Comments by Bob Grimes and Dana Grimes
March 4, 2008 – 9:45 a.m. to 3:45 p.m.
Today was the eighteenth day of the retrial. Judge Whelan heard oral argument this morning regarding Defendant Gardner’s attempt to invoke his Fifth Amendment privilege to remain silent, and the Government’s support of his invocation. Although it was the Government who called Gardner to the stand during the first trial, it is now the defense who wants the jury to hear his testimony. Defense counsel in the first trial impeached the top executives such as Gardner with their cooperation agreements and plea bargains with the Government. Today, one of Gardner’s attorneys, Reid Figel, argued that the Government has stated that Mr. Gardner is not protected by his cooperation agreement, because he is being called by the defense and not the prosecution in this retrial. Attorney Figel argued that because Gardner is no longer being given immunity, he is at risk – especially of having his Fifth Amendment privilege undermined in collateral proceedings. Gardner is not going to receive any benefit from the Government for his testimony in this retrial, and potentially could incur the displeasure of the Government for providing testimony favorable to Stulac and Towle; his testimony up this point has been generally favorable to Stulac and Towle. Gary Lenz and Joe Reichner, the two defendants as to whom Gardner provided unfavorable testimony in the first trial, are not part of this retrial.
The Government has consistently called Steve Gardner the “architect” of the conspiracy at Peregrine. The defense position is that now the Government is charging Stulac and Towle with being part of that conspiracy, but is trying to conceal from the jury the facts that the architect of the conspiracy knows.
Judge Whelan assuaged Attorney Figel’s concerns by making it clear that he finds Gardner retains his Fifth Amendment privilege for all purposes other than events as to which he has already testified in the first trial of these defendants. Judge Whelan explained that he believes Gardner faces a low risk of prosecution, because he will only be re-testifying to events he spoke about under immunity in the first trial – the attorneys will not be allowed to delve into new arenas, thus Mr. Gardner faces no new exposure.
Attorney Attanasio called Steve Gardner to the stand, and spent the better part of the court day painting the picture of the fraud at Peregrine from Gardner’s vantage point as the former CEO of the company. Gardner testified that he and a group of other senior executives at Peregrine engaged in deceptive practices including falsifying revenue to meet the expectations of Wall Street. The inner-circle of the conspiracy consisted of Gardner, Farley (until he died of a heart attack), and Gless, as well as some of the top sales people such as Powanda and Cahill. Gardner’s testimony regarding the conspiracy was consistent with that of Doug Powanda. At the end of the quarter, forecast meetings would become increasingly intense. When it became evident that Peregrine would not meet its publicly reported expected revenue for the quarter, senior management would devise dishonest steps to make up the gap. These steps included trickery the jury has already been made aware of, such as secret contingencies which made contracts not final, granting customers 30-day rights of refusal, side deals and the like. Gardner stated, without equivocation, that he was motivated by ego, greed, fear of personal failure, and a desire to help Peregrine maintain financial success. He testified that he participated in the fraud with the mistaken belief that it would be a temporary fix; he maintained hope that Peregrine would eventually catch-up with its legitimate business, and eventually hit its numbers without trickery. Gardner explained that, despite the fraud, the underlying company was vibrant and lawful, and he truly believed that most employees were good, honest people. But, especially after the September 11 disaster and subsequent economic slowdown, instead of diminishing, the fraud fed upon itself. Eventually Peregrine’s upper management realized they had not been employing a temporary fix, but rather building a “classic house of cards.”
Gardner testified that, within six weeks of his becoming CEO in 1998, he became aware that Peregrine backdated contracts and kept the quarter open until it met its numbers. (Powanda was at Peregrine for several years before Gardner arrived.) He admits that he allowed the practice to continue and expand under his direction as CEO. He stated that he knew it was wrong. Attorney Attanasio elicited that the limit on how long the quarter could be kept open was that it would be closed before the audit team arrived. Gardner stated that when the Arthur Andersen audit team arrived at Peregrine, they would inspect the contracts. After having his recollection refreshed by his testimony in the first trial, Gardner stated that he understood that the backdating of contracts would deceive the audit team. He also indicated that it became his general understanding that secret deals and side agreements were not disclosed to the auditors.
Gardner testified that Farley referred to certain deceptive deals as “crap,” and that Farley asked, “How in the name of God do you expect me to sell these deals to the auditors?” Attorney Attanasio asked Gardner if anyone told Farley words to the effect of, “Don’t worry, Dan Stulac will take care of it.” Gardner indicated that nobody said that.
Gardner admitted that his income from 1999 through 2001 was about $16.5 million, and that he grossed approximately $11 million in stock sales over a few days in February 2002. He also indicated that there were windows in which he could have exercised options at a tremendous profit and chose not to because he believed in the company and thought its price would go up.
Gardner agreed with Attorney Attanasio’s characterization of him as CEO, that he wanted people to believe in him and be inspired by him, and that he was good at projecting a vibrant image of Peregrine. Attorney Attanasio then played a series of clips for the jury from May 2000, in which a younger and happier looking Steve Gardner was greeted by cheers from Peregrine employees as he took the stage at a company meeting. The lights and music and cheering crowd made Gardner’s job as CEO seem rather glamorous. His speech and demeanor were more motivational than business-like. While the tape played, the jurors watched attentively. In between clips, with the lights in the courtroom still dimmed, Attanasio asked Gardner if certain statements he had made on that stage, such as “We made every single quarterly goal,” were based on lies. Gardner softly said, “yes.”
Attorney Attanasio then played a CNBC clip in which Gardner, on his way to watch Tiger Woods in the Masters, provided a business rationale for the reason Peregrine was meeting its numbers during a time in which its competitors were struggling. Gardner admitted there was more to the real story than that, and that some of the information he gave the interviewer was false.
Gardner testified that he purchased the Window Washer program in April 2002 with intent to hide Peregrine files from anyone who would later search his computer. (By that time, he apparently saw the house of cards starting to collapse.) He pled guilty to conspiracy, obstruction, and SEC fraud charges. He has not yet been sentenced, but faces a maximum of 20 years.
Gardner explained, in some detail, the Harbinger acquisition. This deal caused the price of Peregrine stock to drop dramatically. It was a $1 billion deal, in which Peregrine stock was used as payment for the acquisition of Harbinger. Gardner explained the concept of reverse due diligence. Attorney Attanasio elicited that through this reverse due diligence process, during which Harbinger put Peregrine “under the microscope” (in order to determine whether Peregrine stock was really worth what it was valued at by the market), the fraud at Peregrine was not discovered. Later, on cross-examination, AUSA Beste elicited testimony that reverse due diligence is less comprehensive than an audit. Gardner also stated on cross-examination that when a company called BMC tried to acquire Peregrine, they did due diligence and discovered problems that led to their refusal to go through with the acquisition of Peregrine.
It was Gardner’s understanding that Gless was going to propose to the auditors that certain accounts receivable be written-off with the annual “backward look” at the Harbinger acquisition. (The backward look allows an acquiring company to look back after a year and write-off the difference between what they paid for a company and what it ended up being worth.) Thus, Gless was going to give the auditors an accounting justification for the write-off. It was never Gardner’s understanding that the auditors would come to a fraudulent agreement on where the uncollectible accounts receivable would be written-off.
Gardner testified that he came into Gless’s office at the tail-end of a meeting between Gless and Arthur Andersen auditors Stulac and Bigelow. Gless told Gardner that Arthur Andersen was going to accept the write-off of accounts receivable. According to Gardner, Stulac said Arthur Andersen would write-off the accounts receivable through the look back process “just this once.” On cross-examination, Gardner indicated that he believed Stulac was saying he did not want to see it happen again. On direct, Gardner stated Stulac’s appearance at the time was not unusual, and he did not seem sick to his stomach. Gardner stated he perceived the meeting to be a normal business meeting – not conspiratorial.
Before the meeting, Gardner expressed to Gless his concern that he did not think the auditors would agree to write-off the accounts receivable as described. Later, on cross-examination, Gardner told AUSA Beste that he believed that writing-off accounts receivable as one-time acquisition expenses was “ridiculous.” He said it was his intent to conceal the uncollectible accounts receivable as an acquisition write-off, and thereby conceal from the public the true financial condition of Peregrine. On direct, Gardner stated that after Stulac and Bigelow left the meeting in Gless’s office, Gardner stated that Gless “chuckled.” Gardner understood this to mean that Gless was happy he had persuaded them of something – Gardner does not know how he did it. Gardner testified that Gless was knowledgeable in accounting and very persuasive with internal audiences. He indicated it was his assumption that Gless had either made a persuasive argument to Bigelow and Stulac, or had lied to them.
Gardner then testified to a large deal with British Telecom (BT), which became problematic after negotiations began in December 2000. BT received a request for a confirmation letter from Arthur Andersen in April 2001, which was before they had any binding obligation to pay on a written contract. Peregrine had already booked the revenue in the quarter ended December 31, 2000. Attorney Attanasio presented Gardner with e-mails involving Gless, Trill, Manton-Jones, Crook, Gardner, Powanda and Cahill, in which the Peregrine team was trying to track the confirmation letter within the structure of BT. Gardner stated that he was trying to have BT confirm for Arthur Andersen that the contract was a perfectly valid deal. A BT officer sent the confirmation letter back, representing to Arthur Andersen that the contact was valid as of December 29, 2000, with no exceptions or out clauses indicated. There was still no written contract for the amount BT indicated it owed Peregrine.
Gardner testified that he felt he had to sign management representation letters, which contained untruths about Peregrine’s financials, in order to continue the charade. He knew Arthur Andersen required the letters, and that signing them was a “fraud and deceit on the organization.” Gardner stated he signed these letters while Bigelow was the engagement partner; he signed them no differently while Stulac was the engagement partner, and he signed them no differently while Baldwin was the engagement partner.
On cross-examination, Gardner agreed with AUSA Beste that he needed people in accounting to put the improper revenue on the books and records. AUSA Beste then showed Gardner various contracts already in evidence, including Schedule A’s from KPMG deals in which KPMG signed for Avnet, CitiGroup, Morgan Stanley, Boeing and Honeywell. (Attorney Thickstun objected later outside of the jury’s presence to AUSA Beste’s repeated “preamble” to the witness that the documents were found in Towle’s office. Judge Whelan noted that since the documents were already in evidence, there was no need to establish authenticity or tell the witness where they were located.) The later KPMG contracts, such as the Schedule A for end-user Honeywell, were entered into despite the fact that KPMG had not yet paid in full on its earlier deals. Gardner testified that he saw a pattern: KPMG was not going to pay on anything unless the end-user bought the product.
Gardner stated that Stulac expressed to him an interest in the Peregrine CFO role, and that they had a short meeting discussing his interest while they were standing in the entryway of Gardner’s office. Gardner told Stulac that Peregrine was looking for a former head of a big company who knew Wall Street well, but that Stulac did have a good financial background. In July 2000, Gless e-mailed Gardner endorsing the idea of Stulac as CFO. When Farley unexpectedly passed away, Gless was selected. Gardner testified he did not know Stulac well.
AUSA Beste elicited testimony from Gardner that, after Arthur Andersen was terminated as Peregrine’s outside auditors, KPMG had been at Peregrine for one month before discovering significant problems on Peregrine’s books.
Attorney Thickstun established that the CFO is the person with ultimate responsibility for the financials of an organization, and for controlling the processes of the people below him. Gardner stated that the last word in write-offs and revenue recognition belongs to the CFO. Gardner never interacted with Patrick Towle while at Peregrine.
Trial resumes tomorrow at 9:00 a.m.
March 5, 2008 – 9:00 a.m. to 1:30 p.m.
Today was the nineteenth and final day of testimony in the re-trial of the Peregrine case. Today’s only witness was Steve Spitzer. He was one of the early defendants to plead guilty in this case, and is facing up to five years in federal prison for his role in the conspiracy.
Attorney Attanasio called Steve Spitzer to the stand and asked him to focus his testimony on the time when Mr. Spitzer was Vice President of Channels & Alliances at Peregrine. Attorney Attanasio, who represents Daniel Stulac, explored some of the details of two fraudulent deals (involving channel partners KPMG and FMI) that Steve Spitzer participated in at that time. Steve Spitzer testified that the KPMG and FMI deals were sometimes referred to as “parking” deals. The idea was that Peregrine was “parking” the deal with the channel partner to get the revenue on the books, even though the channel partner did not actually have an obligation to pay on the contract. Mr. Spitzer said the “parking” deals with channel partners were done by Peregrine in the hope that end-users could eventually be found and the product could eventually be sold through the channel.
Steve Spitzer testified that Larry Rodda of KPMG received an audit confirmation letter from Arthur Andersen regarding the fraudulent “parking” deal discussed above. After hearing from Rodda, Mr. Spitzer called Matt Gless for advice. Matt Gless explained to Spitzer what an audit confirmation letter was (Spitzer knew nothing about such letters). Gless told Spitzer to tell Rodda to sign the audit confirmation letter. The audit confirmation letter asked for confirmation that KPMG truly owed money to Peregrine on the contract. Larry Rodda followed the advice that CFO Gless gave Spitzer. Larry Rodda signed the audit confirmation letter with the words “no exceptions” handwritten above his signature. Steve Spitzer admitted that he knew this letter was part of a fraud at Peregrine to deceive the outside auditors.
Attorney Attanasio introduced an actual side-letter written on April 3, 2001 in an e-mail between Mark Douglas of FMI and Steve Spitzer. The e-mail says that FMI has no obligation to pay on the contract until FMI is paid by an eventual end-user. Attanasio displayed the side-letter next to the Schedule A for the FMI deal. On the face of the Schedule A with FMI it seemed that FMI had an actual obligation to pay Peregrine. The side-letter was not referenced in the Schedule A or attached to it. Steve Spitzer testified it was his understanding that the Schedule A was the document that would be given to Peregrine’s auditors.
Through the testimony of Steve Spitzer, Attorney Attanasio was able to prove that not only did the FMI contract have an undisclosed side agreement, but it was also backdated. Attorney Attanasio displayed an e-mail written on April 3, 2001, from Steve Spitzer to Lynn Morimoto. The e-mail gave Ms. Morimoto the information she would need to prepare the Schedule A with FMI. Steve Spitzer said it was not necessary to instruct Lynn Morimoto to backdate the contract, he knew that Ms. Morimoto would automatically backdate the Schedule A. Steve Spitzer testified that, although the Schedule A indicates it was created and signed on March 31, 2001, it could not have been created and signed until April 3, 2001.
On cross-examination, AUSA Narus asked Steve Spitzer if Gary Lenz instructed Spitzer to enter into the side agreement with Mark Douglas of FMI. Steve Spitzer said that Lenz told him to do it. AUSA Narus asked Mr. Spitzer if his involvement in this FMI side agreement was brief and took approximately 45 minutes of his time. Spitzer agreed that the side agreement was not his idea and did not take much of his time.
AUSA Narus asked what other factors besides his own financial remuneration motivated Mr. Spitzer to perpetuate the fraud at Peregrine? Steve Spitzer said he was just following orders, wanted to keep his job, and wanted to help Peregrine.
Under cross-examination by Attorney Kate Thickstun, Steve Spitzer acknowledged that he made a great deal of money from exercising his stock options while he worked at Peregrine. Mr. Spitzer admitted that, while he worked at Peregrine, he was motivated to help Peregrine make its numbers. Mr. Spitzer said he conspired with others at Peregrine to perpetuate fraud because he knew that Peregrine stock would continue to go up if Peregrine continued to meet its financial expectations. Steve Spitzer also said he gained job security by participating in the fraud at Peregrine. However, Mr. Spitzer denied Attorney Thickstun’s suggestion that he was given direct financial rewards for entering into bogus deals with channel partners.
On re-direct, Attorney Attanasio read a factual stipulation into evidence. The stipulation said that if Dick Bigelow (managing partner at Arthur Andersen) were called to testify, he would say that in April 2000, Daniel Stulac informed him that he (Stulac) was interested in becoming the CFO of Peregrine. Dick Bigelow did not instruct Daniel Stulac to recuse himself from the Peregrine audit.
Before the lunch break, a juror handed a two page hand-written note to the United States Marshal. He gave it to Judge Whelan’s clerk. After lunch, the attorneys discussed what they wished to do about the note. The note spoke of a rumor that one of the jurors had indicated that he or she had read about this case on the internet. It appeared that this second trial may have at least one blog-reading juror. (At the first Peregrine trial, a juror was excused for reading this blog.)
Judge Whelan and the attorneys decided to ask all the jurors except juror number one to leave the courtroom. Judge Whelan asked each juror individually if he or she had read about this trial on the internet. Juror number one replied that he did not have a computer and never accessed the internet. The clerk called juror number two into the courtroom, and the Judge asked her the same question. This scenario repeated itself 14 times, with each juror asserting that he or she had not read about this case on the internet.
The attorneys and the parties agreed that the issue was resolved by Judge Whelan’s individual questioning of each juror.
The jury was told to come back to hear final arguments in this case on Tuesday at 9:00 a.m. The attorneys are meeting with Judge Whelan at 2:00 p.m. tomorrow to argue motions and discuss other matters.