Peregrine Trial – Week 4
Comments by Bob Grimes
May 1, 2007 – 8:30 a.m. to 3:15 p.m.
The new trial schedule will be Tuesday and Wednesday from 8:30 a.m. to 3:15 p.m., Thursday and Friday from 8:30 a.m. to 1:30 p.m.
WITNESS STEVEN SPITZER (contined)
AUSA Beste continued with the direct examination of Steven Spitzer.
Spitzer testified that on September 19, 2000, he met with Joe Reichner in Reichner’s office at Peregrine. Spitzer said that Reichner told him that he had been looking into deals that Spitzer had done with Larry Rodda of KPMG in which Peregrine had not been paid, even though the revenue had been booked. Spitzer testified that Reichner was upset, and said “people go to jail for this kind of deal.” Spitzer told Reichner that these transactions had been approved up to the level of Steve Gardner, the CEO. Spitzer testified that in December 2000, he and Reichner discussed new deals with KPMG. Reichner was no longer upset about these deals, and no longer talked about people going to jail for these kind of deals. He asked Spitzer what kind of incentives he had given Larry Rodda in the past. Spitzer said that Reichner’s boss Lenz told Spitzer that he was trying to get Rodda to sign more deals for KPMG.
Spitzer went into great detail on the Regis and FMI deals. Spitzer testified that Gary Lenz called him at Spitzer’s Peregrine office in Irvine to tell him that Lenz was negotiating a contract with Mark Douglas of FMI. The contract was for FMI to sell $2.5 million of Peregrine software to the end user LA County. Douglas was concerned that FMI might not get paid by LA County. According to Spitzer, Lenz told Spitzer to tell Douglas that if for some reason LA County did not pay FMI, Peregrine had another $8.5 million of facilities software in the pipeline and could steer some of this to FMI. AUSA Beste also introduced e-mails dated April 3, 2001, showing that this deal was still being negotiated at that time even though the date on the contract was March 31, 2001, and the income was booked by Peregrine for the quarter ending on that date. E-mails also indicated that Douglas had been given a side deal by Peregrine, so that FMI would not be held responsible if LA County did not pay for the software.
Gene Iredale, Joe Reichner’s lawyer, cross-examined Spitzer from 10:15 a.m. until the end of the court day at 3:15 p.m. He took Spitzer through the details of transactions where Spitzer had exercised stock options of Peregrine stock. Spitzer made almost $5 million in exercising his stock options.
Spitzer pled guilty to one count of Securities Fraud, which has a five year maximum sentence. Under his plea agreement, his adjusted offense level under the guidelines is 25, but he reserves the right to try to persuade the court for a two-point reduction for having a minor role and another two-point reduction on the basis that mass marketing was not involved in his crime. If he is successful in these arguments, he could argue that the downward departure that he receives for his cooperation in this case could start from as low as 37 months, and it is not impossible that he might receive probation. He pled guilty in June 2003, almost four years ago, and his sentencing will not occur until after this trial.
Beginning in May 2002, Spitzer was interviewed by lawyers retained by the Audit Committee of the Peregrine Board of Directors, including Charles LaBella, the former United States Attorney. These lawyers were conducting an internal investigation of the accounting problems at Peregrine, and they told him it was important for him to tell the truth. Spitzer admitted that he did not tell the lawyers involved in the internal investigation about improper actions that he had engaged in, such as the side deals that he had with Larry Rodda of KPMG. He was interviewed by the FBI beginning in June 2003, and did not disclose all of his wrongdoing to the FBI. Although he did not raise his voice, Spitzer argued with Iredale for some time about whether his misstatements to the lawyers hired by Peregrine or to the FBI were lies, or whether he had not had the opportunity to review documents and prepare for these interviews. Spitzer eventually conceded that he had lied to the lawyers and had lied to the FBI.
Spitzer was talking to Co-defendants Powanda and O’Brien in the same time period that he was being interviewed as part of the Peregrine internal investigation and the FBI investigation. He admitted that he talked to them about the investigation, and O’Brien gave him a memo summarizing events. He worked with Powanda and O’Brien for years. Iredale asked him if these three co-conspirators were trying to get their story straight, and he denied this.
Spitzer knew that audits were done on a regular basis and that random checks would be made of transactions, to see if they were valid. Larry Rodda of KPMG called him when Rodda received an audit information letter regarding a transaction between Peregrine and KPMG. After discussing this problem with CFO (and former co-defendant) Matt Gless, Spitzer instructed Rodda to verify that there were “no exceptions” to the contract, meaning that it was valid as it appeared on its face, with no side deals. Rodda did so, and returned the letter to the Peregrine auditors. Rodda was also indicted, and entered a guilty plea, based on this conduct.
Tomorrow the cross-examination of Spitzer will continue.
May 2, 2007 – 8:30 a.m. to 3:15 p.m.
WITNESS STEVEN SPITZER (continued)
Attorney Iredale contined to ask Steve Spitzer a lot of specific questions to which Mr. Spitzer’s general response was “I do not recall.” Spitzer continued to insist that Gary Lenz knew about the side letter in the FMI/Mark Douglas deal that Spitzer testified about yesterday. On cross-examination, Spitzer admitted that he lied in an e-mail to co-worker, Alicia Alpren. It was Ms. Alpren’s job at Peregrine to collect on money owed to the company. Alpren e-mailed Spitzer asking if he had written an e-mail to Mark Douglas stating that FMI would not be held responsible for the contract (this was the side letter which was testified about earlier). Steve Spitzer told Alpren that he did not know anything about such an e-mail. Spitzer admitted to Iredale that this was a lie.
Kate Leff, Patrick Towle’s attorney, showed Spitzer various documents which demonstrated that Lynn Morimoto was accustomed to backdating contracts, and that she would do so automatically without being instructed to so do.
Steve Spitzer admitted that his motivations to commit fraudulent deals at Peregrine were to increase his job security, to receive bigger commissions, to avoid being demoted, and to receive more stock options. He also said that Peregrine was a good company with a very good product, and that the vast majority of the deals that he was involved in were legal and legitimate.
Gary Lenz’s attorney, Tom Bienert, demonstrated that Spitzer lied to both the FBI and attorneys hired by the Peregrine Board of Directors regarding side letters in 2002. On May 15, 2002, Peregrine’s lawyers confronted Spitzer with a copy of a side letter with his name on it, and he lied and said that it was a mistake and not a side agreement. He did not mention Gary Lenz being involved in this interview. Later, in June 2002, Spitzer told the Latham & Watkins attorneys that he was not repsonsbile for FMI because Gary Lenz was. Finally, in an FBI interview on March 28, 2003, Spitzer admitted to writing the side letter but said that Lenz told him to do it. Bienert pointed out that Lenz was not a sender or recipient or copied on the e-mails that went back and forth involving the FMI/Mark Douglas deal. Bienert suggested that Lenz was not “in the loop” regarding improprieties surrounding the Valentine/Chevron deal about which Spitzer testified yesterday and that was why Lenz was not made aware of the illegalities, and Spitzer replied “maybe so.” Bienert showed Spitzer e-mails suggesting that perhaps Spitzer would e-mail Lenz the clean versions of deals, concealing illegalities from Lenz. On re-direct, AUSA Best introduced e-mails between Lenz and Spitzer that may have been referring to illegalities. The language of these e-mails was vague.
Mike Attanasio, the attorney for Arthur Andersen’s outside accountant Dan Stulac, brought out that the conspiracy count that Spitzer pled guilty to included lying to Arthur Andersen.
There have been past protests by the Defense that the Government will not provide them with sufficient advance notice of their witness list. Iredale renewed the Defense request for better advance notice. Judge Whelan did not feel that he could order the prosecution to provide such notice, but requested that they provide 48-hour notice of the calling of any significant witness who is a cooperating witness and who has pled guilty.
Eric Deller, formerly general counsel for Peregrine, was indicted this past Friday and pled not guilty on Monday.
May 3, 2007 – 8:30 a.m. to 1:30 p.m.
WITNESS STEVEN SPITZER (continued)
It has been established that at the November 21, 2003 FBI interview, Steve Spitzer told the FBI that he spoke to Gary Lenz about the Douglas/FMI deal. At that interview, Spitzer says that Lenz had knowledge of the side letter and told Spitzer not to worry because Peregrine would probably not book the revenue anyway. This statement to the FBI on November 21, 2003 was made late in time. The FBI first interviewed Steve Spitzer on May 2, 2003. The first time Spitzer was asked questions about this matter was by attorneys for the Peregrine Board of Directors on May 15, 2002. However, Spitzer did not mention any details of Lenz’s involvement in the FMI side letter until November 21, 2003. Attorney Bienert implied that Spitzer only implicated Lenz when it became apparent to Spitzer that it was in his best interest to try to help the Government make a case against Gary Lenz.
Yesterday, Spitzer testified that Lenz asked him to get Peter Valentine to sign on the Regis deal. Under re-direct, Steve Spitzer told AUSA Beste that he knew that Peter Valentine could not afford to be responsible for a $1 million contract, and that Spitzer also assumed that Lenz knew that Peter Valentine could not afford to pay that amount of money. On re-cross, attorney for Lenz, Bienert, reiterated the fact that Valentine was already listed as an approved reseller of Peregrine software at the time that Lenz came to work at Peregrine. Bienert pointed out that in the prior Valentine/Chevron deal for $500,000, Chevron did actually pay Valentine. Bienert also asked Spitzer questions that illustrated that Spitzer knew Peter Valentine was extremely wealthy.
WITNESS FELICIA ALPREN
Felicia Alpren worked at Peregrine from November 1998 until August 2002 as a credit and collection manager. Ms. Alpren testified that collecting from resellers was problematic at Peregrine. She testified that while she worked at Peregrine, resellers almost always waited to pay Peregrine until they were actually paid by the end users and not before.
On cross-examination by Daniel Stulac’s attorney, Mike Attanasio, Felicia Alpren explained that it was her impression that Matt Gless was the main person who decided what Peregrine’s policies would be in her department. Alpren said that Matt Gless (or at times, John Benjamin) told Ilse Cappel what to do and Cappel told Alpren what to do. During the 2001 audit of Peregrine by Arthur Andersen, Ilse Cappel told Ms. Alpren to show the AA auditors only how her software worked, and was instructed not to talk to them about accounts or customers. Cappel also told Alpren that if the auditors asked to see an account, that Alpren should show them a clean customer, not a problem account.
Attorney Gene Iredale asked Ms. Alpren about what happened when she e-mailed Andrew Cahill about the problems that she was having with billing errors and channel sales at Peregrine. Alpren testified that 45 minutes after she sent the e-mail, Mr. Benjamin came into her office and was upset with her. Benjamin told Alpren not to send e-mails to Cahill unless he or Gless authorized it.
Felicia Alpren said that many executives at Peregrine ignored her complaints about the collection problems she experienced while working there. She testified that Patrick Towle was one of the Peregrine employees who often ignored her complaints and questions. Her specific recollection of Steve Spitzer was “I could not trust him.”
WITNESS SCOTT STREITMAN
Scott Streitman was a corporate controller at Peregrine from August 1996 until September 2000. His job as controller included making formal filings to the SEC as well as preparing public financial statements that were released four times each year. Streitman has admitted to inappropriate deceptive accounting practices while he worked at Peregrine but he was never charged with a crime. Scott Streitman has entered into a proffer agreement with the Government. On direct, Streitman testified that the Peregrine employees who participated with him in these frauds were Farley, Gless and Stulac.
Scott Streitman testified that while he was working at Peregrine he thought that Stulac was interested in becoming CFO at Peregrine. Streitman also testified that he asked Stulac to meet him in the Spring of 2001 because Scott Streitman was hoping to receive Stulac’s assistance in finding a new job. Streitman testified that at this meeting, Stulac disclosed to Streitman that a large amount of channel sales account receiveables were going to be written off at Peregrine. According to Streitman, Stulac said these write-offs would be done by an undisclosed acquisition that was clearly meant to deceive the public regarding the amount of Peregrine’s accounts receivable.
On cross-examination, Mike Attanasio asked Streitman questions that illustrated his tendency to deny any wrongdoing on his part. Attanasio pointed out that at the beginning of his first interview by the FBI, Streitman denied any wrongdoing.
Attorney Attanasio asked Streitman if he commited fraud? Streitman first responded that he was not an attorney so he could not answer that question. There were several gasps in the courtroom. The second time Attanasio asked the question, Streitman answered “yes.”
Scott Streitman denied knowing that he would receive a benefit for his testimony until Attanasio pointed out that the proffer agreement, which he signed, states that the Government would determine if he would receive a benefit for his cooperation.
Scott Streitman denied that while at Peregrine he was involved in the daily monitoring of the company’s financial position. Mike Attanasio introduced a press release into evidence that had been written based on information found in Streitman’s own resume in which he claimed that while at Peregrine he was involved with the “daily monitoring of the company’s financial position.” Today, Scott Streitman admits that this was a lie on his resume that he wrote in order to receive the best job possible. Attanasio implied that if Streitman would lie to receive a better job, he would certainly lie to help himself stay out of jail.
Scott Streitman testified that he never told Arthur Andersen that he was manipulating the numbers used in the financial statements of Peregrine. Streitman admitted that part of the fraud that he committed at Peregrine was in manipulating the days sales outstanding (DSO) numbers. Attorney Attanasio repeatedly tried to ask questions regarding exactly what Streitman had done with the DSO’s but AUSA Bhandari repeatedly objected, mainly on the grounds that the questions were beyond the scope of direct. AUSA Bhandari’s objections to these questions were sustained.
Streitman testified that he did not remember having any conversation with Daniel Stulac regarding holding the quarter open or backdating contracts. Mr. Streitman also said that he is unaware of any e-mails that indicate that Stulac knew of the frauds that Streitman was perpetrating at Peregrine.
May 4, 2007 – 8:30 a.m. to 1:30 p.m.
WITNESS SCOTT STREITMAN (continued)
Scott Streitman, who is a CPA and is a former corporate controller at Peregrine, continued his testimony. Scott Streitman seemed very nervous. He testified that he and Dan Stulac were involved with Gless and Farley in illegally writing off bad receivables while at Peregrine.
Under cross-examination by Mike Attanasio, Streitman never simply answered yes or no, and seemed evasive. Attanasio rarely raises his voice, and is polite, but he repeatedly confronted Streitman with inconsistencies between his testimony today and his statements to the FBI, and even between testimony today and his testimony yesterday.
Attanasio asked Streitman questions regarding his recollection of a conversation where Streitman says that Stulac discussed illegal write offs of large amounts of accounts receivable. Streitman was very vague in his replies, and argued that he should not be expected to recall details of a meeting that occurred seven years ago. Without missing a beat, Attanasio pointed out that Streitman had testified on direct examination that he recalled that Stulac was wearing a light-colored suit during this meeting. It was a dramatic demonstration of what appeared to be selective recollection on the part of Streitman. By the end of Attanasio’s cross-examination, Streitman had contradicted himself on whether this important meeting had been a dinner meeting or a lunch meeting.
WITNESS BRIAN WYCLIFF
The final prosecution witness of the week was Brian Wycliff. He is with the Forensic Technology Unit at Pricewaterhouse Coopers (PwC). Beginning in late May 2002, his team of six or seven forensic computer experts were hired by Peregrine to assist in the internal investigation, along with the law firm of Latham & Watkins. The job of Wycliff’s forensic team was to locate any relevant electronic data. They narrowed down the potentially relevant e-mails to 500,000, from a much larger universe of Peregrine e-mails. A search engine designed to find e-mails relating to individuals and transactions that were likely to be most relevant could then search this datebase of 500,000 e-mails.
On cross-examination by Thomas Bienert, Wycliff testified that before PwC had access to the servers and hard drives and personal computers from which they obtained the electronic data, these items had been in possession of KPMG. KPMG had been doing forensic work on the investigation until they were removed because of a potential conflict of interest. Before KPMG had these servers and hard drives, convicted conspirators Gardner, Gless and Powanda had authority and access, and could possibly have changed or deleted information.
On re-direct by AUSA Bhandari, Wycliff identified an e-mail from Gary Lenz to a Mr. Black of SSI on April 1, 2001, in which it appears that Lenz says that he “got the paperwork signed today.” Black responds the next day, “you’re the man.”
In his opening statement, AUSA Bhandari said that through e-mails from Lenz and Reichner, the jury was going to hear from their own mouths that these two defendants were involved in the conspiracy, and the jury would not have to take the word of the co-conspirators who are testifying against them. It is apparent that the defense attorneys are taking the position that the e-mails attributed to Lenz and Reichner are vague, and that the authenticity of the e-mails may be in question.
BRIEF SUMMARY OF THE FIRST FOUR WEEKS OF TRIAL
Judge Thomas Whelan – Judge Whelan is a highly respected and well-liked judge. Before being appointed to the Federal Court, he was a trial judge in the San Diego Superior Court, and before that he was a career DA. He has a wealth of trial experience. He is paying close attention to the evidence. He lets both sides present their case. There are many objections and arguments, both in front of the jury and outside of their presence. Judge Whelan rules decisively and impartially on these matters. He expects the lawyers to be professional and to behave with civility.
The Government – AUSA’s Bhandari and Beste do most of the questioning of the witnesses and legal arguments, and AUSA William Narus assists them in and out of court, and has done some questioning. FBI agents, who have been working on this important case for the last four years, assist the AUSAs. The Government has already won a significant victory in this case, with the guilty pleas of 11 defendants, including the architects of the fraud, Gardner and Gless and Powanda.
Bhandari and Beste and the agents have been presenting a very well prepared and well-organized case. This is not easy to do in a case of this size and complexity. They have all of their exhibits pre-marked and organized so well that they are able to project the exhibits on the screen flawlessly, for the witnesses and jury to see. Bhandari and Beste know their case and know the Evidence Code, and make good evidentiary objections when necessary.
The Defense – The lawyers for the four defendants are all experienced and well prepared, and they also have strong technical support in presenting exhibits on the screen, usually during cross-examination. In a criminal trial, the defense is often presented, either entirely or partially, through cross-examination of prosecution witnesses. These defense lawyers are very good at this, and they know exactly what they want to get out of each prosecution witness.
Cooperating Co-Conspirators – Included among the witnesses who have testified over the last four weeks are three witnesses who have admitted to having knowingly participated in the fraud at Peregrine (although they point out, probably correctly, that they were involved in a lot more legitimate deals than illegal deals).
Douglas Powanda – His demeanor while testifying was subdued and compliant. He appears to be quite depressed, and undoubtedly understands that he will be spending years in federal prison. He could get up to 15 years (his guideline range is a lot higher, but the cap under his plea bargain is 15 years). He was not argumentative on cross-examination, and did not try to minimize his illegal conduct. As with all cooperating co-defendants, the Defense has used his plea agreement to point out his incentive to attribute some blame to these four defendants.
Steven Spitzer – He has a five-year cap on his sentence, with hope of receiving a much more lenient sentence. His testimony was helpful to Stulac and perhaps Towle. If believed, his testimony is damaging to Lenz and Reichner. On cross-examination, he appeared to be evasive, and reluctant to admit the extent of his own responsibility. When Gene Iredale was done with his cross-examination of him, Spitzer was more subdued and more willing to admit his own criminal conduct. Tom Bienert finished his cross-examination of Spitzer by pointing out that the only time during Spitzer’s testimony that he appeared close to tears was when he was being asked about the likelihood of him going to jail. If Spitzer has sympathy for the shareholders and employees of Peregrine who were damaged in the fraud in which he participated, it was not apparent.
Scott Streitman – During his second day of testimony, Streitman finished his half-liter bottle of water and started pouring water from a pitcher on the witness stand. It appears that his mouth was dry.
Streitman was continually reminded during Attanasio’s cross-examination that he had admitted to participating in a felony conspiracy, and that he has not been prosecuted, at least up to this point.
Closing Comment – There will be many more witnesses and exhibits presented in the coming weeks. It is, of course, not possible to make any predictions at all as to the outcome of the case. If the Government knows when Gardner and Gless are going to testify, they have not disclosed this information. The judge has asked the Government to give the defense at least 48-hour notice of when it is going to call cooperating co-defendants of this stature.