Peregrine Trial – Week 7
Comments by Bob Grimes
May 22, 2007 – 8:30 a.m. to 3:15 p.m.
WITNESS PETER O’BRIEN (continued)
AUSA Bhandari went over Friday’s testimony by witness O’Brien regarding the $250,000 marketing fund incentive that Peregrine gave to KPMG in the Honeywell/Boeing deal. AUSA Bhandari emphasized that nothing on the face of that Honeywell/Boeing contract (with KPMG as the alliance partner) indicates that Peregrine actually paid a $250,000 inducement to KPMG. On cross, Attorney Iredale introduced a letter from Steve Spitzer to Larry Rodda into evidence. The letter said that Peregrine would give $500,000 to KPMG for the hiring, training, and certification of sales staff at KPMG in the use of Peregrine software. Witness Peter O’Brien testified that this incentive was not a bribe. O’Brien said that it was an unusually large amount of money but it was understandable given the importance of the relationship between Peregrine and KPMG.
Attorney Iredale brought out the fact that Peregrine sometimes gave referral fees. Peregrine also gave a 10% “influence credit” to companies that substantially influenced another company to sign a contract with Peregrine.
During cross-examination, Gene Iredale asked Peter O’Brien many questions to illustrate that O’Brien and Spitzer had a close working relationship. Iredale introduced O’Brien’s Peregrine application for employment into evidence. Peter O’Brien began to work at Peregrine in early January 1998, however, the application was not filled out until February 23, 1998. Iredale implied that O’Brien’s friendship with Steve Spitzer meant that he had the job wired. Witness O’Brien denied this characterization.
Attorney Iredale illustrated that O’Brien was copied on many e-mails in which Spitzer was the recipient and/or the sender. O’Brien testifies that he did not know any details about these deals, and he said he had no explanation for the fact that he was copied on so many of Steve Spitzer’s e-mails regarding these transactions. Iredale asked O’Brien if he was copied on Spitzer’s e-mails because O’Brien knew that there were secret side agreements involved in these contracts. The witness denies this is true. One of the transactions that O’Brien adamantly insists he knew nothing about was Citigroup/AVNET. Iredale introduced a July 11, 2000 e-mail into evidence. The e-mail was written by Steve Spitzer to Jeff Hoffstetter and copied to O’Brien. In this e-mail Steve Spitzer wrote “I understand you talked to Peter re: Citigroup/AVNET”. O’Brien admits that the “Peter” referred to in the e-mail would have to be himself but O’Brien testified that he cannot recall ever discussing the Citigroup/AVNET deal with Jeff Hoffstetter or Steve Spitzer.
Peter O’Brien had his first of many interviews regarding the problems at Peregrine on May 13, 2002. The first interview was conducted by lawyers hired by the Peregrine board of directors to conduct an internal investigation. As he testified on Friday May 18, Mr. O’Brien admits to lying at this interview. O’Brien admits to lying at the first three interviews (including his first interview with the Government). On May 14, 2002 (the day after his first interview) O’Brien wrote an e-mail to Steve Spitzer. The subject of the e-mail was “recollection”. The e-mail itself was cryptic and listed some transactions with notes beside them. Attorney Iredale implied that O’Brien wrote this e-mail to Spitzer on the day after his first interview because Spitzer and O’Brien wanted to get their story staight. O’Brien denied this.
May 23, 2007 – 8:30 a.m. to 3:00 p.m.
WITNESS PETER O’BRIEN (continued)
On cross, Attorney Iredale pointed out that Mr. O’Brien lied at his first interview with the FBI even though under the proffer agreement with the Government nothing that he said in that interview could be used against him. It was only after O’Brien received a letter from the FBI naming him as a target in the Peregrine investigation, that O’Brien decided to tell the truth about his wrongful acts while working at Peregrine.
Peter O’Brien testified that he met Steve Spitzer for lunch shortly after Spitzer pled guilty in the Peregrine case. O’Brien says that Steve Spitzer told him that Gary Lenz and Joe Reichner were both going to be in trouble over the Peregrine Honeywell/Boeing deal.
Through his questioning of this witness, Attorney Iredale implied that the Government would be more inclined to recommend a lesser sentence for O’Brien if he helps to implicate Lenz and Reichner.
O’Brien testified that he had four to five telephone conversations with Jim Murphy of KPMG regarding the Honeywell/Boeing deal without Reichner being involved in the calls. O’Brien testified about two conference calls that he says were between himself, Reichner and Murphy. O’Brien testified about these two conference calls last week on Friday, May 18.
In the first conference call, O’Brien testified that Reichner offered Murphy discounts, extended the contract payment terms and offered Murphy a $250,000 incentive in order to persuade Murphy to sign the Honeywell/Boeing contract. Peter O’Brien testified that this $250,000 was just an incentive at first. O’Brien says that he came up with the idea to characterize the $250,000 as a management development fund (MDF). O’Brien says that he thought of this idea when he was asked to draft a letter documenting the existence of the $250,000 incentive. Witness O’Brien testified that the $250,000 was actually held in a fund for KPMG to use in the marketing of Peregrine software.
O’Brien testfied that during the second conference call, Joe Reichner told Jim Murphy not to worry if the Peregrine software in the Honeywell/Boeing deal is not sold because “we will take care of you”. The witness is certain that Joe Reichner said those exact words. O’Brien also testified that Reichner said “we won’t come after you” and that Reichner may have said something like “we won’t come track you down”. Iredale pointed out that in his prior interviews, O’Brien has not been consistent regarding Reichner’s exact words during the conference call. But witness O’Brien insisted that he is sure Reichner said those words to Murphy during the second conference call.
Peter O’Brien testified that he had a phone conversation with Joe Reichner (that lasted less than a minute) regarding the GMSI deal sometime during the negotiation phase of the deal. O’Brien’s testimony regarding this short phone call to Reichner is new. Gene Iredale pointed out that O’Brien never mentioned this phone call until 2007. In response to Iredale’s observation, O’Brien said “I can’t believe that” and “I think I would have mentioned it earlier”. Until 2007, O’Brien has consistently testified that he did not involve Reichner in the negotiations of the GMSI deal. Until recently, O’Brien has testified that he only asked Reichner to become involved in the GMSI deal when GMSI notifed O’Brien that they were backing out of the contract.
On cross, attorney Kate Leff asked Mr. O’Brien if his commissions were the same for software that was sold in the channel and software that was sold through the channel. O’Brien said he could not remember. O’Brien also stated again that he could not begin to understand Patrick Towle’s explanation of how to handle the accounting issues raised by the GMSI State of Florida deal. O’Brien testified that he did not understand anything that Mr. Towle said about the complex accounting procedures.
May 24, 2007 – 8:30 a.m. to 1:30 p.m.
WITNESS PETER O’BRIEN
After four days, Peter O’Brien finally concluded his testimony. The final points of cross-examination by Tom Bienert were related to channel partners and the ending of quarters. Regarding channel partners, O’Brien testified that it was important for Peregrine to cultivate established channel partners such as KPMG. KPMG was a well established consulting firm with important end-user clients like Citibank and Boeing. Peregrine had a good product, and selling Peregrine software to well known end-users through strong channel partners such as KPMG was good business for all concerned.
O’Brien testified that quarters could be left open for a few days for administrative matters, so leaving the books open for a few days after the end of a financial quarter was not necessarily considered improper.
WITNESS RON FIOR
Under direct examination by AUSA Bill Narus, Fior testified that he was the CFO of Remedy Corporation when Peregrine acquired Remedy in 2001. He said that Peregrine, represented by their CFO Matt Gless, made a strong PowerPoint presentation to the officers of Remedy prior to the acquisition. Matt Gless told Remedy that Peregrine had experienced 16 consecutive quarters of exceeding or meeting revenue projections since its IPO. This was particularly impressive to Remedy, as they had just experienced a tough quarter in the same industry. Remedy was also a software company, and was a competitor to Peregrine. Fior said that the fact that Peregrine was being audited by an established accounting firm such as Arthur Andersen added to Peregrine’s credibility. Peregrine paid $1.2 billion for Remedy. They paid $270 million in cash and the rest in Peregrine stock. Fior and all other Remedy officers and shareholders who took Peregrine stock in payment for Remedy stock lost a lot of money.
On cross-examination, Attorney Mike Attanasio asked Fior to describe the due diligence which Remedy Corporation conducted on Peregrine before agreeing to being acquired by Peregrine. Fior himself was a very experienced accountant with a background which included auditing public corporations, and he was knowledgeable in the software industry, having been the CFO of Remedy. He helped assemble a team of auditors, lawyers, and other experts to do an intensive diligence of Peregrine. This included six investment bankers from Morgan Stanley with experience in the software industry, an auditing firm Ernst & Young, and an outside law firm. Dozens of people were involved in going through voluminous boxes of Peregrine documents at a data center to verify the financial situation of Peregrine. They spent thousands of hours at this task, at a cost to Remedy of several million dollars. Arthur Andersen made all of its audit records and work papers regarding Peregrine available to this Remedy audit team. Nonetheless, the audit team was not able to detect the fraud at Peregrine. Fior testified that CEO Steve Gardner and CFO Matt Gless were both very impressive and persuasive. Even with the impressive experience that Fior had in financial analysis of public corporations, and in spite of the efforts of the auditing team, Remedy made the mistake of accepting the representations of Gardner and Gless.
Attorney Gene Iredale conducted a three minute cross-examination of Fior. This was very refreshing, as lawyers in general have spent too much time with their examination of witnesses, and this trial is behind schedule. Under Iredale’s questioning, Fior said that during his negotiations with Peregrine’s management regarding the acquisition, Fior never met Joseph Reichner. Iredale also emphasized that relying on Gless and Gardner has resulted in a loss of a great deal of money for Fior and other Remedy officers and shareholders.
WITNESS ROSS BALDWIN
The next witness was Ross Baldwin. AUSA Sanjay Bhandari conducted 30 minutes of direct examination of Mr. Baldwin before the recess at the end of today’s testimony at 1:30 p.m. Mr. Baldwin’s testimony will resume tomorrow at 8:30 a.m.
Baldwin was an accountant with Arthur Andersen for 22 years. He became the engagement partner for Peregrine for the quarter ending September 30, 2001.
Tomorrow, May 25, will be the conclusion of seven weeks of trial. Next week, testimony will resume on Wednesday, May 30 not on Tuesday, the 29th. It is possible that it will conclude by the end of June, but at this pace, it could go longer.
May 25, 2007 – 8:30 a.m. to 1:30 p.m.
Ross Baldwin, the Arthur Andersen engagement partner who followed Daniel Stulac in that position, testified all day. AUSA Sanjay Bhandari showed Mr. Baldwin a number of documents that had been prepared by Stulac’s team doing the outside auditing of Peregrine, prior to Mr. Baldwin replacing Stulac. There were some documents that went into a risk binder, and other documents that were prepared for various meetings, and there appeared to be some discrepancy between some of the documents. Baldwin said that Stulac reported to him that Peregrine had a perfect history of collections without concessions. There was a document in one of the files that indicated that Peregrine did not have a history of collecting on contracts with extended payment terms. Baldwin said that he was not told that the German auditors had objected to Peregrine booking revenue on three contracts with extended payments, with total revenue of close to $12 million.
When Baldwin took over the Peregrine engagement, he dealt quite a bit with BJ Rassam (the Controller) and Matt Gless (the CFO). He dealt with Patrick Towle infrequently. He did recall discussing the issue of debits to revenue with Towle, and there was some controversy over this issue. It appeared that Towle was deferring to his boss, Rassam, on this issue.
Baldwin described an emergency meeting that he conducted on a Saturday morning on February 9, 2002. He brought in high level Arthur Andersen auditors to assist him in dealing with accounting concerns that he had discovered at Peregrine. Baldwin testified that Arthur Andersen was terminated as the outside auditor for Peregrine, and that one of the reasons was that in relation to its Enron work the firm had been convicted of obstruction of justice. During a recess, the defense lawyers for all four defendants joined in a motion for mistrial, because Judge Whelan had ruled during the pre-trial motions that the conviction of the Arthur Andersen firm was inadmissible in this trial. The defense lawyers argued strenuously that referencing the Arthur Andersen conviction was very prejudicial to all four defendants, because all four had worked at Arthur Andersen at one time or another. They said that their research on the matter showed them that any relationship with Arthur Andersen was potentially very prejudicial to jurors. They argued that this is a “birds of a feather” case, where these defendants are being tried on very little evidence and the prosecution is based primarily on guilt by association with conspirators at Peregrine who have already pled guilty. AUSA Bhandari responded that he was surprised that the witness had made reference to the Arthur Andersen conviction. Judge Whelan inquired of Baldwin’s attorney whether Baldwin had been advised not to mention the conviction, and was informed that Baldwin had not received any such admonition by the Government (when courts make rulings on the admissibility of evidence, they expect the lawyers who are presenting witnesses on that topic to admonish the witness not to testify on prohibited areas). Judge Whelan stated that he wanted these defendants to be tried on the evidence, not in their previous associations with Arthur Andersen. He announced that he would bring the jury in and inquire if any juror would have any trouble setting aside the association with Arthur Andersen in judging these defendants, and that he would instruct the jury that it was not relevant in any way to the guilt or innocence of these defendants in this case. The judge said that if he couldn’t get the assurance of 12 jurors that they could all disregard any reference to the Arthur Andersen conviction, he would grant a mistrial. The judge then instructed the jury that the statement about the Arthur Andersen conviction had previously been ruled inadmissible, particularly in view of the fact that it had been reversed by the U.S. Supreme Court, and none of these defendants were involved in any way with that matter. He asked if any juror would have any trouble following his instruction to disregard this evidence. No juror expressed any concerns on this issue, and the trial resumed.
On cross-examination, Attorney Mike Attanasio took Baldwin back to the emergency high-level meeting on Saturday, February 9, 2002. Including Baldwin, there were four very experienced and reputable Arthur Andersen accountants involved in that meeting. Although accounting concerns were discussed that needed further evaluation, they had agreed to provide their consent to a securities filing by Peregrine related to an acquisition. This amounted to an endorsement of the auditing results of previous Arthur Andersen engagement partners, including Stulac, based on the information that was available up to that point.
On direct examination, the government had elicited from Baldwin that Peregrine management, including Matt Gless, did not want Stulac replaced. Under questioning by Attanasio, Baldwin stated that it was not surprising that a client would not want to have the engagement partner replaced. Clients value continuity, knowledge of the company, and relationships. Baldwin further testified on cross that many of the documents that the government had shown him on direct were probably prepared by members of Stulac’s auditing team, not by Stulac himself. Stulac’s style was to delegate most of the detail work, and in Baldwin’s opinion two of the primary members of Stulac’s team working with him on the Peregrine engagement had not done a very good job on the detail work. He said that Stulac was over-worked and had two larger clients than Peregrine at the same time he was Peregrine’s engagement partner. He was aware that at one point Stulac collapsed at his desk.
Baldwin was a very detailed-oriented auditor, and Attanasio asked him if Stulac ever did anything to keep Baldwin from getting all of the information that he needed regarding Stulac’s auditing work at Peregrine. Baldwin answered “In no way.”
This concludes the first seven weeks of testimony.