Comments by Bob Grimes and Dana Grimes
February 26, 2008 – 9:30 a.m. to 3:00 p.m.
At the start of this fourteenth court day of the retrial, the attorneys discussed several issues outside the presence of the jury. AUSA Beste indicated that he was planning to ask Witness Kevin Ortzman questions pertaining to the Peregrine restatement. Attorney Aaron Arnzen, representing Daniel Stulac, argued that the Peregrine restatement is irrelevant because the defendants in this case are not challenging the fact that Peregrine’s revenue was improperly booked. Judge Whelan ruled that the Government could ask Mr. Ortzman questions about the Peregrine restatement, but the Judge made it clear that he did not want Mr. Ortzman to talk about the details of each Peregrine contract analyzed in the restatement.
Attorney Kate Thickstun informed the court that the Government had just handed the defense team two FBI reports (302s) pertaining to upcoming Witness Mr. Ortzman. These 302s were written in November 2002. Attorney Thickstun said that the Government had deliberately delayed giving the defense team the reports in order to interfere with their ability to cross-examine the witness effectively. Judge Whelan asked AUSA Beste why he delayed giving defense counsel the FBI reports. AUSA Beste responded that the two reports together are only four pages and furthermore he “didn’t have to give it to them at all.”
Kevin Ortzman took the stand. Mr. Ortzman is a CPA and worked as an accountant and an auditor for six years. From 1997 to 2004, Kevin Ortzman worked at his own management consulting firm as a specialist in financial accounting matters. Kevin Ortzman worked on the Peregrine restatement. His task was to determine whether Peregrine’s revenue had been properly recognized for fiscal year 2000, fiscal year 2001, and for the first three quarters of fiscal year 2002.
Mr. Ortzman testified that he analyzed between 2,000 and 2,500 Peregrine contracts in order to complete the Peregrine restatement. Kevin Ortzman stated that he frequently found errors regarding revenue recognition in the Peregrine contracts that he analyzed. AUSA Beste displayed two documents that were part of the restatement. These documents illustrated that the “adjustments” made to the revenue as previously reported by Peregrine were significant. In one of the documents, almost half of the total contract revenue was taken out in the restatement.
Mr. Ortzman stated that he worked on the restatement for one year, working 60 hours per week. Mr. Ortzman had a staff (which fluctuated between 15 and 40 people) to assist him.
Kevin Ortzman testified that Patrick Towle only worked at Peregrine for the first month or two of the year he spent working on the restatement. Mr. Ortzman said that Patrick Towle was not “forthcoming” when Mr. Ortzman asked for his help in procuring documents. Witness Ortzman recalled that, when he asked for Mr. Towle’s assistance, Patrick Towle was slow in giving him the documents, or Mr. Towle would never give him the documents. Kevin Ortzman testified that Patrick Towle never worked late, unlike some other Peregrine employees, and when Mr. Towle left every day at 5:00 p.m., he locked his door.
Under cross-examination, Kevin Ortzman agreed with Attorney Attanasio that he did not have to rely on financial data from CEO Gardner or CFO Gless or Controller BJ Rassam because they were all gone by the time Mr. Ortzman came to Peregrine to work on the restatement. Mr. Ortzman acknowledged that if the fax headers on documents had been whited-out and copied over, he would not have been able to see that the fax header date did not match the contract signature date. Kevin Ortzman agreed with Attorney Attanasio’s statement that Witness Ortzman does not know if e-mails that were made available to him and his staff were also made available to the Arthur Andersen audit team.
Under cross-examination by Attorney Kate Thickstun, Kevin Ortzman agreed that he did go into Patrick Towle’s office and he cannot remember finding any document that he was searching for in Mr. Towle’s office. Mr. Ortzman admitted that, to his knowledge, Patrick Towle never hid anything from him. Kevin Ortzman admitted that he did not know if it was a Peregrine policy to lock one’s office door when leaving for the day.
On re-direct AUSA Beste implied that an auditor should have found the same information that Kevin Ortzman found regarding improperly recorded revenue at Peregrine. AUSA Beste asked questions designed to illustrate that Mr. Ortzman’s work as an auditor was similar to his work at Peregrine when conducting the restatement.
On re-cross examination Attorney Attanasio pointed out that Mr. Ortzman had a great deal more time to conduct his restatement work than an auditor has to conduct an audit. Mr. Ortzman admitted he had a bigger staff than any audit team, and he admitted that he did not have to rely on bogus customer representation letters. Kevin Ortzman agreed that he did not rely on management representation letters from an experienced CEO and CFO during his work on the restatement. Mr. Ortzman admitted that nothing was ever hidden from him during his work on the Peregrine restatement, like it was hidden from the AA audit team while Daniel Stulac was the engagement partner.
The next witness was Mimi Le. Ms. Le is an attorney who works for a private company that regulates stocks traded on NASDAQ. Mimi Le prepared several charts for the Government that illustrated that Peregrine’s stock price tended to go up after positive Peregrine press releases.
Attorney Attanasio displayed some charts that Mimi Le created for the first Peregrine trial. Under cross-examination, Ms. Le agreed that one of her old charts showed Peregrine’s stock price dropping in reaction to a positive press release. Ms. Le admitted that she did not take any other information into consideration when she prepared her charts, other than the information that the Government told her to include.
This trial is on schedule and all testimony should be completed by the end of next week.
February 27, 2008 – 9:00 a.m. to 3:30 p.m.
This morning, outside of the jury’s presence, Judge Whelan ruled on motions submitted by the Government and defense counsel. Dan Stulac’s attorney, Mike Attanasio, stated that he may call Steve Gardner to the stand. Attanasio recently learned that Gardner seeks to invoke his 5th Amendment right not to testify if he is called. Attanasio argued that Gardner does not have a 5th Amendment right with respect to things he already testified to in the prior trial – the court agreed. Attanasio also argued that the Government, in this retrial, is taking a position inconsistent with the truth-finding process by not immunizing Gardner in this retrial and by not treating Gardner’s testimony as cooperation within the meaning of his plea agreement. Judge Whelan did not order the Government to immunize Gardner.
Minutes after the jury was seated, the Government rested its case. This is surprising, given that today was the fifteenth day of the retrial, and the Government has not called any of the cooperating co-defendants to testify.
Defense attorney Mike Attanasio then recalled witness Mary Lou O’Keefe to the stand. Ms. O’Keefe testified that Peregrine was a multi-national, robust corporation for a time. Displaying an account executive compensation plan for the fiscal year of 2001, Attorney Attanasio elicited from Ms. O’Keefe that side letters (deals not reflected in the written contracts), were a “significant no-no” and grounds for termination of sales employees.
Ms. O’Keefe then testified to the large amount of money Gardner made at Peregrine. She read pay stubs that showed Gardner had been paid about $14 million during a 16-month period spanning 1999 and parts of 2000. She also read a series of stock option exercise forms, which demonstrated that over a 3-day period in February 2000, Gardner exercised options yielding a $9.4 million gain. Ms. O’Keefe testified that her sense of Mr. Gardner, before the fraud came to light, was that he was a trustworthy person and CEO, and it was her opinion that others she worked with felt similarly. She then testified that CFO Gless, after a raise, made $250,000 per year and another $125,000 in bonuses. Reading numerous stock option exercise forms – all from the same busy day in February of 2000 – Ms. O’Keefe testified that by exercising shares at Peregrine’s all-time high trading price, Gless made a total of $1.7 million.
By February 2002, Ms. O’Keefe stated, she had grown concerned that what Gless was recommending for BJ Rassam in terms of compensation and stock options was excessive. Reviewing a status change form for Rassam dated April 19, 2001, the witness testified that Rassam was paid half of his bonus early, in the amount of $20,000. The form was signed by Gless and a manager from human resources. Attorney Attanasio introduced another form, showing that thirty days later, Rassam received a $15,000 bonus. On that form, Gless wrote, “Work performed over and above the call of duty.” A different exhibit demonstrated that in September 2001, Rassam’s bonus amount increased to $75,000. Ms. O’Keefe read an e-mail from Gardner to Gless, approving raises Gless suggested; Gardner also noted that he would raise Rassam’s compensation further. Rassam later received an advance on his increased bonus in the amount of $30,000. Yet another form was introduced to show that in January 2002, Rassam’s salary was increased by $25,000. Handwriting on the margin of the form noted that Ms. O’Keefe refused to sign the form. Ms. O’Keefe stated that she refused because she believed Rassam was already receiving too much money; her opinion was over-ruled by Gardner and Gless. She then read e-mails previously presented to the jury, in which she referred to Rassam’s compensation as “over-the-top,” and Gardner disagreed, stating that Rassam was the only possible back up for Gless.
On cross-examination, AUSA Narus elicited from Ms. O’Keefe that to her, the term “back-up” refers to an internal company employee. Ms. O’Keefe stated that Stulac was not a Peregrine employee. AUSA Narus then asked Ms. O’Keefe to explain what happened when Peregrine collapsed. Ms. O’Keefe testified that she lost $285,000 when Peregrine’s stock price fell. AUSA Narus then went over the personal stock options of John Benjamin (the form showed 4,300 shares exercised and 94,000 canceled), and Gary Lenz (the form showed 428,000 shares, none of which were exercised). Ms. O’Keefe testified that she did not know fraud was involved in BJ Rassam’s increasing compensation; she refused to sign-off on his salary increase of January 2002 because she did not agree with it and did not wish to endorse it.
Attorney Kate Thickstun conducted a direct examination of Ms. O’Keefe, going over the employment application of Patrick Towle and his new employee form. As a revenue accounting manager, Towle earned a $68,000 salary. Attorney Thickstun moved into evidence a form demonstrating that Towle had a stock purchase plan for one year at Peregrine, before opting-out of the program. In the fall of 2000, Peregrine experienced substantial lay-offs. Attorney Thickstun introduced into evidence various forms demonstrating that in 1999 and 2000, Lynn Morimoto received bonuses and pay increases totaling $35,000 – a significant amount of money relative to what her pay was at the time. The witness then read Patrick Towle’s option status form, printed in July 2002. During that timeframe, Peregrine stock had dropped from $22 per share to .44 cents per share. The form displayed that, although some of Towle’s option had vested, he never exercised any options.
Ms. O’Keefe then explained the Peregrine “black-out period,” which prevented potential company insiders from trading during the last month of every quarter. A black-out list of Peregrine employees included names such as Gless, Gardner, Cahill, Reichner, and others. The list did not include Towle.
In his first question of cross-examination, AUSA Narus asked Ms. O’Keefe to read a handwritten note on a $5,000 bonus form for Towle. The note, written by Gless, stated “Work performed over and above the call of duty.” This is the exact same language that Gless used on Rassam’s bonus form. AUSA Narus elicited from Ms. O’Keefe that Lynn Morimoto likely received her increase in compensation because she was underpaid as compared to external colleagues. Ms. O’Keefe stated that the black-out list presented by Attorney Thickstun was not exhaustive, and that other Peregrine employees could have had insider information. Ms. O’Keefe testified that when Towle’s salary was increased to $68,000, that was a $20,000 increase.
Next, witness Nick Scher was called to the stand by Attorney Thickstun. Mr. Scher worked at Peregrine from March of 2000 to November of 2002. When he joined the company, he worked to implement the infamous “PeopleSoft” software. PeopleSoft was supposed to handle general ledger and all account managing information. Numerous witnesses in the first trial and this re-trial have testified that it worked poorly.
Mr. Scher testified that because of how busy the ends of the quarters were, closing quarters did not ever happen at the actual date of the quarter’s end. He stated that no company closes at the date the quarter ends, because there is a significant amount of processing to do. He said that in the best-case scenario, the quarter was closed five or six days after the quarter-end date. Mr. Scher did not like the program “GetPaid” because it was a “bolt-on” program that did not meet all of the needs of the business. He stated that Felicia Alpren wanted the program. According to this witness, part of the “heartburn” causing them to keep quarters open at Peregrine was that they didn’t have good systems implemented.
Mr. Scher always found Towle to be honest and forthcoming about his accounting needs. Mr. Scher said that he never suspected anything illegal was going on; he thought he was working with people eager to put in the extra hours for a company they believed in, and among those people was Patrick Towle.
On cross-examination, AUSA Beste and Mr. Scher did not get along. On cross, Mr. Scher stated that he never personally was involved in the revenue recognition process. AUSA Beste and Mr. Scher quarreled about how friendly Mr. Scher and Towle are. Mr. Scher maintained that he and Towle were friendly at work, but have seen each other socially five times or less. AUSA Beste asked various questions to establish that Mr. Scher could not have known everything that Towle did while at Peregrine. Mr. Scher testified that during the quarter close process “holding the quarter open” meant that he and others would put the business activity into the correct period. At one point, when AUSA Beste was trying to establish that Towle was responsible for revenue recognition, Mr. Scher stated that Towle “was the manager of revenue recognition like I was the manager of systems, but I didn’t decide to upgrade the system, higher-ups did.” After AUSA Beste asked Mr. Scher to read the press release announcing Peregrine’s revenue recognition irregularities, Mr. Scher testified that he believes it was the higher-ups who made the money on the deals who were responsible for the “irregularities.” On re-direct, Kate Thickstun asked the witness if he would lie for Patrick Towle. Mr. Sher responded, “I wouldn’t lie for anybody.”
Attorney Thickstun then thanked and excused Mr. Scher, and called Tracy Okamura to the stand. Tracy Okamura presented as a pleasant woman. She stated that she tried to fix the PeopleSoft program at Peregrine, and she giggled as she explained that it was a “mess.” Ms. Okamura had daily contact with Towle during this implementation stage, and had many meetings with him. During these meetings, she learned about revenue recognition for software sales, so that she could design a system for Towle which would give him detailed reports regarding accounts. Ms. Okamura testified that she did not like “GetPaid” software, because it was another system to monitor, with data being inputted and exported, which could create problems. Ms. Okamura politely stated that getting information from Felicia Alpren was difficult. Referring to her communications with Ms. Alpren, Ms. Okamura said: “I learned to ask the same questions many different ways.” Ms. Okamura stated that she always found Towle to be very detail oriented and cooperative. He was very particular about how revenue should be recognized within the system and the way things would need to be booked before recognition. Ms. Okamura stated, “Patrick was anal and I mean that in the nicest of ways.” As an illustration of his demand for accuracy, Ms. Okamura explained that Towle would take a ruler to her invoices to show her that information needed to be lined up straighter. Ms. Okamura stated he had a reputation for being strict and detail oriented, and that she never felt that he was deceptive or dishonest.
February 28, 2008 – 9:00 a.m. to 3:30 p.m.
The first witness to take the stand this morning was Larry Marinesi. Outside of the jury’s presence, Mr. Marinesi was questioned by Judge Whelan regarding his reading of this blog. Although he had read most of this blog’s coverage of the first trial and retrial, the witness stated that he would not let it influence his testimony. He did not specifically recollect reading about the KPMG/CitiGroup transaction that was the subject of his testimony today.
On direct examination by Attorney Thickstun, Mr. Marinesi explained that he is currently a budget manager at San Diego Metropolitan Transit System, and was formerly an accounting manager at Peregrine. Mr. Marinesi worked in revenue recognition for Peregrine’s professional services, which meant that he billed for the time Peregrine consultants spent implementing software for companies. He indicated that, although payment was often in advance on professional services, maintenance revenue was not recognized until the service work was actually performed. He worked closely with Patrick Towle and became friends with him. Towle alerted Mr. Marinesi when a professional services contract was coming to him and would tell him to defer revenue recognition.
In a similar vein to previous witnesses, Mr. Marinesi stated that the systems at Peregrine, especially PeopleSoft, were “very broken,” which forced the staff to do manual work and data entry. Mr. Marinesi spent a lot of time trying to fix PeopleSoft.
Attorney Thickstun asked Mr. Marinesi about the KPMG/CitiGroup transaction – a large and complex deal with a $10 million contract value. This witness testified that it took a group of people, including Towle, quite a while to understand and book that contract. Mr. Marinesi and Towle decided to back out a portion of the revenue from the CitiGroup transaction in an effort to ensure accuracy. (During the first Peregrine trial, Steve Gardner testified that at one point he learned that some deals that had been projected to close by June 30 had not closed. These included the large deal with end-user CitiGroup. According to Gardner, Powanda suggested that Peregrine go to their channel partner KPMG to take the deal, so that Peregrine could book the revenue in the quarter ending June 30. KPMG signed for CitiGroup at the end of June.)
On cross-examination, AUSA Eric Beste elicited from Mr. Marinesi that he was not interviewed by lawyers from Latham & Watkins, or lawyers from Wilson Sonsini Goodrich & Rosati, in connection with their internal investigation for Peregrine’s Audit Committee. He stated that he was not included in these interviews because he had no knowledge of the fraud at Peregrine. The outside lawyers were looking into license revenue, and Mr. Marinesi only handled revenue recognition for professional services. Mr. Marinesi indicated that he did not have input into all of the decisions made by Towle, nor was he privy to all of Towle’s communications with Gless and Rassam.
AUSA Beste presented Mr. Marinesi with a series of e-mails regarding an outstanding balance Peregrine had with KPMG. One Peregrine employee from professional services e-mailed Joseph Reichner, stating that KPMG’s failure to pay was “lunacy” and asked if Peregrine should withhold payment to KPMG – in order to encourage KPMG to pay their outstanding balance – for a debt Peregrine owed them. In response, Reichner told the Peregrine employee to have Towle “work this out.” Mr. Marinesi then wrote an e-mail stating that payments to KPMG from Peregrine for other matters would be put on hold until KPMG paid off their outstanding balance.
AUSA Beste displayed Towle’s resume to Mr. Marinesi, to establish that Towle was responsible for what he indicated thereon, including the bullet point “responsible for setting and ensuring compliance with revenue policy.” Another bullet point on Towle’s resume stated that while at Peregrine he ensured compliance with SOP 97-2 (the software revenue recognition rule), and that he was the primary revenue contact for Peregrine’s external auditors. Attorney Thickstun elicited from Mr. Marinesi that BJ Rassam, as controller, was ultimately in charge of revenue recognition policy. Mr. Marinesi stated that a group of people worked on SOP 97-2 compliance, and that communications with external auditors was likewise a joint effort.
Attorney Mike Attanasio called Doug Powanda to the stand. Interestingly, Mr. Powanda is the first big fish to testify in this retrial. In the first trial, the Government called Mr. Powanda; today, he was subpoenaed by Dan Stulac’s defense attorney. Mr. Powanda is tall and has silver hair. He testified about his ten years at Peregrine with a rather grave and stately air. After rising up from entry level sales when Peregrine was a small company, Mr. Powanda was eventually a very senior sales manager. In July 2001, he began serving in the Office of the Chairman of the Board, and reported directly to Gardner. He stayed with Peregrine until May 2002.
Just as he did in the first trial, Mr. Powanda testified that Peregrine was a company that was extremely focused on meeting its quarterly goals. He stated that in 1999 and 2000 Peregrine had hundreds of deals each quarter, and the vast majority were legitimate sales with reputable companies. He explained the illegal activities that would take place during “forecast meetings” if quarterly goals were not likely to meet the expectations of Wall Street. These forecast meetings became increasingly stressful toward the end of each quarter, with the pressure of trying to meet the numbers, and Gardner would become very intense. The fraud included keeping the books open and backdating sales contracts and recognizing sales as final when they were not.
Attorney Attanasio asked about a specific deal with channel partner Barnhill. According to Mr. Powanda, Barnhill’s owner – in on the fraud – would sign on behalf of an end-user who was not yet in a contract with Peregrine in the hope that the end-user would eventually enter into a valid contract. It was the understanding of the senior executives at Peregrine that the channel partner Barnhill was never really obligated to pay. This witness agreed that the Schedule A’s resulting from those transactions were “bogus.” Attorney Attanasio asked many questions about the senior executive group responsible for making these decisions and the secrecy of their actions, in order to establish that this collusive fraud was perpetrated by an inner circle at Peregrine. Attorney Attanasio also asked about a deal with a German company which was owned by a man named Mr. Vien. Mr. Vien had a relationship with Mr. Powanda from having previously worked at Peregrine. The phony deals entered into by Peregrine and Mr. Vien’s company were referred to by CFO Farley as “Vienerschnitzel” deals.
Mr. Powanda did not name Dan Stulac or Patrick Towle as having been involved in any of the illegal deals that he testified about today. Mr. Powanda stated that he met Stulac once, in passing. Mr. Powanda said that other people were involved, including Gardner and Gless (who have both pled guilty), and Nelson and Crook (who are scheduled to go to trial after the present trial ends).
Mr. Powanda admitted to being nicknamed “Porkwanda” while at Peregrine because of his habit of exercising and selling his considerable stock options as quickly as possible. He admitted his motivation was largely greed.
(In July of 2006, Mr. Powanda pled guilty to one count of Conspiracy to Commit Wire Fraud and one count of Securities Fraud, with a total possible exposure of up to 15 years in prison. He admitted to participating with his co-conspirators in a fraudulent scheme to inflate the value of Peregrine’s stock, and to making false statements to, and concealing material information from, the SEC and the public shareholders of Peregrine. His guilty plea includes details of specific fraud deals, including the Barnhill acquisition.)
Attorney Attanasio pointed out that Mr. Powanda pled guilty in 2006 and has not yet been sentenced. Attorney Attanasio also drew attention to a provision of Mr. Powanda’s plea agreement with the Government in which, as part of his factual basis for pleading guilty, he admitted to working to deceive outside auditors.
Attorney Attanasio presented Mr. Powanda with confirmation letters regarding bogus deals. The senior executive group prevented these confirmation letters from going to people at the outside companies who were not in on the collusive fraud. Mr. Powanda also read an e-mail from Gless, stating “It’s important we show cash receipt for AA in order to justify channel inventory.” Mr. Powanda stated that it was his general understating that auditors relied on Schedule A’s and revenue information provided by Peregrine, and that the backdated contracts and “Vienerschnitzels” were not available to Arthur Andersen. In his last question on direct, Attorney Attanasio asked if, in the forecast meeting conversations with senior executives, anyone ever said anything to the effect of, “We don’t need to do these things because Dan Stulac is in on it too.” Mr. Powanda answered, “No.”
On cross-examination by AUSA Beste, Mr. Powanda stated that he had limited interaction with Arthur Andersen auditors, and that he has no personal knowledge of what Stulac may or may not have talked about with Gless or Farley. He stated that people within Peregrine and outside of the company were responsible for helping Peregrine to manipulate its numbers. For scheduling reasons, Mr. Powanda was excused, subject to re-call. (Cross-examination of Ms. Okamura, who testified yesterday, was postponed for scheduling reasons. She is also subject to being re-called to testify.)
Attorney Attanasio then called Kerry Miller to the stand, to testify as the custodian of record of various Arthur Andersen documents. Mr. Miller is an Arthur Andersen in-house attorney, familiar with Andersen’s production and preparation of subpoenaed documents. Through his testimony, Attorney Attanasio introduced various confirmation letters that were received by Arthur Andersen on the Peregrine engagement from customers such as Action, Tivoli Systems, and Barnhill. The confirmation letters stated that Peregrine had few if any unfulfilled obligations to the customer company. Mr. Miller read a memo from Ross Baldwin to the Arthur Andersen files, dated April 2002, which listed the reasons Arthur Andersen had decided to issue consent for Peregrine’s S-3 filing. Another memo by Mr. Baldwin asked a local Arthur Andersen head to monitor Stulac’s behavior, and to report “mistakes or issues.” Baldwin wrote, “If he strays or has an episode, I need you to inform me immediately.” Another memo from Mr. Baldwin – this one to Mr. Shanley – discussed various Peregrine risks, such as “the company sells with extended payment terms up to three years.” The memo indicated that this risk was minimized by the fact that Peregrine typically “sells its paper” (i.e. sells what it is owed on a contract to a bank for less than the contract value), thereby minimizing the risk.
During direct examination, Mr. Miller testified that on a “Fraud Risk Practice Aid” Richard Bigelow had indicated that he discussed fraud risk with Farley and learned that senior Peregrine management was very risk averse. On cross-examination, AUSA Beste asked Mr. Miller about his ability to recognize Mr. Bigelow’s handwriting. When AUSA Beste asked, “Do you know what his initials look like?” Mr. Miller replied, “I know what his initials are,” which elicited chuckles or smiles from several jurors. AUSA Beste established on cross that this witness had no role in the creation of the Arthur Andersen memos and no knowledge of the existence of any other documents that might contradict them. Mr. Miller’s testimony is an illustration of what can happen when an attorney takes the witness stand. At one point, he was asking AUSA Beste questions; then he stopped and said, “I’m sorry, I should let you do this.”
Next, Attorney Thickstun called Olivia Barelmann, who was a staff accountant at Peregrine from 2001 to 2002. She would conduct manual calculations on Schedule A’s from Ms. Morimoto’s group, and determine how much revenue to recognize on each deal. Attorney Thickstun presented this witness with various revenue-booking forms. Ms. Barelmann testified that she would look at the hard date by the signature line of contracts, and never the fax header, when deciding what quarter to recognize revenue in. Ms. Barelmann’s testimony will resume tomorrow at 9:00 a.m.
February 29, 2008 – 9:00 a.m. to 1:00 p.m.
Kate Thickstun continued her direct examination of Olivia Barelmann from yesterday. Ms. Barelmann was an accountant at Peregrine. Her job was to look over Schedule A’s and to determine how much revenue (if any) Peregrine should recognize on the deal. Attorney Thickstun introduced several Schedule A’s. Witness Barelmann testified that she looked at the license commencement date and the signature date on the Schedule A’s when determining in which quarter to book the revenue. Ms. Barelmann said that the accounting revenue department at Peregrine relied on the sales operations department to send the complete Schedule A. If a side agreement existed, revenue accounting would depend on sales operations to include the side agreement with the Schedule A.
Olivia Barelmann testified that it was not fun to be at Peregrine after the discovery of the fraud by upper management. She testified that all the remaining Peregrine employees knew that their “days were numbered” and lost their motivation.
Ms. Barelmann said she believes Patrick Towle is an honest person and has never seen him do anything unethical. Olivia Barelmann testified that Patrick Towle never asked her to do anything wrong while they worked at Peregrine.
On cross-examination AUSA Narus introduced into evidence an e-mail dated August 28, 2001 from Patrick Towle to several other members of the accounting department at Peregrine that stated that there was a new password to gain access to the Peregrine Revenue Report. The e-mail said that if one of the accounting staff needed to access the Revenue Report, he or she should contact Patrick Towle for the new password.
On re-direct, witness Barelmann agreed with Attorney Thickstun that it is normal for a publicly traded company such as Peregrine to protect material information such as a Revenue Report.
The next witness was Tracy Okamura, who began her testimony last Wednesday, February 27, 2008. Under cross-examination by AUSA Beste, Ms. Okamura reiterated that she was the IT person who tried to help fix the PeopleSoft program at Peregrine. Tracy Okamura testified that one division in the accounting department relied on PeopleSoft to record revenue and Patrick Towle’s group relied on Excel to record revenue. Ms. Okamura said it was often difficult to get the two programs to reconcile.
Tracy Okumura testified that she worked closely with Patrick Towle regarding the implementation of PeopleSoft from the fall of 2000 until January 2001. In response to AUSA Beste’s cross-examination, she said that during this four-month period she spent a great deal of time in Patrick Towle’s office and she overheard Towle tell sales people at Peregrine “no, you cannot backdate contracts.” Ms. Okamura volunteered under cross-examination that she heard Patrick Towle tell Peregrine sales people that they had to obtain a signed Schedule A. These statements seemed to surprise Attorney Beste.
Douglas Powanda returned to the stand, as a defense witness. His testimony was interrupted because of witness scheduling conflicts. Mr. Powanda has lost at least 20 pounds since testifying at the first trial, and he seems to be carrying the weight of the world on his shoulders. He will probably receive less than the 15 years that is the maximum sentence under his plea bargain, but he is going to prison. As he testifies in this retrial (as in the first trial), he is sitting about six feet away from the judge who will be imposing sentence on him. His demeanor is subdued, but he answers questions from both the prosecution and the defense without argument or evasion.
Under cross-examination by AUSA Beste, Powanda agreed that he and others at Peregrine conspired to commit fraud. AUSA Beste delineated some of the details of Peregrine contracts that were fraudulent. For example, Attorney Beste asked Doug Powanda questions about a bogus contract between Peregrine and KPMG with Morgan Stanley as the end user. The hard date on the Schedule A was September 29, 2000, yet Powanda testified that the deal was not struck until early October. The face amount of the contract was for $11.5 million, yet Powanda and Larry Rodda (of KPMG) had a side agreement that KPMG did not really have to pay. Mr. Powanda testified that Rodda insisted that Peregrine wire some amount of money to KPMG. The money was owed to KPMG by Peregrine but Rodda wanted it paid immediately as an enticement for Rodda to enter into the phony deal. Doug Powanda said he does not know the details of how this wire transfer to KPMG was actually carried out.
AUSA Beste stressed the idea that other people at Peregrine were in on the scheme to commit fraud. Attorney Beste stressed that people who were part of the scheme did not need to be physically present at every illegal act in order to be part of the scheme, and appeared to be implying that Dan Stulac and Patrick Towle could have been part of the conspiracy even if Powanda was not aware of it.
AUSA Beste showed Powanda several Schedule A’s on which Doug Powanda’s signature appeared to have been stamped rather than written by hand. On one Schedule A, the signature stamp had been applied upside down. Powanda testified that he never used a signature stamp and he never signed his signature upside down. The implication was that others at Peregrine were using a Doug Powanda signature stamp. It was not clear how unauthorized use of Doug Powanda’s stamp had anything to do with Stulac or Towle.
Doug Powanda testified that he did not know Patrick Towle while he worked at Peregrine. Powanda said that he knew who Daniel Stulac was but he does not know what role, if any, Daniel Stulac played in the fraud at Peregrine.
On re-direct, Mr. Powanda agreed with Attorney Kate Thickstun that Powanda did everything that he could to make the Schedule A’s of his fraudulent contracts appear to be valid contracts executed within the quarter he wished to have them booked. Powanda admitted he was concealing the true facts from many Peregrine employees, including the accounting revenue recognition department.
In a dramatic moment, Attorney Attanasio stood before Doug Powanda and said: During cross examination by the prosecutor you said that you conspired with others at Peregrine. Who were they? List them for us! Mr. Powanda named Gardner, Gless, and Farley at the top of the conspiracy, and said that he could trace it down from there. He named Spitzer as one of the sales staff involved in the conspiracy, as well as channel partners Rodda and Vien. Powanda did not go on to name specifically the rest of the lower level conspirators, but he agreed with Attorney Attanasio that he did not conspire with Daniel Stulac.
After a long sidebar fight, and many objections from AUSA Beste, Attorney Mike Attanasio read part of Matt Gless’s grand jury testimony into the record. Attorney Attanasio read the questions as asked by the grand jury, and had Doug Powanda speak the answers that Matt Gless gave the grand jury. Reading from the grand jury transcript of Matt Gless’s testimony, Mike Attanasio asked if former CEO Gless attempted to conceal the true financial condition of Peregrine from Andy Cahill. Powanda read Gless’s answer “No.” Attanasio asked “Doug Powanda?” Powanda read Gless’s answer “No.” Attorney Attanasio read part of the transcript in which Matt Gless implicated BJ Rassam in the fraud at Peregrine. The next question was whether, to perpetrate the fraud, Gless had to mislead the auditors, rely on their sloppiness, or string them along? Powanda read Gless’s answer “Yes.”
Attorney Attanasio ended his examination of this witness by showing Doug Powanda a copy of his plea agreement (drafted by the Government) that listed each entity Powanda agreed he intended to deceive. The entities that Doug Powanda agreed he intended to deceive included the investing public, Peregrine’s auditors, financial institutions, the SEC, shareholders of Peregrine stock and people who were given Peregrine stock as compensation. Attorney Attanasio emphasized two words “Peregrine’s auditors” as he read the list of entities.
On re-cross AUSA Beste clarified that Doug Powanda does not know whether Patrick Towle knew that contracts were being backdated. Powanda also agreed with Eric Beste that he (Powanda) does not know if either defendant on trial today was in on the scheme to commit fraud at Peregrine.