Peregrine Trial – Week 3
Comments by Bob Grimes
April 24, 2007 – 8:30 a.m. to 1:30 p.m.
WITNESS DOUGLAS POWANDA (continued)
Once again, Attorney Iredale asked Doug Powanda many questions about his written plea agreement in his cross-examination. Mr. Powanda testified that under the Federal Sentencing Guidelines, his prison sentence should be set between 324-405 months (approximately 30 years). Gene Iredale asked the witness questions that implied that Mr. Powanda is motivated to implicate the defendants in order to receive a more lenient sentencing recommendation from the Government at the time of sentencing.
Mr. Powanda admitted the details of several wrongful acts today. For example, Mr. Powanda estimated that Barnhill (a Peregrine partner company) had approximately $8 million worth of contracts with Peregrine that had been recognized as revenue but that did not actually have to be paid to Peregrine. The fraudulent deals were entered into with Barnhill, in order to recognize revenue that did not really exist. Eventually, Peregrine acquired Barnhill with the illegal intent of “erasing” the fraudulent Barnhill debt.
Witness Powanda did not name Joseph Reichner as having been involved in any of the illegal deals that he testified about today. Powanda said that other people involved included Gardner and Gless (these two have both pled guilty and will be testifying as Government witnesses in this trial), and Nelson and Crook (these two are scheduled to go on trial after the present trial ends).
The Government considered Mr. Powanda to be the third most culpable of all Peregrine defendants, after CEO Gardner and CFO Gless. Powanda’s testimony supports his ranking.
Attorney Iredale showed about eight photos of a large home in Rancho Santa Fe, which Powanda had bought with some of the proceeds of stock options that he exercised. Iredale asked a number of questions about Powanda’s sale of this house in 2003 to Representative Duke Cunningham (who is serving a prison sentence of over eight years for corruption). AUSA Beste objected to these questions on the grounds of relevance, and the court sustained these objections.
The cross-examination of Douglas Powanda will continue tomorrow. The pace of this trial is not what Judge Whelan had hoped for when he agreed to the defense request to a shortened trial schedule.
April 25, 2007 – 8:30 a.m. to 1:30 p.m.
Before testimony resumed today, Judge Whelan told the jury that because of testimony regarding punishment and the plea agreements of the cooperating co-defendants, he had an instruction for them. Judge Whelan told the jury that the question of punishment is strictly for the court to decide. It is relevant only as to how it may affect the testimony of any witness, not as to the guilt or innocence of any accused.
WITNESS DOUGLAS POWANDA (continued)
Today was Douglas Powanda’s fourth day of testimony (and third day on cross-examination). Defendant Reichner’s lawyer, Gene Iredale, continued his cross-examination. He led Powanda through a number of transactions that involved illegal side deals, including Morgan Stanley, AVNET and Citicom. Conspirators, including Spitzer and Larry Rodda of KPMG, were involved with Powanda in these deals, which occurred before Reichner even worked for Peregrine. Iredale closed his cross-examination of Powanda by totaling the amount of money that Powanda made from August 1999 to May 2001. The figure was over $24 million, of which the total gain to Powanda was $15 or $16 million (apparently this is the gain after taxes).
Towle’s attorney, Leff, cross-examined Powanda in about 15 minutes of very focused questioning. She had Powanda describe the sales process, in which the salespeople generally do about 95% of the work negotiating a contract. Powanda was the closer, and would meet with customers at the end to resolve sticking points. Powanda started working at Peregrine in 1992, and was familiar with the generally accepted accounting principals used in the software industry. The commissions of salespeople (including Powanda) depended on the recognition of revenue under the contract. In spite of his admittedly fraudulent behavior, Powanda believed in Peregrine. He testified that it was a good company with great products, and the vast majority of its sales were completely legitimate.
Lenz’s attorney, Beinert, cross-examined Powanda from about 10:25 a.m. until the end of the court day at close to 1:30 p.m., and will resume his cross-examination tomorrow. He went over a lot of the ground covered during the three previous days of testimony, but also brought out some specific points favorable to Lenz. Powanda and the primary co-conspirators Gardner and Gless had been doing fraudulent transactions for years before Lenz began working at Peregrine in mid-2000. At one time, Powanda was supposed to report to Lenz, but Powanda objected to this and complained to Gardner – Powanda was even considering leaving Peregrine. Gardner felt that Powanda was valuable to Peregrine and persuaded him to stay, in a high management capacity. In early 2001, when Gardner was off work for about six weeks because of an operation, many people at Peregrine would go to Powanda for authority and direction that they normally would have sought from Gardner. Even when Lenz was President and Chief Operations Officer, a number of high-ranking Peregrine officers did not report to Lenz.
Gary Lenz came to Peregrine from Arthur Andersen LLP, where he had worked on large accounts of hospitality companies, and his main job at Peregrine was supposed to be forming alliances with other companies to sell Peregrine software. Powanda said that Lenz did not understand the software industry and did not know as much about Peregrine as others.
Powanda previously testified to Lenz’s participation in a deal with Fujitsu United States where a contract was signed on October 3, 2000, but dated September 28, 2000. The Government has alleged that this was part of Lenz’s involvement in the conspiracy, and it was alleged as an overt act against Lenz. Under cross-examination by Beinert, Powanda testified that this was a legitimate deal with a very legitimate company. The Fijitsu executives were on one side of the table in the conference room on the fifth floor of Peregrine’s offices, and a number of senior Peregrine officials were present, including Powanda, Gardner, Gless, and Cahill. Not a single person in the room thought that this was a bad deal. Powanda had directed that the September 28 date be typed into the contract, and most (perhaps all) of the real negotiation had been accomplished by September 28 or 29 (September 29 was a Friday). Powanda signed the contract on behalf of Peregrine and received a substantial commision for the Fujitsu deal. Lenz, who had only been at Peregrine since about May or June of that year, received no commission.
Beinert’s cross-examination of Powanda continues tomorrow. Cross-examination of Powanda by the defense has brought out some points favorable to the defendants, but has probably taken significantly more time than the court expected. The court has also sustained objections by AUSA Beste to quite a number of defense questions on grounds of asked and answered, irrelevant, and misstating the evidence.
April 26, 2007 – 8:30 a.m. to 1:30 p.m.
AUSA Bhandari argued that there is no basis for any inquiry into the sale of Mr. Powanda’s Rancho Santa Fe home to former Rep. Duke Cunningham. After some dispute, all parties agreed to never mention it again.
WITNESS DOUGLAS POWANDA (continued)
Attorney Thomas Bienert asked Mr. Powanda many questions about the Fujitsu deal that was discussed yesterday. Doug Powanda testified that the conflicts that arose at Peregrine after the Fujitsu contract was signed, occurred due to in-house fighting between Fujitsu Europe and Fujitsu U.S.A., and had nothing to do with any possible illegalities in the contract.
Attorney Bienert referred Powanda to the transcript of his SEC deposition. In the transcript, Mr. Bienert pointed out that Mr. Powanda told the SEC that he never wrote “side letters” or engaged in “side agreements” while working at Peregrine. Powanda admitted today that he had engaged in side agreements while at Peregrine.
Attorney for Daniel Stulac, Mike Attanasio, argued that certain Peregrine employees conspired with others not only to conceal information from Arthur Andersen but to deceive them. Attorney Attanasio made this point by showing several e-mails that would have been of interest to Arthur Andersen, but Arthur Andersen employees did not receive the e-mails.
On re-direct by AUSA Beste, Mr. Powanda testified that he was not the closer for the Fujitsu deal because Peregrine expected Fujitsu to sign. Doug Powanda also testified that a written 30-day cancellation clause was put into the contract, at the request of Gary Lenz. Doug Powanda does not know anything about the negotiations that led Lenz to concede to allow Fujitsu to have this clause. Perhaps later we will hear testimony that will explain this but so far it does not seem to incriminate Gary Lenz. We also have not heard evidence that anyone except Mr. Powanda knew that the contract had been backdated on the signature line, where Doug Powanda signed.
WITNESS INEZ LUNA
Inez Luna, a former Contracts Administrator at Peregrine, testified that she boxed up the documents in Gary Lenz’s office after he was terminated.
WITNESS LYNN MORIMOTO
Ms. Morimoto worked at Peregrine in the Sales Operation department from 1991 until 2004. Under direct examination by AUSA Bhandari, she said that the basic documents for each deal included a Revenue Booking Form, a Schedule A (that specifies the contract terms, price and product sold), and a SLA (the Software Licensing Agreement). In some situations there were additional documents. After being received by the Sales Operations department, these documents would be sent to Revenue Recognition, which was headed by Patrick Towle.
Ms. Morimoto testified that on a number of occassions, Patrick Towle would ask her to remove the fax header (showing the date the contract was received by fax) by whiting out the fax header. She testified that this would usually be done when the fax header showed that a contract was received after the end of a quarter, and generally was on the larger contracts. Ms. Morimoto started doing this automatically. When BMC was considering the acquisition of Peregrine in 2000, and was doing its due diligence, her department was providing a lot of existing Peregrine contracts to BMC. She said that if the fax header had the “wrong date” on it, she would white it out. Ms. Morimoto said that she did not know what Patrick Towle was going to do with these contracts with the fax headers whited out. However, she knew it was wrong, and knows that the auditors need to look at this information. AUSA Bhandari had her hold a number of contracts up to the light to see if she could see the real date on the contract through the white out. She was having some trouble reading the dates. Mr. Bhandari asked Judge Whelan for permission to publish the contracts to the jury. Prior to this point, the jury has been shown hundreds of documents on the projection screen. In this case, the actual contracts were passed from juror to juror, and each one held them up to the light.
Attorney Kate Leff, who represents Patrick Towle, cross-examined the witness. Ms. Leff established that when Lynn Morimoto was dismissed in June 2004, she was escorted from the building. Ms. Morimoto testified that in Sales Operations, she drafted the standard contract language, sometimes with help from the Legal Department or the Accounting Department in complex deals. After negotiations with a customer, the sales staff would ask Sales Operations to prepare the contracts. Sometimes there would be hundreds of contracts in a quarter, mostly at the end of the quarter.
Attorney Leff referred to an interview that Ms. Morimoto had with the FBI in 2003 in which she said that she did not know it was wrong to white out the fax headers. Today she testified on direct that she knew it was wrong.
April 27, 2007 – 8:30 a.m. to 1:30 p.m. (1:45 p.m.)
WITNESS LYNN MORIMOTO (continued)
Attorney for Patrick Towle, Kate Leff, established that it was Lynn Morimoto’s testimony yesterday that both Matt Gless and Patrick Towle had instructed her to white out fax headers on Peregrine contracts. Attorney Leff asked Witness Morimoto about the time period around June 2002, when Peregrine hired the law firm of Latham & Watkins to conduct an internal investigation of accounting irregularities. Morimoto admitted today that when she was interviewed by the attorneys for Latham & Watkins, she only told the attorneys that Gless asked her to white out dates, she did not mention Patrick Towle’s name. Ms. Morimoto testified today that she did the same thing when the SEC interviewed her in June of 2003. Morimoto told the SEC that Gless had instructed her to white out fax headers, but failed to mention Patrick Towle. Attorney Leff established that Ms. Morimoto first stated that both Gless and Towle instructed her to white out fax dates on Peregrine contracts in August 2003 when the FBI interviewed her.
On cross-examination, Attorney Iredale asked Ms. Morimoto if she ever whited out dates by the customer signature line on Peregrine contracts. Witness Morimoto testified that she did not ever do that.
Attorney Bienert introduced a Peregrine Schedule A into evidence that showed the reseller as being SMF Systems and the end-user as being the FBI. This contract also contained a 30-day cancellation clause. On re-direct AUSA Bhandari pointed out that since the FBI was the end-user in this contract, the 30-day “out” clause was actually between Peregrine and SMF Systems.
In Attorney Mike Attanasio’s cross-examination of Morimoto, he clarified that when Ms. Morimoto speaks of the Accounting Department, that she is referring to the internal Accounting Department of Peregrine, and not the outside accounting firm of Arthur Andersen. Gless and Towle worked for Peregrine and Attanasio’s client, Stulac, worked for AA. Mr. Attanasio also had Ms. Morimoto explain that when she whited out faxes, she made copies of the whited out contracts so that the whited out part was not visible. Morimoto testified that she sent out the clean copy and kept the whited out original in her own department.
On re-direct of this witness, Bhandari brought out the fact that in order for a 30-day clause to be inserted into a contract, someone at a high level of management at Peregrine had to authorize it. Morimoto testified that these clauses usually occurred on large contracts that were signed at the end of a quarter.
When asked by Attorney Bienert if Gary Lenz had ever authorized a 30-day out clause, Morimoto answered “no.”
WITNESS KAREN LOGAN
Karen Logan worked at Peregrine from 1999 until 2006 as a director of purchasing. AUSA Beste asked her many questions regarding Valentine Enterprises, which is a consulting firm made up of one individual, Peter Valentine. Beste established that in the 12-month period from April 1, 2001 until March 31, 2002, Peregrine hired Valentine to consult with the company for $270,000. Witness Logan testified that Gary Lenz, and to some extent, Joe Reichner, dealt with Peter Valentine.
The Government asked Karen Logan to explain why she referred to the outside auditors from Arthur Andersen as the “the Gestapo” in one of her e-mails (Daniel Stulac was one of these auditors). She laughed and explained that she had no problem with the AA auditors but that they were demanding because they asked for a great deal of documents and they worked long hours for many days in a row.
On cross-examination of this witness, Attanasio made a point of having her explain that the Arthur Andersen auditors worked extremely hard and behaved professionally.
Thomas Bienert asked Ms. Logan questions that illustrated that the contract between Peter Valentine and Peregrine for $270,000 had been negotiated before Lenz or Reichner went to work at Peregrine.
WITNESS STEVEN SPITZER
Steven Spitzer worked at Peregrine in Channel Sales and Alliances from August 1997 until June 2002. Spitzer’s work involved selling Peregrine software to third parties who would resell it to end-users. Spitzer characterized Lenz and Reichner as having been hired by Peregrine because of their experience and contacts at high levels in the business world. Steve Spitzer testified that Peter Valentine also had high-level contacts in the area of real estate. On direct by AUSA Beste, Spitzer testified about a contract for $572,000 that Valentine signed with Peregrine as a reseller of Peregrine software, but with the designated end-user to be Chevron. Witness Spitzer testified that both Powanda and Gless directed him to ask Valentine to sign the contract. At first, Valentine refused because he said he could not afford to pay for the software if he did not sell it and futhermore, that he did not know anything about reselling software. When Spitzer explained that Valentine would not be liable for the software if Chevron did not buy it, Valentine signed the contract, and Peregrine booked the revenue. In the following quarter, Chevron did close a deal for a similar amount of Peregrine software but the transaction had already been booked in the preceding quarter.
At 1:30 p.m., the jury and the witness were excused. A heated argument between some of the lawyers commenced. Bienert argued that the Government should have informed the defense that Doug Powanda was involved in the Chevron/Valentine deal. AUSA Beste replied that this information was provided in the materials that were given to the defense. Judge Whelan said that he trusts that the Government knows its ethical obligations regarding the discovery rules and that if the Government asserts that they have upheld their obligations, he trusts that they have done so.
Attorney Attanasio renewed his motion on behalf of Daniel Stulac, for a separate trial from Patrick Towle, and Towle’s attorney, Kate Leff, joined him. Attanasio pointed out that today it has become apparent that Towle and Stulac have mutually inconsistent defenses because today’s testimony was exculpatory to Stulac but incriminating to Towle. He said that he felt like he was prosecuting Towle (Attorney Leff’s client) when he brought out testimony that Towle had allegedly been involved in causing fax headers on contracts to be whited out before copies of contracts were sent to the group of independent auditors at AA, which was headed by his client, Stulac. Judge Whelan denied the motion.