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Former Peregrine Manager Admits to Bank Fraud

Former Peregrine Manager Admits to Bank Fraud

Law: Artificially Controlling Company’s DSO Kept Analysts at Bay, States Plea Agreement

BY MIKE ALLEN

Senior Staff Writer

At the heart of the felony admitted by a former Peregrine Systems assistant treasurer is the troubled San Diego software company’s strategy of keeping the time period when it received payment for its software below a certain number of days.

According to the plea agreement by Ilse Cappel, a former assistant treasurer for Peregrine Systems, the company was intent on maintaining its revenues growth while it kept its DSO, or days sales outstanding, to a low number.

Knowing that DSO number was rising, Cappel turned to selling Peregrine’s accounts receivables to a bank with the knowledge those accounts were invalid, according to Cappel’s plea agreement with federal prosecutors.

Cappel, who resigned from Peregrine in June, is facing a maximum five years in prison and $250,000 for bank fraud. Neither the U.S. Attorney’s Office nor Peregrine Systems would comment on the action, but legal documents describe the fraud and why it was arranged.

“Peregrine’s management was very concerned about keeping its DSO below a certain number in part because management had previously provided guidance to analysts about the expected DSO number,” states the plea agreement.

The legal document described Peregrine’s recording sales to resellers, which would have delayed the time payment was actually received.

That delay would have increased its DSO beyond normal levels and could have alerted securities analysts that something was amiss, the plea agreement said.

Finding Alternatives

To avoid this, Peregrine and Cappel turned to selling invoices to banks to maintain the appearance those payments were flowing as the company said they were.

According to Cappel’s plea, she arranged the sale of a $19.5 million invoice from KPMG Consulting LLC to Wells Fargo HSBC Trade Bank on or about June 29, 2001. Cappel sold the receivable to the bank as if it was valid when it really wasn’t “because Peregrine had no valid contract with KPMG Consulting LLC at the time for that amount under those terms,” the plea stated.

Cappel wasn’t alone in arranging the fraud, states the plea agreement, and “conspired with others.”

The plea agreement does not contain the names of the alleged co-conspirators. The mid-manager isn’t likely to be the only person to plea bargain with federal prosecutors, some contend.

“I’d be surprised if this was the last criminal indictment by the U.S. Attorney as it applies to Peregrine,” said Ken Bender, managing director for Software Equity Group, a San Diego-based software investment advisory firm.

In addition to the criminal action, Cappel is also being sued by the Securities and Exchange Commission.

The latest news concerning Peregrine overshadowed the company’s efforts to emerge from Chapter 11 bankruptcy and the sale of its Remedy unit to BMC Software last month for $355 million.

That sale reduced Peregrine’s employment to about 650 workers from more than 1,400 several months ago. About two years ago, Peregrine Systems had a market cap of more than $9 billion, sales in excess of $500 million, and more than 3,000 employees.

In May the company revealed it discovered “accounting irregularities” totaling more than $100 million and forced out CEO Steve Gardner and CFO Matt Gless. Peregrine founder John Moores returned to take back the chairman’s job.

Bender said the use of accounts receivable financing, called factoring, is “pretty unusual” for a public software company, but is legal.

“It just means your cash flow is in bad shape and you’re probably in trouble,” he said.

Peregrine has yet to report restated financial results for three fiscal years, but has said the results will show an overstatement of at least $250 million in revenues. The results are expected to be released before the end of the year.

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