Peregrine Trial – Week 30
Comments by Bob Grimes and Dana Grimes
March 13, 2009 – 8:45 a.m. to 1:30 p.m.
Government Closing Argument
Just after 9:00 a.m., AUSA Bill Narus began his closing argument for the Government. His argument went over the highlights of the Government’s case, and lasted just over an hour. The courtroom was so full that a number of people had to stand throughout the arguments. Members of the audience included FBI agents, Deller’s friends and family, and a juror from the second Peregrine trial.
During his closing argument, AUSA Narus stood eight feet from the jury box and spoke in an amiable and conversational tone. He presented a chronology to the jury of the allegations against Deller. A number of jurors took notes, apparently relieved to have a timeline to work with after having seen a large number of documents and e-mails that were not presented in chronological order. For example, the timeline indicated that on March 19, 2001, Deller misled Wells Fargo when he signed an opinion letter stating he had examined the invoices Wells Fargo was purchasing, and that they were valid and enforceable. AUSA Narus argued that by that date, Deller knew the BT deal was unenforceable, and he acted with reckless indifference by not performing due diligence. Perhaps for the benefit of the retired commercial pilot on the jury, AUSA Narus compared Deller’s actions to a pilot not performing a pre-flight check.
AUSA Narus argued that Deller committed bank fraud by misleading Mary Anne Graulich at Wells Fargo, who testified that she had relied on Deller’s legal opinions. AUSA Beste argued that the opinion letter signed by Deller and given to Wells Fargo was no better than a forgery, because it was valueless. With respect to the conspiracy charges, the Government’s position is that Deller, Benjamin, and others acted in concert to keep information from Wells Fargo in order to avoid having to repurchase the BT receivable.
The Government’s position is that the SEC comment letter signed by Deller was an untrue statement provided to the SEC. AUSA Narus argued that on April 28, 2001, Deller was involved in a CNBC conference with Gardner, Gless, Patterson and Deller touting Peregrine while he knew things the investing public did not: that BT was a “monumental f**k up” and that the CorpSoft deal was cancelled. Mr. Austrian testified that his clients lost millions of dollars once the fraud was uncovered.
AUSA Narus stated that this case turns on “the intent to deceive.” He went through evidence of Deller’s knowledge, reminding the jury that Deller advocated firing Ron Hall, that he received e-mails from Emma Wilson regarding the invalidity of the BT deal, and that Mr. Allen stated that Deller participated in “communications without a trace” with the rest of the co-schemers, including Rassam, Gless and Gardner. He also stated that in February 2002, when Deller signed the line of credit with Fleet, the bank had a right to know about side letters with ProCom and BT, but that Deller did not disclose those problems.
Special Agent Bridgette Cook assisted in the creation and presentation of the Government’s closing argument PowerPoint; she has worked diligently on the Peregrine assignment for seven years. She and other FBI Agents such as Marc Pennebaker have contributed significantly to the Government’s ability to successfully obtain guilty pleas from the major players in the fraud.
Throughout his closing argument, AUSA Narus emphasized accountability and responsibility. He argued that, as the general counsel of Peregrine, Deller was responsible for compliance with regulatory agencies’ requirements and for working within the confines of the law with respect to other companies and banks.
Defense Closing Argument
Attorney McConville argued for an hour and forty-five minutes. He contended that Eric Deller is innocent; the Government mistakenly believes Deller committed fraud, and that mistaken belief colors their understanding of the e-mails and documents. He highlighted that only two witnesses who worked at Peregrine testified in the trial: John Benjamin and Gretchen Nail. He listed a number of Peregrine defendants including Gardner, Gless, Cappel, Rassam, and others (the jury does not know these Peregrine employees pled guilty and signed cooperation agreements with the Government). McConville stated “Absence of evidence creates reasonable doubt.”
Attorney McConville argued that just because there were references in the evidence to a BT side letter does not mean a side letter actually existed, and reminded the jury that they saw evidence of only a BT contract executed in December 2001, months of negotiation, and an amendment executed in August 2001. He argued that BT was referred to as a “monumental f**k up” simply because salespeople were creating problems for legal that required an amendment to the deal. Attorney McConville argued that on March 19, 2001, the date the Government alleges Deller committed fraud by signing a letter to Wells Fargo, the BT receivable was not included in the list of receivables provided to Wells Fargo; he argued Ilse Cappel added the BT receivable to the list submitted to Wells Fargo on March 30, 2001.
Attorney McConville reminded the jury that Gretchen Nail testified that Emma Wilson was concerned with legal issues, and perhaps not aware of the revenue recognition repercussions of drafting contracts. He stated that Deller relied in good faith on people to do their jobs, and that good faith reliance is an absolute defense. He argued that Deller did not have a motive to participate in fraud.
An e-mail from Emma Wilson with the phrase “attorney-client privileged and confidential” was displayed to the jury. Attorney McConville explained that clients rely on lawyers to retain their discussions in confidence, and asked the jurors to apply a jury instruction stating that a lawyer cannot disclose confidential information. Attorney McConville noted that Benjamin testified that he and Deller had never discussed the impaired nature of the BT receivable. He stated that even if Deller had wanted to disclose what had been discussed in his meeting with Benjamin, he could not have, because he was providing legal advice to his client. McConville stated that there are no documents that say a general counsel has an obligation to make disclosures to a bank. He noted that Benjamin testified it was Benjamin and Gless – not Deller – who met with Wells Fargo and did not tell them the whole truth. John Benjamin never said, “Eric Deller and I were involved in fraud together.” He argued Deller participated unknowingly in the fraud, along with outside counsel and others.
With respect to Fleet Bank, Attorney McConville told the jurors that the “Ratification of Guarantee” Deller signed multiple times was nothing more than an acknowledgement by the subsidiaries that they were still on the hook for the Fleet loan. It was Matt Gless who signed the false covenants and guarantees. With respect to the transmittal letter sent to the SEC, Attorney McConville reminded the jury that it was Matt Gless who actually signed the SEC comment response itself, and that there was no evidence that Deller had read and reviewed the response. McConville argued that out of the more than 20,000 e-mails in the FBI database regarding Deller and 30,000 documents retrieved from Deller’s office, none of them showed that Deller reviewed 10-K’s or 10-Q’s.
Attorney McConville argued that employee Ron Hall threatened to disclose inside information to the Wall Street Journal, and Deller’s response was an appropriate response for a lawyer trying to avoid a lawsuit in dealing with an employee who violated company policy and the law.
Attorney McConville stated there may have been a massive fraud ongoing at Peregrine, but that Deller did not join in. He reiterated the Government’s burden of proof and the presumption of innocence, and argued there was no evidence presented that Deller knowingly engaged in a scheme to defraud the banks, or that Deller willfully committed securities fraud.
AUSA Beste argued for forty-five minutes. He told jurors that lawyers are disliked because they find loopholes and they are evasive; he argued now is not the time for chicanery and excuses, saying, “It’s a license to practice law, it’s not a license to lie.”
AUSA Beste told the jurors that an accounting background was not required to understand that the entire emerging markets channel at Peregrine was “bogus.” He argued that when it mattered to Deller, so that he could receive bonuses and recognition, he was happy to say he prepared, reviewed, and filed SEC documents, but now he is claiming ignorance of the false statements in documents that he reviewed closely.
In response to Attorney McConville’s argument that Deller acted in good faith, AUSA Beste read a portion of the good faith jury instruction stating “A defendant does not act in good faith . . . if he also knowingly makes false representations . . . or conceals material facts.” Beste held up an opinion letter signed by Deller and provided to Wells Fargo, saying “this is flat out a lie.”
AUSA Beste argued Deller had every reason to believe that Peregrine would try to sell the BT receivable, and no reason to believe it was valid. The defense argument that BT was not a side letter, the Government argued, is contradicted by Mr. Allen’s testimony that Deller told him there was a BT side letter.
Even though an attorney is required to maintain client confidences, AUSA Beste argued that an attorney is not allowed to participate in a fraud the way Deller did – by working with Benjamin to deceive the bankers. He reiterated that Benjamin did not want to be associated with a bankrupt company, and that non-financial motives can induce people to commit fraud.
AUSA Beste stated that the defense is that Deller relied on people, but “how about the people that were relying on him?” He argued, “It was not the defendant who was led astray, it was the victims, employees and shareholders.”
At 1:10 p.m., Judge Whelan read the jury instructions. Among many other topics, the jurors were instructed on the law of conspiracy, securities fraud, wire fraud and bank fraud. They were also instructed on the defense of good faith, and the duty of an attorney to keep inviolate the confidences of his client.
The judge thanked both the Government and defense for their professional advocacy of their respective clients. The jurors will resume deliberations Tuesday morning.
March 12, 2009 – 9:15 a.m. to 2:30 p.m.
Special Agent Mark Pennebaker
Special Agent Mark Pennebaker testified all day today. AUSA Beste continued eliciting testimony from Special Agent Pennebaker regarding internal Peregrine e-mails. The e-mails showed corrections and comments to press releases exchanged among Deller, Gardner, Farley, Powanda, Nelson, Lenz and others. The press releases announced Peregrine’s confirmation or surpassing of quarterly earning projections for quarters ending in 2000, 2001, and 2002. On cross-examination, Attorney Haag established that when Deller edited the documents, he made no substantive revisions; he made a few changes such as changing the abbreviation “Dec.” to “December.”
For over an hour, AUSA Beste went through a number of e-mails among Gardner, Gless, Deller and other high-ranking Peregrine employees related to the scripting of Peregrine’s conference calls. In one e-mail, Deller wrote to Gless “Looks good, the only thing missing is the proverbial, ‘back to you, Steve.’” One conference script reported “Our infrastructure management group, ING, had a very strong quarter … with continued remarkable growth.” The January 2001 script stated “major new expanded ING customer relationships” had developed during the past quarter, including the BT deal.
AUSA Beste displayed an e-mail indicating that as of August 2001, Emma Wilson had e-mailed Deller regarding BT, writing “to keep you posted, the saga continues.” AUSA Beste was attempting to demonstrate through these e-mails that Deller endorsed fraudulent press releases and statements in conference calls when he was aware of issues such as the invalidity of the BT deal. On cross-examination, Special Agent Pennebaker agreed that Deller made changes to the scripts such as changing a comma.
AUSA Beste introduced a July 5, 2001 e-mail reflecting that Deller had edited a Peregrine shareholder letter. On cross-examination, Attorney Haag established that when Deller edited that document, he made minor changes such as the capitalization of letters, not substantive changes in the information provided to shareholders.
Special Agent Pennebaker read a number of documents collected from Deller’s office during Peregrine’s internal investigation. The analysts’ reports recommended buying Peregrine stock, in part because of the apparent achievement of the BT deal. Many congratulatory e-mails were sent to Deller.
AUSA Beste admitted into evidence a number of Peregrine’s periodic SEC filings from 2001 and 2002. A number of the documents reflected Deller’s signature. A number of e-mails reflected Deller’s involvement in preparing a draft of the transmittal letter of Peregrine’s SEC comment response. On cross-examination, Attorney Haag established there has been no evidence presented that Deller edited the SEC letter independently of Wilson Sonsini counsel. AUSA Beste introduced an e-mail chain dated December 10, 2000, in which Deller affirmed a high total number of revenue; he attached a calculation of how he reached that number and wrote “Please delete this document once you’ve read it.”
AUSA Beste introduced an e-mail chain from early October 2001 in an attempt to establish that Deller knew of channel stuffing at Peregrine and had advocated firing a Peregrine employee who uncovered it. An e-mail chain started by the Peregrine employee (who was anonymous at first) begins “My legal background suggests that the overall contract worthiness is questionable . . . were the attached documents, or any of the other contracts mentioned above, or this correspondence to fall into the hands of the Wall Street Journal, or a curious analyst, Peregrine will be under serious and immediate scrutiny . . . This is a blatant example of what can be called channel stuffing in its crudest form.” AUSA Beste established that the next day, Deller was sent an e-mail stating “All evidence points to the sender being Ron Hall of Brisbane, Australia.” Gless wrote to Gardner and Deller “If evidence permits, we should dismiss him . . . Anyone who threatens to divulge insider information should be fired.” Deller replied, “We need to fire this guy. That is a given. Let him think he remained anonymous . . . . We’re terribly sorry, love you to death, here’s the door.” Deller advised Peregrine should not let Ron Hall know that his “blackmail” was uncovered, writing “His story is a lot more compelling if it ends, and then they fired me for reporting the bad guys.”
On cross-examination, Attorney Haag implied AUSA Beste had not shown the jury the entire context of the e-mail chain. She noted that the first person to respond was Gless, who wrote “Given that this person is sending confidential documents under a non-company e-mail address, I’d like to trace it.” An IT employee responded that it might be difficult to trace the sender without a court order, writing “This kind of nonsense happens frequently. Let me know if you want me to work with Deller on pursing legal action.” Next, Gardner responded to the IT employee, cc’ing Deller and Gless for the first time, writing “the movement of company documents . . . into public domain is quite concerning to me.” At that point, an IT employee apparently identified the sender.
Attorney Haag established that a few months prior to the e-mail from Ron Hall, Peregrine reminded its employees that it was against policy for employees to communicate with financial analysts concerning the company, or to communicate with the press or media. Over AUSA Beste’s objection, Attorney Haag read into evidence an e-mail Gless sent on October 3, 2001 responding to the anonymous e-mail sender. Gless wrote “I am a bit confused as to your motives . . . it is important that you understand all the acts surrounding the revenue . . . . Most of the revenue you listed is not booked yet, and are by definition not channel stuffs.” The defense explanation of Deller’s advice to fire the employee is that he was attempting to protect his client, Peregrine, from a rogue employee anonymously threatening blackmail.
Outside of the presence of the jury, Attorney Haag stated that the Government is trying to suggest the termination of Ron Hall was part of the conspiracy. Therefore, she requested to introduce portions of Gardner’s previous testimony in which Gardner, probably the person most responsible for the fraud at Peregrine, stated the termination of Ron Hall had nothing to do with the fraud. Judge Whelan ruled that she could not present that information to the jury by asking Special Agent Pennebaker to read a transcript. Defendant John Benjamin’s plea agreement was admitted into evidence. Attorney Haag established that if the Government asked Benjamin to testify, he would be required to testify under the terms of his cooperation agreement.
Previous testimony indicated CorpSoft was sent an audit confirmation letter by Arthur Andersen regarding the Peregrine/CorpSoft deal. Documents reflected that CorpSoft sent the audit confirmation, including the contract signed by Deller on September 29, 2001 , to Nevanna Sachs at Arthur Andersen.
By the time Special Agent Pennebaker was excused at 2:10 p.m. after reading e-mails all day long, his voice sounded tired. The Government rested at 2:15 p.m. After a break, the jury was called back to the courtroom at 2:30 p.m., at which time Attorney Haag indicated the defense also rested. The jury will be called back for closing statements of counsel tomorrow at 9:00 a.m. They will have the option of deliberating on Monday if they choose. At 8:45 a.m. tomorrow, the court will hear argument on the Defense’s Rule 29 motion to dismiss charges.
March 11, 2009 – 9:00 a.m. to 4:00 p.m.
Mary Anne Graulich
Attorney Melinda Haag continued her cross-examination of Ms. Graulich. According to Mary Graulich, Peregrine put together a package of materials relating to Wells Fargo’s purchase of the BT account receivable in June 2001. Attorney Haag established that an opinion of counsel was not included in the package.
Attorney Haag also established that CEO Farley signed both the original agreement between Peregrine and Wells Fargo Trade Bank and the first and second amendments to the purchase agreement.
Ms. Graulich testified that she could identify five “events of re-purchase” surrounding the contract between Wells Fargo and Peregrine for BT account receivable, yet in early April 2002, Wells Fargo allowed Peregrine to substitute BT accounts receivable rather than enforcing the re-purchase agreement. This substitution occurred three weeks before the financial collapse of Peregrine.
On re-direct, AUSA Narus established that Wells Fargo Trade Bank relied on Eric Deller, among other Peregrine employees, to do due diligence to ensure that all the information given to Wells Fargo regarding the BT account receivable was correct. Ms. Graulich also testified that she does not know if Ilse Cappel knew that the BT contract was invalid and unenforceable.
The Government called securities analyst Robert Austrian to the stand. Mr. Austrian worked from 1996 through 2004 as a software securities analyst for Banc of America Securities. Mr. Austrian “covered” Peregrine as one of the software companies that he studied. Mr. Austrian studied software companies, such as Peregrine, in order to write reports for Banc of America Securities. In these analyst reports Mr. Austrian issued his opinion regarding whether an investor should buy a software company’s stock. Robert Austrian testified that he relied on companies’ financial statements, conference calls and press releases in order to write his opinions.
Mr. Austrian said that Peregrine’s conference calls, financial statements and press releases all left out certain pertinent pieces of information that were essential for him to give an informed opinion. For example, Mr. Austrian said that Peregrine’s press release on April 4, 2001 failed to mention that the BT contract had been cancelled and that therefore $14 to $15 million dollars of revenue could not be included in the quarter. Mr. Austrian testified that was a significant omission that would have changed his opinion of Peregrine’s stock growth potential.
On cross-examination by Attorney Warrington Parker, witness Robert Austrian admitted that he cultivated a close relationship with CFO Gless and CEO Gardner in order to gather more information on Peregrine. Banc of America Securities put together a “road show” for Gardner and Gless. On the road show Gardner and Gless tried to convince potential investors to invest in Peregrine.
On re-direct by AUSA Beste, Mr. Austrian testified that attorney Eric Deller would be considered to be part of the senior management team of Peregrine. He testified that the general counsel of any company would be considered as such.
Government witness, Brian Allen, has been an audit partner at KPMG for the last 23 years. Early in April 2002, KPMG began an audit at Peregrine for the fiscal year ended March 31, 2002. Mr. Allen testified that after one week on the engagement, he began to have “reservations” about Peregrine. His doubts were based on his observation that Peregrine’s books were a mess and his hearing that a Peregrine employee had mentioned the existence of a side letter.
Before the KPMG engagement began, Matt Gless and BJ Rassam admitted to a single side letter, but they both insisted that it was created by a rogue employee who had been terminated. About two weeks into the engagement, Brian Allen was alone at Peregrine, in BJ Rassam’s office, and he looked through papers piled on Rassam’s desk. Mr. Allen found an e-mail from Gless to Rassam that indicated the existence of more than seven side letters.
Brian Allen did not tell anyone at Peregrine that he had found evidence of many side letters. He just spoke of the issue to see what their reaction would be. BJ Rassam denied knowing anything about more than a single side letter. Matt Gless admitted that there may have been three or four. Gless eventually gave Brian Allen a list of several Peregrine deals that included side letters. This list became known as the “CFO’s list.” Brian Allen said that the CFO’s list was confusing and it did not name all the side agreements that Allen found listed in the e-mail from Rassam’s office.
Mr. Allen testified that when he questioned Eric Deller about side letters, Mr. Deller mentioned the existence of a side letter in the BT deal. Mr. Allen testified that he told Deller that Allen had heard there was a ProCom side letter. Mr. Deller said it was similar to the BT side letter. Brian Allen testified that Mr. Deller was outwardly cooperative, but Deller said that he would have to get back to Mr. Allen when Allen asked for specific information.
Brian Allen testified that KPMG was fired shortly after entering into the engagement because of Peregrine’s concerns regarding KPMG’s lack of independence; certain individuals at KPMG Consulting were licensed re-sellers of Peregrine’s software and KPMG Consulting was once part of KPMG. Mr. Allen said that he did not believe that a true conflict of interest ever existed and that KPMG was really fired because they were uncovering too much bad information about Peregrine. (It should be noted that, after KPMG was fired, a KPMG Managing Director pleaded guilty to criminal charges in connection with KPMG Consulting’s re-seller contracts with Peregrine.)
Under cross-examination, witness Allen reluctantly agreed that there is no one source that auditors can turn to in order to determine GAAP (Generally Accepted Accounting Principles).
AUSA Beste called FBI special agent Mark Pennebaker to the stand. His testimony will continue tomorrow at 9:15 a.m.
March 10, 2009 9:00 a. m. – 4:00 p. m.
AUSA Narus called Sharon Turley-Harpin to the stand. Ms. Turley is an attorney who worked as part-time general counsel for “CorpSoft,” a corporate technology reseller. In October 2000, a lawyer working for Ms. Turley, Paul Trainer, along with Emma Wilson at Peregrine Systems, worked to document an $8 million deal in which CorpSoft would resell Peregrine Software.
During the testimony of this witness, Special Agent Cook published a number of documents to the jury reflecting the terms of the Peregrine and CorpSoft deal, including language stating that both parties would make efforts to resell the product and that CorpSoft retained the right to terminate the deal if the software was not sold.
AUSA Narus pointed out that on one document supposedly signed by Eric Deller on September 29, 2000, the fax header was dated October 6, 2000. Ms. Turley testified that the fax header was consistent with her memory that negotiations regarding termination of CorpSoft’s pre-payment obligation were ongoing as of October 2000. On cross-examination, Attorney McConville established that the broad strokes of the Peregrine and CorpSoft transaction were already completed by September 2000.
CorpSoft did exercise its out clause – an April 25, 2001 letter from CorpSoft addressed to the director of licensing and contracts at Peregrine states “Accordingly, CorpSoft is exercising its right to terminate its pre-payment obligations.” Ms. Turley testified that her conversations with Mr. Deller continued because Peregrine and CorpSoft decided to try again to make the deal work. AUSA Narus established that as of May 1, 2001, CorpSoft still had a right to cancel their contract with Peregrine, CorpSoft’s obligation to pay was contingent upon resale, and Peregrine had a remaining obligation of performance to provide assistance in CorpSoft’s resale of the product.
On cross-examination, Ms. Turley agreed with Attorney McConville that it was a common practice at times for a deal to be documented on one date, and finalized later on. She testified that just because a document is not dated the day it is signed, that does not render it part of an illegal transaction.
Ms. Turley indicated that one cause of delay for the Peregrine and CorpSoft deal was that they were not working from a form reseller contract, so they had to re-write the contract to accurately reflect the deal. Ms. Turley stated that if CorpSoft had entered into an end-user agreement with Peregrine, they would not have been permitted to resell, and it would not have been an accurate portrayal of the underlying transaction; she agreed with Attorney McConville that it would have lead to “monumental problems down the road.”
Attorney McConville established that the people negotiating the deal in the April 2001 timeframe were Mark Chattel of CorpSoft and Gardner and Gless at Peregrine; the role of this witness and Deller as attorneys was to ensure the business deal with Peregrine was accurately reflected in the documents.
AUSA Narus established that payment terms for the deal extended into April 2001, and then extended into September of 2001 – the witness does not know whether Peregrine ever told Arthur Andersen about those two extensions.
AUSA Beste called Mara Ransom to the stand. Ms. Ransom has worked for the SEC in Washington, D.C. for eight years. She explained to the jurors that the SEC is an independent federal agency established by Congress in 1934. She further explained that shortly after the Great Crash in 1929, Congress tried to figure out a way for investors to regain confidence; they learned there was very little disclosure to investors and little transparency in the market. Ms. Ransom testified that the mission of the SEC is to protect investors and to maintain fair and orderly capital markets. (If the SEC has recently failed in that mission, surely Ms. Ransom is not to blame.)
Ms. Ransom stated that companies that are registered with the SEC have an ongoing reporting obligation to investors to make periodic reports including annual Form 10-K’s and quarterly Form 10-Q’s. (These periodic reports are filed on a database called “Edgar” and available to the public on http://www.sec.gov.) Ms. Ransom testified that it is very important to everyone from “banks to grandmothers” to have comprehensive and accurate information in the periodic reports.
“Comment letters” are sometimes issued by SEC staff after they review a disclosure document of a company. According to Ms. Ransom, comment letters and the responses of the company can “turn into a tennis match.” AUSA Beste established that if false information were supplied to the SEC in a company’s response to a comment letter, then the SEC’s ability to protect investors could be hampered.
On April 13, 2001, Peregrine responded to an SEC comment. The response to the SEC, signed by Matthew Gless, stated in part “no right of return is granted to third parties . . . . [C]ontracts signed are non-cancelable and are generally payable under ‘net 30 day’ terms’ and ‘the contracts are never contingent on resale.’” Ms. Ransom testified that if in truth Peregrine did have obligations to help resellers with sales, and contracts were cancelable, Peregrine’s withholding of that information would affect the SEC’s ability to protect shareholders. There was a transmittal letter addressed to the SEC, essentially asking them to “please find attached” Peregrine’s response to the SEC comment. AUSA Beste highlighted that Eric Deller had signed that transmittal letter to the SEC.
After lunch, Attorney Parker cross-examined Ms. Ransom. He went through each sentence of the short transmittal letter signed by Deller asking if any of the representations in that letter were false. Ms Ransom agreed that there is no reason to believe that any of those statements were false. She agreed that Peregrine’s SEC comment responses were signed by Gless. Deller did not answer any of the questions posed by SEC.
Attorney Parker went over a few dense accounting questions posed by the SEC comment, and asked Ms. Ransom if she herself knew what the accounting terms meant. Ms. Ransom stated that she does not understand a number of the accounting terms, and she does not know if Deller understands them either. She agreed with Attorney Parker that she had “no idea” what Deller knew to be true in the SEC comment response. She agreed Deller did not represent in his letter that he knew Peregrine’s comment response to be true.
Heather Trapnell was called to the stand by AUSA Narus. She is an attorney who worked for Latham & Watkins during their 2002 internal investigation of Peregrine. She testified that she took detailed notes and prepared a memorandum of an interview of Deller conducted by Latham & Watkins’ partner Peter Benzian on June 13, 2002 and July 10, 2002. Ms. Trapnell has no independent recollection of that interview, and read portions of her memorandum into evidence.
Ms. Trapnell read the following three paragraphs of her memorandum into evidence:
1) Treasury handled the sale of receivables and Deller was not involved. He does not remember taking part in any of the negotiations or disputes with the banks or the insurers.
2) Deller did occasionally sign letters to the banks providing various opinions regarding Peregrine and the receivables being sold . . . . Deller relied on Benjamin and Cappel’s assurances that the representations were true. He conducted no due diligence of his own.
3) Deller did not participate in any discussions with Treasury regarding ethics and regulations.
Ms. Trapnell testified she does not remember whether Peter Benzian attempted to refresh Deller’s recollection with regard to the sale of the BT receivable. Attorney Haag noted that Ms. Trapnell had to drive from El Centro to testify today, and established that Latham & Watkins is “a couple of blocks down the street” (implying that the Government could have called Mr. Benzian as a witness, but would prefer to have Ms. Trapnell read her memo). Attorney Haag moved to have the entire memorandum introduced into evidence under the rule of completeness. Judge Whelan sustained the Government’s hearsay objection to the rest of the document.
Mary Anne Graulich
AUSA Narus called Mary Anne Graulich to the stand. Ms. Graulich worked for Wells Fargo for 32 years; she spent the final nine years preceding her retirement at the Wells Fargo HSBC Trade Bank. She was a lender, and her last assignment was as a supervisor for a group purchasing accounts receivable, including the purchase of the BT receivable from Peregrine. On direct examination, Ms. Graulich indicated that Wells Fargo was “only interested in blue chip names,” and when asked by AUSA Narus about the purchase of the BT receivable, she stated “this was a very liberal arrangement, predicated on the trust we had in Peregrine.”
AUSA Narus effectively established that a litany of situations arose at Peregrine that would have been material to Wells Fargo’s agreement to buy the BT receivable, and that Wells Fargo was not made aware of any of them. With respect to the sale of the BT account receivable to Wells Fargo, Ms. Graulich put it best when she stated “Peregrine sold us something they didn’t own.”
As previous testimony has established, Wells Fargo allowed Peregrine to repurchase the BT receivable with other accounts receivable, instead of demanding cash. Ms. Graulich stated that Wells Fargo would not likely have allowed Peregrine to substitute new receivables in for the bad BT receivables if Wells Fargo had known the BT receivable was not valid and enforceable. She stated “It’s not a good practice to continue to lend money to a borrower who is lying to you.” She would have expected Peregrine management to tell her if the BT receivable was invalid and unenforceable. Peregrine was required to do so, and it would have triggered an event of re-purchase.
AUSA Narus introduced an opinion of counsel letter dated June 26, 2001 signed by Deller, in which he represented that he had examined copies of receivable purchase agreements, the UCC financial statement, and the invoices. Ms. Graulich testified that the purpose of obtaining an opinion of counsel letter was to have legal counsel from Peregrine assure Wells Fargo that Peregrine could legally enter into the agreement with the bank. AUSA Narus established that Deller’s opinion letter was not a formality; both it and the opinion letter of CFO Gless were relied upon by Wells Fargo.
According to Ms. Graulich, it would have been material to Wells Fargo if in March, April, or June 2001 Peregrine had serious doubts about its right to collect the BT receivable. Wells Fargo had no indication that the BT receivable was anything but healthy.
On cross-examination, Attorney Haag established that Ilse Cappel often made a last-minute scramble to add accounts receivable to the Wells Fargo list. Ms. Graulich testified that Peregrine was “chaotic in June,” information came to Wells Fargo piecemeal, and documents were often late in coming.