Peregrine Exec Accounting Scandal. When Peregrine Systems Inc. ousted its top management amid an accounting scandal in May, the San Diego software company turned to the man who built it from a tiny firm to a $13-billion enterprise: John J. Moores.
The multimillionaire owner of the San Diego Padres baseball team seemed like a natural choice. A self-described computer nerd, he had served on the board for 13 years, including a decade-long stint as chairman. Moores took the company public after buying a controlling stake and personally co-signed on corporate loans.
But now that the company has filed for Chapter 11 bankruptcy protection; been accused of “possible fraud” by one of its former auditors, KPMG; received a subpoena from the Justice Department and also faces an investigation by the Securities and Exchange Commission, the choice of tapping Moores as corporate savior raises a critical question: Is the man brought in to help clean up Peregrine partly responsible for the mess?
The company’s records show that the questionable accounting that landed Peregrine in federal Bankruptcy Court last week started on Moores’ watch. Peregrine is restating its finances from April 1999 through December 2001 and says revenue may have been inflated by as much as $250 million.
For 16 of those 33 months, Moores was chairman of the company. Over that span, he sold nearly $371 million in Peregrine stock. All told, Moores and entities affiliated with him have sold nearly $611 million in Peregrine shares, reducing their stake in the company from 62.5% at the time of its public offering in 1997 to about 3% today.
The stock, which peaked at more than $80 a share in 2000, closed Monday at 6 cents in over-the-counter trading.
Citing pending litigation, Moores declined to discuss his current or previous tenure as Peregrine’s chairman, or the allegations of fraud at the company. Peregrine officials say that its board, which typically met once a quarter, had no idea about the company’s financial troubles.
A recent internal investigation, led by law firm Latham & Watkins and the accounting forensic team of PricewaterhouseCoopers, found “that the outside directors were in the dark about the accounting improprieties,” said Meryl Young, a Gibson, Dunn & Crutcher attorney who is representing Peregrine and its outside board members in a series of lawsuits filed by shareholders.
Peregrine has sued former auditor Arthur Andersen for not catching the accounting shenanigans sooner and alerting the board. When Moores and other board members were finally told of the problems last April, “they immediately did all the right things,” Young added. “They’re fulfilling their job now.”
But the shareholder lawsuits paint a picture of a company where, at the very least, Moores ignored his responsibilities as chairman. And some critics are incredulous that Moores is being positioned today as the one who can resurrect Peregrine.
“Moores wouldn’t know what a white horse looks like, let alone do what it takes to be a company’s savior,” said Bert Hochfeld, managing director at Montauk Capital Markets Group and a former employee who resigned from BMC Software Inc., a Houston company that Moores started in 1980.
For Moores, the stakes are huge.
Several of the 40 lawsuits filed against Peregrine name Moores as a defendant. One of San Diego’s most well-known–and controversial–citizens, the 58-year-old Moores is a generous philanthropist and also serves as chairman of the UC Board of Regents. As chairman of the Padres, he found himself at the center of a political corruption scandal involving the team’s new downtown sports stadium; he was cleared in the case, though a city councilwoman who received gifts from Moores was forced to resign and pleaded guilty to two misdemeanor counts of not reporting the items.
If Moores is implicated in the scandals at Peregrine, shareholders’ lawyers conceivably could go after his personal assets. San Diego attorney Jeffrey Krinsk said he intends to ask a federal judge this month to put Moores’ holdings, including the Padres, into a “constructive trust,” which does not freeze a person’s assets but pools them together to ensure that they are not drained.
“I don’t know that he sat late at night with his cohorts by a dim lamp and mapped out a way to convert shareholder money to his benefit,” Krinsk said. Nonetheless, Krinsk maintains that Moores may be liable because he failed to recognize the accounting problems.
For their part, current and former employees–many of whom refuse to speak on the record for fear of being sued by Peregrine–tell of a corporate culture that pushed the rules. The company’s financial statements, these employees said, were built in part on an unorthodox accounting procedure known as “burn.” Burning is the practice of booking sales months before they close, and often for far more cash than they actually bring in, to help a company hit its quarterly revenue target.
“This was common and openly discussed in the management ranks,” said a former regional sales director. “I remember being at an executive meeting at Peregrine’s headquarters and my boss telling me, ‘When I walked into this job, I inherited $80 million in burn.’ When you’re that far behind before you even start, you cannot succeed. This was a house of cards waiting to blow up.”
For the company’s detractors, there are only two possibilities: Either Moores knew what was going on and didn’t stop things, or he was so out of touch that he didn’t see the abuses occurring right down the street from his venture capital firm on High Bluff Drive.
Moores has deep roots in the business-software industry. After working in his 20s and 30s as a programmer at IBM Corp. and Shell Oil Co., Moores co-founded BMC with less than $1,000 in savings. More than a decade later, the Houston-based company was worth billions and had gone public–a deal led by Moores and Charles Noell III, who now serves on Peregrine’s board of directors. Moores sold his stake in BMC in 1992 for about $400 million.
In the meantime, Moores and his venture-capital firm JMI Equity bought a controlling interest in Peregrine. Its future seemed bright. The Internet boom was just beginning and demand for the company’s products was high.
Employees recount stories of Moores, when he still lived in Houston, stopping into Peregrine’s San Diego-area offices and offering to take a number of workers to lunch on his personal jet. “The people who came back said they couldn’t believe that even the faucets in the bathroom were gold,” recalled one former employee.
Moores was no less generous to his adopted hometown, showering millions on charities and cancer research. “He came in like a mafia don, spreading money around,” said former state Senate President Jim Mills, a close observer of the local scene.
Peregrine’s core business focused on making software to help corporations manage their sales and marketing teams. Later, its product lineup included software that, among other things, tracks computer downtime and manages real estate.
The company went public in April 1997 at $9 a share, and the stock price rose steadily to more than $45 the following year. Six months after the IPO, Moores began selling chunks of stock. A spokeswoman for both Moores and JMI said the stock sales were steady and automated, with the amounts falling within federally regulated limits. Peregrine and JMI officials say it was only logical for Moores to shed his stock. After building Peregrine, they said, any smart venture capitalist would want to cash out the investment.
One shareholder lawsuit, which examined SEC filings, lays out a different scenario. It alleges that Moores knew Peregrine was misstating its revenue and earnings–and that he picked up the pace of his stock sales during his last 16 months as chairman, when the questionable accounting practices occurred.
Moores stepped down as chairman in July 2000, making way for Chief Executive Stephen P. Gardner to assume the post.
All the while, the company continued to “burn,” and the domino effect of pre-booking sales seemed to grow more intense over time.
“When I went to Peregrine, there were comments that there was so much software out there that has to be burned,” said former employee Roger Justice, who joined Peregrine’s offices in Bethesda, Md., in 2001.
When Justice attended a sales training seminar at the company’s San Diego headquarters last February, he said, he was startled to hear a colleague mention that he would have to make sure that one of his accounts burned $20 million of pre-sold software before he would see a nickel of commission.
“That was the first time I said, ‘Something ain’t right here’ in my own mind,” said Justice, who left the company at the end of that month as part of one of Peregrine’s many rounds of layoffs.
In one deal, described in an e-mail from a Peregrine employee obtained by The Times, the company prematurely booked the sale of a software and services contract with Citigroup Inc.’s Global Technology Infrastructure Group in Tampa, Fla.
Citigroup had committed “in principle” to making the acquisition, but contract negotiations were “still several months away from completion,” according to the e-mail. Peregrine, however, booked the deal in September 2000 after it got a nonbinding letter of acquisition from Citigroup. The actual sale wasn’t completed until the following quarter in December 2000. Citigroup acknowledged the deal but declined further comment.
Charles La Bella, a former federal prosecutor who is now Peregrine’s senior counsel, said the burn practices were discovered and detailed in the Latham & Watkins internal investigation earlier this year. “It was a topic that was addressed,” La Bella said. “We turned over our results” to the SEC and the Department of Justice.
About the same time, Peregrine fired Gardner and its chief financial officer. Moores retook the post of chairman. Gary Greenfield, formerly president and CEO of e-business development company Merant, replaced Gardner as CEO.
One of the first things Greenfield did was call the staff together. Things would get better, he promised. Moores was back.
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