Peregrine Trial – Week 1
Comments by Bob Grimes
April 10, 2007 – 8:30 a.m. to 1:30 p.m.
The attorneys for both sides were given questionnaires that have been filled out by the prospective jurors, to assist in jury selection. The jury panel was screened for a trial which could last three months or more. Judge Whelan allows attorney voir dire. All four defense lawyers emphasized in their voir dire that the Government has the burden of proof, and the defendants are not required to testify or present any evidence. Only 12 of the jurors have been questioned individually. By 1:30 p.m. today, the defense lawyers had finished their jury voir dire, and the court recessed until 8:30 a.m. tomorrow morning. After voir dire by the prosecutors, both sides will execute their challenges, and the remaining jurors will be the trial jurors and alternates. I would not expect prosection voir dire to last more than 20 to 30 minutes. Opening statements will follow, perhaps beginning around 10:00 a.m. or a little later.
Opening statements could last until the end of the trial day tomorrow at 1:30 p.m., and perhaps part of Thursday morning. It appears that all four defense lawyers will make opening statements at the conclusion of the prosecution’s opening, rather than reserving until the conclusion of the prosecution’s case-in-chief. There are common counts and some common themes, but each of these four defendants has different issues to raise in this trial. Each of the defense lawyers is probably going to want to communicate to the jury the strong points of his or her individual client right away, instead of waiting two months or more for the conclusion of the prosecution’s evidence.
There are computers and three screens at the table of the three prosecutors, and computers and five screens at the table of the lawyers for the four defendants. The courtroom has projection equipment and screens for the jury to see documents and other exhibits. A bookcase has been set up behind the table of defense counsel, to assist them in keeping their documents in order. Large numbers of documents have been premarked as exhibits.
April 11, 2007 – 8:30 a.m. to 1:30 p.m. (1:45 p.m.)
At the close of today’s session a jury of eight men and four women were sworn in, along with three alternates (two women and one man).
The prosecution was willing to accept the first 12 jurors examined, shortly after 10:00 a.m. The defense used about nine or ten peremptory challenges. In the voir dire of the new prospective jurors, the defense continued to emphasize the law that the defendants are not required to testify or to produce any evidence. The defense lawyers also stated that a number of the prosecution witnesses have pled guilty to crimes because of their actions, and that some of these witnesses also committed perjury in previous testimony about their own conduct.
A number of the jurors expressed opinions that white collar defendants get off too easy or that defendants should testify to prove their innocence. In addition to allowing the defense voir dire in depth on these issues, Judge Whelan instructed the jurors several times that the prosecution has the burden of proof beyond a reasonable doubt and that the defense is not required either to testify or to produce any evidence. Several jurors who appeared unable to accept these principles of law were excused by the court, for cause.
Just before releasing the trial jury this afternoon, Judge Whelan stated that the trial will probably last between 4 and 12 weeks, with the trial schedule continuing to be Tuesday through Friday, 8:30 a.m. to 1:30 p.m.
When the trial begins tomorrow at 8:30 a.m., the prosecution will present its opening statement, followed by those of the defense. I expect that these opening statements will be quite detailed, and could last to the end of tomorrow’s session at 1:30 p.m.
April 12, 2007 – 8:30 a.m. to 1:30 p.m.
All of the spectator seats in the court were filled, and a number of people were turned away.
AUSA Sanjay Bhandari presented an opening statement of about an hour and a half. It was accompanied by a PowerPoint presentation which included photos and job descriptions of the four defendants and the cooperating co-defendants, and visual descriptions of the fraudulent activity in which the Government says the four defendants were involved.
Bhandari showed a diagram of offices on the fifth floor of the Peregrine building in San Diego, where he says that Stulac and Towle schemed and plotted with Gless, Rassam, and Benjamin. He showed other offices where he says that Lenz and Reichner schemed with Powanda, Gardner, Gless, and Cahill. All of the above-mentioned co-defendants are going to be among the Government witnesses, but Bhandari told the jury that e-mails and other evidence corroborates the testimony of the cooperating witnesses. As an example of this, he showed an e-mail from Lenz to O’Brian on July 2, 2001, which he says describes backdating of a contract and giving a contingency “out” clause to the buyer. He said that Lenz and Reichner would go to channel partners and sign a “partner paper,” where the partners pretended that they were buying Peregrine software but really were not obligated to do so. He says that these four defendants and about a dozen people who have pled guilty to these offenses chose continually to lie and to put on the books purported revenue, when they knew that the true revenue figures were much less favorable. Bhandari described fraudulent contracts with KPMG, and said that Reichner was involved in these deals and that Reichner remarked at the time that “people go to jail for deals like these.”
Bhandari stated that during the investigation after the collapse of Peregrine, Arthur Andersen Auditor Stulac confessed that he knew the revenue recognition practices at Peregrine that he approved were ridiculous, wrong, and done to deceive the public. Stulac allegedly said that it made him sick to sign off on these wrongful practices, but that he did so anyway.
Reichner’s attorney, Eugene Iredale, argued for about two hours. He said that Reichner was only at Peregrine for 15 months, and the conspiracy was going on when he was hired and continued after he left. He said that Reichner argued with Cahill in opposition to illegal deals, and that as a result Reichner was fired.
During the Government’s opening, AUSA Bhandari had described how Peregrine’s channel sales (in which the software is sold to the end-user after an initial sale to a reseller) had been used by the defendants to commit fraud. Iredale responded that in the software industry channel sales are normal and proper, and commonly used by companies including Microsoft, Oracle, and Intuit, not just Peregrine.
Iredale showed pictures of the cooperating defendants next to their potential exposure in prison, highlighting their motive to testify against these four defendants to try to get a recommendation of leniency from the Government. These included: Gardner – possible 20 years in prison; Gless – possible 15 years in prison; Cahill – possible 10 years in prison; O’Brien – possible 10 years in prison; and Spitzer – possible 5 years in prison.
Lenz’s attorney, Thomas Bienert, gave the next defense opening. He said that although Lenz worked at Arthur Andersen for 17 years (Reichner had also worked at AA), Lenz was not an accountant, he had worked in real estate consulting. Bienert argued that Lenz was not aware of the fraud. Gless and Gardner hid the fraud from Peregrine’s Board of Directors, and did not want the Board to know of the side deals with partners. When the Board started asking too many questions, and wanted Gardner to hire a Chief Operating Officer, Gardner and Gless wanted to put Lenz in this position because he did not have sufficient experience in accounting to detect their ongoing fraud.
Tomorrow, trial resumes one hour late, at 9:30 a.m. The attorneys for Stulac and Towle will make their opening statements, and then testimony will be presented until the close of the day at 1:30 p.m.
April 13, 2007 – 9:30 a.m. to 1:30 p.m.
Patrick Towle’s attorney, Kathryn Leff, made an opening statement. She told the jury that she was appointed by the court (the other defense attorneys are retained). She introduced Towle’s mother to the jury, and said that she would be attending the trial when she can take time off from her work. The attorneys for Lenz and Reichner said that their clients had made so much money working for Arthur Andersen that they had no financial motivation to commit fraud at Peregrine. Leff’s approach for Towle was different, and emphasized his lack of money and his youth and inexperience. He made about $230,000 in his three years at Peregrine.
Patrick Towle got a BA and Masters in Accounting at San Diego State. When he began working at Peregrine in 1999, he was 31 years old and had little practical experience. He was the Worldwide Revenue Recognition Officer, but had a lot of different duties. He sometimes worked 60-70 hours a week. According to his attorney, Leff, Patrick Towle reviewed hundreds of contracts and accepted at face value the dates on which the contracts purported to have been signed, and was not aware of any side contingencies. Attorney Leff argued that Towle tried to follow proper rules for revenue recognition, and was not responsible for side deals. She said that sometimes these side contingencies would be created by salespersons who wanted to get a commision. Leff asserted that there was a lot of pressure from Gardner and Lenz to make the quarter. At the end of the quarter there would be discounts offered to buyers, and sometimes there would be increased commisions for the salespeople.
Mike Attanasio made an opening statement on behalf of Daniel Stulac. He started with photos of CFO Gless and CEO Gardner. He said that Gardner made $11 million in stock options and Gless made $3.1 million, and they committed fraud to do so. He said “follow the money.” Stulac was paid by Arthur Andersen, not Peregrine, and had no Peregrine stock.
Attorney Attanasio said that Stulac had no knowledge of side deals creating contigencies. He said that Stulac slowly worked his way up in Arthur Andersen and was thrown into the position of Engagement Partner for several other major corporations. He and other Arthur Andersen auditors would go to the conference room at Peregrine in San Diego and toil diligently trying to do their job as auditors. But Attanasio argued that Stulac is not an FBI agent, and the fraud on the part of senior management was impossible for the auditors to detect. According to Stulac’s attorney, the primary conspirators were Gardner and Gless, and they had the assistance of Rassam, Benjamin, and Cappel, who all provided information to Stulac. For the conspiracy to be successful, they had to deceive Arthur Andersen, and they did so.
When showing the jury a fraudulent contract confirmation document, signed by Gardner and Gless as well as Lenz, Attanasio pointed out that Lenz’s attorney has already stated that Lenz came to Peregrine late and did not know of the conspiracy. It appears that the attorneys for these four defendants are doing their best to avoid inconsistent defenses.
FIRST PROSECUTION WITNESS
Margaret Turner worked at Peregrine in the Accounts Payable department. Her highest salary was $37,500 per year, and she was laid off in 2002, after 12 years. She bought Peregrine stock, and invested about $18,000, and said it is now worth about 15 cents.
Mimi Le is an attorney and is counsel for the NASD, working in the Criminal Prosecution Assistance Division. She presented numerous charts and graphs, showing the value of Peregrine stock at different times. She showed how the price of Peregrine stock would rise sharply after its press releases and public filings, in which it claimed that it had met or exceeded prior earnings estimates.
Reichner’s attorney, Gene Iredale, cross-examined Ms. Le. He pointed out that market forces caused many stocks to lose money. The NASDQ composite index went from 5,132 (on March 10, 2000) to a low of 1,100 at the end of 2002. Iredale questioned her for some time on the drop in the stock market after the attacks of 9/11 in 2001. He asked her if the Government attorneys had directed her to keep this out of her charts, and implied that the Government is trying to make an incomplete and unfair presentation on the loss of value of Peregrine stock.