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Federal Grand Jury Indicts Former General Counsel in Peregrine Scandal

Another former executive of Peregrine Systems Inc., the subject of the largest corporate accounting fraud in San Diego history, was indicted by a federal grand jury last month.

Eric Paul Deller, Peregrine’s former general counsel and an assistant secretary to the company’s board of directors, pleaded not guilty April 30 to a variety of felony charges made by the U.S. attorney’s office involving securities and wire fraud, bank fraud and conspiracy to commit fraud.

Deller’s attorney, Tom McConville, said his client was added to an indictment originally made in October 2004, which initially involved more than a dozen employees and associates of Peregrine.

So far, 11 people charged in the original indictment, including former Chief Executive Officer Stephen Gardner and Chief Financial Officer Matthew Gless, have pleaded guilty.

At least six, including Deller, have chosen to fight the charges. Four of these are now being tried in San Diego federal court in a trial that prosecutors said is expected to last at least two months.

Following this trial, Deller may be added to another trial scheduled for two defendants, Jeremy Crook and Richard Nelson, but McConville said he wasn’t sure this would happen.

In the trial that began April 10, four defendants are contesting a wide range of felony counts involving an elaborate accounting scheme that brought down the once high-flying Peregrine, which made software that helps large companies track and manage assets such as computer systems.

The defendants on trial are Gary Lenz, Joseph Reichner, Daniel Stulac and Patrick Towle. Lenz was Peregrine’s chief operating officer; Reichner was the senior vice president of alliances and business development; Stulac was an Arthur Andersen auditor assigned to Peregrine; and Towle was a revenue accounting manager.


Presenting Their Case

During the four weeks of testimony, federal prosecutors have laid out their case against the defendants, which involved an alleged scheme to artificially inflate the company’s revenues and meet forecasted targets to maintain Peregrine’s stock price.

Prosecutors allege that Peregrine executives and associates profited from manipulated stock price increases by cashing out of stock options and awarding increased salaries and bonuses as the company ostensibly grew revenues.

Among the methods used by defendants in the alleged scheme were booking false contracts that were really sham transactions the buyers knew didn’t require payment; booking sales in a prior quarter by backdating contracts to artificially inflate revenues; deceiving lenders by providing false financial information; concealing certain accounts receivables and other false debts or keeping it off the company’s books, and then writing it off through its acquisitions of other companies; and using a variety of illegal accounting entries to fraudulently improve the company’s financial appearance, prosecutors state in court documents.

“This indictment charges these defendants with knowingly perpetrating the largest fraud in the history of the Southern District of California,” said then-U.S. Attorney Carol Lam in an Oct. 6, 2004, statement when the federal grand jury indictment was handed up.


Auditing The Books

The Peregrine scandal first was revealed in May 2002 when former Chairman John Moores, the majority owner of the San Diego Padres, returned to the company after it had uncovered “accounting inaccuracies” by its auditor. The inaccuracies were estimated then to be “as much as $100 million.”

In fact, an audit completed in 2003 after Peregrine filed for Chapter 11 bankruptcy protection revealed that the company overstated revenues by $500 million for three years, and understated its net loss during the same period by more than $4 billion.

Peregrine shares were first sold publicly in April 1997 at $2.25, but rose quickly as the firm grew. By 2000, the stock reached a peak of $79.50, but soon after the accounting problems surfaced, shares plummeted. By the time it filed for bankruptcy in September 2002, the stock was worthless.

Prosecutors say executives profited handsomely from their fraud by collecting huge salaries, bonuses, stock options and commissions.

In a recent filing on the case, at the time Gardner resigned from Peregrine in 2002, he had collected about $4 million in salary and bonuses, and was granted and exercised stock options worth about $13 million.

Another executive who pleaded guilty to charges, Douglas Powanda, Peregrine’s vice president of worldwide sales, was paid more than $2 million in salary and bonuses, but exercised stock options totaling $30 million before he left the company in 2002, according to the indictment.

After emerging from bankruptcy in 2003, Peregrine was sold to Hewlett-Packard Co. in 2005 for $425 million.

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