With the guilty plea that prosecutors extracted recently from Peregrine Systems’ former chief financial officer, the investigation into the corporate accounting scandal has reached a crucial threshold.
In pleading guilty on April 16 to conspiracy and securities fraud, Matthew C. Gless expressed his desire to provide substantial help in the investigation and prosecution of others involved in Peregrine’s fraud.
As Peregrine’s CFO and a board member, Gless was at the hub of financial operations for the San Diego software company.
This means federal investigators in San Diego have advanced significantly beyond the stage reached in similar probes of financial fraud at Enron and WorldCom. As one former federal prosecutor noted, those cases have hit a kind of bottleneck because former CFOs Andrew Fastow and Scott Sullivan have pleaded innocent and continue to battle federal charges.
But with Gless’ cooperation, federal investigators in San Diego have moved into a higher realm reaching the doorsteps of officials who interacted with the 30-something Gless while he was CFO.
Court documents clearly indicate the probe is moving methodically toward Peregrine’s former chairman and chief executive, Stephen Gardner.
After that, the direction is less obvious.
One likely avenue of investigation leads to resellers and other business partners who helped Peregrine overstate nearly $260 million in software sales, which was a central element of the fraud. Another path could lead to former members of the board’s audit committee, who shared responsibility for overseeing Gless and Peregrine’s financial reports.
For many, the big question is whether the investigation may lead to John Moores, the longtime Peregrine board chairman who got about $611 million from sales of Peregrine shares he controlled.
Moores was Peregrine’s biggest investor, owning more than 80 percent of the stock at the time of the company’s 1997 initial public offering. As owner of the San Diego Padres and chairman of the University of California Board of Regents, he also was the most prominent person at the company.
Moores and three other Peregrine directors resigned in February in a deal to placate combative creditors in the company’s Chapter 11 bankruptcy reorganization.
In court papers sealed in January, the company’s creditors had sought authority to sue three unnamed former directors for more than $480 million to recover what the creditors called illicit profits from insider trading.
Those former directors have not been identified.
Moores has nevertheless become a lightning rod for civil shareholder suits, largely due to the sheer size of his stake. According to court documents in one case, Moores sold $463 million in Peregrine shares during the 33-month period covered by the company’s financial restatement.
As a result, the future course of the criminal investigation conceivably could affect broader state and local issues, including redevelopment around San Diego’s new downtown ballpark.
Such concerns might help explain why federal prosecutors have moved carefully. Though Gless pleaded guilty to conspiracy, documents that accompanied his guilty plea cautiously identify other co-conspirators only as Peregrine “executives, employees and other individuals.”
So who are the “other individuals?”
The Securities and Exchange Commission says in a civil lawsuit filed against Gless that “the heart of the fraud” was recording hundreds of millions of dollars of revenue “despite non-binding arrangements” with customers.
Those arrangements included secret oral or written side agreements that enabled Peregrine to “sell” its software but did not obligate a customer to pay. Customers who helped falsify such deals in violation of generally accepted accounting principles were clearly part of the conspiracy.
The SEC said Peregrine also entered into a variety of reciprocal deals with other software companies in violation of accounting rules. As millions of dollars of unpaid accounts receivable accumulated on Peregrine’s balance sheet, the SEC said Gless and others devised schemes to cover up those losses.
In a briefing after the Gless hearing, U.S. Attorney Carol C. Lam assiduously avoided giving any indication whether the federal investigation includes Moores or any other former board members.
“As far as we know, Mr. Moores is not the subject of any criminal investigation,” said John Quinn, a trial lawyer with the Los Angeles firm of Quinn Emanuel, who is representing Moores.
“This is a case of inside accounting fraud,” Quinn said in the prepared statement. “John Moores was an outside director at Peregrine. There is not a shred of evidence that Mr. Moores knew of or had anything to do with these matters at the Company.”
A similar statement was made on behalf of Charles E. Noel III, a former Peregrine director and close associate of Moores.
“There is no question whatsoever that Charlie did the right thing, and that he asked the right questions as a member of the board and as a member of the audit committee,” said Brian Pastuszenski, a Boston lawyer who represents Noell in Peregrine-related matters. “To the extent that things went wrong, it was not for lack of diligence on my client’s part. He simply did not know what was happening.”
Since Moores resigned from Peregrine’s board, he has hired Houston lawyer John Watson to work at JMI, Moores’ Del Mar investment firm, to oversee legal work on a variety of fronts. Watson, a former partner at Vinson & Elkins, drew up the documents for Moores’ purchase of the San Diego Padres and has known him for decades.
New legal problems are already erupting.
For example, Peregrine’s new board sought to hire the Houston law firm of Yetter & Warden to pursue potential claims against certain former employees, executives and board members. The bankruptcy judge overseeing Peregrine’s reorganization recently approved that move, which was first sought by the company’s biggest creditors.
“There hasn’t been any work done in any detail to figure out who might be liable for how much,” said Bennett Murphy, a bankruptcy attorney for the official committee of unsecured creditors. The creditors claim that the company can recover $480 million from certain former directors for illicit insider trading gains.
A lawyer for Moores disputed that claim, saying the likelihood of recovery is nil because Moores and other board members did nothing wrong.