Peregrine Trial – Week 27
Comments by Bob Grimes and Dana Grimes
December 30, 2008 – 9:20 a.m. to 9:50 a.m.
BJ Rassam was sentenced today to 24 months in the custody of the Bureau of Prisons. The recommendation from the Federal Probation Department was 120 months (they do not take cooperation into consideration), and the recommendation of the Government was 41 months.
Before Judge Whelan imposed sentence, he announced that he had read all papers filed by defense counsel, Attorney Steven M. Goldsobel, and the Government, as well as additional letters of support from Mr. Rassam’s family and friends. Judge Whelan felt that the amount of loss did exceed $100 million, but that not all of the loss was attributable to Mr. Rassam. Judge Whelan indicated that Rassam did play a substantial role in the fraud at Peregrine, but agreed with the Government that Rassam had earned a downward departure for his substantial assistance as a prosecution witness. After giving his tentative ruling of 24 months, the judge allowed counsel to argue.
Mr. Goldsobel said that this has been a painful and long process for Rassam. He now has a felony conviction, which caused the loss of his accounting license and has made him virtually unemployable in the accounting field. Rassam has even been turned away from certain charities because they do not want a convicted felon volunteering with their organization. Mr. Goldsobel said that Rassam is the last of those defendants who cooperated appearing for sentencing. He stated that Rassam is the least culpable of the defendants. Rassam is “penniless” and is living with his mother, whom he cares for, and that she was not present today in court because she is too frail to travel.
Attorney Goldsobel argued that Rassam was one of the last people to join Peregrine at a time when the fraud was well underway. He was a 34-year-old Controller (a position he never held before being hired by Peregrine). He was asked to “write off” accounts receivables by CFO Gless.
Goldsobel compared Mr. Rassam’s tentative sentence of 24 months to Andrew Cahill’s sentence of 27 months. He said that Andrew Cahill was a Worldwide Controller and that Rassam was not a senior executive at Peregrine.
Eric Beste and Bill Narus appeared for the Government, and Eric Beste presented the Government’s argument. He pointed out that Rassam did testify for four days and did provide substantial assistance to the Government, even though no convictions resulted from the first two trials. Eric Beste said that Peregrine needed to get the accounts receivable off the books after they were reported because the accounts were not being paid, that it was Rassam who was responsible to get those accounts receivable off the books, and that this was done covertly. Rassam was a high-level employee. He said that there was a distinct difference between Rassam and Benjamin: whereas Benjamin did not appreciate or know how to write off accounts receivable, Rassam did know how the scheme worked and helped make it work. Rassam was an important player in the fraud at Peregrine.
AUSA Beste also pointed out that BJ Rassam was indicted in October 2004, and did not plead guilty until February 2007 after an in limine hearing. However, he did cooperate with the Government in every respect.
After considering these arguments, Judge Whelan confirmed his tentative ruling, imposing a 24-month sentence.
December 22, 2008 – 10:15 a.m. to 11:00 a.m.
Andrew Cahill was sentenced today to 27 months in the custody of the Bureau of Prisons.
Cahill began working for Peregrine in May 2000 as Vice President for Worldwide Sales, and was named Executive Vice-President for Worldwide Sales in October 2000. On February 27, 2007, he pled guilty to one count of Securities Fraud, which has a maximum penalty of ten years in prison, and agreed to cooperate with the Government. In his plea agreement, Cahill admitted to very specific conduct with specific co-conspirators. He stated that he worked with “co-schemers” to cause Peregrine improperly to book new deals for software license sales. Cahill stated that, beginning in 2000 and continuing to May 2002, he knowingly participated with co-defendants in a fraudulent scheme to misstate material facts to be used in public reports of Peregrine’s financial condition in order to fraudulently inflate the price of Peregrine stock.
Andrew Cahill’s attorneys Stephen Mansfield and David Fields argued that this was an appropriate case for the defendant to receive probation. Interestingly, federal probation agreed with the defense, and did not recommend any prison time. AUSA Bill Narus argued for the Government that 51 months would be an appropriate prison sentence.
Attorney David Fields argued that Peregrine did not fire Cahill, but allowed him to stay and help the company through its bankruptcy proceedings because new management found that the good Cahill had done for the company outweighed the mistakes he had made. There was significant disagreement between the defense and the Government as to Cahill’s involvement in the fraud; his attorneys contended that, although Cahill was aware of various schemes, he was not always aware of their illegality, and even when he was, there was nothing he could do about it.
AUSA Narus disagreed, and indeed the Government’s papers indicated that without Cahill’s participation in the scheme, backdated contracts would not have been recognized as revenue. AUSA Narus also stated that although Cahill should be commended for pleading guilty (which all parties seem to agree was a major factor in former CEO Stephen Gardner’s decision to plead guilty two weeks later), he pled guilty only six weeks before trial, thereby reducing his helpfulness. Attorney Fields argued that Cahill’s plea six weeks prior to trial gave the Government plenty of time, and that the Government’s decision not to call Cahill as a witness was strategic and should not be held against his client. The judge explained to all parties that he never holds a defendant’s decision to litigate his case to the fullest against the defendant. Judge Whelan indicated that, if a defendant’s decision to plead guilty is made rather late in the case and that decision affects the Government’s recommendation based on the defendant’s acceptance of responsibility that is the Government’s business.
Judge Whelan disagreed with all parties with respect to sentencing, stating that this was not a probation case, nor did Cahill’s conduct warrant four years in prison. The judge noted that Cahill had personally signed a backdated KPMG contract, and allowed that contract along with other revenue to be recognized improperly. The judge noted that, on the other hand, the $100 million of loss is a figure that overstates Cahill’s responsibility, and that it was significant to him that Cahill had not exercised any stock options; therefore, he did not personally gain from the fraud. Because of that, and because of the fact that Cahill was the only Peregrine defendant to stay on board at the company and help it through its bankruptcy proceedings, the judge found 27 months to be an appropriate sentence.
Judge Whelan set a restitution review hearing for February 23, 2009. Andrew Cahill is ordered to surrender to the United States Marshal on March 20, 2009, by noon.
B.J. Rassam will be sentenced on December 30, 2008 at 9:00 a.m.
December 18, 2008 – 9:00 a.m.
Today a tearful Ilse Cappel was sentenced to probation for her involvement in the Peregrine accounting fraud. Cappel, a former Peregrine accounting executive, admitted six years ago to participating in bank fraud. She was given considerable credit for her assistance to the Government and her very early acceptance of responsibility – no one disputes that she began telling the truth about her role in the scheme from her very first interview with attorneys from Latham & Watkins. Moreover, she pled guilty five months to five years before other Peregrine defendants started pleading.
Judge Whelan’s tentative ruling was to grant Cappel probation and not order restitution. Cappel’s highly regarded attorney, Michael Lipman, wisely submitted to the Court that it sounded to him like an appropriate sentence. Although federal probation recommended the statutory maximum $250,000 fine, Judge Whelan agreed with Attorney Lipman, who noted that the probation report offered no legal basis as to why Cappel’s stock profits should correlate to that fine amount in a case involving conspiracy to commit bank fraud.
With respect to restitution, Attorney Lipman argued that while Wells Fargo “took a haircut” in bankruptcy proceedings following dealings with Peregrine, none of that loss was attributable to his client as criminal restitution. Declining to have the issue briefed, Judge Whelan agreed that restitution was not appropriate under the circumstances.
Ms. Cappel spoke briefly at her hearing to express her remorse. Barbara Murray, of Coughlan, Semmer and Lipman, was also present on behalf of Ilse Cappel.
December 17, 2008 – 9:10 a.m. to 10:30 a.m.
Former Peregrine CFO Matthew Gless was sentenced today to 63 months in the custody of the Bureau of Prisons. AUSA Bill Narus was present on behalf of the Government, although AUSA Eric Beste made the arguments in today’s Peregrine hearings. Characteristically, Judge Whelan referred to the voluminous documents he read in preparation for the sentencing, made a tentative ruling so that the parties knew what areas to focus on in their oral arguments, and then he allowed everyone ample opportunity to be heard.
Gless’s attorney, James Riddit, argued that the stipulated $100 million-plus figure of loss in this case does not properly reflect his client’s culpability. He argued that market forces independent of any fraudulent activity were substantially responsible for the devaluation of Peregrine stock. He also contended that this type of fraud is not as aggravated as directly stealing money. He referenced Scott Sullivan, former CFO of WorldCom. He also referenced infamous Andy Fastow, the former CFO of Enron, architect of the various scams that reduced the seventh-largest corporation in America to a smoking ruin. Riddit argued that Sullivan and Fastow caused greater losses, profited substantially more from their crimes, and were sentenced to a mere five and six years, respectively.
Attorney Riddit referred to Mr. Gless’s family at various times throughout the sentencing hearing. His ex-wife was in court to show support, along with a large number of his current co-workers from Quest Software. Four months after leaving Peregrine, Gless was hired by Quest, and apparently rose up through the ranks there with the support of his colleagues and management (he does not work in a financial capacity at the company). Riddit argued this is evidence of post-offense rehabilitation.
AUSA Beste agreed with Attorney Riddit that Gless’s assistance to the Government was “extraordinary.” Gless was interviewed for hours on over two dozen occasions. AUSA Beste readily acknowledged that Gless’s explanation of how the fraud was committed was essential to the Government’s understanding of it. Gless also gets credit for the fact that he pled guilty pre-indictment; indeed, he was the second person to plead guilty, after Ilse Cappel. (Ilse Cappel, who will be sentenced tomorrow, is represented by Attorney Mike Lipman.)
However, AUSA Beste argued that the fraud itself was “extraordinary,” and that but for Gless’s substantial cooperation, the Government would be recommending 180 months in prison for his critical role in the fraud. AUSA Beste said that every Peregrine defendant played a role in the fraud, but that Gless’s role was central to the scheme; he made sure the bad revenue on the books was hidden from the public, to their detriment, while exercising over $3 million in stock options which he knew were inflated in value. Attorney Riddit disagreed with the Government’s figures regarding profit from stock options exercised during the fraud. With respect to cooperation, Riddit asked for a more larger departure than that recommended by the Government.
Judge Whelan has given other Peregrine defendants more credit than recommended by the Government for their cooperation. However, he did not do so in this case because he did not have the opportunity to observe that assistance; Gless did not testify. Judge Whelan noted that the Government’s recommendation was about one-third of the 180 months they would have recommended if Gless had not cooperated in such a helpful, forthright and remorseful way. He also made the interesting observation that in terms of percentages, the Government’s departure recommendation for Gless’s cooperation was greater than the recommendation the Government made for Gardner, who testified for weeks. Judge Whelan has the highest of reputations among defense attorneys and prosecutors for independence and general fairness. He was a prosecutor and a state court judge, before his appointment to the federal bench. Judges are tremendously influenced by Government recommendations, particularly with respect to cooperation, since the Government is typically in the best position to judge how much they have been assisted by any particular defendant. However, Judge Whelan does not miss anything, even in a three month trial, which is why his rulings are quick. His attentiveness also makes him very independent and objective. If Judge Whelan has the opportunity to observe testimony, and finds a defendant deserves a greater benefit for his cooperation than recommended by the Government, he will depart downward.
Gless spoke briefly at his sentencing hearing. In a soft voice, he accepted responsibility for his actions and apologized to shareholders, his friends and family, and the Government.
Judge Whelan stated that although multiple factors played a role in the depreciation of Peregrine stock, the collapse of Peregrine coincided with the company’s announcement that it would not release its financial statements, followed by the announcement that accounting irregularities existed on the books. Whelan noted that it was the fraud that made the bottom fall out of Peregrine, and that $100 million dollars or more of loss is therefore an appropriate figure. Judge Whelan noted that Gless is getting credit for pleading guilty over five years ago, pre-indictment, but that he “can’t pretend this didn’t happen.” He made the recommendation that Gless be allowed to serve his time (60 months for Count 1 and 63 months for Count 2) to be served concurrently at a federal prison camp near Santa Barbara, where one of Mr. Gless’s children will be beginning college next fall.
Douglas Powanda, former Executive Vice-President for Worldwide Sales at Peregrine Systems, was sentenced today to 78 months in federal prison. Upon request of the defense, Judge Whelan recommended an alcohol addiction program as well as a federal prison camp close to Powanda’s wife’s residence. Attorneys Howard Frank and Michael Pancer represent Doug Powanda.
Howard Frank argued at the sentencing hearing. He made similar arguments to those of Attorney Riddit regarding the amount of loss, but did not belabor the points having already heard Judge Whelan’s opinion on the matter. He recommended a 46 month sentence on behalf of his client.
Attorney Frank did an excellent job of arguing for additional credit for Powanda’s substantial assistance to the Government. He stated that Powanda is clearly an intelligent man, who understood that his sentence would largely depend on the Government’s recommendation for a downward departure for his cooperation in their prosecution of the defendants being tried. Howard Frank noted that during Powanda’s testimony in both of the Peregrine trials, he could have ingratiated himself to the Government when questioned about his knowledge of the involvement of others. He could have lied, and could have put Reichner, Stulac and others in meetings where fraud was discussed, thereby implicating them in a way that very well could have led to convictions. Attorney Frank noted that this likely would have led to a more significant recommendation for Powanda’s assistance to the Government, not because they would have known he was lying but simply because it would have made them happier with his cooperation. It speaks to Powanda’s integrity that he didn’t lie to the jury to save himself time in prison.
Howard Frank has been a prosecutor and is now a defense attorney, and he stated that in his entire carreer he has never heard of a defendant doing what Powanda did by setting aside over $5 million early on in the case in an account exclusively held for the benefit of the victims of the fraud.
AUSA Beste argued that although setting aside millions to repay his victims at the outset of the case is unheard of, it is only because Powanda made tens of millions of dollars selling Peregrine stock at artificially high prices that he was able to do so. Powanda made more in stock sales than any other Peregrine defendant. AUSA Beste stated “Powanda was THE quarter-maker,” and referred to “Powanda’s magic drawer,” wherein Powanda would pull deals seemingly out of thin air at the quarter’s end – a number of which ended up being completely illegitimate sham contracts. AUSA Beste noted that Powanda directed others in the fraud, and that Spitzer reported to Powanda. He also noted that although Powanda pled guilty relatively early, he did so after Rodda and Whit already had, and were essentially willing to cooperate against Powanda.
Doug Powanda spoke in the same calm, deep, sorrowful tone which jurors and spectators became familiar with during his testimony in the two Peregrine trials. He referred to the fraud at Peregrine as a “dark period” in his life, and apologized for his bad judgment and for breaking the law. He has addressed his alcohol addiction. He stated that he has had six years to reflect upon his wrongs, and has tried to return to the person he used to be before becoming involved in the scheme.
Attorney Frank made the interesting point that in a case where someone’s life is in limbo for years between pleading guilty and receiving a sentence, they suffer in a way not contemplated by the Sentencing Guidelines. For six years, Powanda has lived in the shame of his past conduct, endured the humiliation of two trials, and suffered the uncertainty of not knowing what his sentence would be. Attorney Frank argued that this situation is not typical, as most cases move with greater alacrity.
Judge Whelan agreed with Attorney Frank that Powanda could have lied to the jurors by implicating co-defendants, and commended Powanda for his candor, stating “It would have been easy for you to shade your testimony, and you didn’t.” He gave Powanda one more point for substantial assistance to the Government than was recommended by the prosecutors. He also noted that Powanda took unusual steps to make his victims whole. The judge alluded to the fact that sentencing people in a multiple-defendant fraud case is not easy, and that he tries to strike a balance based on everyone’s involvement, their cooperation with the Government, and other factors. Judge Whelan told Powanda that if he had not cooperated, he would have had no problem sentencing him to 15 years in prison because of his high-level at Peregrine, and essential role in the fraud. After going through the math of the advisory Federal Sentencing Guidelines, Judge Whelan sentenced Powanda to 60 months on Count 1 (Conspiracy) and 78 months on Count 2 (Securities Fraud), to be served concurrently.
A restitution review hearing for both Powanda and Gless is set for February 23, 2009, at 9:00 a.m. They are ordered to surrender to the United States Marshal by March 20, 2009 at noon.