, Stulac continued to answer questions from Peregrine. He said that this created a problem, because Peregrine management considered Baldwin’s engagement team to be unreasonably strict, compared to Stulac’s engagement team. This continuing contact of Stulac with Peregrine management was the topic of a heated discussion at a meeting on January 2, 2002 which included Baldwin and Stulac and Weeks, with the Practice Director Robert Stanley. Stulac explained to the others that he was trying to do the right thing to help in the transition, and Stanley eventually said “Damn it Dan, you have to get out of the way.”
Weeks testified that the rule at AA was that an engagement partner was not allowed to seek employment with a client. If the engagement partner did so, he was required to notify AA management, and to remove himself from the engagement.
On re-cross, Mike Attanasio introduced an e-mail and a memo indicating that Stulac’s continuing involvement with the Peregrine account appears to have been at the request of new engagement partner Baldwin.
Both Ross Baldwin (who testified earlier in the trial) and Don Weeks were experienced and conscientious AA auditors at the time they worked on the Peregrine account. Although they did nothing improper, they were tainted by their relationship with this account, and neither one could find continued employment in the public accounting industry.
WITNESS ALAN MCCOLL
Alan McColl was called, out of order, as a defense witness. In 2002, he was a manager of the forensic practice of KPMG. Under questioning from Gene Iredale, he described an interview that he had on May 14, 2002, with David Roudebush. Roudebush testified previously in this trial, and McColl’s testimony was offered as impeachment of Roudebush’s previous testimony.
McColl testified that he prepared a report indicating what Roudebush told him. On April 17 or 18, 2002, Roudebush was given a list of customers by CFO Matt Gless and was told to contact them to influence information that they might provide regarding their business dealings with Peregrine. Roudebush was not comfortable with this.
Tomorrow, cross-examination of Weeks will continue, and there will probably be two more witnesses. The prosecution is expected to rest tomorrow. Judge Whelan will announce tomorrow whether court will be in session next Tuesday, July 3, or if we will return on July 5, 2007. The defense will have the long weekend to decide if they are going to call witnesses, or be prepared to argue the case.
June 29, 2007 – 8:30 a.m. to 1:30 p.m.
WITNESS DON WEEKS (continued)
Don Weeks, former auditor with Arthur Andersen, testified that if an engagement partner considers employment with a client, there is a duty for the auditor to notify their office managing partner (OMP). There has been testimony in this case that Daniel Stulac was interested in the position of CFO at Peregrine while he was AA’s Peregrine engagement partner. According to Mr. Weeks, the Independent Standards Board states that it is the OMP’s duty to determine if the auditor should be removed from the engagement due to lack of independence on the part of the auditor seeking employment.
WITNESS BRIAN ALLEN
Brian Allen has been an accountant for twenty four years. Allen currently works as an accountant for KPMG, LLP, and he was the KPMG engagement partner for Peregrine after AA was terminated. Brian Allen testified that he began work at Peregrine in early April of 2002. Mr. Allen said he had several discussions with Daniel Stulac about Peregrine and Allen said that Stulac said complimentary things about Peregrine.
Witness Allen testified that the two engagement partners from AA, Stulac and Baldwin, often gave him inconsistent information about accounting issues at Peregrine.
KPMG began the field work on the Peregrine audit in mid-April of 2002. Brian Allen testified that he saw many accounting irregularities at Peregrine that concerned him. Allen testified that he was given inconsistent information from different employees about the same topic, and he was given “the run around” when he asked questions.
Allen described one occasion when he was using BJ Rassam’s desk to do his work. Everyone at Peregrine had gone home. Allen had nothing better to do, so he started working his way through a foot high stack of papers on BJ’s desk. Mr. Allen found a document, about one third of the way down the stack that listed Peregrine contracts that contained side letters. Brian Allen asked Gless for information about Peregrine deals that contained side letters. Allen said that it was his belief that Gless was a liar and that this was a test of his truthfulness. Gless gave Allen a list of Peregrine deals that Allen dubbed the CFO list. The CFO list contained seven deals. The CFO list was inconsistent with BJ Rassam’s list of fifteen deals with side letters.
These concerns, as well as others, caused Allen to take extraordinary measures. On May 2, 2002 Allen held a meeting with the audit committee. Brian Allen excluded Matt Gless from the meeting. At that meeting the audit committee decided that KPMG was going to conduct an independent audit to thoroughly investigate Peregrine’s accounting practices by bringing in forensic accountants who would secure evidence, and ensure that pertinent documents were not destroyed.
Around mid-May there was a meeting with AA to announce the impending independent audit. Brian Allen, Dick Bigelow, Ross Baldwin, Dan Stulac and John Riley were present at the Arthur Andersen meeting.
Allen testified that KPMG took immediate action after the AA meeting and began to seize and secure evidence (such as capturing e-mail servers). Allen testified that KPMG was quickly fired by Peregrine before they were able to complete the 2002 audit. Peregrine’s stated reason for KPMG’s termination was that Peregrine had concerns regarding KPMG’s independence given the relationship between KPMG Consulting and Peregrine, and the fact that KPMG Consulting was formerly part of KPMG, LLP.
The Government rested their case.
Attorney Bienert rested his case in defense of Gary Lenz, after introducing a stipulation regarding Dean Whitlock. Bienert read Dean Whitlock’s grand jury testimony regarding the question of why Whitlock signed a contract that was incorrectly dated the 29th. When asked why he signed a contract dated the 29th, Whitlock said, I thought it was insignificant, we negotiated the deal the week before, there was no revenue and there was nothing going on.
Attorney Kate Leff rested on behalf of Patrick Towle.
Attorney Gene Iredale read James Murphy’s grand jury testimony into evidence because Murphy is unavailable. Murphy testified about many deals that he and Larry Rodda did with Peregrine while they were at KPMG Consulting. Murphy took over Larry Rodda’s business with Peregrine.
One deal that Murphy engaged in with Peregrine while he was with KPMG was the Honeywell deal. Murphy testified that Honeywell was the first deal that Murphy was involved in after Larry Rodda handed over his account with Peregrine to Murphy. Murphy said that Peter O’Brien called him and asked him to sign for a deal with Honeywell. O’Brien explained that Honeywell would sign the deal eventually but not soon enough to make the quarter. During negotiations a Boeing deal was added to the Honeywell deal. Murphy testified that he asked O’Brien if he could call Matt Gless directly and get Gless’s assurance that the deals with Honeywell/Boeing were solid and that KPMG would not be on the hook if the sales fell through. According to Murphy’s grand jury testimony, Gless spoke guardedly to Murphy but he conveyed the assurance that Murphy was seeking. Murphy testified that he was not sure if Joe Reichner was knowledgeable about the details of the Honeywell/Boeing transaction.
Murphy testifed it was his belief that the Honeywell and Boeing deals never closed. Murphy said that a Peregrine employee from collections called him and asked for payment on the contracts. Murphy referred the Peregrine collections department to Joe Reichner. Murphy told collections that he was not obligated to pay. Murphy testified that he did not recall if Joe Reichner ever told him that he was not on the hook for these deals but he is certain that Gless and O’Brien did say or imply that he would never have to pay if the deals fell through.
Murphy testified that he “lumped” the names of Lenz and Reichner in an e-mail that he sent to Gless regarding an internal investigation of accounting irregularities at Peregrine. Murphy stated that he knows that he talked about contingency deals with O’Brien and Gless. Murphy is certain that those two knew about the details of the shady transactions between KPMG and Peregrine. Murphy is uncertain if anyone else knew about the bad deals he and Rodda engaged in with Peregrine while working at KPMG.
Iredale also read into evidence a portion of Steve Spitzer’s deposition with the FBI. Iredale said that FBI Agent Bridgid Cook would testify that Steve Spitzer told the FBI that he did not recall telling Reichner that KPMG was taking the risk on a contract with Citigroup in return for a guaranteed $500,000 in service contract work.
It is also Steve Spitzer’s testimony that he does not remember telling the FBI that Reichner called Spitzer asking about the details of bad deals with KPMG and Spitzer told Reichner not to worry about it. Spitzer does not recall saying this to the FBI.
Iredale also read Peter O’Brien’s testimony to establish that the first time Peter O’Brien testified about a one minute phone call between himself and Reichner was in 2007.
Attorney Iredale rested on behalf of Joe Reichner.
Attorney Attanasio introduced some documents into evidence that were not displayed.
Attanasio said that if Dick Bigelow testified, he would state, that in August of 2000 Daniel Stulac told Bigelow that he was interested in becoming the CFO at Peregrine. Bigelow was Stulac’s OMP at that time. Bigelow never told Stulac to recuse himself as Peregrine’s engagement audit partner.
Attorney Attanasio rested his case on behalf of Daniel Stulac.