Peregrine Trial – Week 9
Comments by Bob Grimes
June 5, 2007 – 8:30 a.m. to 3:15 p.m.
WITNESS WARREN DAVID ROUDEBUSH (continued)
Attorney Thomas Bienert went over the details of Peregrine’s contract with Lee Kirby of Ranier Technology Group (RTG). Witness Roudebush testified that on December 27, 2001 when the contract between Peregrine and Kirby of Denali/RTG was entered into, Roudebush thought that Xanadu had some problems but that they would be worked out and Xanadu would become an exceptional product with exceptional sales. In early 2002, frustration over the Peregrine Xanadu product increased. Mr. Roudebush testified that Xanadu just did not work.
Mr. Roudebush testified that Lee Kirby’s lead salesman at Denali, Jeff Boissoneault, was a “hindrance” to making the Peregrine/RTG contract work. Roudebush testified that Peregrine management encouraged Lee Kirby to fire Jeff Boissoneault. Roudebush said that Kirby did fire Boissoneault and that was a significant decision for Kirby to make on behalf of Peregrine.
Roudebush testified that in early April 2002, Matt Gless gave Roudebush a list of several people who were about to receive audit forms. Roudebush said that Gless told him to call the people on the list and ask them to make misrepresentations on the audit forms about the deals they had entered into with Peregrine. Roudebush did make several calls and asked people to lie; the next day he called them back and told them to tell the truth on the audit forms. Roudebush testified that he just did not feel right about what Matt Gless asked him to do. Roudebush said that was the first time Gless had ever done anything to put him in such an awkward position.
On re-direct, AUSA Bhandari, brought out the fact that Peregrine entered into the December 27, 2001 contract with Kirby/RTG in order to be able to book some revenue before the quarter ending December 31, 2001. Bhandari pointed out that Peregrine gave a $350,000 discount in that contract. The Government illustrated the fact that Lenz was involved in the negotiating of the contract. Roudebush testified that in late 2001 and early 2002, Roudebush was still hopeful that Peregrine would be able to fix Xanadu so the problems with the Kirby/RTG contract would be over because the product would actually be sold.
Under re-cross by Gene Iredale, Roudebush testified that in his view Joe Reichner was a Peregrine employee who was “part of the solution.”
WITNESS JEFFREY BOISSONEAULT
Jeff Boissoneault worked for Lee Kirby as a salesman. Boissoneault explained that Lee Kirby owned a portion of Denali and 100% of RTG. Under direct examination by AUSA Narus, Boissoneault characterized RTG as a shell company because it had no employees and no revenue. Witness Jeff Boissoneault testified that he remembers telling Gary Lenz and Warren Roudebush that RTG was just a shell company. The witness testified that both Roudebush and Lenz understood that RTG would never be able to pay Peregrine on the contract it had signed unless there were actual sales of Xanadu.
Both Roudebush and Boissoneault testified that there was an understanding that the first ten of Xanadu’s expensive product line called “Consultants in a Box” (CIB) would be sold against this deal between Peregrine and RTG. Boissoneault testified that Gary Lenz specifically said that this agreement could not be documented in the written contract but that Lee Kirby could count on Roudebush’s and Lenz’s own assurances that RTG would get the credit for the first ten CIB’s sold anywhere in the world.
Boissoneault testified that he and Lee Kirby had a meeting with Gary Lenz at a restaurant in February of 2002. Lenz had been fired from Peregrine but he was interested in helping to sell Peregrine software. Boissoneault testified that Lenz described the problems at Peregrine as being way beyond the ones that Boissoneault and Kirby had witnessed with Xanadu. The witness testified that Lenz characterized himself as “the fall guy” at Peregrine.
Jeff Boissoneault testified that he was not fired on March 27, 2002. Boissoneault says that he left Kirby’s employment because he was not comfortable working for him anymore.
Warren Roudebush testified that Jeff Boissoneault led him to believe that RTG had assets. In March 2002, Lee Kirby told Roudebush that if Peregrine tried to make him pay on the RTG contract, RTG would simply declare bankruptcy. In response, Roudebush wrote an e-mail to Lee Kirby expressing surprise because Boissoneault had told him that Denali was a parent company to RTG. In response to Roudebush’s e-mail, Jeff Boissonaeult wrote an e-mail to Lee Kirby which said “I was very careful not to expose you, myself, or Denali”.
Attorney Tom Bienert introduce into evidence an e-mail, dated November 20, 2001, from Jeff Boissoneault that described RTG as being a company that “rolls up under the Micro-standard family.” Micro-standard was a company with assets over $200 million at that time, and was the parent company of Denali. Witness Boissoneault explained that Lee Kirby directed him to use this exact language in this e-mail. Despite this misleading e-mail that linked RTG with Micro-standard, Boissoneault continued to insist that prior to December 27, 2001 (the date of the RTG/Peregrine contract) both Lenz and Roudebush were aware that RTG was a shell company.
Bienert pointed out that in March of 2006, Boissoneault had a phone conversation with the FBI in which Boissoneault said that he did not know if Lenz, Roudebush or Reichner knew that RTG was a shell company.
June 6, 2007 – 8:30 a.m. to 3:15 p.m.
WITNESS JEFFREY BOISSONEAULT (continued)
On cross-examination, attorney Tom Bienert asked Jeff Boissoneault questions about the e-mail that Gary Lenz wrote to Lee Kirby assuring Kirby that RTG would be given credit for the first ten CIB’s sold anywhere in the world. Yesterday, Boissoneault testified that Lenz said this agreement could not be spelled out on the face of the contract. Bienert pointed out that this crediting of software toward RTG’s obligation under the contract was unusual because it gave RTG a credit for sales that they may not have even worked on. Boissoneault testified that it was not unusual for a software company to give credits against a contract with a re-seller if the re-seller receiving the credit had actually made the sale. Bienert asked Boissoneault if Peregrine may have wished to keep this information secret from other re-sellers, so they would not demand similar treatment by Peregrine in their contracts. Jeff Boissoneault agreed. The implication was that Gary Lenz wished to keep this agreement secret because he did not wish for other software companies to ask for the same sort of deals in the future.
Attorney Gene Iredale referred witness Boissoneault to several e-mail communications in which Boissoneault repeatedly referred to Denali and RTG as being the same entity. In several e-mails, Boissoneault referred to what “we” will do for Peregrine if Peregrine enters into a contract with us. Iredale demonstrated that Boissoneault wrote several e-mails saying things such as “we are giving ten experienced consultants to help with this project.” Iredale pointed out that Boissoneault had to be referring to Denali because RTG had no employees. Iredale inferred that Boissoneault deliberately gave Peregrine the impression that Denali was interchangeable with RTG. Iredale suggested that when Kirby negotiated for RTG to sign the actual contract with Peregrine, it was a win/win situation for Kirby. If things went well, Kirby (owner of RTG) would make money, if things went badly Peregrine would be left to sue a shell company. However, the witness testified that he never intended to deceive Peregrine.
On re-direct, Jeff Boissoneault testified that it was his belief at the time, that Lenz and Roudebush did not want the credit agreement for the first ten CIB’s sold to appear on the face of the contract because that would mean that the contract could not be accepted as revenue by Peregrine’s financial division.
WITNESS CHRISTOPHER MORITZ
Mr. Moritz was the president and CEO of a company called Supply Solutions (SSI), from March 1999 until October 2002. SSI was a software company that provided software to customers in the automotive industry. This software was designed to help the customers track their inventory.
SSI and Peregrine entered into a legitimate contract in which Peregrine agreed to invest $10 million in SSI and SSI paid $2 million for Peregrine software. It was a good contract for both parties and ended up being profitable for Peregrine and SSI. The only problem with the contract was that the contracts were signed on April 1, 2001 but the date under the signature lines were March 30, 2001. Chris Moritz testified that the terms of the deal were complete on Saturday, March 31, 2001. SSI wrote Peregrine a check dated March 31, 2001. Moritz testified that since he and Gary Lenz had a golf date set up for Sunday, April 1, 2001, they decided to sign the contracts at that time. Lenz, Reichner and Moritz played golf, then Lenz and Moritz proceeded to sign the contracts. Moritz said that he thinks that Lenz asked him to backdate the contract. Moritz believes that Joe Reichner was at the table when the contracts were signed but he is not certain. Moritz testified that he did not think that there was anything wrong with the fact that the contract was backdated. Moritz testified that he believed that the deal was complete on March 31, 2001 and the signing was just a formality.
AUSA Beste pointed out that if Peregrine had not signed the contract promising to invest $10 million in SSI, then SSI would have not delivered the $2 million check to Peregrine. Moritz agreed with this hypothetical.
WITNESS DAVID DOWN
David Down is a CPA, who has worked for KPMG since 1994. He testified that he met with Daniel Stulac in late January 2002 to discuss the possibility of Stulac coming to work at KPMG because Arthur Andersen was going out of business. Down testified that he told Stulac he was more likely to receive the job if he could bring clients, like Peregrine, with him. In the Spring of 2002, KPMG withdrew the job offer because of Daniel Stulac’s involvement with Peregrine.
WITNESS STEPHEN GARDNER
Stephen Gardner testified regarding his impressive educational background. Gardner has a Bachelor’s degree from Princeton and a Master’s in Business Administration (MBA) from Harvard. Gardner’s father died when Stephen was 11-years-old and Steve Gardner suffered a heart attack at the age of 43, in 1998 (before he began working at Peregrine).
Gardner testified that when he was hired at Peregrine, he was told by the board of directors that they wanted him to be aggressive and to focus on two main goals; to work toward developing new products and to acquire other companies with complimentary products. Gardner testified that his performance at Peregrine was measured by how well he accomplished those two goals and also by how well Peregrine stock was doing.
Steve Gardner testified that he felt pressured to meet the financial analyst’s expectations for Peregrine. Gardner said that if Peregrine did not meet the expectations for a quarter, Peregrine’s stock price would fall. Peregrine used its stock to acquire new companies.
Steve Gardner testified that, in general, Peregrine’s financial statements were overstating revenue by 10%–25%. He said that, if the financial statements had been truthful, the earnings per share would have been a negative number at times. Gardner admitted that when he was CEO, he thought that it was more important for Peregrine to meet its expectations than to tell the truth in its financial statements.
Stephen Gardner testified that he spoke about the improper activities at Peregrine with his financial executive team, including, Farley, Gless, Cahill, Powanda, Lenz and Reichner.
Gardner testified about the details of the negotiations surrounding Peregrine’s hiring of Gary Lenz in 2000. Gardner said that he was impressed with Gary Lenz’s competence at AA and he helped facilitate Lenz’s hiring by Peregrine. Gardner portrayed Lenz as driving a hard bargain in his negotiations regarding his future employment with Peregrine. For example, Gardner testified that Gary Lenz initially negotiated for Peregrine to provide him with a $500,000 home-financing loan but ended up receiving an $800,000 loan from Peregrine that helped Lenz buy a home in Rancho Santa Fe. Lenz moved to San Diego from the Los Angeles area.
Gardner also testified that at Gary Lenz’s request, Peregrine set Lenz’s stock option price based on the May 26, 2000 price instead of June 2, 2000. Gary Lenz began his work at Peregrine officially on June 2, 2000 but he asked that his stock option price be based on the May 26, 2000 closing price because Peregrine stock was rising rapidly during that time period.
Gardner will resume his testimony tomorrow. His direct and cross-examination are likely to continue for at least a week.
June 7, 2007 – 8:30 a.m. to 1:30 p.m.
WITNESS STEPHEN GARDNER (continued)
Stephen Gardner, former CEO of Peregrine, testified from 8:30 a.m. to 1:30 p.m. on further direct examination by AUSA Eric Beste. Gardner is very articulate and speaks with authority, and gives the appearance of having been a powerful CEO. A number of the witnesses have had their lawyers present during their testimony, and Gardner had two (perhaps three) of his lawyers present. His demeanor is very serious, and he makes eye contact with the jury at the appropriate times. Gardner spent most of the day talking about forecast meetings of senior management at Peregrine. After Gary Lenz was hired by Peregrine in June of 2000, Lenz became part of that group. Other senior management included Gardner, David Farley (who preceded Matt Gless as CFO, and who died of a heart attack in October 2000), Gless, and a couple of other senior sales people.
Gardner testified that towards the end of the first fiscal quarter for 2000 (which ended June 30) it appeared that Peregrine was going to meet its projected revenue. Gardner went to his vacation home in Maine to be with his family. He spoke with Farley every day by telephone, and also spoke with Powanda. He learned that some deals that had been projected to close by June 30 had not closed. These included large contracts with CitiGroup and AVNET. With both of those end-users, Powanda suggested that Peregrine go to their channel partner KPMG to take the deals, so that Peregrine could book the revenue in the quarter ending June 30. KPMG signed for CitiGroup at the end of June, and signed the AVNET contract late in the first week of July, and the contract was backdated to June 30. In July 2000 Peregrine had a company meeting in Bermuda. At the last minute Lenz was invited, since he had joined senior management in June 2000. Gardner conducted this meeting, and expressed his extreme displeasure at being surprised during his family vacation in Maine to learn that the revenue projections for June 30 were not going to be met. He let the other senior managers know how angry he was, and at times used profanity to make his point. In addition to these CitiGroup and AVNET contracts, there had also been problems with CI, and revenue had been booked with CI even though it was not at all certain whether they were going to be able to pay. Gardner told Lenz that he needed to get his arms around sales projections so that things did not fall apart at the last moment, and Lenz said that he understood and agreed that this had been horrible. Gardner told the other senior managers that this had been the worst week in his life to go on a family vacation thinking they had made the quarter to find out that the forecast had not been met. Gardner told those at the meeting that now Peregrine needed to close the AVNET contract that KPMG had booked for the quarter ending June 30. Gary Lenz said that he had a good relationship with the Arthur Andersen partner at AVNET, and that he would talk to him to try to close that deal.
After the Bermuda meeting, Gardner made some organizational changes. One of those was to elevate Gary Lenz to Chief Operations Officer. This would mean that instead of simply being involved in relationships and alliances, Lenz was supposed to be in charge of day-to-day operations of Peregrine. These duties would include sales, marketing, human resources, customer service, and product development. Gardner testified that Lenz was ready to take this position. On July 19, 2000, this elevation was announced to everyone at Peregrine.
At the end of September 2000, it was like déjà vu. Once again the revenue forecasts from the sales staff were not accurate, and the June meltdown was being repeated. Gardner was angry and felt betrayed, and made this clear to the senior management team that met with him on this subject. Those present were Powanda, Cahill, Lenz, Vancheeswaran, and Farley, as well as Gardner. (As AUSA Beste was questioning Gardner about this meeting, Beste observed that Gardner was still visibly upset when reflecting upon this meeting at the end of September 2000.)
Farley was also actively expressing his opinions at this meeting. Sometimes shouting and sometimes using profanity, he expressed that this was very serious. Gardner and Farley felt they were sticking their necks out in their SEC filings and conferences with analysts and investors, and they needed more accurate information from their sales staff on projected revenues. Farley said that we needed to do what we had to do to make June and here we are in the same situation in September. Gardner said that Lenz came up to him after the meeting and remarked about how upset Farley had been. Gardner identified an email from Farley to Gardner in which Farley stated that if a big deal with IBM closed, they would not do anymore of these wacky deals.
Gardner testified that in late July or August of 2000, Dan Stulac came into Gardner’s office. Stulac told Gardner that he would like to leave his position as Peregrine’s outside auditor with AA and become the CFO of Peregrine, as David Farley was talking about leaving. Matt Gless had previously recommended to Gardner that he should consider hiring Stulac away from AA. In October 2000 David Farley died unexpectedly of a heart attack. Farley had been Gardner’s closest friend at Peregrine, as well as someone he had worked with extremely closely. Matt Gless, who had been second in command under Farley in the finance department, was promoted to CFO upon Farley’s death.
In July of 2000, Gardner met Joe Reichner for the first time. Gary Lenz convinced Gardner that Reichner would be perfect to run the channel partners program for Peregrine because of the high-level contacts that he had. Both Reichner and Lenz had been in high level management at Arthur Andersen, and the plan was to have them use their contacts to sell Peregrine software at the level of CEO and CFO and CIO (Chief Information Officer), instead of having the Peregrine sales source working from the bottom up in sales presentations. Joe Reichner became Senior VP in charge of Alliances and Business Development.
Gardner’s testimony will continue tomorrow.
June 8, 2007 – 8:30 a.m. to 1:45 p.m.
WITNESS STEPHEN GARDNER (CONTINUED)
Former CEO Stephen Gardner testified for another full court day under direct examination. At times, Gardner testified from the witness stand, while referring to exhibits projected onto the screen, and at other times Gardner stood about 8 feet in front of the jury box, referring to charts of financial data.
On September 29, 2000, Gardner was in his car on his way to work at Peregrine when he heard on the radio that Peregrine stock was plummeting. When he arrived at work he asked Farley what happened, and learned that someone had put out an analyst report about a tech company, which had missed its numbers for the quarter, and Peregrine’s ticker (PRGN) had inadvertently been put in the article. In response, Gardner decided to issue a press release about Peregrine’s financial status on October 3, 2000. The press release pointed out that the bad publicity about Peregrine on Sept 29, 2000, had been due to a typo confusing PRGN with another company. This was correct, but the press release went on to claim that Peregrine would once again meet or exceed prior estimates of revenue and earnings per share. In his new role as Peregrine’s president and COO, Gary Lenz sent an e-mail to everyone at Peregrine, thanking everyone for their help in meeting projections, and stating that Peregrine had never failed to meet its projections.
Gardner testified to details of a number of complex transactions between Peregrine and other companies, in which improper things had occurred. One of those was a deal with Fujitsu USA. (Co-defendant Douglas Powanda also testified at length on this Fujitsu deal, and his testimony is summarized on this blog.) Gardner testified that the meeting between Peregrine executives and Fujitsu executives occurred on October 3, 2000, but the contract was dated within the quarter ending on September 30, 2000. As part of this transaction, Peregrine was purchasing services from Fujitsu, which made it a reciprocal transaction. Gardner said that Gless was one of the Peregrine officers at this Fujitsu meeting.
The decision on when the books were closed for the quarter was primarily up to the CFO (David Farley, and later Matt Gless). Gardner testified that at Peregrine, the CFO would make the decision about how long the books would be kept open, and that decision would be based to some extent on when the auditors were coming. Gardner said that when the books were being kept open, senior management was aware of it. He said that after Lenz was hired in June 2000 and soon thereafter elevated to president and COO, Lenz was part of the senior management and would be present at meetings when this would be among the topics discussed. Other members of senior management attending these meetings would typically include Gardner, Farley, Powanda, Cahill, and Vancheeswaran.
Gardner testified that Lenz had the primary responsibility for negotiating a major deal with Chevron. On September 19, 2000, Lenz sent Gardner an e-mail, indicating that the first part of the Chevron deal had been signed. Gardner learned (from Farley and Gless) in the first week of October that the deal had not been signed with Chevron (the end-user). Peter Valentine had signed it. Valentine was a consultant of Peregrine who did not have a history of reselling software, and if Chevron did not end up purchasing the software, Peregrine was not going to be able to collect from Valentine. This was a form of channel stuffing. Gardner was furious, felt that he had been misled, and went directly to Lenz’s office to speak to him. Gardner testified that his main point to Lenz, when he spoke to him, was not that Lenz should have not done it this way, but that Gardner had to know about it. Gardner said that Lenz seemed surprised that Gardner felt Lenz had given him the false impression that Chevron had signed the contract.
On October 16, 2000, Gardner sent an e-mail to Lenz and Reichner and Cahill, among others. Gardner had learned that Chevron was acquiring Texaco. Gardner had a lot of experience with mergers and acquisitions, both with Peregrine and in prior corporate experience, and he knew that there is often a lot of chaos. This proved to be true with the Chevron–Texaco merger, and the Chevron executives who had agreed to buy the Peregrine software were dismissed, causing Peregrine to lose this important deal.
Among the other deals that Gardner testified about was one with Divas, a German company that is a division of Daimler Benz. When Peregrine was not able to close the deal with Divas in time to make the quarter, Doug Powanda got Berndt Wien of Netcom to sign the deal. This was an example of channel stuffing deals that Powanda did with Wien, which were known as “Wienerschnizel” deals. This deal resulted in $8.8 million being booked for the quarter ending September 30, 2000. Gardner said that Lenz was told that this was a “Wienerschnizel” deal.
Gardner said that on June 1, 2001, he testified in front of the SEC regarding Critical Path, a highflying software company with which Peregrine did a barter deal. The reciprocal nature of the transaction had not been disclosed at the time (in 2000), because to do so would cause investors and analysts to question the value of Peregrine stock, because it would appear that Peregrine had to commit money to someone in order to entice them to buy Peregrine software. Although under oath, Gardner intentionally misled the SEC to try to prevent them from learning that it was a barter deal, in the hope that the SEC investigation of Critical Path would not broaden into an investigation of Peregrine.
In October of 2004, Gardner was indicted on multiple felony counts related to his conduct at Peregrine. He fought the charges with all of his available resources until early 2007. In March of 2007 he decided to stop living a lie. He admitted his guilt to his family, his lawyers, and ultimately to the court. He pled guilty to Conspiracy and Securities Fraud, as well as to Obstruction of Justice (for his untruthful testimony in the Critical Path matter). He could receive up to 20 years in prison.
Gardner’s testimony about the events at Peregrine has only taken us to December 2000, so there is a lot of direct examination to come when court resumes on Tuesday. When AUSA Beste finishes his direct examination, there presumably will be days of cross-examination.
MOTION TO EXCLUDE TESTIMONY
Warren David Roudebush, who was a witness in this trial last week, disclosed before his testimony that he had been reading this blog. Last week, the Government learned that five of its other witnesses have also been reading this blog. When witnesses read newspaper articles or other information regarding a case in which they are testifying, there is always the concern that their testimony will be influenced. Attorney Mike Attanasio filed a motion to exclude the testimony of these five witnesses who had been reading the “Grimes blog”. For a number of reasons, including the consumption of time in sorting out what the witnesses previously knew from what they learned on the blog, the Government ultimately did not oppose having the testimony of these five witnesses excluded during its case-in-chief. It is possible that some of these witnesses could still be called in rebuttal, if any defendant puts on affirmative evidence, which would be contradicted by these witnesses. The witnesses who now will not be testifying in the Government’s case-in-chief are Matt Gless, John Benjamin, Mark Douglas, Pradeep Vancheeswaran, and Bill Moore.
THANK YOU FOR YOUR INPUT
At the start of the case, I told both the Prosecution and the Defense that I welcome any comments or corrections, as I am not trying to take either side. I have received quite a few comments, and some corrections, from readers of this blog. Many of these readers are very knowledgeable about the Peregrine case. I welcome these comments.
Until next week (which will be the tenth week of testimony).