Peregrine Systems, Inc. Securities Litigation 02-CV-00870-First Amended Consolidated Complaint

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#105317

GOLD BENNETT CERA & SIDENER LLPPAUL F . BENNETT (State Bar No. 63318)SOLOMON B . CERA (State Bar No . 99467)GWENDOLYN R. GIBLIN (State Bar No . 181973)THOMAS C . BRIGHT (State Bar No . 169713)595 Market Street, Suite 2300San Francisco, California 94105-2835Telephone : (415) 777-2230Facsimile: (415) 777-518 9

Attorneys for Section 10(b) Lead PlaintiffThe Loran Grou p

STULL, STULL & BRODYJULES BRODYHOWARD T . LONGMANPATRICK SLYNE6 East 45`h Street, 4`h FloorNew York, New York 10017Telephone : (212) 687-7230Facsimile: (212) 490-2022

ABRAHAM & ASSOCIATESJEFFREY ABRAHAMLAWRENCE D. LEVITOne Penn Plaza, Suite 1910New York, NY 10119-0165Telephone : (212) 714-2444Facsimile : (212) 279-365 5

Attorneys for Section 1 I Lead PlaintiffHeywood Waga

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF CALIFORNIA

IN RE PEREGRINE SYSTEMS, INC .SECURITIES LITIGATION

Case No. 02-CV -0870 J(RBB)

FIRST AMENDED CONSOLIDATEDCOMPLAINT FOR VIOLATIONS OFTHE FEDERAL SECURITIES LAWS

This Document Relates to :

ALL ACTIONS .

)I,,-

JURY TRIAL DEMANDE D

FIRST AMENDED CONSOLIDATED COMP&AINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS -Master File No . 02-CV-0870 J(RBB)

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#105317

TABLE OF CONTENTS

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SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

JURISDICTION AND VENUE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 4

THE PARTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 5

A. Lead Plaintiffs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 5

B. Other Plaintiffs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 6

C . Peregrine Systems, Inc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 6

D. Defendants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 7

CLASS ALLEGATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

PEREGRINE SECURITIES TRADED ON AN EFFICIENT MARKET . . . . . . . . . . . . . . . . . . 29

OVERVIEW OF THE FRAUD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

A . The Defendants Intentionally Destroyed Records . . . . . . . . . . . . . . . . . . . . . . . . 30

B . Peregrine's Internal Accounting Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

C How The Fraud Was Committed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

1 . Improper Revenue Recognition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 1

2 . Quarters Were Improperly Kept Open To Meet Revenue AndEarnings Targets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

3 . Improper Balance Sheet Accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

4. Concealment Of Write Off Of Receivables . . . . . . . . . . . . . . . . . . . . . . . 49

5 . Understatement Of Stock Option Compensation . . . . . . . . . . . . . . . . . . . 49

6. Failure To Implement And Maintain Adequate Internal Accountin gControls . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 0

D. Participation Of The Board Of Directors In Peregrine's Accounting Fraud . . . . 5 2

1 . October 1998 Report To Board Of Directors . . . . . . . . . . . . . . . . . . . . . . 5 3

2 . April 1999 Report To Board Of Directors . . . . . . . . . . . . . . . . . . . . . . . . 54

3 . October 1999 Report To Board Of Directors . . . . . . . . . . . . . . . . . . . . . . 5 7

4. January 2000 Report To Board Of Directors . . . . . . . . . . . . . . . . . . . . . . 5 8

5 . February 2000 Activity Regarding the Harbinger Acquisition . . . . . . . . 60

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TABLE OF CONTENTS1 (Continued )

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3 6. July 2000 Report To The Board Of Directors . . . . . . . . . . . . . . . . . . . . . 64

47. October 2000 Report To The Board Of Directors . . . . . . . . . . . . . . . . . . 66

58. January 2001 Repo rt To The Board Of Directors . . . . . . . . . . . . . . . . . . 67

6 9. April 2001 Report to Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . . 6 87

10. July 2001 Repo rt To The Board Of Directors . . . . . . . . . . . . . . . . . . . . . 6 8

811 . October 2001 Repo rt To The Board Of Directors . . . . . . . . . . . . . . . . . . 70

9 12 . December 2001 Report To The Board Of Directors 7 1

10. . . . .13 . January 2002 Repo rt To The Board Of Directors . . . . . . . . . . . . . 7 2

1114. February 2002 Repo rt To The Board Of Directors . . . . . . . . . . . . . . . . . 7 3

1215. March 2002 Repo rt To The Board Of Directors . . . . . . . . . . . . . . . . . . . 74

1316. April 2002 Report To The Board Of Directors

14E. Audit Committee Members Knew Of Or Were Deliberately Reckless Wit h

15 Regard To Peregrine's Accounting Fraud . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 5

16 1 . July 6, 1999 Audit Committee Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . 7 8

17 2. April 25, 2000 Audit Committee Meeting . . . . . . . . . . . . . . . . . . . . . . . . 79

18 3 . January 24, 2001 Audit Committee Meeting . . . . . . . . . . . . . . . . . . . . . . 79

19 4. April 25, 2001 Audit Committee Meeting . . . . . . . . . . . . . . . . . . . . . . . . 7 9

20 5 . June 29, 2001 Audit Committee Meeting . . . . . . . . . . . . . . . . . . . . . . . . 8 0

21 6. July 23, 2001 Audit Committee Meeting . . . . . . . . . . . . . . . . . . . . . . . . . 8 1

22 7. October 24, 2001 Audit Committee Meeting . . . . . . . . . . . . . . . . . . . . . 82

23 8 . February 12, 2002 Special Audit Committee Meeting . . . . . . . . . . . . . . 83

24 9. April 2, 2002 Audit Committee Meeting . . . . . . . . . . . . . . . . . . . . . . . . . 84

25 10. April 29, 2002 Audit Committee Meeting . . . . . . . . . . . . . . . . . . . . . . . . 85

26 THE INDIVIDUAL DEFENDANTS' KNOWLEDGE OF AND/OR DELIBERATERECKLESSNESS AS TO THE FRAUD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87

27A. Stephen P . Gardner . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92

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is •TABLE OF CONTENTS

(Continued)

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B. Matthew A . Gless . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98

C. Steven S. Spitzer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104

D. Ilse Cappel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106

E. Richard T. Nelson . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108

F. Douglas S. Powanda . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114

G. Frederic B. Luddy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118

H. John J. Moores . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120

1. Charles E . Noell III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127

J. Christopher A . Cole . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129

K. Norris van den Berg . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131

L. Thomas G . Watrous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132

DEFENDANT JOHN J. MOORES CONTROLLED PEREGRINE AND CERTAIN O FITS OFFICERS AND DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132

ARTHUR ANDERSEN'S PARTICIPATION IN THE FRAUD . . . . . . . . . . . . . . . . . . . . . . . 142

1 . Fiscal Year 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149

2. Fiscal Year 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151

3. Fiscal Year 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157

AWSC'S PARTICIPATION IN THE FRAUD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165

KPMG'S PARTICIPATION IN THE FRAUD . . . . . . . . . . . . . . . . . . . . . . . . . . . 176

THE FALSE STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 182

1Q 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .182

2Q 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 184

3Q 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 187

4Q 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .189

IQ 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 192

2Q 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 194

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3Q 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 196

4Q 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 199

FISCAL YEAR 2001 ANNUAL REPORT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 1

REMEDY PROXY STATEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 202

IQ 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 202

2Q 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 205

3Q 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 8

THE TRUTH BEGINS TO EMERGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 1

BASIS OF FACTUAL ALLEGATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 4

DEFENDANTS' CONCEALMENT OF WRONGDOING . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 4

THERE IS NO STATUTORY SAFE HARBOR APPLICABLE TO TH EALLEGATIONS OF THIS COMPLAINT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 5

COUNT I (Violations Of Section 10(b) Of The Exchange Act And Rule I Ob- 5Promulgated Thereunder And Of Section 20(a) Of The Exchange Act) . . . . . . 21 5

COUNT II (Violations Of Section 14(a) Of The Exchange Act And Rule 14a- 9Promulgated Thereunder And Of Section 20(a) Of The Exchange Act -Harbinger Acquisition) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 220

COUNT III (Violations Of Section 14(a) Of The Exchange Act And Rule 14a- 9Promulgated Thereunder And Of Section 20(a) Of The Exchange Act -Harbinger Acquisition - Arthur Andersen, AWSC And Stulac) . . . . . . . . . . . . 224

COUNT IV (Violations Of Section 14(a) Of The Exchange Act And Rule I4a- 9Promulgated Thereunder And Of Section 20(a) Of The Exchange Act -Remedy Acquisition) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 227

COUNT V (Violations Of Section 14(a) Of The Exchange Act And Rule 14a- 9Promulgated Thereunder And Of Section 20(a) Of The Exchange Act -Remedy Acquisition - Arthur Andersen, AWSC And Stulac) . . . . . . . . . . . . . . 23 0

COUNT VI (Violations Of Section 11 Of The Securities Act - The HarbingerAcquisition) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 234

COUNT VII (Violations Of Section 15 Of The Securities Act - The Harbinge rAcquisition) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 8

COUNT VIII (Violations Of Section 11 Of The Securities Act - The Remed yAcquisition) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 240

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TABLE OF CONTENTS.(Continued)

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COUNT IX (Violations Of Section 15 Of The Securities Act - The Remed yAcquisition) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 244

PRAYER FOR RELIEF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 245

JURY DEMAND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .246

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#105317 I

Pursuant to the Court's November 21, 2003 Order, Lead Plaintiffs, on behalf of themselve s

f and all others similarly situated, for their First Amended Complaint, allege as follows :

SUMMARY

1 . This is a securities class action brought on behalf of all persons and entities (th e

"Class") who purchased or otherwise acquired the securities of Peregrine Systems, Inc .

("Peregrine" or the "Company") between July 22, 1999 and May 3, 2002, inclusive (the "Class

Period") . This action is also brought on behalf of all persons and entities who held Harbinger

Corporation common stock or Remedy Corporation common stock and received Peregrine

common stock in connection with mergers between each of those companies and Peregrine .

Included within the Class are all those who, during the Class Period, purchased Peregrine

securities on the open market or who acquired Peregrine securities as a result of a merger

transaction . The defendants are certain of Peregrine's former officers and directors, its former

independent auditor, an individual partner thereof and a related entity, and certain major

customers of Peregrine .

2 . Peregrine represents one of the most egregious financial frauds ever committed .

As alleged herein in detail , the senior management , as well as all directors of Peregrine, wer e

complicit in the Company's accounting fraud . This case also involves unprecedented insider

stock sales by individuals who knew of, or were deliberately reckless with regard to the fraud,

while they were enriching themselves . This lawsuit is an attempt to recover the massive losses

incurred by public investors and to help restore the integrity of this country's capital markets .

Contrary to its published story of ever increasing success, Peregrine was a house of cards,

propped up by books and records that had been "cooked" by senior officers of the Company with

the knowledge and/or deliberate recklessness of members of Peregrine's Board of Directors .

Peregrine stands with Enron, Tyco, WorldCom, and Adelphia in the rogue's gallery of corporat e

accounting frauds .

3 . At all relevant times, Peregrine developed and marketed software products that

enabled business customers to be more competitive by reducing infrastructure costs an d

increasing efficiency . The Company also developed and marketed business-to - business an d

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1 integration software to reduce the costs of electronic commerce . By the beginning of the Class

2 Period, Peregrine had adopted a business model of aggressively growing its business throug h

3 acquisitions and other strategic alliances . That business model required Peregrine to report ever

4 increasing revenue so as to increase its share price . Peregrine planned on and used its stock as

5 the primary currency to pay for acquisitions by means of stock for stock mergers and strategi c

6 alliances . With an increasing share price, Peregrine was able to complete at least thirteen (13 )

7 acquisitions or strategic alliances during the first eleven (11) quarters of the Class Period, with an

8 announced value exceeding $3 .4 billion . The higher the price of Peregrine stock, the fewer th e

9 number of shares Peregrine would have to issue for each acquisition . That was significant to the

10 individually named defendants herein who served as officers or directors Peregrine because they

11 owned a substantial number of shares of Peregrine common stock and did not want the value of

12 their holdings diluted by the issuance of too many new shares . Thus, in order to keep up the

13 price of the Company's stock, it was imperative that Peregrine meet Wall Street's expectations

14 and continue to report strong demand for its products so that investors could expect record sales

15 and earnings growth to continue quarter after quarter .

16 4. During the Class Period, Peregrine reported quarterly increases in revenue :

17 Announcement Reporting Period Reported Revenue Reported Growth in18 Date (Ending Date) Revenue Compared

With Prior Year Result s

19 7/21/99 1Q 00 (6/30199) $51 .6 million 137%

20 10/20/99 2Q 00 (9/30/99) $57.8 million 95%

21 1/20/00 3Q 00 (12/31/99) $67.5 million 67%

22 4/26/00 4Q 00 (3/31/00) $76.3 million 66%

23 7/19/00 1Q 01 (6/30/00) $94.3 million 83%

10/24/00 2Q 01 (9/30/00) $142.7 million 147%

24 1/24/01 3Q 01 (12/31/00) $156 .6 million 132%

25 4/26/01 4Q 01 (3/31 /01) $171 million 124%

26 7/24/01 IQ 02 (6/30/01) $172 million 82%

27 10/24/01 2Q 02 (9/30/01) $175 million 23%

28 1/24/02 3Q 02 (12/31/01) $175 .2 million 12%

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5 . During the Class Period, Peregrine also reported dramatic increases in annual

revenue as follows :

Announcement Reporting Period Reported Revenue Reported Growth inDate Revenue Compared

With Prior Year Results

4/26/00 Fiscal Year 2000 $253 .3 million 83%

4126101 Fiscal Year 2001 $564.7 million 123%

6. On February 28, 2003, Peregrine filed with the United States Securities and

Exchange Commission ("SEC") restated financial results for its fiscal years 2000 and 2001, and

the first three (3) reporting quarters of fiscal year 2002 . By these restatements the Company has

admitted that it improperly recognized over $500 million in revenue during the restated periods.

These restatements are also an admission that each document publishing the originally

announced financial results for the restated periods contained untrue statements of material fact .

Thus, Peregrine has admitted that each of the press releases and the annual and quarterly reports

filed on SEC Forms IO-K and 10-Q and all other SEC filings incorporating or including such

financial information, for the periods ending June 30, 1999 through and includin g

December 31, 2001, contained untrue statements of material fact . The devastating impact of the

accounting restatement is reflected by a comparison of the originally reported results with actual

results, as set forth below.

Fiscal Year Ended March 31, 2000 ($ 000 omitted)

Income Statement As Reported Restatement Adjustment Restated Amount

Revenue $253,300 ($121,668) $131,632

Net Loss ($25,070) ($192,348) ($217,418 )

Cash Flow Statement As Repo rted Restatement Adjustment Restated Amount

Cash Flow Provided By $57,611 ($92,373) ($34,762)Operation s

Advances From Factored ----- ($90,885) ($90,885 )Receivables

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I Fiscal Year Ended March 31, 20011($000 omitted )

Income Statement As Reported Restatement Adjustment Restatement Amount

Revenue $564,683 ($254,105) $213,35 3

Net Loss ($852,241) ($922,276) ($1,844,517)

Cash Flow Statement As Reported Restatement Adjustment Restatement Amount

Cash Flow Provided By ($10,171) ($113,618) ($97,316 )Operations

Advances From Factored ----- ($180,372) ($180,372 )Receivable s

7. Through Board of Directors meetings, their contacts with other directors and

senior management, and other means, the individually named defendants and defendants Arthur

Andersen LLP learned material, adverse nonpublic information concerning Peregrine's financial

condition and negative prospects beginning prior to and continuing throughout the Class Period,

which information they failed to disclose to the investing public .

8. Specifically, at a Board of Directors meeting on April 14, 1999, the individually

named defendants then serving on the Board, which was at that time chaired by defendant John J .

Moores, approved the use of the sell-in method of accounting . The issue was presented for

approval to the full Board by Chief Financial Officer David Farley (now deceased), because of

the serious ramifications of adopting this unusual and extremely aggressive method of accounting

for software license revenue. As a result of this accounting change, Peregrine began to record

revenues as if it had fully completed the software sales process when it "sold" software to

resellers, even though the resellers had no commitments from end users or even identified end

users interested in the product . Farley informed the full Board that application of the sell-in

method, as opposed to the sell-through method (i.e., recording sales when the software was

actually purchased by an end user), was the only means by which Peregrine could meet its

quarterly revenue goals .

9 . Farley signaled the entire Board that Peregrine was embarking on an accounting

fraud by informing Board members that sell-in was not the "preferred method ." There was never

any public disclosure of this material change in accounting policies . As alleged hereinbelow,

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Peregrine instead affirmatively misrepresented its revenue recognition policy. Notwithstanding a

negative financial report to the Board on April 14, 1999, and adoption of a new, highly

aggressive accounting policy as a result, shortly thereafter, in what was to continue as a pattern

throughout virtually all of the Class Period, on April 26, 1999, Peregrine issued a very positive

press release describing 1999 as "an incredible year of growth" with an increase in fourth quarter

revenues of 129% over the prior year's fourth quarter results.

10 . By the next quarter, notwithstanding the aggressive accounting method the Board

had approved in April 1999, Peregrine's financial prospects had worsened . According to

defendant Stephen P . Gardner, Peregrine's Chief Executive Officer, the second quarter of fiscal

year 2000 (the quarter ended September 30, 1999) was "the toughest quarter we have

experienced since June of 1997 ." In his quarterly report to the Board dated October 15, 1999,

defendant Gardner alerted the individually named defendants then on the Board as to a specific

problem arising from use of the sell-in accounting treatment, as follows :

We have now reached a level of channel activity that isconcerning as we look to the future . We have a large amount ofinventory in the channel that must be sold through, and this mustbe done as we simultaneously continue to grow our direct business .Sales rep productivity in the direct sales area was at a very lowlevel (less than $1 million annualized) in the September quarter .(Emphasis added) .

11 . Consistent with Farley's previous warning to the Board, while revenue was bein g

booked upon sell-in to the channel partners, there was no concurrent sell-through to end users .

Peregrine and its channel partners were unable to reduce hugely bloated inventory levels . End

user demand for Peregrine software was disappearing . Exacerbating the problem was that

Peregrine was unable to effectuate any significant amount of direct sales . These facts were

disclosed to and known by Board members as of the start of the Class Period , but were never

disclosed to the investing public .

12. Nevertheless, on October 20, 1999, Peregrine again issued another positive pres s

release repo rt ing enormous gains over the prior year : "We are delighted with our continued rapi d

growth . . . . "

13 . On January 18, 2000, defendant Gardner alerted the individually named

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defendants serving on the Board that, like the second quarter, the third quarter of fiscal year 200 0

1 (the quarter ended December 31, 1999) "was a very tough quarter ."

Our channel business is now a cause for concern . . . We havebeen much more successful generating sales to channels andgetting partners to buy into our message and vision . We have notbeen as successful, and in some cases unsuccessful, in getting thesell-through that would remove the inventory of software from thechannels . . . . The net of this is that we are now at a level ofchannel inventory that makes our auditors uncomfo rtable.This will take us two to three quarters to work through .(Emphasis added) .

14. The defendants serv ing on the Board as of January 2000 thereby knew that (i) th e

I channel was stuffed with software that could not be sold; (ii) Arthur Andersen was

I uncomfortable with the amount of inventory in the channel ; and (iii) it would take 2 to 3 quarter s

to work through the problems .

15 . None of the foregoing adverse information was publicly revealed . Contrary to the

adverse information the Board learned on January 18, 2000, Peregrine's January 20, 2000 press

release boasted that "once again, we report a record quarter for revenue and income ."

Peregrine's internal financial reports did not improve through fiscal year 2001 . On

July 17, 2000, defendant Gardner's "Review and Outlook" for the first quarter of fiscal year 2001

(the quarter ended June 30, 2000), informed the Board that "[i]t was a very tough quarter . "

16. Notwithstanding the continuing negative financial developments within the

Company, in or about February 2000, Board members were aware that Peregrine intended to

make its largest acquisition ever, a $1 .5 billion purchase of Harbinger Corporation . These

defendants also knew that the acquisition, once announced, would depress the price of Peregrine

stock. This was due not only to the market's natural tendency to depress the price of the shares

of an acquiring company in a transaction of this size, but because Harbinger had a slower growth

rate and lower operating margins than those purportedly achieved by Peregrine, a sure indication

that market analysts would question the wisdom of the transaction for Peregrine . In fact, one

Board member, defendant Charles E . Noell III, opposed the proposed acquisition. Board

members were continuously updated in the January - February 2000 timeframe as to the progress

of the Harbinger acquisition . In four (4) days of insider selling between February 15 and 18 ,


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2000, defendants John J . Moores, Christopher A . Cole, Matthew C. Gless, Frederic B . Luddy,

and Douglas S . Powanda sold 4 .3 million shares of Peregrine stock for over $194 million, with

defendant Moores' trading accounting for $177 million of this amount in just two days . So

egregious was this insider selling that in an e-mail exchange between defendant Richard T .

Nelson and Farley, the selling defendants' conduct was denigrated and referred to as "the hogs

are at the trough."

17. This insider selling occurred when the selling defendants knew of, and traded on,

two material facts that were not known to the investing public ; specifically, that Peregrine's

channel sales were out of control, there was minimal sell-through, and its auditors were

I "uncomfortable" with the level of inventory in the channel, and (ii) that the Company was abou t

to make the biggest acquisition in its history that would in the short term depress the price of

Peregrine shares . Further, these February 2000 insider sales by the aforementioned individuall y

named selling defendants occurred during a "lockup" period by which Peregrine had barred its

directors from engaging in trading due to their possession of material, nonpublic inside

information. Peregrine's then General Counsel Eric Deller told investigators in May 2002 that,

"[f]rom the end of 1999 through February of 2001, all section 16 officers and directors were

prohibited from trading ." This was confirmed in defendant Gardner's "Fiscal Q3 2000 Review

and Outlook" report dated January 18, 2000, by which the individually named defendants were

informed that "given the uncertainty in the quarter due to the nature of the EDS deal, and our

own concerns regarding the uncertainty in the direct sales forecast, we are going to extend the

lock-down period for all Section 16 officers and directors until such time that the forecast is

firm, the EDS deal is signed or committed." (Emphasis added) . The forecast was never firmed

up. The EDS deal was not announced until April 2000 .

18 . Peregrine's financial fortunes continued to deteriorate throughout fiscal year 2000 .

On October 16, 2000, in defendant Gardner's "Review and Outlook" report for the secon d

quarter of fiscal year 2001 (the quarter ended September 30, 2000), he informed Board member s

that :

Another quarter is behind us . As you know, it was a real nail-biter ,

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but in the end we pulled it off. We had some significant wins andsome great orders, but we also had to borrow from the future tomake the present happen ." (Emphasis added) .

19. On January 15, 2001, defendant Gardner's "Review and Outlook" (for the quarte r

I ending December 31, 2000) alerted these same Board members that "Our direct business i n

North America was a disaster ." He continued by stating that "our continued heavy reliance o n

I alliance and channel partners leaves me cautious . "

20. At a July 18, 2001 Board meeting, defendant Gardner informed Board members o f

a barter transaction that had occurred with Critical Path, Inc . ("Critical Path") . At this Board

meeting, defendant Nelson discussed the fact that defendant Gardner and two other Peregrine

employees had already been deposed by the SEC in connection with this transaction . Former

General Counsel Deller has affirmed in an interview with investigators that Gardner's testimony

to the SEC and Peregrine's production of documents were "common knowledge to Board

members" at this time. Nelson's handwritten notes as to what transpired at this Board meeting

reflect a discussion of how Peregrine could "spin" this "public relations" concern . In a May 2001

e-mail from Deller to defendant Gardner, he expressed concern about where the SEC

investigation would lead and stated "[m]ore ominously, [the SEC] told me they were sending

another subpoena and what the contents would be . . . Here is the disturbing one : They also said

they would be asking for a copy of PRGN's revenue recognition policy ." This reflects guilty

knowledge, shared with Gardner, that Peregrine's revenue recognition practices were illegal .

21 . On October 2, 2001, defendants Gardner and Luddy received an e-mail wit h

attached documents from a Peregrine salesperson in Australia, Ron Hall, informing them that

Peregrine software license agreements contained side letters and were otherwise without

commercial substance, and represented "channel stuffing in their crudest form ." The message

went on to state that, "[w]ere the attached documents, any of the òther' contracts mentioned

above, or this correspondence to fall into the hands of the `Wall Street Journal' or a curious

analyst, Peregrine Systems will be under serious and immediate scrutiny ." Defendant Gardner

immediately forwarded this e-mail to defendant Moores, who was assured that this individual

was being "taken care of." In an e-mail exchange dated October 5, 2001 between defendant s

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Gless, Gardner, and General Counsel Deller, it was stated "[w]e need to fire this guy . That is a

given." Defendant Gardner arranged to have the e-mail sender terminated as part of a supposed

lay off, to hide the fact that he was being fired for blowing the whistle on Peregrine's revenue

recognition fraud. When he learned of his termination due to his branch office's allege d

"redundancy," Hall sent an e-mail dated October 25, 2001 to his manager stating :

Attached is a very important document I sent to the US a short timeago - Steve Gardner, Eric Deller, Matt Gless, Andy Cahill, JohnMoores, Fred Luddy all received copies . I sent it because Ibelieve what you're doing with Partner contracts here isunethical, immoral and unconscionable . There is also nojustification to book revenue when no product has beenordered , there is a `sales guarantee ' and there is li tt lelikelihood of payment if things don't go as we predicted duringdiscussions . . . . Here is the document, it's self explanatory . Myclosing comment that anyone who objected to the "channelstuffing" partner approach would be laid off is ironically relevant .(Emphasis added) .

22 . Throughout the Fall of 2001, senior management of Peregrine, including

defendants Gardner, Gless, and Nelson, as well as Arthur Andersen, were repeatedly informed of

the use of side letters excusing or deferring payment on software license sales, and the existence

of large uncollectible accounts receivable from channel transactions . This same month, October

2001, the members of the Audit Committee of the Board (defendants Noel], Thomas G. Watrous

and Rodney T. Dammeyer) were explicitly informed by Arthur Andersen that specific instances

of questionable recognition of revenue on channel sales had added millions to the Company's

sales numbers which, as announced, had just met Wall Street earnings targets as provided by

defendants Gardner and Gless .

23 . Beginning in Februa ry 2002, Peregrine ' s fraud garnered the constan t and intense

attention of Peregrine's Board members . Upon seeing that Peregrine's participation in

questionable Critical Path barter transactions was reported in a newspaper article, defendant

Moores arranged to hire his own lawyer to conduct a secret internal investigation in a self-serving

attempt to separate and exonerate himself from the obvious, but as yet publicly undisclosed,

massive accounting fraud ongoing within Peregrine . By April 25, 2002, defendant Moores was

informed that a successor accounting firm, KPMG LLP, had affirmatively concluded that ther e


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had been accounting fraud within Peregrine and would likely go public with this information .

Moores arranged to have himself appointed as Chairman of the Board, so as to be in a position to

control the flow of information, position himself as "above the fray," and to squelch any

suggestion of his personal involvement in the wrongful conduct . In a further attempt to insulate

himself and cover up his involvement, Moores had his personal counsel conduct a purported

"independent" investigation of the facts . In truth, Moores had arranged to have an investigation

conducted that would cast senior management and the auditors of Peregrine as the only

wrongdoers, and exonerate himself and his business cronies who had served as his eyes and ears

on the Peregrine Board . However, as the facts became known, and the extent of Moores's

knowledge of the fraud and trading on inside information gradually were exposed, coupled with

the announcement of a massive restatement on February 28, 2003, Moores was finally forced to

relinquish all positions within Peregrine . As of the date of submission of this Amende d

Complaint , and notwithstanding guilty pleas by three former senior officers of Peregrine, an SEC

investigation is continuing , as is a criminal investigation by the U.S. Department of Justice .

24 . The foregoing summary of critical events at Peregrine during the Class Perio d

demonstrates that Board members and Arthur Andersen knew, or were deliberately reckless i n

I not knowing, that a financial fraud was afoot at Peregrine . This fraud involved the followin g

financial and accounting manipulations :

• Peregrine's reported revenues were generated primarily from two sources : (1 )

I product licensing revenues from resellers, distributors and end users, and (2) service and support

revenues . Peregrine could not properly recognize revenue from the sale of software licenses t o

resellers, distributors or end users unless : (i) an unconditional contract had been signed ; (ii) the

product had been delivered; (iii) the fee was "fixed and determinable;" (iv) the risk of concession

was deemed remote; (v) no significant vendor obligations remained ; and (vi) collection of the

receivable was probable . Hundreds of millions dollars of reported revenue was improperl y

recognized by Peregrine during the Class Period on transactions in which these required criteri a

under Generally Accepted Accounting Principles ("GAAP"), which were acknowledged in it s

own SEC filings, had not been met .


0 41 • Revenue was recognized by Peregrine despite the existence of both oral and

2 written agreements and side letters with resellers under which they had no obligation to pay

3 Peregrine for product until it was sold-through to an end user . The practice of recognizing

4 revenue on agreements where there was no fixed obligation to pay (Le., sell- in), was

5 authorized by the full Board and widely known to exist throughout the Company. The

6 amount of a resellers' "commitment" which had not sold-through to the end user was closely

7 monitored by Peregrine and was referred to as the "burn ." A former regional sales director was

8 quoted as saying, "[Burn] was common and openly discussed in the management ranks . . . This

9 was a house of cards waiting to blow up . "

10 • Peregrine improperly recognized revenue on transactions which were in reality

11 product swaps or barter transactions with third parties, entered into to allow Peregrine to meet

12 publicly announced revenue goals ;

13 • Peregrine materially misrepresented its balance sheet and statement of liabilities

14 by failing to include significant obligations to financial institutions . These obligations arose out

15 of Peregrine's undisclosed business practice of factoring substantial portions of its account s

16 receivable and treating those borrowings as sales of receivables, in violation of GAAP . During

17 the Class Period, the amount of debt omitted from Peregrine's financial statements reached as

18 high as $180 million and, by August 29, 2002, was approximately $103 million ;

19 • Because Peregrine improperly treated the foregoing factoring transactions as

20 "sales" of accounts receivable, it understated its accounts receivable reflected on its balance sheet

21 by as much as $180 million during the Class Period . This massive understatement of accounts

22 receivable caused Peregrine to materially misrepresent and understate its Days Sales Outstanding

23 ("DSO") . DSO is the average number of days it takes a company to collect its account s

24 receivable, and is a key financial metric used by investors and securities analysts to gauge the

25 quality of a company's reported revenue and the collectibility of its accounts receivable ;

26 • Peregrine understated option compensation expense that it was required to record

27 during the Class Period by approximately $100 million ;

28 • Peregrine was constantly in need of, or had run out of, cash to run its operations,

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in contrast to the image it portrayed of a highly successful business enterprise. The Company

repeatedly needed to access the capital markets to raise cash during the Class Period . Because of

this desperate need for repeated cash infusions, no disclosure could be made by the defendants of

the material adverse information regarding the Company's adverse financial fortunes as alleged

herein because any such disclosure would render it impossible to raise the needed cash and

would have led to the revelation of Peregrine's accounting fraud and/or possible bankruptcy ;

• Despite its rapid growth, the Company failed to maintain adequate systems of

internal accounting and financial controls throughout the Class Period, which was a "Ted flag" to

each of the defendants that Peregrine's senior management could not and did not accurately

report the Company's revenues and earnings in compliance with GAAP ;

• The members of the Audit Committee of the Board of Directors knowingly and/or

with deliberate recklessness failed to carry out their obligations notwithstanding knowledge of

Peregrine's bogus accounting as conveyed to them by Arthur Andersen ;

• There were numerous significant manual adjustments to software license an d

~ maintenance revenue ;

• There was a failure to record the deferred tax effects for accruals in Peregrine' s

various business combinations ;

• There was an inability to quantify the amount of sales to resellers (and thei r

identities) during particular accounting periods ; and

• There were substantial delays in providing, or an inability to provide, information

such as trial balances, general ledgers and subledgers that would customarily be readily available

from a company's accounting systems .

25 . The foregoing accounting manipulations were engaged in by high level executive

officers of the Company, and were known to or, with deliberate recklessness, disregarded by the

individually named defendants who served as members of Peregrine's Board of Directors . These

Board members lent their names to public statements which they knew were false, or acted with

deliberate recklessness as to their truth or falsity . During the Class Period, while Peregrine was

falsely reporting record financial results, certain of the individually named defendant s


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collectively sold more than $450 million of Peregrine stock while knowing or, with deliberate

recklessness disregarding, the material undisclosed adverse information about Peregrine's

financial results and operations herein alleged . A huge portion of this insider selling occurred at

a time when the individually named selling defendants -- but not the investing public -- knew of

the planned $1 .5 billion acquisition of Harbinger Corporation and knew that the acquisition

would be negatively received by the market . These selling defendants sold massive quantities of

Peregrine shares based on this insider knowledge in violation of Company prohibitions on selling

and before the public learned of the proposed transaction .

26. The massive accounting fraud alleged herein was nurtured and condoned by

defendant Arthur Andersen LLP which abrogated its duties and responsibilities as Peregrine's

purportedly "independent" outside accountant. In an extraordinary example of financial

chicanery, Arthur Andersen actually functioned as a confederate of Peregrine's senior

management in carrying out their accounting fraud, often disregarding complaints and concerns

of lower level Peregrine financial personnel . As alleged in greater detail herein, prior to the

public revelation of the accounting fraud, Arthur Andersen knew about the accounting

irregularities at Peregrine, but took no action to correct Peregrine's accounting manipulations,

failed to inform the investing public that Peregrine was engaging in accounting fraud, and did not

resign its position as it should have given its knowledge of Peregrine's accounting defalcations .

The lack of independence between Arthur Andersen and Peregrine was a major contributing

factor in the perpetuation -- and concealment -- of the accounting fraud alleged herein . Among

other things, Arthur Andersen provided the Company with unqualified annual audit opinions, and

reviewed and approved throughout the Class Period, the Company's quarterly financial reports,

even though it knew (i) that the Company's internal accounting and financial controls were

grossly deficient, (ii) that the Company was recognizing material amounts of revenue in violation

of GAAP, (iii) that the Company was classifying loans as sales in violation of applicable

accounting standards and principles, and (iv) that Peregrine otherwise was manipulating the

Company's accounts at quarter-end and year-end in order to meet pre-established revenue targets .

27. The public dissemination of materially false and misleading financial statement s

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I and other positive statements about the Company's business and operations caused Peregrine' s

share price to trade at artificially inflated prices throughout the Class Period . As the false

financial results were reported throughout the Class Period, Peregrine's stock price increased

from approximately $13 .125 per share at the beginning of the Class Period to a Class Period high

of over $78.00 per share (adjusted for stock splits) . As the fraud was revealed and assimilated b y

the market, the price of Peregrine common stock declined to $0 .89 per share on the trading day

after the close of the Class Period .

JURISDICTION AND VENU E

28. Counts I through V of this Complaint arise under Sections 10(b), 14(a) and/o r

20(a) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. §78j(b), § 78n(a)

and §78t (a), respectively , and the rules and regulations promulgated thereunder, including SEC

Rule lob-5, 17 C .F .R. §240.10b-5, and SEC Rule 14a-9, 17 C .F.R. §240.14a-9 . This Court has

jurisdiction over the subject matter of this action pursuant to Section 27 of the Exchange Act,

15 U .S .C . §78aa. Counts VI through IX of this Complaint arise under Sections 1 l and/or 15 o f

the Securities Act of 1933 (the "Securities Act"), 15 U .S.C. §77k and §77o. This Court has

jurisdiction over this action under §22(a) of the Securities Act, 15 U.S.C. §77v(a) . This Court

also has jurisdiction over the subject matter of this action under 28 U.S .C. §§1331 and 1337 .

29. Venue is proper in this District pursuant to Section 27 of the Exchange Act ,

15 U .S.C. §78aa , Section 22 (a) of the Securities Act, 15 U.S.C. §77v(a), and 28 U.S.C. § 1391(b) .

The wrongs alleged herein occurred, in substantial part, in this District . At all relevant times ,

Peregrine conducted, and still conducts, significant business in this District and maintains its

principal place of business in this District . At all relevant times, the defendants named herein

conducted substan tial business and/or resided in this District , or committed violations of United

States law by acts committed in this District .

30. In connection with the facts and conduct alleged in this Complaint, defendants,

directly or indirectly, used the means and instrumentalities of interstate commerce, including, bu t

not limited to, the United States mails, interstate telephone communications, and the facilities o f

the national securities markets .


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2 A. Lead Plaintiffs

3 31. (a) Lead Plaintiff David Levy purchased or otherwise acquired Peregrine

4 securities during the Class Period and was damaged thereby .

5 (b) Lead Plaintiff Leighton Powell purchased or otherwise acquired Peregrine


7 (c) Lead Plaintiff David Schenkel purchased or otherwise acquired Peregrine

8 secu rities during the Class Period and was damaged thereby .

9 (d) Lead Plaintiff John Virden purchased or otherwise acquired Peregrine


11 (e) Lead Plaintiff Conrad Willemse purchased or otherwise acquired Peregrine


13 (f) Lead Plaintiff Bill Holman purchased or otherwise acquired Peregrine


15 (g) Lead Plaintiff Bob Benesko purchased or otherwise acquired Peregrine


17 (h) Lead Plaintiff Michael Slavitch purchased or otherwise acquired Peregrine


19 (i) Lead Plaintiff Richard Maheu purchased or otherwise acquired Peregrine


21 (j) Lead Plaintiff Mark Rollins purchased or otherwise acquired Peregrine


23 (k) The Lead Plaintiffs identified in subparagraphs (a)-(j) above are sometimes

24 herein collectively referred to as to the Loran Group.

25 (1) Lead Plaintiff Heywood Waga held Harbinger Corporation shares and

26 acquired Peregrine registered common stock in connection with Peregrine's acquisition of

27 Harbinger Corporation which was consummated on or about June 16, 2000 and was damaged

28 thereby .

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(m) Plaintiff John Sutliff ("Sutliff') held Harbinger Corporation shares and

acquired Peregrine registered common stock in connection with Peregrine's acquisition of

Harbinger Corporation which was consummated on or about June 16, 2000 and was damaged

thereby .

(n) Plaintiff M. Clifford Balch, Jr., Trustee of the Balch Family Trust (`Balch"),

held Remedy Corporation shares and acquired Peregrine registered common stock in connection

with Peregrine's acquisition of Remedy Corporation which was consummated on or abou t

August 27, 2001 and was damaged thereby .

(o) Plaintiff Alan Hylton ("Hylton") held Remedy Corporation shares and

acquired Peregrine registered common stock in connection with Peregrine's acquisition of

Remedy Corporation which was consummated on or about August 27, 2001 and was damage d

thereby .

C . Peregrine Systems, Inc .

32 . Peregrine was incorporated in California in 1981, reincorporated in Delaware in

1994, and went public with its initial public offering ("IPO") in April 1997 . The Company is

headquartered in San Diego, California. Peregrine is an unnamed defendant herein . But for

Peregrine's September 22, 2002 filing for protection from its creditors under Chapter 11 of the

United States Bankruptcy Code, it would be named as a defendant .

33 . On June 30, 2003, the SEC filed a complaint against Peregrine in this Court . In

relevant part, the SEC complaint alleged as follows :

This case involves a massive financial fraud by defendantPeregrine Systems, Inc ., a publicly traded San Diego-basedsoftware company . The purpose of the fraud was to inflatePeregrine's revenue and stock price . To achieve its unlawfulpurpose, Peregrine filed materially incorrect financial statementswith the Commission for 1 I consecutive quarters betwee nApril 1, 1999 and December 31, 2001 . . . In February 2003,Peregrine restated its financial results for its fiscal years 2000 and2001, and for the first three quarter of fiscal 2002 . Peregrinereduced previously reported revenue of $1 .34 billion by $50 9

. . .million .

34 . On July 22, 2003, Peregrine consented to entry of a Final Judgment in the SE C


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•action against it . Among other things, the Final Judgment (i) permanently enjoined Peregrine

and related persons from violating the antifraud provisions of the federal securities laws; (ii)

required the Company to retain an Internal Auditor acceptable to the SEC who is required to

report directly to the Audit Committee of Peregrine's Board of Directors, and to assess and

enforce Peregrine's accounting control structure and to ensure that Peregrine's financial

condition and results are accurately reported in Peregrine's public financial statements ; (iii)

required Peregrine to establish a Corporate Compliance Program and appoint a Corporate

Compliance Officer acceptable to the SEC whose duties include assessing and reporting on

Peregrine's compliance with recognized standards of "best practices" with respect to corporate

governance and to ensure that Peregrine's Board of Directors (and its committees) have

appropriate powers, structure, composition and resources ; and (iv) required Peregrine to

commence a training and education program for its officers and employees, to prevent violations

of the federal securities laws .

35 . Lead Plaintiffs filed Class Proofs of Claim against Peregrine in its bankruptcy

case on behalf of themselves and the Class and Sub-Classes of securities purchasers define d

herein. These Class Proofs of Claim were based on the violations of law alleged herein. On

October 14, 2003, Lead Plaintiffs settled their claims against Peregrine pursuant to an Amended

Settlement Agreement which was approved by the United States Bankruptcy Court for the

District of Delaware .

D. Defendants

36. (a) Defendant Stephen P . Gardner was initially hired by Peregrine as Vice

President, Strategic Acquisitions on May 19, 1997 . As of January 20, 1998, Gardner was

promoted to Executive Vice President and assumed principal responsibility for the day-to-day

operations of Peregrine . He was one of three members of the "Office of the Chairman,"

established as of that date, the other members being defendant Moores and David A . Farley . At a

Board of Directors meeting on April 16, 1998, defendant Moores sought the appointment of

Gardner as President, Chief Executive Officer, and director, positions Gardner assumed on tha t

date . Gardner also became Chairman of the Board of Directors on July 19, 2000 . He was

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terminated from all positions at Peregrine on May 3, 2002 . During the Class Period, while in

possession of material , undisclosed adverse information about Peregrine, Gardner sold 452,51 2

shares ofPeregrine common stock and received gross proceeds of approximately $14,030,526 .

(b) Defendant Matthew C . Gless was hired as Peregrine 's corporate controller on

April 18, 1996 . From 1990 until April 1996, Gless held various accounting and financial

management positions at BMC Software, Inc . ("BMC Software"), a company founded by

defendant Moores, which is headquartered in Houston, Texas . Gless's wife also worked for

BMC Software . She subsequently worked at JMI Services, Inc . ("JMI Services"), a company

owned and controlled by defendant Moores . Gless became Vice President, Finance and

Peregrine's Chief Accounting Officer on November 30, 1999 . He served as Chief Financial

Officer and a member of the Board of Directors from November 1, 2000 until May 5, 2002 .

During the Class Period, while in possession of material, undisclosed adverse information about

Peregrine, Gless sold 169,250 shares of Peregrine common stock and received gross proceeds of

approximately $3,993,188.75. On April 16, 2003, the SEC filed a Complaint against Gless

which alleged that he violated, inter alia, Section 10(b) of the Exchange Act by knowingly or

recklessly making misrepresentations and omissions of fact with the intent of materially

misstating Peregrine's publicly reported financial results . That same day Gless pled guilty to a

criminal information charging him with a conspiracy, beginning no later than June 1999, to

commit, among other offenses, securities fraud. Gless's guilty plea is attached hereto as

Appendix A and is incorporated herein by this reference . By his guilty plea, Gless has effectively

admitted liability to the Class identified herein .

(c) Defendant Steven S . Spitzer was hired by Peregrine as Vice President ,

Alliances in August 1997 . He became Vice President, Managed Service Providers, in April

2000, and returned to his former position as Vice President, Alliances in March 2001, until he

was terminated on June 28, 2002 . During the Class Period, while in possession of material

undisclosed adverse information about Peregrine, Spitzer sold 185,000 shares of Peregrine

common stock and received gross proceeds of approximately $5,230,000 . On June 16, 2003, the

SEC filed a complaint against Spitzer in this Court alleging that from at least December 1999, he


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knowingly or recklessly participated in a scheme by which Peregrine materially misrepresented

its publicly reported financial results, including its revenue, in violation of, inter alia,

Section 10(b) of the Exchange Act . That same day, a criminal information was filed against

Spitzer charging securities fraud, to which he pled guilty . Spitzer's guilty plea is attached hereto

as Appendix B and is incorporated herein by this reference . By his guilty plea, Spitzer has

effectively admitted liability to the Class identified herein .

(d) Defendant Ilse Cappel was employed at Peregrine from September 1993 unti l

she left the Company in June 2002 . Cappel was Senior Manager, Treasury from

September 3, 1993, and became Director, Treasury on April 1, 2001 . Cappel's primary

responsibilities included financing accounts receivables, international collections, and forecasting

cash and DSO. Immediately prior to and during the Class Period, while in possession of

material, undisclosed adverse information about Peregrine, Cappel sold approximately 16,249

shares of Peregrine common stock and received gross proceeds of approximately $334,287 . On

November 22, 2002, the SEC filed a Complaint against Cappel alleging that she committed bank

fraud by selling falsified and illusory Peregrine receivables to banks . That same day, Cappel pled

guilty to a criminal information charging her with a scheme beginning no later than June 1999 to

defraud a federally insured bank by making false statements, misrepresenting the true financial

condition of Peregrine, and fabricating invoices . Cappel's guilty plea is attached hereto as

Appendix C and is incorporated herein by this reference . By her guilty plea, Cappel has

effectively admitted liability to the Class identified herein.

(e) Defendant Richard T . Nelson served as Peregrine 's Vice President and

General Counsel from November 8, 1995 to March 2000 . He formerly worked for BMC

Software, and had made numerous investments with defendant Moores . Starting in February

1997, Nelson also served as Peregrine's Corporate Secretary . Nelson was Peregrine's Vice

President, Corporate Development from March 2000 to April 2001 . Nelson thereafter served as

Senior Vice President, IMG Operations until May 6, 2002 when he was appointed interim Chief

Executive Officer . During the Class Period, while in possession of material undisclosed adverse

information about Peregrine, Nelson sold 375,000 shares of Peregrine common stock and


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I received gross proceeds of approximately $8,827,120 .

(f) Defendant Douglas S . Powanda was hired by Peregrine on February 18, 199 2

as Sales Manager with fifteen years of experience in the software business . During the Class

Period, Powanda held the positions of Director of Sales, Director of International Sales, Vice

President of International Sales, Vice President of North American Sales, Vice President and

General Manager of International Sales, Executive Vice President for Operations, Executive Vice

President, Worldwide Sales (as of January 1998), until he ceased working as an employee of

Peregrine in February 2001, but continued to serve as a consultant with regard to major accounts .

Pursuant to an employment agreement dated April 1, 2000, which was prepared in September

2000 and backdated, Powanda was entitled to a specified amount of stock options provided he

reached specified sales target numbers in the multi-millions of dollars . Powanda ultimately hit

the target number of $100 million in sales specified in his employment agreement, and was

therefore entitled to 100,000 shares of stock, which he received between July 2000 and the end of

the fiscal year on March 31, 2001 . From April 2001 to June 2001 Powanda took a 90 day

sabbatical . He orally resigned in July 2001, but as of July or August 2001, he was encouraged

by defendant Gardner to continue working for the Company and had responsibility for certain

large accounts . During the Class Period, while in possession of material undisclosed adverse

information about Peregrine, Powanda sold approximately 862,446 shares of Peregrine common

stock and received gross proceeds of approximately $24,286,288 .

(g) Defendant Frederic B. Luddy served as Vice President, Research and

Development, and Chief Technology Officer of Peregrine from January 1998 through the Class

Period . During the Class Period, while in possession of material undisclosed adverse

information about Peregrine, Luddy sold 465,763 shares of Peregrine common stock and

received gross proceeds of approximately $11,823,660 .

(h) Defendant John J . Moores served as a member of Peregrine's Board o f

Directors from October 1989 through the Class Period, and as Chairman of its Board of Directors

from March 1990 until July 2000. During the Class Period, Moores also chaired the

Compensation Committee of Peregrine's Board of Directors . Moores left the Peregrine Board i n


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February 2003 . In 1980, Moores founded BMC Software and served as its President and Chief

Executive Officer from 1980 until 1986 and as Chairman of its Board of Directors from 1980

until 1992. Since September 1991, Moores has served as Chairman of the Board of JMI

Services, a private investment company which Moores controls . JMI Services and its affiliate,

JMI Equity Fund, L .P. ("JMI Equity Fund"), had offices during the Class Period in the same

complex as Peregrine's office . JMI Services leased office space from Peregrine . Peregrine was a

"former portfolio company" of the JMI Equity Fund . Since June 2001, Moores has served as the

interim Chief Executive Officer of NEON Systems, Inc. ("NEON Systems"), a company which

he controls. Moores is also a Director and member of the Compensation Committee of the Board

of Directors of NEON Systems . During the Class Period, while in possession of material

undisclosed adverse information about Peregrine, Moores sold 17,407,841 shares of Peregrine

common stock and received gross proceeds of approximately $401,640,096 .

(i) Defendant Charles E . Noell 111, served as a member of Peregrine's Board o f

Directors from January 1992 until February 2003 . Noell was a member of the Audit and

Compensation Committees of Peregrine's Board of Directors during the Class Period . Since

January 1992, Noell has served as President and Chief Executive Officer of JMI Services, and as

a general partner of the JMI Equity Fund, entities controlled by defendant Moores . Defendant

Moores hired defendant Noell to manage the JMI Equity Fund . Noell also serves as a Director

and member of the Compensation Committee of the Board of Directors of NEON Systems, a

company controlled by defendant Moores, and is a director of Bridge Transfer Corporation and

Skunkware, Inc., both of which are also JMI Equity Fund portfolio companies controlled by

defendant Moores. Defendants Moores and Noell became acquainted at BMC Software in

connection with BMC Software's IPO in 1988 . At the time, Noell was employed by Alex Brown

& Sons, which was an underwriter of BMC Software's [PO . During the Class Period, while in

possession of material undisclosed adverse information about Peregrine, Noell sold 174,375

shares of Peregrine common stock and received gross proceeds of approximately $6,395,812 .

6) Defendant Christopher A. Cole served as a member of the Board of Director s

of Peregrine from the Company's founding in 1981 through the end of the Class Period . He

FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS -Master File No. 02-CV-0870J(RBB) 21

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1 served as President and Chief Executive Officer of Peregrine from 1986 until 1989 . Since 1992,

2 Cole has been President and Chief Executive Officer of Questrel, Inc ., UrStudios, Inc . and

3 Headlamp, Inc ., each of which is a software development company . During the Class Period,

4 while in possession of material undisclosed adverse information about Peregrine, Cole sold

5 1,304,000 shares of Peregrine common stock and received gross proceeds of approximately

6 $24,762,415.

7 (k) Defendant Norris van den Berg served as a member of the Board of Directors

8 of Peregrine from January 1992 until he resigned in October 2000 . van den Berg was a member

9 of the Audit Committee of Peregrine's Board of Directors during the Class Period until hi s

10 resignation. van den Berg has also served as a General Partner of the JMI Equity Fund, an entity

1 I controlled by defendant Moores, and served as a Director of NEON Systems, Bridge Transfe r

12 Corporation and Skunkware, Inc ., companies also controlled by defendant Moores . During the

13 Class Period, while in possession of material undisclosed adverse information about Peregrine,

14 van den Berg sold 40,000 shares of Peregrine common stock for gross proceeds of $1,728,000 .

15 (1) Defendant Richard A. Hosley II, served as a member of the Board of Directors

16 of Peregrine from January 1992 until his resignation on June 15, 2000 . Hosley was a member of

17 the Audit Committee of Peregrine's Board of Directors from April 22, 1999 until his resignation .

18 Hosley had previously served as President and Chief Executive Officer of BMC Software, a

19 company founded by defendant Moores . Hosley has had a 40 year personal friendship and

20 business relationship with defendant Moores .

21 (m) Defendant William D. Savoy served as a member of the Board of Directors

22 of Peregrine from on or about June 15, 2000, the effective date of the Harbinger acquisition, on

23 whose Board he served, through the end of the Class Period . He became a member of the Audit

24 Committee of Peregrine's Board of Directors on October 17, 2000 and served in that position

25 until October 17, 2001 . Since 1988, Savoy has served as President of Vulcan Northwest, Inc ., a

26 privately held venture capital and investment firm based in Seattle, Washington controlled by

27 Paul G. Allen . Savoy served as a director of the following companies while contemporaneously

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Online City Search, USA Networks, Metricom, Charter Communications, Drugstore .com,

Go2Net, Value America and High Speed Access Corporation .

(n) Defendant Thomas G. Watrous served as a member of the Board of Directors

of Peregrine from January 1999 through the end of the Class Period . He became a member of the

Audit Committee of Peregrine's Board of Directors on April 17, 2000 . Watrous was a senior

partner with the management consulting firm of Andersen Consulting (now known as

Accenture), which was previously an affiliate of defendant Arthur Andersen LLP . During the

Class Period, while in possession of material undisclosed adverse information about Peregrine,

Watrous sold 15,000 shares of Peregrine common stock and received gross proceeds o f

I approximately $811,200 .

(o) Defendant Rodney T. Dammeyer served as a member of the Board of

Directors of Peregrine from June 29, 2001 through the end of the Class Period . He became

Chairman of the Audit Committee as of the Committee' s meeting on October 24, 2001 .

Dammeyer worked for defendant Arthur Andersen beginning in 1962, and was an audit partner

of the firm until 1979 . He thereafter served as Chief Financial Officer of various publi c

companies including Northwest Industries and Household International, He spent 15 years with

Itel, and its successor Anixter International, Inc ., including serving as its Chief Executive Officer

from January 1993 to February 1998 . While with Anixter, Dammeyer also served as Managing

Director and Managing Partner of Equity Group Corporate Investments, a diversifie d

management and investment firm. Dammeyer has been a director of numerous public

companies, and served on the audit committees of several of those companies, including

Stericycle, Inc . and TeleTech Holdings, Inc. He has also served as a trustee of Van Kampen

Closed-End Mutual Funds .

(p) Defendant Arthur Andersen LLP ("Arthur Andersen") was a firm of certifie d

public accountants . Arthur Andersen was engaged by Peregrine to provide independent

accounting and auditing se rv ices, as well as tax and consulting services , and to give Peregrine

accounting advice and consultation regarding its annual and quarterly reports filed with the SEC .

Arthur Andersen falsely represented, in its audit opinions on Peregrine's fiscal years 2000 an d


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2001 financial statements incorporated in SEC Forms 10-K filed for those years , that the

Company 's financial statements fairly presented the Comp any' s financial condition and results of

operations in conformity with GAAP and had been audited by A rthur Andersen in accordance

with Generally Accepted Auditing Standards ("GRAS") . In addition , Arthur Andersen reviewed

and approved of the mate rially false and misleading quarterly financial statements published by

Peregrine for each of the quarters of fiscal years 2000 and 2001 and the first, second and third

quarters of fiscal year 2002 . On Ap ril 5 , 2002 , Arthur Andersen was replaced by KPMG LLP as

Peregrine's independent auditor. A rthur Andersen was paid approximately $4 million in fees for

its auditing, accounting , and consulting work for Peregrine since being retained in July 1996 .

(q) Defendant Daniel F. Stulac was an employee and partner of defendant Arthur

Andersen at all relevant times . Stulac provided accounting and auditing services to Peregrine in

connection with its annual and quarterly reports filed with the SEC during the Class Period .

Stulac was the audit engagement partner for the annual audit relating to Peregrine 's fiscal year

2001 financial statements incorporated in the SEC Form 10-K filed for that year, which falsely

represented that the financial statements fairly presented the Company 's financial condition and

results of operations in conformity with GAAP an d had been audited in accordance with GAAS .

(r) Defendant AWSC Societe Cooperative, en liquidation ("AWSC"), is a societe

cooperative organized under the Swiss Federal Code of Obligations . During the Class Period,

AWSC was comprised of the AWSC member firms and their respective partners, including

Arthur Andersen and Arthur Andersen Germany . AWSC served as the coordinating entity for

the international network of the various Arthur Andersen firms . During the Class Period, AWSC

set the policies and procedures to be used by AWSC members, including Arthur Andersen,

throughout the world and also during the Class Period conducted audits and reviews of the

international segments of Peregrine's business which were incorporated in Peregrine's published

financial results .

(s) Defendant KPMG LLP is a firm of certified public accountants , and was on e

of Peregrine's principal customers during the Class Period . During the Class Period, KPMG

entered into agreements with Peregrine for delivery of software which it knew were nothing mor e


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1 than "parking" arrangements, whereby Peregrine would deliver software to KPMG which KPMG

2 was not obligated to pay for. KPMG knew that these arrangements were for the sole purpose of

3 permitting Peregrine to report revenues which met Peregrine's published earnings estimates and

4 which revenues KPMG knew Peregrine would not and did not obtain .

5 (t) Defendant BearingPoint, Inc. (`BearingPoint"), formerly known as KPMG

6 Consulting, Inc . ("KMPG Consulting"), is a large publicly held business consulting, systems

7 integration and managed services firm . KPMG Consulting was one of Peregrine's principal

8 customers during the Class Period. During the Class Period, KPMG Consulting entered into

9 agreements with Peregrine for the delivery of software which it knew were nothing more than

10 "parking" arrangements, whereby Peregrine would deliver software to KPMG Consulting which

11 KPMG Consulting was not obligated to pay for . KPMG Consulting knew that these

12 arrangements were for the sole purpose of permitting Peregrine to report revenues which met

13 Peregrine's published earnings estimates which revenues KPMG Consulting knew Peregrine

14 would not and did not obtain .

15 (u) Defendant Larry Rodda is a certified public accountant who was at al l

16 relevant times a principal of KPMG LLP and KPMG Consulting . Rodda was the individual at

17 KPMG LLP and KPMG Consulting who signed agreements with Peregrine during the Class

18 Period on behalf of those firms, which he knew were for the purpose of allowing Peregrine to

19 falsely report that it had attained a certain level of revenues and pursuant to which he knew that

20 KPMG and KPMG Consulting had no obligation to pay .

21 37. Each of the individually named defendants (other than defendant Rodda) was

22 provided with copies of Peregrine's press releases and SEC filings containing materially false

23 and misleading financial information prior to or shortly after their issuance and had the ability

24 and opportunity to prevent their issuance or to cause them to be corrected . Each suc h

25 individually named defendant had a duty to promptly disseminate accurate and truthful

26 information with respect to Peregrine's operations, financial condition and future busines s

27 prospects, or to cause and direct that such information be disseminated so that the market price of

28 Peregrine's securities would be based on truthful and accurate information .

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38. Because of their positions and access to mate ri al nonpublic information, each of

the individually named defendants who sold Peregrine stock knew, prior to their sales of

Peregrine stock during the Class Period, of the material adverse facts specified herein which had

not been disclosed to, and were being concealed from, the investing public, and that the positive

representations which were being made by Peregrine and certain of its executive officers were

materially false and misleading. Each such individually named defendant was in a position to

control or influence the contents of, or otherwise cause corrective disclosures to be made in the

public dissemination of the false and misleading information and failed to do so in order to

protect Peregrine's desire to grow through acquisition and in order to allow certain of these

defendants to sell substantial amounts - more than $450,000,000 .00 - of Peregrine common

stock while its share price was artificially inflated and while they were in possession of material

nonpublic adverse information .

CLASS ALLEGATIONS

39. Lead Plaintiff the Loran Group brings this action as a class action pursuant to

Rules 23(a) and (b)(3) of the Federal Rules of Civil Procedure, on their own behalf and on behal f

of a class consisting of all other similarly situated persons or entities who purchased or otherwise

acquired Peregrine securities from July 22, 1999 through May 3, 2002 . The foregoing identified

period during which the securities law violations alleged herein were committed, was not

arbitrarily selected by Lead Plaintiff the Loran Group . Rather, by its restatements announced on

February 28, 2003, Peregrine has admitted that the financial results it published applicable to the

period between April 1, 1999 (the commencement of the first quarter of fiscal year 2000) an d

December 31, 2001 (the end of the third quarter of fiscal year 2002) were materially misstated .

Further, investors in Peregrine securities were not informed until, at the earliest , May 3, 2002 ,

that an accounting fraud may have occurred at Peregrine . In keeping with its fiduciary

obligations to the Class, and based on Peregrine ' s admissions , Lead Plaintiff the Loran Group is

dutibound to allege the period from July 22, 1999 (when Peregrine announced results for the first

quarter of fiscal year 2000) through May 3, 2002 as the period during which purchasers of

Peregrine securities were defrauded . This period is a direct consequence of the timing and scop e


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I of Peregrine's admitted accounting fraud .

2 40. This action is also brought by Lead Plaintiff Heywood Waga and the othe r

3 plaintiffs identified in paragraph 31 (m)-(o) on behalf of two Sub-Classes . The first Sub-Class

4 consists of all persons and entities who held shares of Harbinger Corporation and who acquired

5 Peregrine registered common stock in connection with Peregrine's acquisition of Harbinger

6 Corporation, which was consummated on or about June 16, 2000 (the "Harbinger Acquisition") .

7 The second Sub-Class consists of all persons and entities who held shares of Remedy

8 Corporation and who acquired Peregrine registered common stock in connection with Peregrine's

9 acquisition of Remedy Corporation, which was consummated on or about August 27, 2001 (the

10 "Remedy Acquisition") .

11 41. Excluded from the Class and Sub-Classes are any defendants, any officers and

12 directors of Peregrine, members of their families, Peregrine and any of its parents, subsidiaries ,

13 officers, directors, or affiliates, any entity in which any excluded person has a controlling interest,

14 directly or indirectly, and each of their respective legal representatives, heirs, successors, and

15 assigns.

16 42. The members of the Class and Sub-Classes are so numerous that joinder of all

17 members is impracticable . Peregrine common stock was actively traded on the NASDA Q

18 throughout the Class Period . As of March 31, 2001, Peregrine had more than 160 million shares

19 issued and outstanding and approximately 85,000 beneficial holders of its shares . Plaintiffs

20 believe that there are tens of thousands of Class and Sub-Class members who are geographically

21 dispersed throughout the United States .

22 41 Plaintiffs' claims are typical of those of other applicable Class and Sub-Class

23 members . Plaintiffs and the Class and Sub-Classes sustained damages due to the defendants'

24 common course of wrongful conduct .

25 44. Plaintiffs will fairly and adequately protect the interests of these applicable Class

26 and Sub-Class members . They have retained counsel who are competent and experienced i n

27 securities litigation and class actions . Plaintiffs have no interests that conflict with those of the

28 other applicable Class and Sub-Class members .


1 45. Common questions of law or fact exist as to all Class and Sub-Class members .

2 Those common questions predominate over any potential individual issues . Among the common

3 questions of law or fact to the Class or Sub-Classes are the following :

4 (a) whether the public statements issued by Peregrine and defendants,

5 including Peregrine's financial statements and filings with the SEC contained materia l

6 misrepresentations and/or omitted to state material facts ;

7 (b) whether the market price of Peregrine securities during the Class Period

8 was manipulated or artificially inflated due to the activities complained of herein ;

9 (c) whether the federal securities laws were violated by defendants' conduct

10 as alleged herein ;

11 (d) whether defendants acted negligently, knowingly or with deliberate

12 recklessness in committing the wrongful acts complained of herein ;

13 (e) whether statements by defendants to the investing public during the Class

14 Period misrepresented material facts about the business, operations and finances of Peregrine ;

15 (f) whether defendants pursued the fraudulent scheme and common course of

16 wrongdoing as alleged herein ; and

17 (g) whether members of the Class and Sub-Classes have sustained damages

18 and, if so, the proper measure of such damages .

19 46. A class action is superior to other methods for the fair and efficient adjudication

20 of this controversy because joinder of all members is impracticable . Because the damages

21 suffered by individual Class or Sub-Classes members may be relatively small, the expense and

22 burden of individual litigation makes it virtually impossible for them to individually seek redress

23 for defendants' wrongful conduct .

24 47. Plaintiffs know of no difficulty in the management of this litigation that would

25 preclude its maintenance as a class action . The names and addresses of Class and Sub-Classes

26 members are available from the Company or its transfer agent . Notice can be provided to Class

27 and Sub-Classes members by first class mail and publication .

28 11

FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS-#105317 Master File No. 02-CV-0870 J(RBB) 28

i 'S1 PEREGRINE SECURITIES TRADED ON AN EFFICIENT MARKE T

2 48. As to the claims asserted under the Exchange Act, plaintiffs rely, in part, upon the

3 presumption of reliance established by the fraud-on-the-market doctrine . The market fo r

4 Peregrine securities was, at all relevant times, an efficient market for the following reasons,

5 among others :

6 a. Peregrine's common stock was listed on the NASDAQ, a highly efficient

7 market that quickly reflects all publicly available information concerning a listed company ;

8 b. As a regulated issuer, Peregrine filed periodic public reports with the SEC,

9 including Forms 10-K for fiscal years 2000 and 2001 and other financial statements that

10 contained material misrepresentations and/or omitted material facts during the Class Period, as

11 alleged herein, causing the price of Peregrine's stock to trade at artificially inflated prices ;

12 c. Peregrine's senior management regularly met with and provide d

13 Company-related information to stock market analysts, institutional investors, fund managers and

14 other market professionals ;

15 d. Peregrine was followed by several securities analysts employed by major

16 brokerage firms who wrote research reports, which were distributed to the sales force and

17 customers of their respective brokerage firms . Each of these reports was publicly available and

18 entered the public marketplace.

19 e. The brokerage firms following Peregrine during the Class Period included

20 First Union Capital Markets ; CIBC World Markets Corp. ; U.S . Bancorp Piper Jaffray, Inc . ;

21 Thomas Weisel Partners ; and Bear Steams & Co ., Inc. Each of these companies relied upon

22 Peregrine's financial statements, as well as statements made by senior management during

23 conference calls and meetings with analysts, in compiling their reports and making thei r

24 recommendations . First Union, CIBC, Piper Jaffray and Bear Steams each rated Peregrine a

25 "strong buy," "buy," or "attractive" in their research reports disseminated immediately following

26 Peregrine's announcement of its quarterly financial results and conference calls during the Class

27 Period . The analysts' assessments of Peregrine's stock was based, in material part, upon th e

28 honesty and accuracy of Peregrine's reported financial results .

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1 f. The trading volume of Peregrine's common stock during the Class Period

2 shows that there was a liquid market for Peregrine stock during the Class Period ;

3 g. Peregrine disseminated information on a market-wide basis through

4 various electronic media services, including issuing press releases through PR Newswire,

5 Business Wire and through the Internet ; and

6 h. The market price of Peregrine's securities reacted efficiently to new

7 information entering the market .

8 OVERVIEW OF THE FRAUD

9 A. The Defendants Intentionally Destroyed Record s

10 49. Each of the individually named defendants (other than defendants Stulac an d

11 Rodda), went to great lengths to ensure that there would be as little documentation as possible of

12 their misconduct and the activities of the Peregrine Board of Directors and committees thereof .

13 Documents were intentionally destroyed . Procedures were implemented to make it impossible to

14 retrieve e-mail . There was a Company policy in place during the Class Period to shred all Board-

15 related materials disseminated in connection with Board meetings, which each of the individually

16 named defendants (other than defendants Stulac and Rodda) followed . The purpose and intent of

17 these policies and procedures was to make it as difficult as possible for there to be any scrutiny of

18 the activities of Peregrine senior management and its Board members and to secrete from th e

19 public and/or any regulatory authorities the true facts regarding the conduct of the defendants

20 named herein .

21 50. On July 17, 2000, defendant Nelson sent a memo to the Board members at that

22 time (defendants Gardner, Moores, Noell, Cole, van den Berg, Savoy, and Watrous) stating as

23 follows:

24 With respect to all materials distributed at board meetings or inadvance of the meetings in preparation for a board meeting, each

25 board member shall retain such materials for no longer than aperiod of one month from the time of the board meeting. Prior to

26 or at the end of the one-month period, all physical documentsshall be destroyed by the shredding of those documents . Any

27 board materials which may have been received by e-mailshould be deleted and erased from e-mail .

28

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•

With respect to e-mailed materials, I would advise that you printthose materials upon receipt and immediately destroy the e-mailedcopy. This practice will ensure your compliance with our policywith respect to soft copies of board materials . (Emphasis added) .

51 . The minutes of the Peregrine Board of Directors meetings were doctored t o

eliminate any potentially incriminating or controversial material . Defendant Nelson was

primarily responsible for keeping the minutes and for "cleansing" them of potentially damaging

information . Often times there were multiple versions of minutes of the same meetings .

However, by design, the formally approved minutes are bare bones and uniformly unenlightening

as to what transpired at Board meetings . Each of the individually named defendants (excluding

defendants Stulac and Rodda) received copies of the doctored minutes and knew that they did not

accurately and truthfully reflect what transpired at the Board meetings . None of these defendants

sought to change this policy or compel honest reporting of Board discussions .

52 . In or about May 2001, Peregrine senior management took additional steps t o

cover up their misconduct . At the direction of defendants Gardner, Gless, and Nelson, the

Company at that time purchased an e-mail shredding software from Authentica Inc . for at least

$100,000 . This software constituted an online shredding system that scrambled e-mail messages

and limited access to the software key needed to decrypt them . The software allowed e-mail to

effectively self-destruct . It also allowed the sender of e-mail to bar recipients from forwarding,

copying or printing e-mail . To make e-mail messages "disappear," access to the key is

withdrawn after a given period of time . Senior Peregrine executives and Board members

(defendants Gardner, Glass, Spitzer, Powanda, Nelson, Moores, Noell, and van den Berg) used

the Authentica shredding software to send e-mails to one another knowing that their

communications would be difficult if not impossible to reconstruct . Although certain internal e-

mails survived this effort at destruction and are discussed herein, it was the intention of the

defendants to destroy as much of the paper trail of their conduct as possible .

53 . Defendants Moores and Noell also often communicated regarding Peregrin e

business through use of handheld Blackberrys, which allow for remote, wireles s


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I communications . It was widely known at the time that Blackberry communications were

essentially impossible to trace or reproduce . These defendants used their Blackberrys to

communicate regarding Peregrine because they knew of, and wanted to take advantage of, the

secrecy afforded by this mode of communication, to obscure their misconduct as alleged herein,

and to make it as difficult as possible to reconstruct their activities .

B. Pere rine 's Internal Accountin Proces s

54 . During the Class Period, Peregrine was a provider of software and services whic h

was designed to reduce the cost of doing business . Peregrine offered products and services to

address infrastructure resource management, employee relationship management (or self-

service), and e-commerce technologies and services . Specifically, Peregrine's products and

services were intended to make its customers more competitive in their markets by reducing

costs associated with three primary business processes : (a) management of infrastructure assets ,

from the point of procurement through deployment, use, maintenance, change, and ultimately

disposition; (b) employee procurement of required infrastructure, including c-procurement,

employee self-service, knowledge access, and reservation of shared assets, such as conference

rooms and office space in remote locations ; and (c) e-transaction management, which reduced

costs among buyers, suppliers, and market places as customers attempted to transact business

through a global web of connected trading partners .

55 . The Company's premier product has been "ServiceCenter," which is a service

desk software system that assists businesses in managing their internal computer networks and

related assets . During fiscal year 1998, Peregrine decided to expand its product base to include

not only technology management software, but also physical asset management software and

services .

56. Primarily through acquisitions, the Company expanded its product menu for asset

management, fleet management, facilities management, rail management and telecommunication

management. The most significant of its acquisitions included : (i) the June 2000 acquisition o f

Harbinger Corporation, which provided software enabling e-transaction management and other e-

business products and services ; (ii) the December 2000 acquisition of IBM's Tivoli Service Desk

FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS -Master File No. 02-CV -0870 J (RBB) 32

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i and customer base enabling ; and (iii) the August 2001 acquisition of Remedy Corporation, a

2 supplier of IT service management and customer relationship management software . These

3 acquisitions were stock for stock mergers .

4 57. The Sales Operations department was responsible for generating the contrac t

5 documents for all Peregrine sales . Peregrine used several types of agreements to license software

6 depending on the type of customer (e .g., end user, reseller, system integrator) . Peregrine' s

7 various contracts included the Standard License Agreement ("SLA"), the Reseller Agreement,

8 the Value Added Reseller ("VAR") agreement and the Solution Integrator agreement.

9 58. None of these license agreements specified products to be licensed, pricing o r

10 payment terms. Deal-specific terms were contained in a separate exhibit to the license contract,

11 which Peregrine called the "Schedule A ."

12 59. Channel contracting relationships involved entering into a contract (including a

13 Schedule A) with the channel partner. Within the last year of operations before disclosure of the

14 accounting fraud, Peregrine developed a "Schedule "P" to document partner sales to end users .

15 The Company used the Schedule P to invoice the channel partner when the resale occurred .

16 60. Prior to the creation of the Schedule P, both channel sales and end user sales were

17 documented on the standard Schedule A. Schedules A's involving channel sales with identified

18 end users were identifiable because the "bill to" address would reflect the channel partner and the

19 "ship to" address would identify the end user. Sales constituting channel burn, however, were

20 not apparent on the face of the contract .

21 61. Sales Operations sent the executed Schedule A (or Schedule P) to the Revenue

22 Manager within the Finance Department, to book the revenue (or track the channel bum) . The

23 revenue recognition decision was automatic : the Company always recognized license revenue

24 immediately, the only question was how much of the sales price would be deferred for

25 maintenance .

26 62. After October 2001, Sales Operations began sending draft, pre-executio n

27 Schedule A's electronically to the Revenue Group via a "Schedule A Quotes" folder in Microsoft

28 Outlook. Once approved, the draft Schedule A was sent back to Sales Operations for the sales


1 representative to obtain the customer's signature . Sales Operations electronically sent th e

2 executed Schedule A to the Revenue Group . The Revenue Group reviewed the contract for a

3 second time using the same approval matrix, calculated the license-maintenance revenue split,

4 and sent the Schedule A to the Billing Department .

5 63. Using the Schedule A from the Revenue Group, the Billing Department created a

6 customer file and entered key contract information (salesperson ; customer ; product and number

7 of units purchased ; license amount ; maintenance plan purchased ; due date ; payment terms) into a

8 PeopleSoft "order management" system . The system generated an invoice and posted the license

9 and maintenance amounts to accounts receivable in the general ledger .

10 64. For license revenue, the system would bill the entire amount up front (consistent

11 with immediate revenue recognition), regardless of extended payment terms .

12 65. For channel sales, Billing created an original invoice for the entire amount of the

13 purchase. When the channel partner sold-through to an end user and so advised Peregrine ,

14 Billing created two additional invoices : (i) a new invoice to the channel partner for paymen t

15 based on the resale to the end user, and (ii) a "credit invoice" against channel partner's original

16 invoice (crediting the partner for the channel bum) .

17 66. When payment on an invoice (receivable) came due, the data that the Billing

18 Department entered into PeopleSoft uploaded directly into GetPaid, the software used by the

19 Collections Department .

20 67. Although Treasury had responsibility for assessing the creditworthiness o f

21 customers, the Company had no procedure for doing so until after the end of the Class Period .

22 This allowed the Company to book revenue on sales to channel partners who had failed to bum

23 existing inventory or pay a prior channel invoice .

24 68. Peregrine's foreign offices followed their own sales operations processes and used

25 their own contract documents . The Europe, Middle East, and Africa Division ("EMEA") had a

26 haphazard sales operations process and few controls over revenue recognition . EMEA sales

27 representatives did not use standard contract documents or license agreements . Information

28 reported from overseas often was incomplete and/or inaccurate, when reported at all .

FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS -4105317 Master File No. 02-CV-0870 ](RBB) 34

0 S1 69. The financial reporting breakdown inside Peregrine was particularly egregious

2 with respect to worldwide revenue reconciliation. In order to perform a worldwid e

3 reconciliation, each foreign office was supposed to send revenue information, along with copies

4 of the executed Schedule A's, to the domestic Revenue Group . However, the foreign countries

5 did not report accurate or complete revenue information, rarely sent all executed Schedule A's,

6 and usually delivered them only after the close of the quarter .

7 70. The Revenue Group received only about 50-60% of the international Schedule

8 A's. Without accurate revenue information or complete contract documents for the foreign

9 transactions, the domestic Finance personnel could never reconcile the EMEA revenue report .

10 The lack of Schedule A's from overseas made it impossible for the domestic office to account

11 properly for license sales .

12 71. In recognition that there were no financial controls over worldwide operations, the

13 Company had been implementing a plan to improve worldwide operations through the Sale s

14 Operations Process Integration ("SOPI") project . The goal of the SOPI project was to create a

15 worldwide "end-to-end" integrated system that would capture every aspect of the Company's

16 transactions from sales negotiations, to contracting, to revenue recognition, to invoicing, t o

17 collections . In addition, the SOPI project was to integrate the international offices int o

18 Peregrine's domestic systems . The project was never implemented and was halted due to the

19 revelations of accounting fraud and resulting downsizing.

20 72. Lack of communication, disorganization and management conflict within the

21 domestic Finance Department and between the domestic and international Finance office s

22 aggravated the Company's problems . Conflicts, dispute, and distrust were rampant among the

23 Finance personnel .

24 73. Treasury was responsible for accounts receivable and for maintaining the accounts

25 receivables report . However, Treasury could not reconcile the receivables report to the balance

26 sheets because the Controller maintained the necessary information regarding what revenue was

27 booked, billed and written off. Thus, for most of the Class Period, the Company had no accounts

28 receivable detailed subledger that reconciled with the receivable balance reported in th e


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Company's financial statements .

74 . During the Class Period, Peregrine had two kinds of software customers : end

users and resellers . The Company initially sold software almost entirely to end users . In or about

1996, the Company began to focus on the benefits of partnering with resellers who could attempt

to broaden the distribution of Peregrine products . The effort did not succeed, however, until

defendant Spitzer joined the Company in August 1997 and recruited other sales representatives

experienced in developing channel relationships.

75. Early in Peregrine's partner program, resellers typically bought product from

Peregrine only when an end user was already identified and ready to buy . In these transactions,

sell-in and sell-through were synonymous . Over time, Peregrine placed diminishing importance

on sell-through, however, and sought the sales and earnings boost delivered by large sell-i n

channel deals without identified or committed end users .

76 . Peregrine's sales organization consisted of two groups . The "field" (or "direct")

sales force concentrated on selling to end users, irrespective of whether the software inventory

resided with Peregrine or with a channel partner . The "Alliance" sales force developed

relationships with channel partners and concentrated on selling into the channel .

77. The Alliance sales group historically had been structured around target indust ries

and key partner relationships, specifically KPMG and other major accounting and consulting

firms , as well as Peregrine 's primary partner, IBM .

78. Each quarter, Peregrine 's Regional divisions - North America, EMEA, Asia

Paci fic , Harbinger (EMG) and Alliances - independently built their own sales forecasts . Sales

Operations prep ared the North America forecast . The forecast was updated and refined through

conference calls, held bi-weekly , weekly and ultimately daily as the end of a quarter approached.

During these calls, the Area Vice Presidents reported deals that had been finalized and forecast

projected sales . They assigned rough probabilities to sale closure (e .g. "commitment, "

"expectation," "upside " or "pipeline") .

79. On the working day following each Regional forec asting call, Peregrine held a

worldwide conference call during which input was received from the Regional Vice Presidents

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on their sales forecasts . Sales Operations prepared a consolidated worldwide sales forecas t

which included a section called "On-Top." "On-Top" identified sales that typically were

negotiated by senior management ( including defendants Gardner and Gless ) and frequently

materialized into the forecast near the end of the quarter .

80. Defendants Gardner and Gless used the worldwide forecast to give market

guidance on the Comp any ' s anticipated sales revenue . After the last day of the quarter, Sales

Operations reconciled the forecast to the Finance depa rtment 's revenue repo rt .

81 . Intense pressure from defendants Gardner , Gless , Nelson , Spitzer, and Powanda

accompanied the quarter-end "count down" as forecasted sales came in and the gap closed on th e

Company's target revenue.

C How The Fraud Was Committed

82. By the commencement of the Class Period, the individually named defendants on

the Board (defendants Gardner, Moores, Noell, Cole, van den Berg, Hosley, and Watrous),

together with defendants Nelson and Powanda, had adopted a business model for Peregrine

which emphasized growth through acquisitions and strategic alliances . In addition, these

defendants focused sales and marketing efforts on Fortune 500 companies and large transaction s

with those companies in order to generate 'substantial increases in reported revenue . Increases in

reported revenues were expected to and did fuel the increase in the share price of Peregrin e

common stock .

83. The dramatic rise in the price of Peregrine common stock provided the means for

the Company to pursue acquisitions and strategic alliances while using its common stock a s

currency for these purchases or alliances . Du ring the Class Period , Peregrine completed more

than ten (10 ) acquisitions and three ( 3) additional strategic alliances for a stated value exceeding

$3 .4 billion. Appendix D hereto, which is incorporated herein by reference , identi fies the

acquisitions and alliances entered into by Peregrine during the Class Period . Each of these

transactions was approved by Pereg rine's Board of Directors .

84. GAAP prohibits recognition of any revenue from sales to channel partners unless

speci fic criteria are met. Therefore, Peregrine represented in its filings with the SEC both before


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and during the Class Period that the Company recognized revenues from product license sales t o

I service providers or partners, system integrators or resellers only if the transaction met thes e

I criteria.

85 . In its fiscal year 1999 Form 10-K filed with the SEC on or about June 29, 1999

(shortly before the commencement of the Class Period), Peregrine set forth its revenu e

I recognition policy with respect to sales of license agreements :

Revenues from license agreements are recognized currently,provided that all of the following conditions are met : anoncancellable license agreement has been signed, the product hasbeen delivered, there are no material uncertainties regardingcustomer acceptance, collection of the resulting receivable isdeemed probable and risk of concession is deemed remote, and noother significant vendor obligations exist .

86 . Peregrine made substantially the same representation concerning its revenu e

recognition policy in each of its quarterly and annual reports filed with the SEC during the Class

Period . For example, the Form 10-K for fiscal year 2000 filed with the SEC on or about

May 10, 2000 included the following statement as to Peregrine's revenue recognition policy from

license agreements :

Revenues from direct and indirect license agreements arerecognized currently, provided that all of the following conditionsare met : a noncancellable license agreement has been signed, theproduct has been delivered, there are no material uncertaintiesregarding customer acceptance, collection of the resultingreceivable is deemed probable, risk of concession is deemedremote, and we have no other significant obligations associatedwith the transaction.

Peregrine thereby assured the investing public throughout the Class Period that its revenues were

not improperly inflated through the improper and premature recognition of revenue from sell-in

transactions which were not completed. The vast majority of Peregrine's reseller deals, on which

revenue was immediately recognized upon an agreement with the reseller, involved situations

where the reseller had no obligation to pay Peregrine, or the payment was contingent on a further

sale to end users .

87 . As the size of the license agreements pursued by Peregrine grew, the Company' s

difficulty in closing these transactions increased . Purchase commitments from end users require d


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approval at the top echelons of management of extremely large corporations. Further, without a

purchase commitment from an end user, Peregrine's resellers were unwilling to enter into

irrevocable, noncontingent software licensing agreements and unconditionally obligate

themselves to purchase product with uncertain sell-through prospects . Instead, resellers required

significant inducements, in the form of discounts, rebates and the like, to take on Peregrine

products and to enter into contingent transactions .

88 . Faced with these obstacles to reporting consistent revenue growth, the

individually named defendants on the Board embarked upon a scheme in which they knowingly

violated Peregrine's own publicly announced revenue recognition policies as set forth above .

They caused Peregrine to inflate its reported revenue through the undisclosed sell-in revenue

recognition policy, and use of side agreements, oral and written, with resellers . These side

agreements were necessary to induce resellers to enter into large software license agreements so

that Peregrine could report revenue consistent with prior public guidance given to securities

analysts and investors by Peregrine's senior management, including defendants Gardner and

Gless .

89. In these transactions, Peregrine knowingly recognized revenue from softwar e

licensing deals with resellers despite the fact that one or more conditions for proper recognition

of revenue under GAAP were never met, including the following : ( i) the fee owed to Pereg rine

was not fixed and determinable ; ( ii) collectability of the fee was not probable ; or (iii) the

resellers' obligation to pay for the product was contingent upon subsequent sale of the product to

an end user. In addition , Peregrine provided ce rtain resellers with side payments , deep discounts

and rebates to induce them into "purch as ing" license agreements where no end user ha d

commi tted to purchase the product .

90. In its restatement, Peregrine admitted the illegality of its revenue recognitio n

practices by stating as follows :

During fiscal years 2002, 2001 and 2000, Peregrine recognizedrevenue when it "sold in" to a third party reseller, regardless ofwhether the reseller had a firm commitment from an end-user topurchase the software . In many cases, revenue was recognizeddespite the fact that the purchase commitments with resellers wer e


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not fixed, but were subject to conditions and contingencies . As aresult, revenue has been restated to reflect revenue only uponcompletion of the ultimate sale to an end-user customer.

91 . One confidential witness , a former senior officer of a Peregrine reseller, described

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the breadth and scope of Peregrine's illegal revenue recognition practices as follows :

I became aware in my dealings with Peregrine of what it meant towork off the "burn" - namely, I learned that there were many othertransactions similar to RTG [Rainier Technology Group, Inc .]wherein the prepayment commitments had to be "worked-off' overtime by selling the software and that Peregrine had improperlyrecognized these transactions as revenue when they should havewaited for the software to be sold through . Personally, as one ofthe stronger resellers pushing Peregrine software, I became atrusted insider, or "in the club" as it was referred to - that meantthat they trusted me and told me things that they would not say toothers.

Other trusted insider/resellers in Tier Il included :

1 . Intuition (out of Atlanta)2. Predictive Systems (out of New York City)3 . Column Business Systems4. Evergreen5 . TIG-Technical Integration Group (out of San Diego)6. Denali

Tier I resellers included :

I . KPMG2 . Accenture (which was an Arthur Andersen successor)3 . IBM Global4. Siemens5 . Perot System s

All of the above Tier I and Tier II resellers were involved in "winkand nod" transactions - involving prepayments and "burn" - I wasmade privy to this information at a dinner [in February 2002] withmyself, Joe Reichner and Gary Lenz Iformer Peregrine executives] .Peregrine would offer kickbacks to the'resellers sometimes thingssuch as tickets and box seats to sporting events and more complextransactions that involved cash.

92 . In addition, Peregrine improperly recognized revenue on "swap" transactions .

These were transactions without any economic substance . They involved the contemporaneous

purchase and sale of product with customers which were designed solely to increase reporte d

revenue of Peregrine .

93. A former Peregrine employee, who was a Director of the Alliance Group, state d


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her understanding of swaps at Peregrine as follows :

. . . Peregrine would say to the customer, if you commit to x dollaramount of purchases - we will commit a comparable amount inconsulting services to you . I knew that these type of swap shappened regarding PricewaterhouseCoopers, KPMG and Seibel,the latter was a software swap . . . Predictive was another companythat was involved in a product for guaranteed software servicesswap with Peregrine .

94. On June 3, 2002, Peregrine filed with the SEC a Form 8-K in which it admitted

such revenue recognition irregularities :

Revenue recognition irregularities, principally arising in theCompany's indirect Li e,, reseller] channel sales and, to a lesserextent, arising in connection with commercial transactionsinvolving contemporaneous product purchase activities andinvestments or acquisitions [i .e ., swaps.] KPMG has advised thatcorrecting these irregularities would have the effect generally ofdelaying to later periods, or nullifying revenue recognized fromproduct sales .

95 . As detailed below, the individually named defendants caused and/or allowe d

k Peregrine to recognize revenue based on such improper revenue transactions and Arthur

Andersen and AWSC allowed such transactions to be recognized notwithstanding knowledg e

that they violated GAAP and the Company 's own publicly stated revenue recognition policy .

Improper Revenue Recognitio n

96. In early 1999, a meeting took place in the office of defendant Powanda, the then

Executive Vice President of Worldwide Operations for Peregrine . Defendant Gardner and then

Chief Financial Officer Farley were present . During the meeting, there was a discussion as to

whether revenue would be recognized currently on a transaction with IBM Global Services

("IBM") . During the meeting, Gardner told Powanda that Peregrine would book as revenue the

pre-commitments made by IBM in order to meet Peregrine's revenue goals .

97. A former Peregrine employee, who was a Director of the InfraCenter Workgrou p

("ICW Group"), a group within the Alliance Group, recalls this meeting as follows :

I was involved directly in a conversation in early 1999 with DougPowanda, who I reported to specific to I believe IBM GlobalServices which is one of the very first deals where channel stuffingwas involved -- Powanda stated to me that Farley had told him that"we can begin to recognize pre-commitment sales in Q4, January-

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March 1999" -- Powanda told me that "we can really start to use it"referring to booking pre-commitments . . . When I commented [to]him that we can't do this since I believed it to be wrong based onmy prior experience with these matters, . . . Powanda just naivelyshrugged his shoulders .

I also remember that both Farley and Gardner popped their headsinto Powanda's office during this meeting and acknowledged thatwe [should] go ahead with the IBM commitment . It was from thispoint in early 1999 that Peregrine had made the wholesale decisionto book pre-committed re-seller sales as revenue -- after theysigned-off on the IBM deal that day in Powanda's office -- thingsreally started to go downhill for Peregrine . Powanda was actuallyready to fire Spitzer when he said that Spitzer will get thecommitments and we will book them -- this was in the March-April 1999 time frame .

98 . Another former Director of the Alliance Group similarly recalled a meeting in late

1998 involving defendants Powanda and Nelson, and CFO Farley, where they stated that goin g

forward it would be company policy to book "commitments" from resellers as revenue

irrespective of whether the reseller had a firm commitment from an end user .

99 . The meetings, agreements , and discussions regarding recognition of revenu e

immediately upon sell-in to a channel pa rtner regardless of the absence of a valid and binding

commitment to pay reflected implementation by Company employees of the April 1999 Board-

approved revenue recognition policy . Pereg rine's Board explicitly sanctioned Pereg rine's

revenue recognition fraud .

100. Pursuant to the Board's authorization to record revenue pursuant to sell-in ,

throughout the Class Period, defendants Gardner, Gless, Nelson, Powanda and Spitzer authorized

Peregrine's sales personnel to enter into transactions with resellers where there was no obligation

to pay Peregrine until the product was sold-through to the end user in order to meet publi c

revenue guidance . Pursuant to the Board's authorization, revenue on such transactions was

nonetheless recorded in full, immediately, in order to meet Peregrine's publicly stated revenue

goals .

101 . Throughout the Class Period, defendant Gardner was actively involved i n

I negotiating many of the larger pre-commitments from resellers which were improperly booked a s

revenue . After the revenue had been booked, defendants Gardner and Gless became actively


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1 involved in overseeing Peregrine's efforts to assist sales by the resellers to end users so as to be

2 able to collect money from the resellers on sell-through .

3 102. The active involvement of defendant Gardner was recounted by a former

4 Peregrine employee, who was a Director of the ICW Group, as follows :

5 In March of 2000 in a conversation with Spitzer, he talked aboutthe intent of the company to prematurely book pre-commitments as

6 revenue. Spitzer stated that "I am just following orders fromGardner and I am getting paid commissions on the pre-

7 commitments as they are booked -- and I won't take the fall --every quarter I vest my 28,000 option shares . "

8I remember asking Spitzer where the deals were coming from that

9 made our quarters when we are getting a-mails constantly to theeffect that we are going to miss the quarter and then we make it a t

10 the last minute -- Spitzer told me that he was getting paid on thesedeals and that they were coming from Gardner - Spitzer told me

11 that the deals that Gardner got involved in were all big and over$500,000 .

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13 103. Peregrine's Board-authorized practice of improperly booking revenue on

14 transactions with resellers spread worldwide in order for Peregrine to meet its publicl y

15 announced revenue goals . As one former Peregrine employee, who was a Director of the ICW

16 Group, recalled :

17 Powanda brought the practice of booking pre-commitments toEurope - he was head of European sales and later worldwide sales,

18 then Europe again - Dominic O'Reilly and Jerry Crook wer einvolved - Europe was heavily involved with the booking

19 prematurely of pre-commitments in 1999 and 2000. O'Reilly wasGardner's buddy from a previous life -- or company .

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21 104. During the Class Period, Peregrine was able to "make its numbers" to the surprise

22 of many of its employees who were actively working on closing deals . One former Peregrin e

23 employee, who was a Director of the Alliance Group, described the situation as follows :

24 All of a sudden at the end of a quarter . . . there was always somedeal that came from nowhere . . . a deal would just get done . . . it

25 just came! These deals came from all the big 5, KPMG, EDS,IBM, Fujitsu . . . we had 175 business partners .

26I knew that there was something wrong with many of these last

27 minute deals because in my role I was getting partners ready to sellour products . . . and I was surprised because I knew specifically

28 that these partners were not ready to sell our product yet ; they


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weren' t ramping up to sell our product ; and in fact they wereasking us for our help to sell our products for them .

105 . Another former employee, who was a Vice President, Supply Chain Group,

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recalled the "magic" involved in Peregrine "making its numbers" as follows :

. . . The Prokom situation was in June of 2001 and the end of thequarter . The company as a reseller agreed to purchase $5 millionin software from Peregrine - and by way of Day's side letter didnot have to pay for any software until they sold it - yet Peregrinebooked the entire $5 million as revenue at the end of the quarter.

I participated in weekly forecast meetings where accounts and thepotential closing of sales were discussed for each quarter - therewas never any discussion of Prokom as an account that had thepotential to be closed as a sale - if any sale was closed or had agood possibility of closing prior to the quarter's end you wouldhave known about it from our weekly meetings - Prokom wasnever even on the radar screen at our meetings .

When we heard after the quarter's end about the Prokom sale, wewere simply in awe and I asked Day "how did you do that -- howcould you hit your forecast number when Prokom wasn't everdiscussed in the forecast meetings? "

In July or August 2001, Jerry Crook in a conversation told meabout how Peregrine made the numbers for the prior quarter, --"Magic Quadrant Partners," he said -- "when you really need tocount on them at the end of the quarter -- you can go to them andthey come through ."

106 . Another former Peregrine employee, who was a Director of the ICW Group, als o

I recalled the "magic" involved :

I was in a June 1999 staff meeting headed by Powanda with Spitzerand Crook discussing specifics as to how and in what accounts wewere going to meet our sales numbers . . . Crook was goin gthrough every account regarding EMEA (Europe, Middle East andAfrica) and saying we would make this here and when -- and thenhe referred to the Magic Quadrant Partners being able to make thenext 40% of his sales target and that it was subject to working withPowanda - Crook was referring to the use of pre-commitmentsbooked as revenue to help make earnings estimates .

I remember e-mails each quarter close to the end of the quarterdeclaring that the quarter was in trouble -- and then lo and beholdthere were e-mails describing that we had met our quarter andcongratulating EMEA on its efforts in this regard .

107. Attempts at collecting on these phony accounts receivable proved fruitless unles s

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sell-through to the end user had occurred . For example, in the March/April 2000 time period,

Peregrine made an effort to collect from 20 to 25 reseller partner accounts including accounts at

O-E Systems, Barnhill and Corporate Software . The total value of these unpaid pre-

commitments at that time was more than $10 million . When these resellers were contacted, they

expressed anger, telling Peregrine collectors that they were being billed net 30 days for the

balance of their unpaid "commitments" despite the fact that defendant Gardner and other

executives from Peregrine had told them, at the time that the pre-commitments were made, that

they did not have to pay for software until it was sold-through to the end user .

108 . A former Peregrine employee who was a Director of the ICW Group an d involve d

in the collection effort recalled that :

It was Spitzer who told me directly that the pre-commitments hadbeen taken into revenue by the company. O-E Systems was oneaccount ; Barnhill for $1 .25 million was another -- Peregrine putthis company in a box by extracting an unattainable commitmentfrom them and then acquired them when they failed to pay ; andCorporate Software was another -- there was a list of thes eaccounts. When I started to call these partners they became veryangry telling me that they were getting billed net 30 days for thebalance of their unpaid commitments when they were told bySpitzer, Steve Gardner and others from Peregrine at the time of thecommitments that they did not have to pay for software that theywere unable to sell-though .

2. Quarters Were Improperly Kept Open To Meet Revenue AndEarnings Targets

109 . Peregrine engaged in other improper accounting practices in order to maintain th e

I appearance of revenue growth . This included holding the books open for the Company' s

I reporting quarters past the end of the fiscal period , sometimes for as long as seven (7) days . This

occurred on a regular basis throughout the Class Period .

110 . In its restatement, Peregrine admitted that quarters were improperly kept open . In

this regard, Peregrine stated :

In addition, Peregrine previously recorded numerous transactionsas revenue in a given period, although the sales order was notcompleted until after the end of the fiscal period . Revenue hasbeen restated to record these transactions in the proper periods .

111 . A former member of the Alliance Group recalls the quarters being kept open a s


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follows :

Starting in 1999, Spitzer would tell me each quarter that if I hadany outstanding deals pending, that I had a few extra days after themonth's end in the quarter to process them - other Alliancemanagers were told the same thing .

Also, in 1999, it was routine at the end of a quarter to see JohnMoores, who had an office next door to our offices roam the hallsof our building with Farley and Powanda . Moores and the otherswanted to know how the quarter ended .

112 . A former Director of the Alliance Group stated that there were repeate d

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occurrences where,

"We were not at the number for the quarter by the end of the monthand then mysteriously we would hear that we had made the quarter .Quarters were held open as a practice each and every quarter overmy six and one-half year tenure with the company ranging from 2-5 days after the calender end of the quarter . It was an ongoing jokein the company and was referred to as being the 34th or 35 ' of themonth . It got worse quarter by quarter after 2000 when th eprevailing attitude in the company was that we had to make ourquarters at all costs ."

113 . One former employee of Peregrine, who worked in sales at the ICW Group ,

recalled the quarters being kept open as follows :

I can recall specifically by e-mail and through verbal directivescoming from Bill Moore, Doug Powanda and Maree Chung, thatwe were going to keep the quarter open for 3 days, 4 days andsometimes 7 days specifically referring to each quarter ending inMarch 2000, June 2000, September 2000 and December 2000 .The relayed intent was to bring in more sales so that the companycould meet its earnings targets for the previous quarter . . .

114 . Another former employee, who also worked in sales, recalled the quarters bein g

kept open as follows :

Leaving the quarter open happened on a regular basis . . . it wasalmost on a "wink-wink" basis . It was standard operatingprocedure . My earliest recollection was in 2001 . The quarterwould stay open if we had not made our number or if we wereclose to making our number - I remember that quarters were leftopen from 2001 until when I left the company . . .

I remember specifically at the end of the fiscal year 2001, March2001 that Andy Cahill, a senior sales manager, wandered intoInside Sales - he knew and understood that we were still workingon deals for the quarter when the quarter should have been closed .

115 . By holding open the quarters, Peregrine added additional sales into the affecte d


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periods and thereby artificially inflated the Company's repo rted revenue in order to meet publicly

announced revenue goals set by Peregrine m anagement . This practice of keeping the quarters

open was widely known at Peregrine . Instructions to hold quarters open so as to allow the

Company to make revenue goals were given to employees in the sales department through verba l

directives as well as by e-mail .

3 . Improper Balance Sheet Accounting

116 . Due to Peregrine's practice of improperly booking revenue on contingent sales

agreements, the Company accumulated millions of dollars in accounts receivable which

defendants knew could not be collected . This in turn resulted in increasingly large numbers fo r

Peregrine's DSO. DSO is an analytical tool used by financial analysts and investors to assess the

quality of a company's receivables, as well as its revenue . DSO represents the average number

of days which a company takes to collect on its accounts receivable . Defendants engaged in a

scheme to conceal the increasing difficulties in the collection of Peregrine's accounts receivable

by manipulating DSO .

117 . In order to reduce the Company's DSO figures and its reported accounts

receivable, defendant Gless, after consultation with defendant Gardner, instructed defendant

Cappel, Peregrine's Senior Treasury Manager, to remove receivables from the Company's

balance sheet by "selling" them to banks at the end of each quarter. Cappel thus calculated the

dollar amount of receivables that had to be "sold" to banks to reach a target range set by Gardner

and Gless for the DSO, and "sold" the requisite amount for cash . The receivables were then

removed from Peregrine's balance sheet . This practice was not disclosed in Peregrine's public

statements, and created the illusion that Peregrine's customers were paying on a more timely

basis than they actually were . This scheme also helped conceal the existence of the contingent

sales which were being entered into by Peregrine throughout the Class Period .

118 . Toward the end of the quarter ending June 30, 1999, Peregrine had "sold" all

available accounts receivable but still had not reached its targeted DSO . Defendants Cappel and

Gless and other Peregrine personnel prepared invoices for transactions, which had not yet closed,

in the total amount of $12 million, and then sold them to banks as receivables . When some of


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the contracts ultimately did not close, Peregrine was left with a shortfall of several millio n

dollars .

119 . In June 2001, Cappel told Gless that Peregrine would miss the targeted DS O

I number for the quarter . With Gless's approval, Cappel created a false invoice in the amount of

$19 .58 million and sold it to a bank . Pereg rine 's cash flow was thereby overstated and it s

accounts receivable were understated on its books and records .

120. Peregrine also distorted and falsified its DSO and balance sheet by improperly

I accounting for cash collected from its customers . Peregrine had an agreement with its lende r

banks that the Company would collect on receivables that it "sold" to the banks, and remi t

payment to the banks within a certain time period. Peregrine had a practice of reducing its

accounts receivable when it "sold" the accounts to a bank while still retaining the monies from

the collections on these accounts until such time as it had to pay them to its banks . When the

money was collected by Peregrine from the customers whose receivables had been "sold" to

banks, Cappel would again reduce the Company's accounts receivable, thus resulting in what

Cappel called a "double dip . "

121 . Peregrine also failed to include its liability to the bank for these "sales" on its

accounts payable and it would record the cash received for the benefit of the banks as its ow n

instead of holding it in trust as required . Peregrine would then remit the payments to the banks in

the next quarter and reverse the "double dip" entries . These "double dips" occurred almost every

quarter during the Class Period beginning in September 1999. The double dips resulted in

artificially reduced accounts receivable as well as an artificial increase in Peregrine's reporte d

cash .

122 . For example, on December 11, 2001, a Peregrine customer made an early paymen t

of $13.8 million on a receivable which Peregrine had sold to a bank. The customer's payment

was not due until February 13, 2002 . Peregrine's contract required it to receive and hold

payments on receivables in trust and to remit them within two weeks . Instead, Peregrine did

neither . As a result, its accounts receivable for the quarter were understated by $13 .8 million as

was its liability to the bank .


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123 . Peregrine's transactions with its banks as alleged above did not constitute a "sale "

I of the receivables . Rather, these transactions were nothing more than borrowings from th e

banks. Throughout the Class Period, Peregrine routinely borrowed money from financia l

I institutions and treated the funds received as proceeds from the sale of assets as opposed t o

borrowings as required by GAAP . The amount of the undisclosed liabilities reached up to $180

million during the Class Period and exceeded $ 100 million by the end of the Class Period . The

effect of this accounting irregularity was to significantly understate Peregrine 's liabilities .

124. In its restatement, Peregrine admitted that "these factoring arrangements shoul d

have been recorded as loans instead of sales of receivables ." Accordingly, Peregrine restated its

balance sheet to reflect the accounts receivable and related bank loans . As of March 31, 200 0

and 2001, the undisclosed liability of the Company on these loans was approximately $90 million

and $180 million, respectively.

4 . Concealment Of Write Off Of Receivables

125 . Peregrine also violated GAAP by including the write off of receivables in the

expense catego ry of "Acquisition costs and other," and in other accounts . For example,

Peregrine did so with respect to a $3 million receivable of Barnhill as of March 31, 2000 . In a

June 6, 2002 letter to the SEC, KPMG stated that they had advised Pereg rine "and its audit

committee that the classification of the write offs of accounts receivable or revenue reversal s

recorded as an "Àcquisition costs and other ' expense in [Peregrine 's] statement of operations

was not in accordance with generally accepted accounting principles . "

126. As admi tted by Peregrine in its restatement , "[m]any accounts receivable balances

arising from improperly recorded revenue transactions . . . were inappropriately charged to ba d

debt expense, cost of acquisitions or accrued liabilities . The restated results reflect thos e

transactions as reductions in previously reported revenue ."

5 . Understatement Of Stock Option Compensatio n

127. Peregrine also understated by approximately $100 million the represented value o f

stock option compensation. In its restatement, Peregrine admitted to its improper accounting for

stock option compensation and therefore restated its financial statements with respect to stoc k


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I option accounting . In its restatement, Peregrine states :

Based on Peregrine's past practice, many employee stock optionscontained exercise prices that were below the common stockmarket values on the dates the options were granted . Under APBOpinion No . 25, the Company should have recorded compensationcost equal to the aggregate difference between the fair value of thestock and the exercise price of the options granted . The Companyalso accelerated the vesting periods for certain options which hadpreviously been granted to employees . Under FASB InterpretationNo. 44, "Accounting for Certain Transactions Involving StockCompensation, an Interpretation of APB Opinion No . 25" ("FIN44"), the acceleration of vesting of stock options after June 30,2000 could cause an accounting charge for the affected options .The consolidated financial statements, as restated, now reflect theappropriate accounting for stock options .

6. Failure To Implement And Maintain Adequate Internal AccountingControls

128 . The individually named defendants (other than defendant Rodda) and defendant s

Arthur Andersen and AWSC knew, or with deliberate recklessness disregarded , throughout the

Class Period, that Peregrine was experiencing pervasive deficiencies in its internal accounting

controls and that the financial information generated for inclusion in Peregrine ' s financial

statements was grossly inaccurate and unreliable .

129 . The Foreign Corrupt Practices Act ("FCPA"), 15 U .S.C. §78m(b)(2), was enacted

on the principle that accurate record-keeping is an essential ingredient in promoting management

responsibility and is an affirmative requirement for publicly held American corporations to

strengthen the accuracy of corporate books and records . The representations made by a company

in its financial statements and in other financial disclosures to the public are the representations

of that company's management .

130. Pursuant to the FCPA, every issuer having a class of securities registered pursu ant

to § 12 of the Exchange Act, 15 U.S.C. §781, shall :

(a) Make and keep books, records, and accounts which, in reasonable detail ,

accurately and fairly reflect the transactions and dispositions of the assets of the issuer; and

(b) Devise and maintain a system of internal accounting controls sufficient t o

provide reasonable assurances that :


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(1) transactions are executed in accordance with management's general o r

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specific authorization ;

(2) transactions are recorded as necessa ry ( i) to permit preparation of

financial statements in conformity with GAAP or any other criteria applicable to such statements,

I and (ii) to maintain accountability for assets ;

(3) access to assets is permitted only in accordance with management's

general or specific authorization ; and

(4) the recorded accountability for assets is compared with the existing

assets at reasonable intervals and appropriate action is taken with respect to any differences .

131 . Moreover, SEC Rule 13b-2, promulgated pursuant to the FCPA, was enacted to

(i) assure that an issuer's books and records accurately and fairly reflect its transactions and the

disposition of assets, (ii) protect the integrity of the independent audit of issuer financial

statements that are required under the Exchange Act, and (iii) promote the reliability and

completeness of financial information that issuers are required to file with the Commission or

disseminate to investors pursuant to the Exchange Act .

132 . To comply with the FCPA, GAAP and SEC rules, and to accomplish th e

objectives of accurately recording, processing, summarizing and reporting financial data, a public

company is required to establish and maintain adequate internal financial and accounting

controls . Contrary to the requirements of the FCPA, GAAP and SEC rules, the individually

named defendants (other than defendant Rodda) failed to implement and maintain adequate

internal accounting and financial controls and defendants Arthur Andersen and AWSC had

knowledge of such deficiencies . The indicia of the lack of internal accounting controls at

Peregrine included the following :

(a) the use of oral and written "side agreements" allowing for nonpayment by

customers ;

(b) the absence of formal minutes from any meetings of the Audit Committee ;

(c) substantial delays in providing, or inability to provide, information such a s

trial balances, general ledgers and subledgers that would customarily be readily available from a


• i1 company's accounting systems ;

2 (d) the presentation of manually prepared schedules when such information

3 would customarily be readily available from computerized accounting systems ;

4 (e) the inability to quantify the amount of sales to resellers during particular

5 accounting periods ;

6 (f) the inability to provide a list of resellers used during particular accounting

7 periods ;

8 (g) the existence of numerous, significant manual adjustments to software

9 license and maintenance revenue ;

10 (h) the preparation of the registrant's fiscal 2001 tax provision based upon pro

1 I forma earnings rather than earnings computed in accordance with GAAP ; and

12 (i) the failure to record the tax deferred effects for accruals recorded in

13 Peregrine's various business combinations .

14 133 . The Company's lack of adequate internal controls or a properly functioning Audit

15 Committee, combined with the tremendous pressure placed on the Company's employees and its

16 Board of Directors to increase dramatically reported revenue, created an environment tha t

17 encouraged the type of accounting fraud that Peregrine has admitted caused materia l

18 overstatements of Peregrine's financial results during the Class Period . The Company's lack of

19 adequate internal accounting controls constituted a "red flag" for both the individually named

20 defendants (other than defendant Rodda) and defendants Arthur Andersen and AWSC .

21 D. Participation Of The Board Of Directors In Peregrine 's Accounting Fraud

22 134. Shortly before the commencement of the Class Period, the individually named

23 defendants (other than defendant Rodda) were informed that the Company needed to rely more

24 heavily on channel sales to boost revenue and compete in its market segment . However, channel

25 sales were known by these defendants to be susceptible to manipulation and abuse, especiall y

26 where the sell-in accounting method is used . As applied to channel sales, the sell-in method

27 resulted in revenue recognition when software product was delivered to the channel partner and

28 thereby "sold into" the distribution channel . Under GAAP, the channel partner was obligated to

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have a binding commitment from a third party to purchase the software at the time of delivery in

order for there to be proper revenue recognition under GAAP .

135 . The propriety of revenue recognition in software sales, and the risk of fraud in

such transactions, was a widely known problem in the software industry during the Class Period,

and was known to experienced professionals in the software industry, including members of the

Peregrine Board, specifically defendants Moores, Noell, Cole, van den Berg, Hosley, Savoy, and

Dammeyer, who had extensive experience in the industry . There were numerous high profile

examples of accounting fraud in the software industry throughout the 1990s involving improper

revenue recognition which were known to the Peregrine Board members, including Informix ,

I Network Associates, and McKesson HBOC .

136 . Prior to the Class Period, channel sales accounted for a small portion of

Peregrine's software license revenues . For the first three quarters of fiscal year 1999 (i.e., April

to December 1998), the Company recorded only $4 .8 million in total channel sales, representing

less than 10% of license revenues for the period . A change in the Company policy regarding

channel sales approved by the Board ushered in the era of fraud at Peregrine .

1 . October 1998 Report To Board Of Directors

137 . Channel sales took on new significance with defendant Gardner's elevation to the

positions of President and Chief Executive Officer . In preparation for the Board's quarterly

meeting in October 1998, Gardner prepared a report to all Company directors concerning the

state of the Company. Entitled "Review and Outlook," these reports were distributed each

quarter to Board members prior to the Company's quarterly Board meetings . The reports were

intended to serve as a basis for discussion at the quarterly board meetings . Defendants Moores,

Nelson, Noell, Cole, Hosley, and van den Berg received and reviewed Gardner's October 1998

"Review and Outlook" report at the time it was disseminated prior to the October 1998 Boar d

meeting .

138. In his quarterly report dated October 1998, Gardner advised the Board members

that with respect to channel sales there had been "lots of smoke, little fire," and revenue fro m

channel sales was "absent ." Gardner advised Board members that "We are going to move


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'I Channels under Worldwide Sales and Marketing, focus on 3 relationships and make it happen .

I This change will be made in the next few weeks . . . "

2 . April 1999 Report To Board Of Directors

139. By the fourth quarter of fiscal year 1999, ending March 31, 1999, the Company

was in the midst of the new channel strategy . Channel sales rose to $6 .7 million, representin g

22% of all license revenues that quarter, more than double prior quarters .

140. The Company intended to raise these numbers even higher . On April 21-24,

1999, the Company's sales force met at the La Costa Reso rt and Spa in La Costa, California for

its annual Sales Kick-Off. At the meeting , channel sales were a featured topic . In a presentation

at this event, defendant Powanda spoke concerning "Integrating our Channel Partners ." In a 90-

minute presentation that same day, defendant Spitzer, Vice President, Alliances, spoke on the

topic, "Using the Channel in FY 00 - Key to Closing Business . "

141 . In conjunction with the Sales Kick-Off meeting, the Board of Directors met at L a

Costa on the afternoon of April 22, 1999. The meeting was conducted to review both quarterly

results and results for the recently-completed fiscal year, including an "outlook and budget" for

fiscal year 2000 and executive compensation issues . In addition, given the proximity of the Sales

Kick-Off meeting, defendant Gardner encouraged the directors to take advantage of the

opportunity it afforded and "to attend as much of the kick-off as you like ." Attendees at this

Board meeting included defendants Gardner, Moores, Nelson, Noel], Cole, Hosley, van den Berg ,

and Watrous .

142 . Defendant Gardner's report in connection with this Board meeting was dated

April 19, 1999 and was titled "Fiscal Year 1999 Review, including details of the 4'h Quarter ."

Defendants Moores, Nelson, Noell, Cole, Hosley, van den Berg, and Watrous received and read

this report at the time it was disseminated to the Board members in April 1999 . The report

contained a section headed "Continued Strong US performance, particularly in Channels ."

It stated that,

This was the first quarter that channels contributed meaningfully torevenue . Steve Spitzer's team came through in a big way .


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2 Given the favorable valuation of the company, it is time to proceedwith a follow-on offering to raise additional cash for acquisition

3 purposes. We would propose a follow-on offering which wouldnet $70 to $100 million in cash for the company in the May 1999

4 time period. The total offering size would depend upon theappetite for our equity in the market and the desires of other selling

5 shareholders.

6 Commenting on related issues, Gardner informed the Board members that in the area o f

7 "customer satisfaction" an external survey showed "a negative trend from the survey six months

8 earlier ." As to productivity of sales personnel, Gardner advised the Board members that "[o]ur

9 median performer is not producing enough and we have too many people who were on-quota all

10 year who produced very little ." In projecting results for Fiscal Year 2000, Gardner informed the

11 Board members as follows: "We are targeting to exceed budget , as a global organizatio n

12 with $300 million revenue and at least $0.65 EPS for FY 2000; This is our 300/200

13 program ." (Emphasis added) . In explaining the program to the Board members, Gardne r

14 relayed that "if we meet the goal of $300 million in revenue in FY2000 with an EPS of at leas t

15 $0.65 per share, that every employee will be fully vested at the end of one-year in 300 options for

16 Peregrine stock at an exercise price set in April of 1999 . . . Please approve the 300/200 program

17 option grant and the attached budget submission ." The program was approved by the Board as

18 proposed . Gardner also advised the Board of a major organizational change to achieve th e

19 300/200 goal, which involved putting defendant Powanda in charge of the "Operations Group,"

20 including sales, marketing, professional services and customer support . Powanda's new title was

21 Executive Vice President for Operations . One of the reasons offered by Gardner for Powanda's

22 promotion, and related increase in proposed compensation, was that he helped to achieve th e

23 Company goal of increasing channel revenue from less than 5% in the first half of the year to

24 over 15% in the second half .

25 143. Like the Sales Kick-Off meeting, channel activity was a topic addressed at the

26 April 1999 Board meeting, a reflection of the recent increase in channel sales and, mor e

27 importantly, their anticipated future growth. Then Chief Financial Officer Farley presented to the

28 Board the issue of whether to apply the more aggressive sell-in method rather than the sell-


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through method of accounting to the Company's channel sales .

144 . Farley told the Board that the sell-in method was not the "preferred" method of

accounting. He explained that it was only by using the sell-in method, that the Company would

meet its financial goals for the prior quarter (the fourth quarter of fiscal year 1999), which had

ended three weeks earlier . He warned that, without adopting the new approach, the Company

would fail to meet stock market expectations . Farley had insisted that the Board be made aware

of this proposed change in accounting treatment of channel sales and signify its consent, which

the Board did at this meeting . Defendants Gardner, Moores, Nelson, Noell, Cole, Hosley, van

den Berg, and Watrous specifically approved of the use of this new more aggressive accounting

method at the April 1999 Board meeting .

145 . At the April 22, 1999 meeting, Board members also were told that defendant

Arthur Andersen, the Company's auditor, was not comfortable with any level of channel activity

which accounted for more than 25% of revenue . In the just-completed fourth quarter of fiscal

year 1999, 22% of license revenue derived from channel sales and it was clear from Gardner's

report to the Board that channel sales would represent an increasing percentage of licens e

revenue .

146 . Farley stated at the April 1999 Board meeting that adopting the sell-in metho d

I would not be a panacea for problems the Company was experiencing. For example, by applying

the more aggressive sell-in method for the prior qua rter , the Company would meet revenue

expectations only by cu tting into revenue for the coming first qua rter of fiscal year 2000 ending

June 30 , 1999 . It was in essence borrowing revenue from the future . This confirmed to Board

members that there was an underlying and continuing weakness in Peregrine 's overall sales

efforts .

147 . On April 26, 1999, the Company announced its financial results for the quarter

ending March 31, 1999 and its year-end results for fiscal year 1999 . According to the

announcement, and applying the undisclosed sell-in accounting treatment, the Company posted

revenues of $46 .1 million for the quarter, a 129% increase over the prior year's comparable

period, and revenues of $138 .1 million for fiscal year 1999, a 123% increase over results fo r


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fiscal year 1998 . These reported numbers met Wall Street expectations . The investing public

was never informed that the reported results attained throughout the Class Period were only

achieved as a result of the Board's approval of a change to the sell-in method of revenue

recognition at this meeting .

3 . October 1999 Report To Board Of Director s

148 . The individually named defendants (other than defendants Savoy, Dammeyer an d

Rodda) were aware of the deepening problems with Peregrine's channel activities, as reflected in

defendant Gardner's report for the Board's October 19, 1999 meeting . Defendants Moores,

Nelson, Noell, Cole, Hosley, van den Berg, and Watrous received and reviewed Gardner's

October 15, 1999 "Fiscal Q2 2000 Review and Outlook" at the time it was disseminated prior to

the October 1999 Board meeting . Gardner presented an ominous report to these defendants :

[T]his was the toughest quarter we have experienced since June of1997 . A decent performance from the West, a strong quarter (butstill small) from Asia/Pacific Latin America and a very strongchannel performance allowed us to compensate for these majordeficiencies . We have now reached a level of channel activitythat is concerning as we look to the future . We have a largeamount of inventory in the channel that must be sold through,and this must be done as we simultaneously continue to growour direct businesses . (Emphasis added) .

149. All of the channel inventory described by Gardner had been recorded as revenue

pursuant to the policy previously approved by the Board .

150. The ability to sell the burgeoning channel inventory was compounded by a crisi s

in the direct sales area . Although the Company needed "to grow its direct sales," those efforts

had to overcome the fact that it faced a "direct sales challenge ." As reported by Gardner, "Sales

rep productivity in the direct sales area was at a very low level (less than $1 million annualized)

in the September quarter." This reflected a 29% drop in productivity . Gardner advised the

defendants that it was only because of a "strong channel performance" that the Company was

able to overcome these "major deficiencies ." In other words, loading up the channel with

inventory that could not ultimately be sold was allowing the Company to maintain the illusion of

prosperity and success . The defendants identified in paragraph 148 were specifically informed of

this fact in connection with the October 1999 Board meeting .


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151 . In the face of these serious and fundamental problems confronting the Company

in late 1999, defendant Gardner proposed an exit strategy for himself and defendant Powanda .

Rather than waiting for the Company's problems to grow worse, Gardner sought Board approval

for the creation of an e-business website, InfraPlace .com, as a separate company to be run by

defendants Gardner and Powanda, together with Farley . In answering the question he posed in

this report, "So, are all the rats moving on?," he acknowledged that current management was no t

the right "operating management team" to take the Company to $1 billion in revenue . Gardner

stated that Peregrine had "12 to 18 months to get the right team in place before we have a crisi s

I point . . ." Attendees at this meeting included defendants Gardner, Moores, Nelson, Cole, Noell ,

I Hosley, van den Berg, and Watrous.

152 . On October 20, 1999, the Company announced results for the second quarter of

fiscal year 2000 ending September 30, 1999 in a publicly disseminated press release . It reported

revenues,of $57 .8 million, a 95% increase over the prior year's second quarter . No disclosure

was made concerning the Company's increasing level of channel activity and its vital importance

to meeting published earnings estimates, the exploding inventory levels, the weaknesses in direct

sales, senior management's request to leave the Company, or the coming crisis point in 12-18

months .

153 . The crisis from bloated channel inventory deepened in the third quarter of fisca l

year 2000 ending December 31, 1999 . Channel sales remained high , at $18 .6 million,

representing 40% of license revenues , and inventory rose sharply to $57 . 1 million, an amount

equal to 84% of license revenues for the quarter. With a quarterly bum rate of less th an $3

million, the Company would need almost 20 months to dispose of existing inventory .

4 . January 2000 Report To Board Of Director s

154 . On January 18, 2000, Gardner disseminated a report to defendants Moores ,

Nelson, Noell, Cole, Hosley, Watrous, and van den Berg, which they each received and

reviewed, and which was prepared in connection with the January 20, 2000 Board meeting .

Defendant Gardner told the Board members in his report that it was a "very tough quarter" :

Once again, however, this was a very tough quarter. The opening


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lines from Dickens['] Tale of Two Cities summarizes it best : "Itwas the best of times, it was the worst of times . It was a time ofwisdom. It was a time of foolishness."

** *

Why was it the worst of times ?

• We have a $2 million professional services revenueshortfall compared to plan with little or no warning . Halfof the reason for this was Y2K, the remainder was the shifttoward selling through alliances, which had not beenadequately factored into the plan . . . .

• Our bread and bu tter business went to hell. The dealsbetween $75K and $500K just were missing in action .Some of this may also be Y2K effect, most of it wasundoubtably due to the huge sales force re-engineering wehave undertaken . In other words, we did this toourselves . . . I suspect we have one more quarter, andperhaps two, of hand-holding and close upper managementinvolvement in sales . Sales force productivity is at aridiculously low level . The US is substantially under $1million per person and EMEA is right around $1million/person , while we need both to be closer to $1 .5million per person . Big deals and excellent individualperformances were required to cover the shortfall, whenthey should have been the icing on the cake.

• . . . The US was even worse . We had a bad forecast tobegin with, a gradual improvement in the middle part of thequarter, and then a $4 million melt-down in the last week ofthe quarter. Only the KPMG deal with Sodexho/Marriottand Gold mine saved the US performance .

Why was it a time of foolishness ?

• . . . I have come to the conclusion that we are at theawkward teenage stage of our existence . We are muchbigger than we were but not big enough to be takenseriously . . .

• Our channel business is now a cause for concern . Weare victims of both our own success and a changingaccounting and regulatory landscape . We have been muchmore successful generating sales to channels and gettingpartners to buy into our message and vision . We have notbeen as successful, and in some cases unsuccessful, ingetting the sell-through that would remove theinventory of software from the channels . Rather than a3 to 6 month latency, the inventory is moving in closerto 9 months as partners ramp up . Due to several highlypublicized incidents at other companies (Informix,


S •

1 Network Associates , HBOC), the rules are tightenin gand practices are being re-examined . The net of this is

2 that we are now at a level of channel inventory thatmakes our auditors uncomfortable . (Emphasis added).

3

4 155. By his report, Gardner informed Board members that channel sales were a serious

5 ongoing problem. Defendant Gardner also informed the Board of material adverse developments

6 regarding direct sales, and that "big deals" were required to cover the shortfall, to ensure that the

7 Company did not disappoint market expectations .

8 156. Gardner stressed in his report that achieving $75 million in revenue for the fourth

9 quarter of fiscal year 2000 was "important," but would not be easy . To reach that figure while

10 simultaneously holding down or reducing channel inventory, would require three concurren t

11 developments : (i) an increase in direct sales productivity to an annualized $1 .5 million level per

12 salespersons: (ii) a "couple of big deals," citing a prospective large sale to Electronic Dat a

13 Systems ("EDS"); and (iii) completion of some acquisitions before the end of the quarter .

14 Without the latter two elements (i.e ., a large deal and the acquisitions), revenues for the fourth

15 quarter would be only $64 million, well below Wall Street expectations .

16 5. Februa 2000 Activi Regarding the Harbinger Ac uisitio n

17 157. By February 2000, defendants Gardner, Moores, Nelson, Noell, Cole, Luddy, and

18 Powanda were aware of material nonpublic information concerning a planned acquisition o f

19 Harbinger Corporation, an Atlanta-based e-commerce transaction delivery firm . When it later

20 was announced, the Company's proposed acquisition of Harbinger was negatively received by

21 the investing public, causing a 36% drop in the first day alone in the Company's stock price, and

22 erasing over $2.5 billion in shareholder equity .

23 158. In pursuing the Harbinger acquisition, defendants privately had concluded that the

24 acquisition would depress the price of Peregrine stock . They knew that Harbinger had a slower

25 growth rate and lower operating margins (based on then-reported financial results) than did the

26 Company, and the strategic fit with Harbinger was unlikely to be readily apparent to the investing

27 public .

28 159. Consideration of the Harbinger acquisition began in late 1999. Seriou s


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discussions involving executives of both companies took place in January 2000 and Februar y

2000, with updates to key Board members, including defendants Moores and Noell . The

transaction was finalized and documented in March 2000 and publicly announced April 5, 2000 .

Costing more than $1 .5 billion, Harbinger was the largest acquisition in the Company's history .

Given its sheer size, and the strategic departure it represented, the acquisition was reviewed an d

I analyzed by the individually named defendants (other than defendants Savoy, Dammeyer an d

Rodda) well before its public announcement .

160. In early November 1999, defendant Gardner and Farley traveled to Baltimore for a

meeting with defendant Noell's old firm, Deutsche Bank Alex . Brown, whose affiliate Deutsche

Bank Securities Inc . acted as the Company's investment banker . On November 8, 1999,

defendant Gardner placed a call to Karl Will, managing director in Deutsche Bank Alex . Brown's

San Francisco office, who was the senior investment banker representing the Company on the

transaction. Thereafter, Deutsche Bank Alex . Brown forwarded to the Company background

information concerning Harbinger, including stock price and ownership information, SEC filings,

public news articles, and a recent Harbinger presentation for a technology conference hosted by

Deutsche Bank Alex . Brown.

161 . In the ensuing weeks, Farley kept certain key Board members updated on the

unfolding Harbinger transaction, including defendants Noell and Moores . He also coordinated

the sale of insider shares . According to phone records, during the two-week period of inside r

selling from February 15-29, 2000, he made at least five telephone calls either to the main

number at JMI Services or directly to defendant Noell's office at JMI Services .

162 . Farley was in regular contact with brokers responsible for selling the Company's

stock on behalf of defendants, which according to defendant Noell included Deutsche Bank Alex .

Brown and Goldman Sachs . According to phone records , Farley placed at least 25 calls to

Deutsche Bank Alex. Brown (Brett Clifford) and at least 23 calls to Goldman Sachs during the

six-week period from mid January 2000 through the end of February 2000 .

163. Frequent meetings and calls ensued as the Harbinger deal progressed . According

to a Form S-4 filed with the SEC for the merger, defendant Gardner met again with Deutsch e

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Bank Alex. Brown in January 2000, when he authorized contact with Harbinger . Thereafter, on

I February 8, 2000, he talked by phone with the Harbinger Chief Executive Officer and its Genera l

I Counsel concerning "the benefits of a strategic relationship between the companies . "

164 . Additional calls followed in the next several days as the deal gathered momentum .

On February 14-16, 2000, calls were made to the Harbinger CEO . On February 14-15, calls were

I made to the Deutsche Bank banker, including by defendant Gardner .

165 . Between February 15 and 18, 2000, defendants Moores, Cole, Gless, Luddy, and

Powanda sold 4 .3 million shares of Company stock for over $194 million, with Moores

àccounting for over $177 million in just two days of trading . At the time, Peregrine stock trade d

at or near record highs, closing at an all-time high on February 16, 2000. The insider selling

proceeds for the selling defendants in these four days exceeded Peregrine's total reported

revenues over the prior three quarters .

166. According to phone records, Farley placed nine calls to defendant Moores' broker

at Deutsche Bank Alex . Brown on February 17, 2000, with the last call not concluded unti l

7:30 p .m. EST. In addition, he called the Houston office of Goldman Sachs two times, where a

broker retained by defendant Moores was employed, and another three calls were placed from the

Company to numbers associated with Deutsche Bank Alex. Brown. On the following day ,

February 18, 2000, as the selling continued, Farley made two calls to Deutsche Bank Alex .

Brown and another three to Goldman Sachs . One of his last calls that day was to JMI Services ,

the investment firm of defendants Moores and Noel] .

167. Given the ramifications of the Harbinger acquisition , defendants Moores and

Noell kept ab reast of the discussions . On February 22, 2000, defendant Gardner and Farle y

traveled to Houston for what expense records refer to as a "JMI Meeting," where they wer e

joined by defendant Luddy, the Company's chief technology officer .

168 . Prior to departing for the JMI meeting early on February 22, Farley made two call s

each to Deutsche Bank Alex . Brown and to Goldman Sachs, all shortly before or just after the

commencement of stock market trading that day . Upon arriving in Houston later that morning ,

he again made calls to Deutsche Bank Alex . Brown and Goldman Sachs . In addition, he

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accessed the browser function on his cell phone some sixteen times before the close of the

markets that day, on average once every fifteen minutes .

169. The day after the JMI meeting, February 23, 2000, Farley again placed calls to

Deutsche Bank Alex . Brown and Goldman Sachs at or near the time that the markets opened . He

also continued monitoring his browser, initiating some 28 sessions in only two hours, or onc e

every six minutes, before departing Houston .

170. Upon their return to the Company's offices on February 24, 2000, Farley was

again in contact with Deutsche Bank Alex . Brown and Goldman Sachs, and he placed a call to

defendant Noell as well . By the end of the day, defendant Gardner and Farley booked airline

tickets to San Francisco, where on February 29, they traveled with defendant Nelson for a dinne r

meeting with Harbinger executives .

171 . Thus, the Company's management committed to a face-to-face meeting with

Harbinger after the trip to Houston for the JMI Services meeting . Coupled with Farley's constant

monitoring of his browser while in Houston, his repeated phone calls to Deutsche Bank Alex .

Brown and Goldman Sachs, and the presence of the Company's chief technology officer in

Houston, these facts demonstrate that the "JMI meeting" was an update on both the Harbinger

acquisition and the ongoing insider stock sales .

172 . Upon agreement from defendants Moores and Noell, the discussions with

Harbinger moved forward, with defendants Gardner and Nelson, and Farley meeting the

Harbinger CEO, chief financial officer, and general counsel in San Francisco for a dinner on

February 29, 2000 . According to the Form S-4, after a discussion of their respective businesses,

the San Francisco meeting focused on strategic alternatives for the companies, including "a

possible business alliance, joint venture, or business combination . "

173 . Prior to traveling to San Francisco, Farley called defendant Noell at his JMI

Services office . Noell had not been a supporter of the Harbinger acquisition . He believed that

Harbinger's slower reported growth and lower operating margins were likely to cause Peregrine's

stock price to fall upon announcement of the transaction . In an e-mail two years later, defendant

Moores recollected that "Noell was the only dissenting voice on the board ." As for Moores' s


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I own position, he noted : "I forget (conveniently, in all likelihood) what I thought at the time . "

174. Formal approval of the Harbinger acquisition was given on April 5, 2000 with al l

directors voting in favor, including defendant Noell . The vote occurred after defendant Moores '

I stockholdings in Peregrine had been reduced by over $177 million , before the material risk s

I accompanying the Harbinger acquisition became publicly known .

175 . When announced, the Harbinger acquisition caused the Company's stock to fal l

from $58 to $36.75 in a single day of trading on then-record volume of 23 million shares . The

downward spiral in the stock price continued over the next several weeks, until it went under $1 8

per share in late May 2000 .

176. Pursuant to the terms of the merger agreement, as announced on April 5, 2000, th e

Company acquired all of the outstanding stock of Harbinger at an exchange ratio of 0 .75 share of

the Company's stock for each share of Harbinger stock .

177 . During the period February 15-19, 2000, defendants Moores, Cole, Gless, Luddy,

and Powanda, knowing material nonpublic adverse information concerning the Harbinger deal ,

sold more than 6 million shares of Company common stock, obtaining proceeds exceeding $19 3

million.

6. Jul 2000 Report To The Board Of Directors

178 . In his quarterly report for the summer 2000 Board meeting, provided to and read

by defendants Moores, Nelson, Noell, Cole, van den Berg, Watrous, and Savoy in advance of the

July 18, 2000 Board meeting, defendant Gardner gave the Board a very negative depiction o f

events at Peregrine :

Well, we made it through the first quarter . That is probably thebest summary I can give . It was a very tough quarter . . . . It wasnot easy and we did not accomplish everything we should haveaccomplished.

The second half of the quarter was consumed with closingbusiness . This is what we always do for in the second half of aquarter, but this time, though, it was very hard . Our forecasts outof North America evaporated in the final 10 days . We knewwe had a weak forecast in EMEA from the starting day of thequarter , and we have to scramble at the end to get some keydeals done . The Harbinger operation (now our e-BusinessConnectivity Group) also saw a real fall-out of forecasted busines s

FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS -Mas ter File No. 02-CV-0870 J(RBB) 64

in the closing days of the quarter. The bottom line is that what onJune 20" looked like a quarter that would allow us to carry $10to 12 million of backlog into Q2 while beating EP Sexpectations by a penny , turned into a quarter that closed witheffectively no backlog and with EPS on target and the ability toscrape into a penny over with tightened expenses .

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We will show approximately $94 million in top line revenue and$0.10 EPS against a $0 .09 expectation ; however, we go into thealways -difficult September quarter essentially naked . . . .(Emphasis added . )

Under the heading "Areas of Concern," Gardner noted the following :

• Average productivity per direct sales rep fell to a 3 yearlow. The "bread-and-butter" deals in the $100K to $500Krange basically dropped off the radar screen .

• Sales management weakness in France, Germany,Asia/Pacific/Latin America, and parts of the US becameapparent .

Regarding the "Outlook for Q2," Gardner informed the Board members of the following :

Budget numbers call for $145 million in total revenue . . . . Giventhe recent shortfall in forecasts and our growing concerns about theproductivity of our sales teams, this number may be verydifficult to reach .

Our current forecast roll-up would indicate a downside of about$130 million, or a $15 million shortfall . . . . If we close a few ofthese large deals and we do not have another fall-out of the "bread-and-butter" business forecast, we will fill the gap and make thenumbers. We even have the potential to carry a backlog into theDecember quarter, but it would be somewhat miraculous . . . .

In short, it is going to be a tough quarter again, and without abacklog cushion to absorb any shortfall or potential inability to pullin the needed large deals. (Emphasis added) .

179 . In addition to the foregoing business setbacks, defendant Gardner reported to th e

Board members the difficult cash position of the Company, the need to raise cash, and the

inability to do a public offering because of the business uncertainties :

We came out of the quarter with about $70 million in cash.However, we have some large payments due for acquisition-relatedcharges, build-out of the San Diego campus, and other items thatwill drain cash this quarter . Our current projection is that we willend the quarter with $35 million . This is not enough .

We would like to raise a minimum of $50 million and up to $25 0

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to $300 million if market conditions permit . However, given theuncertainty surrounding the September quarter outlook, it is hard toproceed with any type of public offering . (Emphasis added) .

180 . On July 20, 2000, the Company announced its financial results for the first quarte r

of fiscal year 2001, ending June 30, 2000 . According to the announcement, Peregrine had

revenues of $94 .3 million for the quarter, an 83% increase over the previous year's comparable

period . Neither the announcement nor related SEC filings disclosed material nonpublic adverse

information, including (i) that the Company had continuing concerns about its sales teams, whose

productivity was at a three-year low, (ii) that its mid-size market continued to seriously

underperformance, (iii) that it had no sales backlog for the coming "always difficult" quarter, (iv)

that it was running out of cash and could not complete a public offering because there was

substantial doubt as to whether the Company would meet its earnings target for the secon d

quarter of fiscal year 2001 ending September 30, 2000 .

7 . October 2000 Report To The Board Of Directors

181 . In his October 16, 2000 report to the Board members, which was received and

reviewed by defendants Gless, Moores, Nelson, Noell, Cole, Savoy, and Watrous at the time it

was disseminated, Gardner reported as follows :

Another quarter is behind us . As you know it was a nail-biter, butin the end we pulled it off . . . [w]e also had to borrow from thefuture to make the present happen . In other words, we had togrant some extraordina ry terms on a few deals in the closinghours of the quarter to move business into the September timeperiod . This will clearly impact December and March, but Ithink the damage will be manageable .

[S]ales productivity its far from where we want it . . . The averagerep and the average deal is missing in action.

We don't have enough [cash] . . . We need to raise cash now .(Emphasis added) .

182 . As for plans to raise cash, Gardner suggested a convertible preferred debt issue of

$150 to $250 million in the market as a Rule 144 offering . One reason for his suggestion was

that by doing this type of private offering "[w]e also avoid the overhead and delay of an SEC


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filing and review process, . ." Gardner observed that the Company was "saved" by "huge deals

with alliance partners ." It was known to Board members, or with deliberate recklessness,

disregarded by them, that these "huge deals" were fully contingent transactions with resellers

pursuant to the sell-in, Board approved improper accounting method .

183 . With regard to the Company's chronic shortage of cash, according to notes of a

October 9 , 2000 sales group meeting taken by Taylor Barada , Gardner ' s special assistant and

nephew of defend ant Noell , defendan t Gardner announced that the "line of credit is how we live

between [the] first two weeks and last two weeks" of each quarter , and "we need to raise cash ."

A ttendees at this meeting included defend an ts Gardner , Luddy , Powanda, and Gless .

184. On October 24, 2000, the Company announced its financial results for the secon d

quarter of fiscal year 2001 ending September 30, 2000 . According to the announcement,

Peregrine had revenues of $142.7 million for the quarter, a 147% increase over the previous

year' s comparable period . Neither the announcement nor related SEC filings disclosed mate rial

nonpublic adverse information , including : (i) that results for the Company's mid-size transaction

market remained ex tremely unsatisfacto ry, ( ii) that it relied on "huge deals ," which were

contingent, with alliance partners to meet its forecasts , ( iii) that the productivity of its sales force

continued to dete riorate, ( iv) that it had to grant "extraordinary terms" to get key de als done, (v)

that the Company had to "borrow from the future to make the quarter," and (vi) that there w as a

desperate need for c ash .

8 . January 2001 Report To-The Board Of Directors

185. The foregoing material problems persisted in the ensuing quarter. In his report to

the Board for the third quarter of fiscal year 2001 ending December 31, 2000, which was

provided to and read by defendants Gless, Moores, Nelson, Noell, Cole, Savoy, and Watrous in

advance of the January 26, 2001 Board meeting, Gardner reported that "there were also some

substantial business disappointments ." He advised that the Company's "direct business in North

America was a disaster," with only slightly more than $13 million of business on a plan of over

$50 million and a forecast late in the final month of the quarter of almost $40 million . Sales

representative productivity was 68% of plan, and U .S. productivity less than 50% of plan .


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Continued "heavy reliance on alliance and channel partners" remained a concern, such tha t

defendant Gardner was "cautious " about the Company's prospects going into the fourth quarter .

186 . On January 24, 2001, the Company announced its financial results for the third

quarter of fiscal year 2001 ending December 31, 2000 . According to the announcement, it had

revenues of $156.6 million for the quarter, a 132% increase over the previous year's comparable

period. Neither the announcement nor related SEC filings disclosed material nonpublic adverse

information, including : (i) that the Company's direct business in North America was a "disaster, "

(ii) that the continued "heavy reliance" on alliance and channel partner contingent deals made its

CEO "cautious" concerning the future, and (iii) that the productivity of the sale force wa s

I unsatisfactory and materially below plan . In addition, the Company completed a desperatel y

needed $270 million private convertible securities offering in the quarter . Public disclosure of

the material adverse facts reported to the Board members in the January 15, 2001 report woul d

have made this offering impossible to close .

9 . April 2001 Report-to-Board of Directors

187. On April 16, 2001 Gardner disseminated a report to the Board members regarding

the fourth quarter of fiscal year 2001 ending March 31, 2001, and the outlook for fiscal yea r

1 2002 . This report was received and read by defendants Gless, Moores, Nelson, Noell, Cole ,

Savoy, and Watrous prior to the quarterly Board meeting . In his report, defendant Gardner stated

that "the difficulty of the quarter leads us to be more cautious about the next couple of quarter s

than we have been previously . . ." Gardner referred to the "massive expansion of our relationshi p

with IBM" as the highlight of the quarter. However, he observed that very large deals with Fleet

Boston, Morgan Stan ley , and ABN AMRO Bank (each with greater than $10 million potential )

were scrapped because the customers "were not prepared to spend any money ." He further told

the Board members that management "are very concerned about the irrational buyer behavio r

now being seen in the market . . . "

10 . July 2001 Report To The Board Of Director s

188. In early July 2001, Gardner disseminated a report to the Board members regarding

the first quarter of fiscal year 2002 ended June 30, 2001 . This report was received and read by


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defendants Gless, Moores, Nelson, Noell, Cole, Savoy, Watrous, and Dammeyer prior to the Jul y

118, 2001 Board meeting . Among the items discussed by Gardner in this report were renewal o f

concerns regarding available cash :

Cash will decrease to approximately $240 million due toinvestments made during the quarter in Remedy stock (when wewere contemplating a hostile bid) and other investments made inprivate equity placements in strategic partners . . . There was also acash outflow in the quarter to fund severance and restructuringcosts associated with the lay-off 290 people we undertook at thebeginning of the quarter. We are becoming very tight with furthercash expenditures as we get ready for the closure of the Remedydeal . We anticipate after closure and payment of the cashportion of that deal that we will have $150 to $170 million incash for operations . If we see a favorable market windowduring the coming 180 days post -dosing of Remedy , we willprobably want to go out with a common equity offering, fullymarketed , to raise an additional $200 to $300 million .(Emphasis in original) .

189. In addition, defendant Gardner informed the Board about the overall status of th e

Company's business . He called the quarter "difficult," and advised that "Europe did weaken

dramatically in the final weeks of the quarter . . ." Further ,

[The] "Infrastructure Management Group (IMG) team struggled inthe quarter as the economic downturn really impacted both newname sales and reduced average deal sizes ." "We now know thatEurope is weakening, which we had not assumed last quarter, andthat this weakness is flying into a seasonally weak period in Europeanyway. We are seeing signs of a mild recovery or at least stabilityin the US, but that is very fragile. We also have less backlog towork with going into September than we did in June, but avery large pipeline. I believe the quarter is quite achievable, butas always, there is plenty of risk and uncertainty that we will needto manage through . Our close rate on end-user deals with directsales will have to improve . . . My larger concern is December, inwhich we had guided to a fair amount of sequential growthassuming that we would see normal year-end buying patternsand a recovering economy . Both assumptions are in question .(Emphasis added) .

190. At a July 18, 2001 Board meeting at the J.W . Marrio tt Hotel in New York City ,

attended by defendants Gless, Nelson, Noell, Cole, Savoy, Watrous, and Dammeyer, these

defendants were advised that the Company had received an inquiry from the SEC regarding

transactions with Critical Path, a software company based in San Francisco that principally

focused on Internet communications . They learned that a national business magazine, Business

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Week, had contacted the Company in connection with an upcoming article concerning Critical

Path, raising the possibility that Peregrine would be linked publicly with the ongoing federal

investigation . In response, defendants directed preparation of a press release to be issued, if

necessary, denying any wrongdoing by the Company . Shortly after this meeting, defendant

Moores was informed about what had occurred at the meeting by defendants Nelson and Noell .

191 . Subsequently, on February 12, 2002, the CEO of Critical Path pled guilty to

conspiracy to commit securities fraud in connection with the transaction between the Company

and Critical Path. Peregrine was associated with Critical Path's fraud . According to his plea

agreement, "the object of the conspiracy was to report false revenues to meet Critical Path's

predicted financial results ." Critical Path and Peregrine "separated contracts for each purchase,

each paid full amounts owed, and made payments to each other on different days," in order "to

avoid the appearance that the transaction was a software swap . "

11 . October 2001 Report To The Board Of Director s

192. On or about October 15, 2001, Gardner disseminated a report to the members of

the Board which was received and reviewed by defendants Gless, Moores, Nelson, Noel], Cole ,

Savoy, Watrous, and Dammeyer in connection with the Board meeting conducted o n

October 17, 2001 . He informed the Board members that the financial guidance that the Company

had given to the investment community during a conference call on October 4, 2001 was already

in jeopardy of being inaccurate : "[a]s of right now, forecasts from our sales teams at the

"commit" level are skittish and a bit below the level we need for even the lowered guidance fo r

the December quarter ." Gardner reported that the only way the Company would be able to meet

its earnings per share guidance was by starting, in January 2002, to require employee

contributions to benefits plans "for the first time ever." He advised the Board members : "[t]hi s

$30 million savings will permit us to make our EPS guidance against the lower revenue

25 11 guidance . "

193 . Once again, Gardner directed Board members' attention to the problematic cash

situation :

We have about $140 million in cash and we have nearly completed

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1 a $150 million LOC . We can run the company at these levels but itis a bit tight. We plan on filing a shelf registration shortly, not to

2 sell stock at current levels, but to have the ability to do so shouldmarket conditions change . Ideally, we would raise an additional

3 $200 to $300 million in capital .

4 The Company's continuing need to access the capital markets to raise cash to fund operations

5 made it imperative that there be no disclosure of the material adverse facts reported to the Board

6 by defendant Gardner .

7 194. On October 24, 2001 Peregrine issued a press release reporting its results for the

8 second quarter of fiscal year 2002 ending September 30, 2001 . The press release characterized

9 the results as "disappointing relative to our original expectations," but made no mention of the

10 continuing material problems afflicting Peregrine's business, including (i) the need to collec t

11 contributions from employees to make its earnings estimate for the quarter ending December 31,

12 2001 and (ii) the tight cash situation and the need to raise additional capital .

13 12. December 2001 Report To The Board Of Director s

14 195. On December 31, 2001, Gardner sent a report by e-mail to, among others ,

15 defendants Gless, Moores, Nelson, Noell, Cole, Watrous, and Dammeyer, which they received

16 and reviewed at the time it was disseminated, and which provided a summary of the third quarter

17 of fiscal year 2002 ending December 31, 2001 . Gardner reported as follows :

18 This was a very tough quarter. The final numbers are not yetin and it will take a couple of weeks to get all the detaile d

19 information about expenses , balance sheet items, andbreakdown of revenue, but it is clear today that we missed our

20 external revenue targets by a wide margin (about $40 million)and we missed our internal targets by a wider margin. My

21 best guess is that we will end at approximately $175 to $180million in revenue. For the first time as a public company we

22 will post a loss in operating results per share . We estimate thatloss to be about $14 - $16 million or about $0.06 to $0.08 pe r

23 share. This was against an expectation of a $0 .10 profit.

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25 Of the approximately $40 million miss versus external goals,roughly $28 million was in EMEA . . . As we inspected the EMEA

26 pipeline , which had been represented to us as being over $50million strong in license sales, we found a lot that was not

27 qualified or forecastable .

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It will take awhile to work through the issues, and while we madegood progress in getting rid of some of the dead wood this pastquarter, we still need to pay a lot of attention to EMEA over thequarters to come . . . . I do not really expect EMEA to be 100%healthy until the December quarter of 2002 .

We had a very weak US quarter in our sales to Managed ServiceProviders (EDS, IBM , Unisys , Fujitsu , Compaq) as their businessslowed and they delayed orders , chosing (sic) instead to fullydeploy software that we had sold to them earlier on in the year .The almost total absence of MSP customer business cost us about$5 to $7 million in our expectations .

Xanadu continues to show great promise . Due to some qualityissues discovered in test , the product did not go into generalavailability status until December 19`h, so impact on thequarter was minimal . (Emphasis added) .

196. By his December 31, 2001 report, defendant Gardner highlighted for the Boar d

members numerous material problems afflicting Peregrine's business which were not known to

the investing public . In particular, Gardner identified the EMEA division as a major source of

problems, and clearly alluded to improper revenue recognition by his reference to $50 million in

license sales which "was not qualified or forecastable . "

13 . January 2002 Report To The Board Of Director s

197. In the first half of January 2002, Gardner followed up his December 31, 2001 e-

mail report with another report which was disseminated to the defendants identified in paragraph

195 and which they received and reviewed in connection with the January 25, 2002 Board

meeting. He reported that "[n]othing has changed with regard to the major areas of concern :

EMEA, MSP business, and the business integration product suite and sales approach ." Gardner

further informed Board members that at a Morgan Stanley conference in Phoenix, "we had the

opportunity to talk to dozens of investors one-on-one, including all of our largest holders . We

have spoken to numerous buy and sell side analysts . The general tone is one of disappointment,

but a continued belief in the Peregrine story and support of management . "

198 . Defendant Gardner also informed Board members by this report that "[t]he loss i n

the quarter did violate some coven ants on the LOC [line of credit] but [defendant] Matt [Gless ]

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has worked with the banks to get agreement on those . . ." As to merger activity, Gardner alluded

to the fact that Peregrine itself would likely be a takeover target, stating "I would expect that the

sharks will gather now that there is blood in the water, and I will discuss adoption of a Poison

Pill at the board meeting ." (Emphasis added) . The desperate situation at Peregrine was

illuminated by Gardner's suggestion for significant changes in the structure of the business :

"[w]e are looking at taking non-strategic assets and either (a) encapsulating them into stand-alone

operations with separate management and clear cash flow and profit targets, (b) selling them, or

(c) shutting them down. I think it is fair to say that most of the assets in this category come from

the Harbinger acquisition and the CRM side of the Remedy acquisition ."

199. On the heels of Gardner's very negative report to the Board members, on

January 24, 2002, Peregrine issued a press release announcing its results for the third quarter of

fiscal year 2002 ended December 31, 2001 . While admitting being "disappointed in the results,"

the press release attributed the problems solely to "global economic weakness, particularly in

Europe." The press release quoted Gardner as stating, "We are committed to returning to

operating profitability, and we are continuing to take appropriate steps to improve our revenue

performance and contain our expenses ." The press release omitted any mention of the crisis

internally at Peregrine, including violations of covenants on the Company's line of credit and

consideration of significant restructuring of the company's business and widespread violation of

GAAP arising from improper revenue recognition .

200. On February 19, 2002, Peregrine announced that its Board had adopted a

Stockholder Rights Plan under which Peregrine would issue a dividend of one right for each

share of its common stock held by stockholders of record as of the close of business o n

March 12, 2002 . The press release went on to state, "[t]he plan was not adopted in response to

any specific attempt to acquire the company ." This was a false statement, as the plan was

adopted in specific regard to then ongoing merger negotiations with BMC Software .

14. February 2002 Report To The Board Of Director s

201 . Defendants Gless, Moores, Nelson, Noell, Cole, Savoy, Watrous, and Dammeye r

I received and reviewed Gardner's report to the Board dated February 23, 2002 at the time it wa s

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i •1 disseminated . Gardner reported on fulfilling the "commitments made to the board during the

2 January 15, 2002 meeting ." These included significant cost reductions through a reduction in

3 workforce . This Board update also mentions the ongoing "Texas discussions," which is a

4 reference to a possible acquisition of Peregrine by BMC Software . In the face of this interest in

5 acquiring the Company, any disclosure of the material adverse facts made known to the Board

6 through Gardner's reports would have killed this potential transaction.

7 15. March 2002 Report To The Board Of Directors

8 202. Defendant Gardner's next update for Board members was dated March 22, 2002,

9 which was received and reviewed on or about that date by defendants Gless, Moores, Nelson,

10 Noell, Cole, Savoy, Watrous, and Dammeyer . The critical feature of this report is the reported

11 precariousness of meeting earnings estimates provided to the investment community . Gardner

12 asks for help in this regard : "If the forecast is met (and I stress there remains a lot of work to be

13 done next week), then we will exceed street expectations for total revenue . Keep your fingers,

14 and anything else you can think of, crossed ." (Emphasis added) .

15 203. As to the potential BMC Software transaction, Gardner reported : "[d]iscussions

16 continue and I expect we will have something definitive to discuss early next month . At this

17 point, I am positive toward doing a deal ." Once again, Gardner thereby signaled fellow Board

18 members that any disclosure of adverse material information such as he had previously reported

19 would undo the potential transaction .

20 204. The Company's situation was known internally to be so precarious at this point

21 that Gardner requested that Board members, "[k]eep thinking good thoughts, we can use all the

22 help we can get . "

23 16. April 2002 Report To The Board Of Directors

24 205. On April 4, 2002 Gardner reported by e-mail to defendants Gless, Moores ,

25 Nelson, Noell, Cole, Watrous, and Dammeyer, that Peregrine had received an offer from BMC

26 Software for 0.76 shares of BMC stock for each Peregrine share . He advised Board members

27 that he had "negotiated them up from 0 .6 per share 5 weeks ago to 0 .76, and I believe that is as

28 far as we can go." Gardner stated his position on the proposed deal as follows :


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1 I am now changing my recommendation to strongly support thi soffer based upon four factors : (1) my much more pessimisti c

2 outlook for the timing of a positive upturn in our revenues leadingme to believe that we need to be part of a larger organization t o

3 have the potential to prosper, or perhaps even to survive . . ."

4 Given the conclusion that the merger transaction was desirable, any disclosure of the material

5 adverse nonpublic information known to Gardner and reported by him to the Board members,

6 would destroy any opportunity for the merger to be effectuated .

7 206. Gardner's report on the Company's operations were gloomy : "[t]he long and the

8 short of the immediate situation is that we have had another very disappointing close to a quarter .

9 Between Wednesday night and Sunday evening of last week, worldwide commit forecas t

10 dropped by over $17 million. . . . The impact of this is that instead of being comfortably above

11 street estimates, we are now struggling to make street estimates ."

12 207. Gardner also reported to Board members the alternatives to a sale of the company .

13 They included "staying the course," but reported that "we could get very low on cash . . . .

14 Therefore, I believe that it is imperative that we raise $100 to $200 million through private

15 placement . "

16 E. Audit Committee Members Knew Of Or Were Deliberately Reckless WithRegard To Peregrine 's Accounting Fraud

17

18 208. The following defendants served on the Audit Committee of Peregrine's Board of

19 Directors during the referenced portions of the Class Period: Noell (April 22, 1999 through the

20 end of the Class Period), van den Berg (April 22, 1999 through October 17, 2000), Hosle y

21 (April 22, 1999 through June 15, 2000), Savoy (October 17, 2000 through October 17, 2001)

22 Watrous (April 17, 2001 through the end of the Class Period) and Dammeyer (October 24, 2001

23 through the end of the Class Period). Defendant Watrous was a former senior partner o f

24 Andersen Consulting, an affi liate of or related party to defendant Arthur Andersen and AWSC .

25 Defendant Dammeyer was a former audit engagement partner of Arthur Andersen . As alleged

26 herein, defendants Noel], van den Berg and Hosley were business partners of defendant Moores

27 in numerous other ventures . Defendant Savoy represented the interests of Paul G . Allen and his

28 investment vehicle, Vulcan, on the Peregrine Board .

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209. Peregrine publicly represented that the purpose of its Audit Committee was "t o

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review with the Company' s management such matters as internal accounting controls and

procedures, the plan and results of the annual audit, and suggestions of the accountants fo r

I improvements in accounting procedures [and] to nominate independent accountants ."

210. By April 2000, Peregrine's Board of Directors had adopted a written Charter t o

govern its Audit Committee . Under the heading "Responsibilities," the Audit Committee wa s

charged with the following :

Reviewing on a continuing basis the adequacy of theCompany's system of internal controls ;

2. Reviewing the independent auditors' proposed audit scopeand approach ;

Reviewing and providing guidance with respect to theexternal audit and the Company's relationship with itsexternal auditors by (i) selecting, and evaluating theperformance of the independent auditors ; (ii) reviewing theindependent auditors' fee arrangements, proposed auditscope and approach ; (iii) obtaining a statement from theindependent auditors regarding relationships and serviceswith the Company which may impact independence andpresenting this statement to the board, and to the extentthere are relationships, monitoring and investigating them ;(iv) reviewing the independent auditors' peer reviewconducted every three years; and (v) discussing with theCompany's independent auditors the financial statementsand audit findings, including any significant adjustments,management judgments and accounting estimates,significant new accounting policies and disagreements withmanagement and any other matters described in SAS No .61, as may be modified or supplemented ;

4. Conducting a post-audit review of the financial statementsand audit findings, including any significant suggestions forimprovements provided to management by the independentauditors ;

Reviewing before release, and recommending to the Boardof Directors for inclusion in the Company's annual reporton Form 10-K, the audited financial statements andmanagement's Discussion and Analysis of FinancialCondition and Results of Operations ;

6. Ensuring that the Company's independent auditors reviewthe Company's interim financial statements included inquarterly reports on Form 10-Q, using professionalstandards and procedures for conducting such reviews ;

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7. Reviewing before release the unaudited qua rterly operatingresults in the Company's quarterly earnings release;

8. Overseeing compliance with the requirements of theSecurities and Exchange Commission for disclosure ofauditor's services and audit commi ttee members andactivities ;

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9. Reviewing management's monitoring of compliance withthe Company's standards of business conduct and with theForeign Corrupt Practices Act ;

10 . Reviewing, in conjunction with counsel, any legal mattersthat could have a significant impact on the Company'sfinancial statements;

11 . Providing oversight and review of the Company's assetmanagement policies, including an annual review of theCompany's investment policies and performance for cashand short-term investments ;

12. Reviewing the Company's compliance with employeebenefit plans ;

13. Overseeing and reviewing the Company's policies regardinginformation technology and management informationsystems ;

14. If necessary, instituting special investigations and, ifappropriate, hiring special counsel or experts to assist ;

15 . Reviewing related party transactions for potential conflictsof interest ;

16 . Reviewing its own structure, processes and membershiprequirements ;

17 . Providing a report in the Company's proxy statement inaccordance with the requirements of Item 306 ofRegulation S-K and Item 7(e) (3) of Schedule 14A ; and

18. Performing other oversight functions as requested by thefull Board of Directors .

211 . The Charter also provided that the Audit Committee was required to meet at leas t

three (3) times a year and maintain written minutes of its meetings .

212. No minutes of any Audit Committee meetings exist . The reason is that the

Company, through defendants Gless and Nelson, one or both of whom regularly attended these

meetings, did not want a record of the matters discussed at Audit Committee meetings, and the

members of the Audit Committee were complicit in this failure to follow Company policy b y


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1 failing to insist on the keeping of minutes to record the activities of the Committee .

2 213. The lack of Audit Committee meeting minutes demonstrates that the Audi t

3 Committee did not function as represented to the investing public . The fundamental failure o f

4 the Audit Committee allowed Peregrine to operate without adequate internal accounting controls

5 at a time when Peregrine was growing rapidly and engaging in numerous acquisitions an d

6 strategic alliances, and permitted the pervasive accounting fraud to go forward in the face o f

7 detailed information presented to the Committee that Peregrine was continuously and egregiously

8 violating GAAP .

9 214. During the Class Period, all of the Audit Committee meetings were attended by,

10 among others, defendants Gless and Nelson, representing Peregrine management, even though

11 one purpose of an Audit Committee is to provide oversight of management's activities . By the

12 presence of Gless and Nelson, and their failure to insist on their recusal from Committee

13 meetings, the members of the Committee were knowingly and/or deliberately reckless in their

14 conduct of Committee business .

15 215 . In light of the lack of adequate internal accounting controls, the aggressive growth

16 of the Company and the lack of a functioning Audit Committee, defendants Noell, van den Berg,

17 Hosley, Watrous, Savoy, and Dammeyer, while on the Audit Committee, knew or wer e

18 deliberately reckless in not knowing of the fraudulent accounting practices alleged herein .

19 Moreover, as Audit Committee members, each of these defendants had control over Peregrine

20 with respect to the accounting and disclosure policies and practices of the Company .

21 1. July 6 ,1999 Audit Committee Meetin

22 216. During the period April 1999 through February 2000, a single Audit Committee

23 meeting was conducted . Defendants Noell, van den Berg, and Hosley attended a July 6, 1999

24 Audit Committee meeting . Defendant Nelson was also in attendance . This meeting occurred on

25 the heels of the Board's April 1999 adoption of a new, highly aggressive accounting policy (sell-

26 in) for the express purpose of allowing the Company to meet first quarter fiscal year 200 0

27 forecasts, and which policy was known to be inconsistent with that used by Peregrine' s

28 competitors. Adoption of this policy was a landmark event in the context of the Company's


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•revenue recognition policy and its overall accounting . However, the Audit Committee at this

meeting failed to give any attention to either the implementation of this policy or its ramifications

for the Company's accounting and financial reporting . The defendants attending this meeting

thereby knowingly and/or with deliberate recklessness failed to fulfill their oversigh t

responsibilities with regard to Peregrine's accounting and the related public disclosures .

2 . April 25, 2000 Audit Committee Meetin g

217. Defendant Noell attended an April 25, 2000 special Audit Committee meeting at

which defendant Arthur Andersen provided a handout entitled "Year-end Audit Committe e

Meeting Fiscal 2000 ." Noell received and reviewed this presentation at the time of the meeting .

218. The April 25, 2000 presentation includes a "Risk Assessment" Section whic h

provides a discussion of "why," "approach" and "results" for the following "risks :" revenue

recognition software, revenue recognition (service/other), financial reporting evaluation,

integration of acquisitions/purchase accounting, acquired in-process research and development,

accounting process and controls, and legal/environment . By this meeting, defendant Noell was

put on notice that revenue recognition was a high risk area of the audit, especially in light of the

Board's adoption of the sell-in methodology, and that there were major issues with Peregrine's

internal controls, especially in light of its frenetic acquisition program .

3 . January 24, 2001 Audit Committee Meeting

219. At a meeting between defendant Noell and Arthur Andersen audit engagement

partner Stulac on January 24, 2001, Noell was informed that the Company had engaged in two

barter transactions with New Era of Networks and Extricity . Although these transactions were

relatively small in amount, Noel] learned that Peregrine was engaging in and recognizing revenu e

on transactions with no commercial substance.

4 . April 25, 2001 Audit Committee Meetin g

220. Defendants Noell and Watrous attended an Audit Committee meeting on

April 25, 2001 . Also in attendance was defendant Nelson and representatives of defendant

Arthur Andersen including Stulac. At this meeting, Arthur Andersen made a presentation

entitled "Year-End Audit Committee Meeting Fiscal 2001 ." It included a section entitled


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"Business Audit - Significant Business Risks" which highlighted "control issues in Europe" as a

problem area. This was a reference to, and there was a discussion of, serious problems with

revenue recognition in the EMEA division of the Company. At this meeting, Stulac specifically

suggested that it would be appropriate for the Company to move to revenue recognition based on

sell-through as opposed to the then operative sell-in method because he knew, and conveyed to

the Audit Committee members, based on Arthur Andersen's audit procedures for the quarterly

reviews and year end audit, that Peregrine was improperly recognizing revenue immediately in

full, on sell-in transactions where there was no binding commitment on the part of resellers .

Defendant Watrous inquired at this meeting as to how "aggressive" Peregrine was with regard to

revenue recognition, and he was informed by Stulac that Peregrine was more aggressive than one

of its leading competitors, citing as an example SAP, which applied the sell-through method . At

this meeting, defendants Noell and Watrous were informed by Peregrine's auditor that the

Company's revenue recognition policy was different in material respects from those of its

competitors who were in the same business . They also knew at this time, or were deliberately

reckless in not knowing, that Peregrine's revenue recognition policy was not truthfully disclosed

in its SEC filings . However, no change was made, recommended or even considered in the

Company's revenue recognition policy .

5 . June 29, 2001 Audit Committee Meetin g

221 . Defendants Noell, Watrous, and Savoy attended an Audit Committee meeting o n

June 29, 2001 . Also in attendance were defendant Nelson and Arthur Andersen audit

engagement partner Stulac . At this meeting, there was a discussion of the fact that the SEC was

reviewing transactions between Peregrine and Critical Path for possible improper revenue

recognition and that defendant Gardner's testimony had been taken by the SEC on June 19, 2001,

as had the testimony of Taylor Barada, Gardner's special assistant, on June 20, 2001 . Noell

informed defendant Moores of these developments following the Audit Committee meeting .

This SEC inquiry into Peregrine's transactions with Critical Path was an additional red flag to

Audit Committee members that Peregrine was engaged in highly aggressive accounting practices

that were drawing the scrutiny of the SEC and which called for heightened vigilance by Audi t


• •

2

Committee members, which was not forthcoming .

6. July 23, 2001 Audit Committee Meetin g

222. Defendants Noell, Watrous, and Savoy attended an Audit Committee meeting on

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July 23, 2001 . Also in attendance were defendant Nelson and Arthur Andersen representatives,

including audit engagement partner Stulac . At this meeting, numerous material problems were

discussed with regard to Peregrine's accounting . Channel sales collections, particularly with

regard to KPMG transactions, were identified as a serious problem, and were referred to as a

"poor fact" and it was stated that the auditors were "very concerned ." This related to the inability

to collect on channel sales to KPMG and problems with "installation," Further, it was discussed

that virtually all of Peregrine's major competitors, or analogous companies, such as PeopleSoft,

Oracle, SAP and ASP Technologies no longer were selling through channel partners, and that all

their sales were direct. Stulac characterized the revenue recognition practices within Peregrine as

"in a state of flux ." Peregrine's revenue recognition policy was referred to as "old" and one that

"needs to be replaced." Defendant Watrous specifically stated that he was "concerned" about

these facts . He asked Stulac, "on a scale of 1 to 10 with 10 being the most `clean"' how

Peregrine's revenue recognition procedures would rank?" Stulac responded they would rank in

the "5-7" range. Watrous queried why Peregrine was not a "10 ." He was told that the problems

were attributable to : (i) software customers delaying purchases until late in the quarter to get

discounts, (ii) as a result, the quarter ends were extremely busy, (iii) the European controller

position was vacant, (iv) there was a failure on the part of Peregrine to appropriately merge the

overseas processes, (v) the European sales force "used more aggressive revenue recognition,"

and (vi) the frequent acquisitions made by Peregrine required the merging of different accounting

systems, which had not been accomplished . Based on these disclosures, Watrous concluded that

Peregrine was not implementing "best practices" and that there was a need to change accounting

policies . Defendant Savoy observed that the auditors (defendant Arthur Andersen) should be

spending time with management dealing with these revenue recognition issues . However, it was

the Audit Committee's duty to challenge management on the clear and continuous accounting

violations that were brought to the Committee members' attention . These discussions were a red


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flag to Audit Committee members that Peregrine was engaging in highly aggressive and

improper accounting transactions, that internal controls were abysmal if not non-existent, an d

that the Company's revenue recognition policy was not being followed by its major competitors

in the same line of business, and was therefore presumptively improper. No actions were taken

by the Audit Committee in response to this discussion of material failures in Peregrine's internal

controls and accounting .

223 . At this meeting, there was also a further discussion of Peregrine' s transactions

I with Critical Path and a decision was made to have Arthur Andersen review these transaction s

I even though they had already been recorded as revenue .

7. October 24, 2001 Audit Committee Meetin g

224. Defendant Dammeyer chaired an October 24, 2001 Audit Committee meeting .

Defendants Noell and Watrous also attended this meeting . Also in attendance were defendants

Gless and Nelson, Peregrine's General Counsel, Deller, and its Vice President, Finance, B .J .

Rassarn, as well as several individuals from defendant Arthur Andersen, including a new audit

engagement partner, Ross Baldwin, as well as Robert S . Shanley, a Phoenix-based National

Practice Director for the Western Region . Mr. Shanley's presence at this meeting was a clear

indication that major problems in Peregrine's accounting, and material adverse information, was

to be discussed .

. 225. A document entitled "Audit Committee Meeting Quarterly Review Q2 2002" was

handed out at this meeting . Although it bore a legend reading "This is Restricted to Audit

Committee Use Only," it was nonetheless provided to defendants Gless and Nelson, who were

not members of the Audit Committee . At this meeting , the Arthur Andersen personnel told the

Peregrine directors that there had been breakdowns in inte rnal control surrounding revenue

recognition during the quarter ended September 30, 2001, and identified 6-7 revenue transactions

which were challenged by Arthur Andersen, including deals with Fujitsu for $6 million, Total

Infosystems for $10 million and Unisys for $6 . 1 million. The auditors specifically discussed that

such transactions adversely impacted the "quality of earn ings ." With regard to the Unisys

transaction , the auditors discussed how the arrangement included a speci fied undelivered version


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• •upgrade, which rendered revenue recognition on this transaction improper . As to "control

breakdowns," the auditors informed the Audit Committee members that this related to the

revenue process of not properly identifying all contract terms that could prevent or reduce

revenue recognition, particularly on large contracts . This was a specific reference to the

existence of side letters eliminating or otherwise impacting the obligation to pay . Attached to the

document handed out at this meeting by Arthur Andersen was a sheet entitled "Types of Potential

Misstatements" which discussed in detail Statement of Position ("SOP") 97-2 and its application

to potential misstatements related to software revenue recognition and the application of this

GAAP principle . This document was handed out to show the Audit Committee members how

Peregrine was intentionally and repeatedly violating GAAP . In response to this discussion,

defendant Gless acknowledged at the meeting that "the Company needs to review its revenue

recognition process and tighten its controls ." The discussions at this meeting made clear that

Peregrine was engaged in accounting fraud . Defendants Noell, Watrous, and Dammeyer, from

their participation in this meeting knew, or were deliberately reckless in not knowing, that

Peregrine's revenue recognition was improper and violated GAAP as a result of, among other

items, the existence of side letters, and that there were no adequate internal controls . Defendant

Noell informed defendant Moores of what transpired at this Audit Committee meeting shortly

after it concluded .

8 . February 12, 2002 Special Audit Committee Meetin g

226. On February 12, 2002 defendant Moores arranged to conduct a special meeting of

the Audit Committee, even though he was not formally a member of the Committee .

Defendants Moores, Noell, Watrous, and Dammeyer participated in this meeting . Also in

attendance were defendants Gardner and Gless . The purpose of the meeting was to discuss the

fact that on January 29, 2002, the SEC had opened an inquiry of Peregrine, including requests for

documents and information regarding barter transactions and sales, in particular involving

Critical Path . The defendants participating in the meeting were informed of the SEC activity .

Further, there was a discussion of a recent news story that had appeared in the press drawing a

connection between Critical Path and Peregrine . Notwithstanding the participating defendants '


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knowledge of the SEC scrutiny of the Company, they failed to make any public disclosure of this

material fact . The omission to disclose this material fact was particularly egregious because just

a few days prior to this meeting, on February 8, 2002, a Peregrine spokeswoman was quoted in

the press as stating, "We have fully cooperated with the SEC's investigation of Critical Path and

will continue to do so as necessary, but there is no formal investigation of Peregrine ." The

defendants who participated in the February 12, 2002 meeting had read, or had been informed of,

this article, and also knew that the SEC's sights were in fact trained on Peregrine as a result of its

transactions with Critical Path, yet failed to inform the investing public of this fact .

9 . April 2 2002 Audit Committee Meeting

227. Defendants Noell, Watrous, and Dammeyer attended an Audit Committee meetin g

on April 2, 2002. Also in attendance were defendants Nelson and Gless, Peregrine General

Counsel Deller, and B .J . Rassam, Vice President, Finance . Among the matters discussed at this

meeting were the ongoing SEC inquiry . Nonetheless, no member of the Committee insisted

upon public disclosure of the SEC activity . One of the open audit issues discussed at this

meeting was "desired improvement in sales cut-off," referring to a discussion about issues that

had arisen with regard to the timing of revenue recognized by the Company and the numerous

examples of transactions being dated after the end of a quarter but nevertheless being improperly

recorded in that quarter . Also discussed at this meeting was the replacement of Arthur Andersen

as the Company's independent auditor and the installation of KPMG in that position . Defendant

Noell reported to defendant Moores after the conclusion of the meeting as to the substance of

what was discussed .

228. In the period following this Audit Committee meeting, defendant Dammeyer, as

Chairman of the Committee, had significant interactions with KPMG He spoke with Brian

Allen of KPMG on April 22 and 25 or 26, 2002. During these calls, Allen identified certain

accounting matters which KPMG was focusing on, including revenue recognition. Allen told

Dammeyer that numerous transactions reviewed by KPMG reflected improper revenu e

recognition, including findings of extended payment terms in violation of SOP 97-2, and other

examples of concessions on deals with extended terms . Specific identification was made of th e


0 •

1 deals with Prokom (for $10 million) and MGX. He identified deals recorded under the sell-in

2 method which did not reflect payment having been made, particularly identifying foreig n

3 transactions as an area of concern . He discussed the fact that if the reporting was changed to a

4 sell-through basis, which he urged based on the current practice in the software industry, that

5 there would be a dramatic change in reportable revenue and a need for a possible restatement .

6 Allen also reported to defendant Dammeyer the existence of side letters which he had been told

7 had been discovered beginning in June 2001 by defendants Gardner, Gless, and Nelson . Also

8 referenced in this conversation was the discovery by KPMG that Peregrine accounts receivable

9 with extended payment terms had been sold to banks and removed from the Company's balance

10 sheet. Allen also drew Dammeyer's attention to the accounting for certain mergers, including

11 Harbinger and Extricity, whereby write offs had been taken by Peregrine in the "acquisition cost

12 and other" line item which were inappropriate . Notwithstanding the devastating information

13 given to Dammeyer, the Chairman of Peregrine's Audit Committee, he made no public

14 disclosure of this information and failed to insist that Peregrine make a public disclosure .

15 10. April 29, 2002 Audit Committee Meeting ,

16 229. Defendants Noell, Watrous, and Dammeyer participated in an April 29, 2002

17 Audit Committee meeting . At that meeting, Allen of KPMG informed the Committee tha t

18 KPMG had discovered $26 million in accounts receivable impairments embedded in a write off

19 taken in the second quarter of fiscal year 2001 . The write off was associated with the line item

20 "acquisition and other" and appeared to relate to the Harbinger acquisition . KPMG believe d

21 these write offs were improper . KPMG also advised the Committee that in reviewing Arthur

22 Andersen's workpapers, KPMG discovered a $3 .8 million transaction from Germany whic h

23 reflected improper revenue recognition . In addition, KPMG told the Committee that there were

24 significant sales to distributors in the first and second quarters of fiscal year 2001, but a relatively

25 small number of sales to distributors in the third and fourth quarters . They reported that a $12

26 million transaction (Prokom) and an $8 million transaction (MGX) remained unpaid at year end .

27 KPMG said it was "unusual" for a company to have two large receivables unpaid at year-end,

28 and that it had not received a satisfactory explanation of these facts from the Company . KPMG


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• •further informed Dammeyer that Arthur Andersen had concluded that the Company's accounting

for the Critical Path transactions was wrong . Also disclosed was that defendant Gless had

confessed to KPMG that he had learned of at least seven side letters in EMEA in August or

September 2001, and had consulted with defendant Gardner about his findings . However,

KPMG informed Committee members that it had learned of a December 6, 2001 e-mail from

Geoffrey Boonen to defendant Gless and B .J. Rassam whose subject line read "Cleaning -

Confidential" and which discussed twenty-one side letters . KPMG explicitly raised the

possibility of a need for a restatement of Peregrine's previously published financial statements .

The discussions at this Audit Committee meeting were relayed to defendant Moores by either or

both defendants Noell and Dammeyer . Defendants made no disclosure of the damning

information provided by KPMG on April 29, 2002 . Instead, the Company caused a press release

to be issued on April 30, 2002 referring to a delay in the planned earnings release "pending

continued audit activities of KPMG ." Defendant Moores and the Audit Committee members

knew that a fraud had been uncovered, yet failed to make or insist upon any appropriate

disclosures . Seeking to distance himself as much as possible from the tarnish of his role as

Chairman of Peregrine's Audit Committee, Dammeyer submitted a short resignation letter to

defendant Moores on May 24, 2002 .

230, As a result of their participation in the foregoing Audit Committee meetings,

defendants Noel], Watrous, Savoy, and Dammeyer, as well as defendant Moores through the

information be obtained from defendants Noell and Dammeyer, and his participation in .the

February 12, 2002 Audit Committee meeting, learned of specific material problems in

Peregrine's revenue recognition practices, that material amounts of revenue had been improperly

recognized, that there were materially inadequate internal controls, and that the Company's

transactions were being scrutinized by the SEC . Yet they made no disclosure of these material

facts and failed to correct Peregrine's materially misleading statements to the public regarding its

accounting practices and its financial results, and failed to insist on the Company making such

disclosures .


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1 231 . Notwithstanding knowledge of material adverse information from their

2 participation in the Audit Committee meetings, defendant Noell signed Peregrine's reports on

3 Form 10-K for the fiscal years ending March 31, 2000 and March 31, 2001 and all Peregrin e

4 registration statements (on Forms S-3, S-4 and S-8) filed with the SEC during the Class Period ,

5 and approved the issuance of quarterly financial results during fiscal years 2000 and 2001 and the

6 first three quarters of fiscal year 2002 . Defendants van den Berg and Hosley signed Peregrin e

7 reports on Form 10-K for the fiscal year 2000 and Peregrine registration statements filed with the

8 SEC until they resigned from Peregrine's Board . They also approved the issuance of quarterl y

9 financial results during fiscal year 2000 . Defendants Savoy and Watrous signed Peregrine's

10 report on Form 10-K for fiscal year 2001 and Peregrine's registration statements filed with the

1 I SEC while they sat on Peregrine's Board . They approved the issuance of Peregrine's quarterly

12 financial results during fiscal year 2001 and the first three quarters of fiscal year 2002 . These

13 acts were committed while these defendants knew of, or were deliberately reckless with regard

14 to, the material adverse nonpublic information herein alleged .

15 THE INDIVIDUAL DEFENDANTS' KNOWLEDGEOF AND/OR DELIBERATE RECKLESSNESS AS TO THE FRAUD

1 6

17 232 . Each of the individually named defendants who served on the Peregrine Board of

18 Directors immediately prior to and during the Class Period learned of material adverse facts

19 regarding the business and operations of the Company through written, oral, and in some cases e-

20 mailed reports provided to them by defendant Gardner, as well as through their access to current

21 financial reports regarding the operations of the Company, including their role as Audi t

22 Committee members (as to defendants Noell, Watrous, Hosley, Savoy, and Dammeyer) .

23 Gardner's reports are alleged in detail in paragraphs 137-207 hereof . As a result of receiving and

24 reading these reports, or gaining access to such information through their Board and/or Audi t

25 Committee participation, each of these defendants had knowledge of the following facts an d

26 knew, or with deliberate recklessness disregarded, that none of these material adverse facts were

27 disclosed to Class members in Peregrine's press releases or SEC filings, or otherwise :

28 • Peregrine had implemented the highly aggressive sell-in method o f


1 recognizing for revenue immediately upon the sale of software licenses regardless of whether

2 there was a firm commitment from the reseller, or an identified and committed end user, because

3 absent such accounting treatment the Company would miss earnings targets provided by senior

4 management to the investment community ;

5 • As a result of approving the sell-in accounting method, the Compan y

6 consistently was borrowing from potential future revenue streams to make its current revenu e

7 and earnings targets, making it increasingly difficult if not impossible for the Company to report

8 the consistent growth that it represented to the market and that would allow it to continue on its

9 strategy of growth through acquisition by stock mergers ;

10 • There was massive inventory in the channel that neither Peregrine nor its

11 resellers could sell, which was hard evidence that GAAP accounting was not being followed in

12 the recording of revenue throughout the Class Period, because Peregrine was recording revenue

13 simply upon entering into agreements with the resellers pursuant to the Board's approval ;

14 • In the aftermath of the Board and Sales Force meetings in April 1999 ,

15 channel sales rapidly increased . For fiscal year 1999, channel sales accounted for only 13% of all

16 license revenue, with the bulk of those sales coming in the fourth quarter . In contrast, durin g

17 fiscal year 2000 (April 1, 1999 to March 31, 2000), the Company equaled or exceeded the 25%

18 maximum set by Arthur Andersen in all quarters . As shown below, at the close of fiscal yea r

19 2000, channel sales represented over 38% of all license revenues, nearly triple the percentage of

20 channel sales a year earlier and well past the auditor's maximum :

21 Fiscal Quarter Channel Sales as % of Total LicenseRevenues

22 4Q/99 $6,700,000 22%

23 1 Q/00 $12,677,896 40%

24 2Q/00 $19,287,692 52%

25 3Q/00 $18,600,273 40%

26 4Q/00 $12,409,381 24%

Total FY 2000 $62,975,242 38%27

28 • From $6.5 million at the end of fiscal year 1999, channel inventory levels


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peaked at over $57 million in December 1999, before falling to a level of $34 .9 million in March

2000, and then rising again to $49.6 million by September 2000. Channel inventory levels rose

so quickly that in some quarters they threatened to exceed license revenues reported in the sam e

quarter:

Fiscal Quarter

4Q199

1 Q/00

2Q/00

3Q/00

4Q/00

I Q/012Q/01

Channel Inventory

$6,500,000

$21,080,000

$40,137,168

$57,150,842

$38,793,304

$34,888,893

$49,577,302

as % of Total Revenue

14%

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69%

84%

50%

37%

35%

• Channel partners were unable to sell the inventory even when assisted by

the Company's sales force . Internally, the Company tracked "burn," sales out of the inventory o f

its channel partners. Its ability to "burn" inventory was dwarfed by the sheer size of the channel

inventory that partners were accumulating ;

• In the second quarter of fiscal year 2000 ending September 30, 1999, the

Company burned $2 .2 million of channel inventory . But at quarter's end overall channe l

inventory was $40.1 million . At that rate, the sales force would have needed 18 months to

eliminate existing channel inventory, without any allowances for future channel inventory

increases . Less than six months after the change to the sell-in method of accounting, quarterly

channel sales had reached $19 million, representing 52% of all license revenues, and channel

inventory was more than two-thirds of license revenue ;

• In the ensuing third quarter of fiscal year 2000 ending December 31, 1999,

the Company improved its "burn" of channel inventory to $2 .9 million . However, there was a

much larger jump in channel inventory during the quarter to $57 .1 million . The Company's sales

force would have needed nearly 20 months to eliminate this inventory ;

• Peregrine had a direct sales crisis arising from weak and diminishing direc t


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•sales and poor sales force productivity, such that reliance on stuffing the channel and recording

revenue in violation of GAAP before an end user could be found became necessary to mee t

I revenue and earnings estimates ;

• Peregrine's auditors were uncomfortable with the level of revenue based

on sell-in to the channel, and discussed with the Audit Committee known violations of applicabl e

I revenue recognition principles ;

• Excessive use of channel deals to create revenue was forcing the Compan y

to consistently rely on "big deals" to cover shortfalls in revenue, which deals were difficult to

complete and which often demanded extraordinary terms such that recognition of revenue o n

such transactions was improper ;

• As of October 1999, the Chief Executive Officer of the Company,

defendant Gardner, wanted to implement an "exit strategy" for himself and the Company's

leading salesman, defendant Powanda, and warned of the Company coming to a "crisis point" in

12 to 18 months ; and

• Throughout the Class Period the Company was constantly in need of cash,

resulting in undisclosed "sales" of receivables to purportedly raise cash, and the need to access

the capital markets to fund operations, creating a situation where any earnings miss or disclosure

of the fundamental problems underlying the Company's business would lead to disastrou s

consequences .

* * *

233. In addition to the foregoing material facts, which were known to, or with

deliberate recklessness disregarded, by each of the individually named defendants (other than

defendant Rodda), the allegations in paragraphs 236-368 below set forth additional evidence of

these defendants' knowledge and/or deliberate recklessness . In addition, Appendix E hereto,

which is incorporated herein by this reference, provides detailed allegations as to specific

transactions whereby revenue was knowingly, or with deliberate recklessness, improperly

recorded, and identifies specific defendants involved in such transactions .

234. In connection with the allegations made below regarding the individua l


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•defendants' insider sales of Peregrine shares, during the Class Period Peregrine had adopted a

formal Insider Trading Policy . The policy required "that all directors and executive officers of

the Company refrain from conducting transactions involving the purchase or sale of th e

Company's securities other than during the period commencing at the open of market on the third

trading day following the date of the public disclosure of the financial results for a particula r

fiscal quarter or year and continuing until the close of market on the last day of the second

calendar month of the next quarter ." In addition, there were other black-out periods which were

imposed and which related to Company specific events . For example, from September 1, 1999

through February 8, 2001, there was a black out on trading by Peregrine insiders based on a

series of Company events . As a result, during the Class Period, although there were 699 public

trading days, the black-out periods referenced above meant that officers and directors could trade

during only 225 of those days . As alleged herein, certain of these corporate blackout periods

were disregarded by the individual selling defendants .

235 . With regard to the prices at which the individual defendants sold Peregrine stock,

the peak price for Peregrine stock during the Class Period occurred during a quarterly black-out

period . Accordingly, it was illegal for Peregrine insiders to sell at peak prices during the Class

Period, yet they did so . The following chart shows the number of days during the Class Period

that officers and directors could trade outside of the corporate black-out periods, by price rang e

for Peregrine stock :

Price Range Number Of Availabl eTrading Days Peregrin eStock Traded In Pric e

Range During The Clas sPeriod

$0.00-$9 .99 79

$10.00-$19 .99 43

$20.00-$29 .99 76

$30.00-$39 .99 27

$40.00-$49 .99 0

$50 .00-$59 .99 0

Percentage Of AvailableTrading Days At Price

Range

35%

19%

34%

12%

0%

0%

11 FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS -#105317 Master File No. 02-CV-0870 J(RBB) 91

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$60.00-$69.99 0 0%

$70.00-$79.99 0 0%

A. Stephen P. Gardner

236. Gardner, together with defendant Gless, was responsible for and created

Peregrine's communications to securities analysts and investors during the Class Period .

Gardner reviewed, authorized, and participated in the dissemination of Peregrine's financial

results throughout the Class Period and signed Peregrine's reports on Form 10-K for the fiscal

years ending March 31, 2000 and March 31, 2001 . Gardner signed all of the registration

statements (on Forms S-3, S-4 and S-8) filed by Peregrine during the Class Period . Gardner

approved of the filing with the SEC of Peregrine's reports on Form 10-Q throughout the Class

Period . Gardner did so although he knew that the financial statements contained therein wer e

materially false . Gardner also reviewed and approved of the release of all of Peregrine's press

releases and other financial reports issued during the Class Period while knowing of, or wit h

deliberate recklessness disregarding, their falsity .

237 . Gardner knew that Peregrine set unrealistically aggressive growth targets and

pressured its sales personnel each quarter to make the numbers . Gardner presided over periodic

sales meetings in Peregrine's headquarters which were also attended by CFO Farley (until his

death) and/or CFO Gless and its top sales executives including defendant Powanda and his direct

reports and subsequently Joseph G. Reichner, Vice President, Alliances and his direct reports .

The primary purpose of these meetings was to update and discuss the financial outlook for th e

current quarter and to review large license agreements anticipated to close during the quarter .

Through these meetings and computerized reports received from defendant Gless which tracked

the Company's "burn," i .e ., commitments from resellers not yet sold-through to the end user,

Gardner closely monitored the progress of these anticipated deals, as well as Peregrine's progress

towards meeting revenue targets in each quarter during the Class Period .

238. From these executive management meetings and his own direct involvement in

the Company's sales activities as particularized herein, Gardner knew that resellers wer e

unwilling to commit to large license agreements unless an end user committed to purchase th e


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product from the reseller . Gardner also knew that , to induce resellers to issue purchase orders

without contingencies for these products, Peregrine had to and did in fact enter into written or

oral side agreements which made payment contingent upon sale of the product to the intended

end user. Notwithst anding the foregoing , and pursu ant to the policy approved by Peregrine's

Board, Gardner autho rized and approved Peregrine ' s recognition of revenue derived from

contingent sales to resellers in violation of GAAP, thereby artificially inflating the Company's

revenues and earnings .

239. In 2000, David Thatcher, CEO of Critical Path and former CFO of Peregrine,

initiated discussions with Gardner regarding a possible barter transaction . The transactions that

the two CEOs negotiated were, from beginning to end, a barter . The parties always contemplated

simultaneous exchanges of software and a superfluous exchange of checks . In an e-mail dated

September 14, 2000 from Gardner to Sue Wagner and Diana Hyland, Director of Business

Development, Gardner described the contemplated transaction as "a basic barter deal ." The

purchases were inter-dependent and both companies were motivated by a desire to recognize

revenue and, in Peregrine's case, to earn a cash "spread ." As alleged herein, the details of this

bogus barter transaction were discussed with the members of the Audit Committee at meetings in

April 2001, July 2001, and with defendant Moores on February 12, 2002 .

240. As to the Critical Path barter, contemporaneous e-mails indicate that Gardner (i)

led the negotiation, (ii) understood that Critical Path's desire to recognize revenue was its primary

motivating factor and (iii) was not concerned with what Peregrine was purchasing . The nominal

value of the transaction increased dramatically near the end of the negotiation unde r

circumstances where there was no corresponding increase in the underlying consideration .

Gardner knew or with deliberate recklessness disregarded that recording revenue pursuant to this

transaction was improper .

241 . Gardner met with defendant Gless on at least a quarterly basis to arrive at th e

DSO which the Company would represent to the investing public . Once the number was agreed

upon, Gardner, through Gless, would have defendant Cappel "sell" the necessary receivables t o

banks in order to reduce the Company's stated accounts receivable and increase the Company' s


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I reported cash. These "sales" were illusory. They were borrowings, as Peregrine has admitted in

2 its restatement .

3 242. Gardner knew that Peregrine's revenue recognition for channel sales presented a

4 legal problem. He brought this "concern" to the Board's attention in January 2000 . The

5 magnitude of the channel sales transactions in the ensuing quarters where no end user custome r

6 was contractually committed to buy the software product and the Company had received no cash,

7 were material and by their sheer magnitude were known to Gardner . Gless reminded Gardner of

8 the growing problem in writing in an e-mail dated November 20, 2000 :

9 We all realize current period effects associated with prior qtr.activities . We are all aware of KPMG/Morgan Stanley . Other

10 notable transactions :

11 Network Consult/DebisFrontRange

12 HyperionKPMG/Avnet

13 KPMG/CitiGroup

14 excluding MS. total value of'other' deals is approx . $22 mil . Thisrecent activity is on top of'other' prior activity . We must close

15 this business this quarter or otherwise risk potentialexposure ." (Emphasis added) .

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17 243. On February 1, 2001, defendant Gardner received a letter from an attorney . for

18 William K. Moore, formerly Vice President Sales, North America . The letter asserted that

19 Moore was terminated for refusing to follow instructions of Gardner and others to commit illegal

20 acts. Specifically, the letter to Gardner stated in pertinentpart as follows :

21 Shortly after he began with Peregrine [on September 1, 1999] Mr .Moore learned of certain unethical and illegal sales practices ,

22 specifically that Peregrine 's revenues were being manipulatedthrough unlawful "channel stuffing" practices. From the time

23 that Mr. Moore first learned of these practices in an October 21 ,1999 e-mail, he objected and refused to engage in these practices .

24In April 2000 . . . Mr. Moore reiterated his objections to channel

25 stuffing as practiced by Peregrine . . . and in December 2000 [was]directed to broker an illegal transaction. Specifically, Mr . Moore

26 participated in a conference call with . . . . you, during which concernwas expressed that the company was unlikely to meet its fisca l

27 2001 third quarter revenue projections . The adverse consequencesof failing to meet the revenue projections on the company's stock

28 price were self-evident, and . . . . asked Mr. Moore to travel to


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Colorado to meet with one of Peregrine's strategic partners,Frontrange . Mr. Moore was told to solicit , in effect , a phantomorder of between $5-10 million in consideration for a 2 %2percent kickback. Mr. Moore met with the principals ofFrontrange, as instructed, but because of his personal objections tothis clearly unethical and illegal practice failed to consummate thetransaction.

We believe that the channel stuffing practices engaged in byPeregrine , for the purpose of manipulating revenue projections tosuppo rt its stock price, is in violation of various state and federallaws, including, but not necessarily limited to , Secu rities Act of1933, 15 U .S.C.§§77q , et seq ., and Corporations Code §25401 .(Emphasis added) .

244. An e-mail from Gless to Joe Reichner dated "August 1, 2001 11 :43 AM" on the

subject of "burn" attached a report entitled "partner-ww-june .xls," similar to a spreadsheet

entitled "Worldwide Special Attention Invoices ." Gless provided the report in response to

Reichner's expression of frustration that "I can't seem to get a clear picture of outstanding

positions with each of our partners worldwide" and questioned "[h]ow can I get an accurate

schedule?" In Gless' response, he states :

this report is not indicative in all cases of revenue booking . This isthe report we use for collection purposes . This report is extremelyconfidential . Please do not distribute . I have sent versions of thisreport to . . . Gardner . . . . We have discussed KPMG in greatdetail and understand actions to be taken .

245. Reichner also reported on a meeting of Peregrine senior management in earl y

2001, where he raised the issue of sales transactions that were recorded as revenue, but did not

actually result in the Company receiving payment . Among the people at the meeting were

defendants Gardner, Gless, and Powanda . Reichner said that he tried to convince the group that

Peregrine should "take the hit," get rid of all the bad receivables, and start afresh . Reichner said

that the entire group was extremely resistant to the idea, with defendant Powanda being one of

the most vocal in opposition . According to Reichner, Gardner "didn't want to hear about it . "

246. William Moore , Vice President Sales , North America, has also stated that he wa s

in a management meeting in the fourth quarter of fiscal year 2000 with defendants Gardner ,

Gless and others where Moore suggested that Peregrine just "take the hit" and write off th e

problematic receivables . According to Moore, Gardner looked at him "like he was crazy" an d


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rejected the idea out of hand.

247. On November 11, 2000, Gardner received an e-mail from Gless listing $22

million in "other" deals that posed the "risk" of "potential exposure" if they did not "close this

quarter," but that had already been booked and were still being carried as revenue . Gardner knew

during the Class Period that Peregrine had "revenue" on its books that was in fact non-existent

and knew that substantial, mate rial amounts of revenue on Peregrine's books should not have

been recorded .

248. Gardner was intensively involved in assuring that the revenue guidance he gave t o

Wall Street was fulfilled each quarter . He reviewed sales forecasts and provided "on top"

information to enhance the Sales department's forecasts . He monitored "countdown"

information, keeping track of how each quarter's revenues were shaping up as the Company

neared each end of its accounting period . He was personally involved in closing large "on top"

transactions at the ends of quarters .

249. Gardner routinely approved improper accounting involving Peregrine's merger

deals to hide unwanted charges and expenses . For example, in September 2001, Gardner wa s

told that former outside directors of Harbinger, which had been acquired by Peregrine in 2000

were unable to exercise some options on Peregrine shares . They complained to Gardner, who

was advised by General Counsel Deller that "fixing this problem . . . would result in a very

significant comp charges to Peregrine ." Gardner's response was to advise Deller and defendants

Gless and Nelson by e-mail dated September 5, 2001, "I think we need to fix this and find a way

to bury the compensation charge in the Remedy deal if we can . ." (Emphasis added) .

250. Gardner knew that the Company engaged in quarter end channel transactions

calculated to achieve revenue forecasts, and that an immense amount of Peregrine's previousl y

recorded revenues would never be realized . The Company's quarterly reports on Form l0-Q and

its annual reports on Form 10-K do not mention any problem of this nature or magnitude .

Gardner repeatedly painted a "big picture" of Peregrine as a thriving enterprise with steadil y

increasing revenues and growing profitability, after adjustments for acquisition costs . The "big

picture" was false . Gardner's detailed reports to the Board alleged herein in paragraphs 137-207


1 demonstrate both Gardner's knowledge of the falsity of his public portrayal and that he conveyed

2 his knowledge to Board members.

3 251. Gardner engaged in the following sales of Peregrine stock during the Class Period

4 while knowing of material adverse nonpublic information concerning the Company .

5 Date Number of Shares Sales Price Proceeds Received

6 08/04/99 12,500 $28.63 $ 357,875.00

7 08/04/99 7,500 $28.63 $ 214,725.00

8 08/05/99 7,500 $28.71 $ 215,325.00

9 08/06/99 5,000 $28.50 $ 142,500.00

10 08/09/99 5,000 $28.72 $ 143,600.00

08/09/99 42,500 $28.72 $ 1,220,600 .00

11 08/13/99 12,500 $31 .93 $ 399,125.00

12 08/13/99 7,500 $31.93 $ 239,475.00

13 02/22/00 35,000 $43.31 $ 1,515,850 .00

14 02/23/00 15,000 $43 .90 $ 658,500.00

15 02/23/00 25,000 $43 .90 $ 1,097,500 .00

16 02/23/00 117,762 $43.90 $ 5,169,751 .80

02/24/00 37,238 $45 .11 $ 1,679,806.1817

02/24/00 20,262 $45.11 $ 914,018.82

18 09/04/01 2,250 $27.50 $ 61,875.00

19 Total 352,512' $14,030,526.80Sold :

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21 252. This insider selling was unusual and suspicious, both in timing and amount .

22 Many of the sales came on the heels of Peregrine's various press releases falsely announcin g

23 "record" levels of revenues and improving balance sheet metrics, including cash and DSO, which

24 Gardner knew or was deliberately reckless in not knowing, were materially false and misleading .

25

26'-' This amount reflects the total number of shares unadjusted for stock splits. On January 20,

27 2000, Peregrine announced a two-for-one split of its common stock . The market price for28 Peregrine stock reflected the stock split beginning February 21, 2000 . The total number of shares

sold by Gardner during the Class Period adjusted to account for this stock split is 452,512 .

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252,5122 shares were sold during what were Company imposed black-out periods . Gardner sold

most of the shares he held during the Class Period (250,262) when he knew of the impending ,

although as yet undisclosed, purchase of Harbinger and that the announcement would depress the

price of Peregrine stock . Further, Gardner was barred from selling during this time period but

nonetheless sold, in violation of Company policy . Before the Class Period, Gardner held

661,500 shares and sold 200,000, or 30% of his holdings? During the Class Period, Gardner

held 1,551,063 shares and sold 452,512, or 29% of his Class Period holdings . Almost 85% of

Gardner's proceeds from insider sales were derived from sales during the Class Period .

B. Matthew A. Gless

253 . Defendant Gless has pled guilty to securities fraud and is awaiting sentencing .

254. Gless approved of and participated in the dissemination of Peregrine's financial

results throughout the Class Period and signed Peregrine's reports on Forms 10-K or 10-Q filed

with the SEC for all quarters during the Class Period and for the fiscal years ending March 31,

2000 and March 31, 2001 and for the first three quarters of fiscal year 2002 . Gless also signed

all the registration statements (on Forms S-3, S-4 and S-8) filed with the SEC by Peregrin e

during the Class Period . Gless did so although he knew that the financial statements containe d

therein were materially false .

255 . Gless was one of the principal orchestrators of the scheme alleged herein to inflat e

Peregrine's reported revenues throughout the Class Period . During the Class Period, Gless

authorized the booking of revenue on contingent transactions with resellers even though he kne w

that revenue recognition on such transactions was improper under GAAP, violated the

Company' s publicly stated revenue recognition policies, and that in m any instances recorded

revenue would never be obtained .

?' Throughout this Amended complaint, the number of shares sold during the Companyimposed black-out periods are not adjusted to reflect stock splits effective February 12, 1999 andFebruary 21, 2000 .

31 Throughout this Amended Complaint, the number of shares sold and held used to computethe percentage of holdings have been adjusted to reflect stock splits effective February 12, 1999and February 21, 2000 .


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1 256. Gless actively participated in sales meetings with defendant Gardner and top sales

2 executives, including defendant Powanda and his direct reports and subsequently Reichner, Vice

3 President, Alliances and his direct reports . Gless monitored Peregrine's total dollar exposure on

4 contingent reseller transactions . Gless did so by creating a computerized report which tracke d

5 the "burn," or the dollar amount of "commitment" by reseller and how much of tha t

6 "commitment" had not yet sold-through to the end user . Gless also tracked the dollar exposure to

7 financial institutions on account of borrowings Peregrine had made when factoring account s

8 receivable . Gless at all times kept Gardner informed of the total exposure from such improperly

9 recorded transactions .

10 257 . Gless was also responsible for reviewing and approving the terms of all licensing

11 agreements whose terms varied from standard terms provided to customers, as well as all large

12 transactions. Gless knew that he and Gardner had authorized sales personnel to tell reseller s

13 throughout the Class Period that they could return product which was not ultimately purchased

14 by end users and that payment to Peregrine was not due until the product had sold-through to the

15 end user . Nonetheless, revenue was recorded on such transactions pursuant to Board approval

16 obtained in April 1999 . This practice was known to be a violation of Peregrine's publicly stated

17 revenue recognition policy . Among other things, Gless authorized the use of side agreements to

18 memorialize such terms. Gless knew that the side agreements rendered the agreement s

19 contingent in nature and that revenue recognition on such transactions was an intentional

20 violation of GAAP . Nevertheless, Gless knowingly allowed material amounts of such

21 transactions to be booked in each quarter during the Class Period .

22 258. Gless also instructed any returned product or bad debts not to be charged against

23 revenue accounts but instead instructed that they be improperly included on Peregrine's financial

24 statements under the line item "Acquisition costs and other." Because Peregrine made numerous

25 acquisitions during the Class Period (see Appendix D hereto), Gless had numerous opportunities

26 to misuse this line item. Gless did so in order to avoid decreasing the amount of Peregrine's

27 reported revenue.

28 259. Gless actively participated in negotiating the terms of and/or the accounting for

FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS -#105317 Master File No . 02-CV-0870 J(RBB) 99

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the bogus swap transaction with Critical Path alleged herein .

260. Gless urged employees to communicate in ways that could not be traced . In a

May 4, 2001 e-mail to B.J . Rassam regarding "$15 .5M AIR Write-Off Detail" he wrote "Let's be

I careful of how we communicate . Not sure e-mail is appropriate means of communication ." In

an e-mail dated September 14, 2001, Rassam noted that,

MG [defendant Matt Gless] tells me not to give KP [KatePatterson, Peregrine's head of investor relations] any info ofconfidential nature due to MG telling a story different than realityto the Street about various fin'l matters such as LT Other Assetshaving LT A/R in there (indicating a cash flow problem to PRGN) ;not sure what his story is and don't really want to know . Alsoduring discussion threatens to use a knife to cut me up (and assertshe has a big knife) if I give away confidential PRGN info.

261 . At the end of each quarter during the Class Period, Gardner and Gless discusse d

the level of DSO that Peregrine was willing publicly to report . After reaching agreement on the

DSO figure to be publicly reported, Gless, with Gardner's authorization, instructed Cappel to

"sell" sufficient receivables to banks so as to meet the desired DSO number . As more fully

alleged below, Cappel "sold" Peregrine receivables to banks and reduced Peregrine's receivables

by the amount of the "sale ." However, there was no sale . The transactions were borrowings

from the banks which were based on specific receivables . Gardner and Gless, with the

participation of Cappel, materially understated Peregrine's DSO, its accounts receivables and its

liabilities to the banks, which reached $180 million during the Class Period, and also thereby

materially overstated Peregrine's true cash position during the Class Period .

262 . Gless made key decisions to misrepresent Peregrine's financial condition by (i)

recognizing revenue on transactions that he knew were contingent or lacked economic substance ;

(ii) improperly accounting for write offs as acquisition costs and expenses, acquisition accruals,

and liability accruals; and (iii) financing Peregrine's accounts receivable without adequat e

disclosure -- including selling fake invoices to banks and engaging in improper accounting for

collections -- all in order to manipulate the Company's DSO and deceive market analysts and

investors .

263. Gless was actively involved in managing the Company's response to the flood of

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00"I side letters that came to light in October, November and December 2001 . On December 6, 2001 ,

he received an e-mail from Geoffrey Boonen, Area Vice President of Commercial Operations for

EMEA, identifying more than 21 EMEA transactions involving side letters and other imprope r

revenue recognition techniques .

264. Gless had also approved revenue recognition on transactions without signed

contracts . For instance, in the fourth quarter of fiscal year 2002, Peregrine received a letter of

intent on a potential deal with ABN AMRO . The deal did not close by the end of the quarter, but

Gless nonetheless directed Michael Fake, a staff accountant, to book revenue of $900,000 base d

I solely on the letter of intent .

265 . Gless routinely approved qua rter-end transactions with "out clauses " and other

contingencies . For instance, Gless approved an out clause giving British Telecom ("BT") the

right to cancel a transaction because " they really needed the BT contract for that quarter." Gless

directed Dorothy T ri ll, European Financial Con troller , to book the $12 , 545,910 revenue despite

the out clause . When Tri ll questioned this, Gless came up with a baseless rationale , i.e., that

because Harbinger had recorded revenue up front, and every Harbinger deal had an out clause,

and Peregrine had acquired Harbinger, Peregrine was also allowed to recognize revenue wher e

there were out clauses.

266. Gless directed that there be revenue recognition on quarter-end sales to channe l

partners with a history of non-payment, such as KPMG . For instance, although Patrick Towle,

Manager of Revenue Accounting, was uncomfortable booking a deal with KPMG involving

contemplated resale to the State of Florida given KPMG's history of non-payment, Gless directe d

him to record it .

267. Gless also approved revenue recognition on sales for which revenue should never

have been recognized in the first place based on a rationale that the Company had sold the related

receivable to a bank. For instance, in March 2001, Gless instructed Cappel to sell the B T

receivable with an out clause to Wells Fargo Bank, and Peregrine had to repurchase the contract

when BT exercised the out clause . On several occasions, Peregrine booked revenue on contract s

I sold to banks on which revenue should not have been recognized, and repurchased them later ,


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• 140

including con tracts with KPMG Consulting , Edward Jones , BT, and Systematics .

268. Gless refused to write off or adequately reserve for uncollectible account s

receivable that languished on the Company's books . He routinely received and reviewed the

Special Attention Invoices list prepared by the Treasury department reflecting channel and

uncollectible receivables worldwide . He also received and reviewed the quarterly Back Out list

of channel and uncollectible receivables . Although these lists clearly highlighted the Company's

growing problem of stale and uncollectible receivables, Gless did not establish an adequate bad

debt reserve, did not write down revenue and receivables, and did not follow GAAP and restate

the Company's financial statements for the periods when the revenue was improperly recognized .

269. Gless used the occasion of Peregrine's acquisitions to pad accruals and hide large

write offs by misclassifying them as "acquisition costs and other expenses ," "acquisition

accruals " and "accrued liabilities ." In calendar year 2001, Gless concealed $91 .6 million in write

I offs through misclassifications. The Remedy acquisition in the second quarter of fiscal yea r

2002 provided a convenient opportunity . The Company padded the acquisition expense accrual

and used it as a "cookie jar" to immediately write off $16 .9 million in unrelated receivables .

270. Gless specifically approved "double counting" of revenue from transactions wit h

IBM. When the Company was running short on new revenue in the last two quarters of fisca l

year 2002, Gless took the position that IBM end user contracts, which otherwise would b e

counted as "bum" against IBM's channel receivable, could be recorded as Peregrine new revenue .

271 . Gless established DSO targets that he wanted market analysts to infer from th e

Company's financial statements . He knew that the Company's "natural" DSO, absent ban k

financing, was much higher than his targets . Cappel prepared quarterly DSO forecasts an d

shared them with Gless . Gless directed Company personnel to "close the gap" between the

Company's "natural" and target DSO through undisclosed bank financing of receivables . He

resisted disclosure of the true nature of the Company's bank financing . He deliberately sought to

I mislead market analysts as to the quality of the Company' s revenue and receivables and hide the

Company's long term channel contracts and bad debts from the public .

272. At June 30, 1999 and June 30, 2001 , the Company ran sho rt of receivable s


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available for sale to the banks and could not close the gap between the "natural" and target DSO .

Accordingly, Gless directed creation of false "off line" invoices and the related sale of

receivables that did not exist. In June 1999, Gless ordered Denise Mastro, Assistant Controller,

to create "off line" invoices totaling at least $12 million .

273. In June 2001, Cappel advised Gless that Peregrine was going to fall about $20

million short of its DSO target, and there were no more receivables available to sell . Gless

directed her to create an invoice for KPMG Consulting, which was based loosely on several aged

KPMG Consulting invoices on which he said collection would be forthcoming . Cappel created a

fake invoice for $19,580,596 and sold it to Wells Fargo Bank, thereby depressing the Company's

quarter-end receivables balance and DSO, and improving its reported cash position . Peregrine

repurchased this "receivable" in November 2001 .

274. The Company retained responsibility for collecting on financed receivables . At

Gless' direction, Cappel misapplied cash collections before remitting the money to the banks .

She reduced receivables by the amount collected (taking a "double dip" since the Company had

already taken the receivables off its books upon sale to the bank), increased Peregrine's own cas h

account (instead of placing the money in a bank trust account), and failed to show any payable to

the bank . Gless directed this practice every quarter, which had the effect of artificiall y

depressing the Company's reported receivable balance and DSO . Then, in the ensuing quarter, he

directed Cappel to reverse these accounting entries . At quarter-end December 31, 2001, Gless

directed a "double dip" on a $13 .8 million IBM collection . The only purpose for this improper

accounting was to present misleading financial statements at quarter end .

275. Gless engaged in the following sales of Peregrine stock during the Class Period

while knowing of material adverse nonpublic information concerning the Company .

Date Number of Sales ProceedsShares Price Received

07/26/99 3,125 $30 .01 $ 93,781 .25

07/26/99 11,250 $30.01 $ 337,612 .50

08/17/99 1,250 $33.00 $ 41,250 .0 0

08/26/99 5,000 $34 .50 $ 172,500.00


1 08/26/99 5,000 $35 .00 $ 175,000.00

2 02/15/00 9,000 $45 .44 $ 408,960.00

3 02/15/00 4,000 $45 .63 $ 182,520.00

4 02/15/00 5,000 $44.50 $ 222,500.00

5 02/15/00 5,000 $45 .00 $ 225,000.00

02/15/00 2,500 $45 .50 $ 113,750.006

02/15/00 500 $45.50 $ 22,750.00

7 02/15/00 6,250 $46.00 $ 287,500.00

8 02/15/00 7,750 $46.00 $ 356,500.00

9 02/15/00 10,000 $45.19 $ 451,900.00

10 02/23/00 5,000 $46.00 $ 230,000.00

11 02/25/00 8,000 $50.00 $ 400,000.00

12 02/25/00 500 $54.00 $ 27,000.00

02/25/00 2,000 $54.50 $ 109,000.0013

02/25/00 1,000 $54.38 $ 54,380.001 4

15 02/25/00 1,500 $54.19 $ 81,285 .00

16 Total 93,625 $3,993,188.75Sold :

17

18 276. This insider selling was unusual and suspicious, both in timing and amount .

19 Many of the sales came on the heels of Peregrine's various press releases falsely announcin g

20 "record" levels of revenues and improving balance sheet metrics, including cash and DSO, which

21 Gless knew or was deliberately reckless in not knowing, were materially false and misleading .

22 68,000 shares were sold during Company imposed black-out periods . Before the Class Period,

23 Gless held 97,000 shares and sold 12,000, or 12% of his holdings . During the Class Period,

24 Gless held 285,000 and sold 169,250, or 59% of his Class Period holdings . 97% of Gless' s

25 proceeds from insider sales were derived from sales during the Class Period .

26 C. Steven S. Spitzer

27 277. Defendant Spitzer has pled guilty to securities fraud and is awaiting sentencing .

28 278. Spitzer joined Peregrine several months after its IPO at a time when vi rtually all


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of Peregrine's software license sales were to end users . By the end of the third quarter of fisca l

year 1998 (December 31, 1997), however, approximately 15% of Peregrine's total licens e

I revenue was being generated through resellers like GE Capital and ATT Capital under Spitzer' s

leadership . Gardner reported to the Board in the report dated October 16, 1998 that the channels

were generating "lots of smoke, little fire" and that he was going to move Spitzer's department

I "under Worldwide Sales and Marketing" -- defendant Powanda's responsibility -- and "focus in

I on 2 or 3 relationships and make it happen ."

279. Spitzer' s cultivation of a relationship with KPMG ultimately bore fruit in March

1999 when Peregrine and KPMG signed a letter agreement by which Peregrine loaned $500,000

to KPMG and KPMG committed to purchase $2 .5 million of Peregrine software and pay for it by

March 31, 2001 . Spitzer signed the agreement and, according to Spitzer, everyone in senior

management, including Gardner, was aware of and approved the agreement knowing that its

payment obligations were fictitious . From December 1999 through December 2000, Spitzer was

involved in a number of transactions with KPMG in which he arranged for KPMG to sign

Schedule A's committing KPMG to purchase more than $35 million of software licenses in

connection with particular entities who were potential end users but with whom Peregrine had

not finalized a transaction .

280. Virtually all of these transactions were done in the last few days of a quarter an d

were motivated by an intention to recognize revenue on a sale of software licenses that otherwise

could not have been recognized in that quarter . Spitzer used his relationship with defendant

Larry Rodda and later Jim Murphy at KPMG to facilitate these transactions . More than $32

million of these transactions were eventually written off by Peregrine because the prospective

end users did not buy Peregrine software, and KPMG refused to pay . Spitzer understood when

these transactions were entered into that KPMG would not pay . Spitzer has admitted that the

structure of the KPMG/Avnet transaction raised red flags . The KPMG/Citigroup transaction was

done at the same time and under virtually identical terms .

281 . According to Reichner, KPMG Consulting's Murphy (who succeeded defendan t

Rodda as the Peregrine relationship manager) told Reichner that KPMG Consulting did not vie w


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the outstanding accounts receivable as an actual obligation because of conversations between

Rodda and Spitzer. Murphy told Reichner that these transactions were done as an

"accommodation" and there was an understanding that KPMG Consulting would not have to pay

on them .

282. Spitzer knew that an understanding had been reached that Peregrine would not

enforce the contractual payment terms against KPMG if contemplated end user deals did not

close . He knew that the Company's financial reports were materially misstated as a result of the

KPMG and other transactions in which he participated .

283 . Spitzer was involved in other transactions where revenue was improperly

recognized . In the fourth quarter of fiscal year 2001, for example, Spitzer assisted in the

negotiation of a $2 .5 million license transaction with FMI, a software reseller in which Peregrin e

had made an investment . In an April 3, 2001 e-mail to FMI's Mark Douglas, Spitzer writes :

"Peregrine will also provide FMI with flexibility on payment terms, should that be necessary ."

284. Between August 12, 1999 and May 24, 2001, Spitzer sold 185,000 shares of

Peregrine common stock for proceeds of approximately $5 .23 million, at prices ranging between

$15 .74 and $52 .42 per share .

285 . This insider selling was unusual and suspicious, both in timing and amount . The

sales came on the heels of Peregrine's various press releases falsely announcing "record" level s

of revenues and improving balance sheet metrics, including cash and DSO, which Spitzer knew

or was deliberately reckless in not knowing, were materially false and misleading . The sale of

20,000 shares on February 25, 2000 occurred during a Company imposed black-out period .

Before the Class Period Spitzer held 165,000 shares and sold 110,000 or 67% of his holdings .

During the Class Period, Spitzer held 185,000 shares and sold 185,000, or 100% of his Class

Period holdings .

D. use Cappel

286. Defendant Cappel has pled guilty to fraud during the Class Period and is awaitin g

sentencing.

287. Cappel has admitted that in June 2001, she prepared and sold a false $19 millio n


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invoice to Wells Fargo Bank purportedly reflecting an obligation of KPMG Consulting . The

invoice was only loosely based on several uncollected, aging KPMG Consulting receivables,

none of which were due in the amount or on the date reflected on the false invoice . Peregrine

purchased this $19 million "receivable" from Wells Fargo in November 2001 . Cappel knew that

Peregrine used this transaction to fraudulently decrease its DSO for the first quarter of fiscal year

2001 .

288. Cappel was responsible for forecasting cash and collections worldwide and

maintained an informal, worldwide accounts receivable aging report which did not reconcile t o

the general ledger . Cappel knew that these receivables were uncollectible and that the Company

did not offset them with an adequate bad debt reserve .

289. Cappel knew of and facilitated Peregrine's efforts to create an artificially low

DSO by selling receivables to banks . She prepared internal analyses of "natural" DSO and the

amount of cash that Peregrine would have to raise -- or accounts receivable that it would have to

sell -- in order to arrive at the internally generated target for DSO . She knew that Gless set the

target DSO as a number that he wanted analysts to infer from the financial statements . She also

knew that Peregrine did not disclose the nature or extent of its bank financing program .

Therefore, she knew that analysts and the market would be misled about the company's true or

"natural" DSO .

290. Cappel also engaged in improper accounting for cash received from customers at

quarter end on accounts that had been sold to banks . She referred to this improper accounting as

"double dipping ." When payments were received near the end of a quarter, but not yet due to the

bank, Cappel did not book an entry reflecting any cash was payable to the bank . Instead, she

recorded the cash payment and reduced receivables as though the accounts receivable still

belonged to Peregrine . This artificially decreased Peregrine 's DSO and increased cash at quarter

end . Cappel reversed these entries when she forwarded the collections to the bank in the

following quarter .

291 . Cappel deliberately sold receivables for maintenance revenue to banks when she

knew that these were not eligible for sale under Peregrine's agreements with the banks . The


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purpose and effect was to artificially reduce Peregrine's DSO .

292. Cappel participated in the falsification of Peregrine 's DSO and its understatement

of accounts receivable and of its liabilities to the banks which reached up to $180 million during

the Class Period . Through these devices, Cappel also participated in the overstatement of

Peregrine's true cash accounts receivable and liability position reflected on Peregrine's financia l

statements .

293 . Between March 17, 1999 and January 2, 2002, Cappel sold 16,249 shares of

Peregrine common stock, for total proceeds of $334,287, at split-adjusted prices ranging between

$14.45 and $30 .25 per share . She sold 10,116 shares at $14 .45 per share on January 2, 2002, just

hours before Peregrine preliminarily announced disappointing results for the quarter ended

December 31, 2001, for proceeds of $146,176 . The announcement of disappointing results was

made after the market closed . The following day Peregrine stock closed at $9 .26. This insider

selling was unusual and suspicious both in timing and amount .

E . Richard T. Nelson

294. Defendant Nelson is a licensed CPA and was, at relevant times, an active membe r

of the California Bar . As an auditor employed by KPMG, he was involved in the audit of BMC

Software in 1997-88. In the course of his various responsibilities over the years at Peregrine,

Nelson became aware of numerous matters that revealed the Company was engaged in fraudulent

financial reporting . As Corporate Secretary, Nelson attended every Board of Directors meeting

and Audit Committee meeting during the Class Period .

295 . As alleged in paragraph 49-52 above, Nelson directed a document destruction

program while at Peregrine and instructed all Board members to destroy any material handed ou t

at or before a Board meeting within thirty (30) days . This was done for the purpose of masking

the defendants' wrongful conduct and making their activities as difficult as possible t o

reconstruct .

296 . As Corporate Secretary, Nelson was responsible for maintenance of the corporat e

minute book and for the preparation of minutes of the meetings of the Board of Directors and its

committees . Nelson prepared minutes of Board meetings that did not accurately reflect th e

FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS -M aster File No . 02-CV-0870J(RBB) 108

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substance of what occurred at those meetings and purged from the final version of the minutes

any potentially damaging material . For example, he omitted any mention of the Critical Path

barter transactions from the final minutes of the Board meeting conducted on July 18, 2001, even

though the subject was discussed at that meeting . He also failed to keep minutes of Audi t

Committee meetings .

297. As Peregrine grew, Nelson's responsibilities burgeoned. Nelson had primar y

responsibility for corporate reporting and deal making, including the due diligence and

documentation for Peregrine's frequent acquisitions . This activity became so intense that in

March 2000, Nelson was promoted to Vice President, Corporate Development, reporting directly

to defendant Gardner, at which time he relinquished his position as General Counsel .

298 . Nelson was also responsible for drafting and filing SEC Forms 10-K and 10-Q,

and up to October 2000 was the principal draftsman of press releases that announced quarterly

results. Based on his knowledge of the material adverse facts herein alleged, Nelson knew, or

with deliberate recklessness disregarded, that each such document was materially false an d

misleading .

299. Nelson also served as the Compliance Officer for Peregrine 's insider trading

policy until March 2000 . Nelson failed to ful fi ll his duties as the Compliance Officer because he

permi tted substantial insider selling to occur du ring black-out periods .

300 . Nelson worked with the A rthur Andersen audit partner Dan iel Stulac to formulate

Peregrine ' s stock option pricing policy . By this process , the Board approved the number of stock

options to be gr anted on a quarterly basis . Nelson knew that pursuant to the policy, defendant

Gardner dated the option grants retroactively based on the lowest stock price of the quarter, and

that this policy was unheard of for a public comp any and had the effect of understating the

Company's option expense . Notwithst anding his knowledge during the Class Period of the

existence of this accounting manipulation , which had the effect of artificially boosting

Peregrine ' s reported earn ings , Nelson took no steps to correct or otherwise challenge its

implementation .

301 . On April 30, 2001 , Nelson was copied on a memo from defend ant Gless regardin g

FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS -Master File No . 02-CV-0870 J(RRB) 109

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I a transaction with Cl Software Solutions which identified it as a barter, no cash to exchange

hands, and referred to it as a "Powanda deal ." Nelson knew that revenue from this transaction

I was improperly recorded by Peregrine .

302 . In the spring of 2001, John Benjamin, Peregrine's Treasurer, prepared an d

delivered to Nelson a four-page report in which he explained to Nelson in detail that Peregrine

was engaging in the sale of short term receivables to mask the impact that uncollectibl e

receivables were having on Peregrine's DSO number . Benjamin took Nelson through the

reseller/channel issues reflected in Special Attention Invoices showing massive unpai d

receivables . Benjamin also explained to Nelson at this meeting the facts regarding ban k

'financing of receivables. Based on this meeting, Benjamin expected Nelson to be "outraged" at

Peregrine's efforts at bank financing to manipulate DSO . Benjamin never heard from Nelson

again, and Nelson took no steps to force Peregrine to cease its improper practices with regard to

either bank financings or receivables .

303 . On September 11, 2001, Nelson was copied on an e-mail from defendant Gardne r

discussing the existence of a side letter on a transaction with IDOM, a Spanish reseller, rendering

revenue from this transaction illusory . Nelson knew such revenue was improperly recorded .

304. Nelson received direct knowledge of aging and uncollectible accounts receivabl e

from his discussions with Geoffrey Boonen, Vice President, EMEA Commercial Operations . He

learned from these discussions that Boonen was having problems collecting receivables, yet the

Company's financial reports failed to account for uncollectible receivables and failed t o

adequately inform investors of the level of such receivables . Nelson was a recipient of two e-

mails from Boonen dated October 30, 2001 and November 6, 2001 outlining outstanding EMEA

channel and other international accounts receivable greater than $500,000 which showed total

such receivables in the tens of millions of dollars . Nelson felt safe in not raising the issue of

uncollectible accounts receivable because he knew that Peregrine was making so many

acquisitions that its operating financial results, and in particular, material amounts of aged

accounts receivable, were being buried in the "acquisition and other" line item expense

associated with acquired companies . In fact, numerous uncollectible accounts receivable wer e


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written off in the "Acquisition and Other Expense" line items of Peregrine's financial statements .

Nelson further knew of two transactions (IMS and Barnhill) where Peregrine made an investment

in a reseller because the entity had an outstanding receivable with Peregrine that it could not or

would not pay . To hide the existence of the receivable, Peregrine simply gave these entities th e

money they owed to Peregrine .

305 . Nelson had specific knowledge in November and December 2001 from reports he

received regarding EMEA sales activity, that EMEA salesmen did not believe they were going to

make their sales quotas in light of the amount of unburned inventory in the channel, and knew

from these reports that the EMEA resellers were unable to effectuate significant sales o f

inventory .

306. Nelson knew of a questionable relationship with MGX, a large South African

company which acted as a reseller of Peregrine software . In June 2001, Peregrine and MGX

executed a master distribution agreement whereby MGX agreed to sell $13,800,000 of Peregrine

product, and had until June 2003 to pay Peregrine . In December 2001, Peregrine made an

investment in MGX, and gave MGX 1 .5 million shares of stock (worth approximately $17

million) and received a promissory note, convertible into MGX stock, in return . A portion of the

proceeds of MGX's sale of the Peregrine stock it received ($5 million) was earmarked to pay

amounts due Peregrine in January and June 2002 under the June 2001 agreement. Defendant

Gardner informed Nelson of MGX's position that it had a side letter that allowed it not to pay ,

and that it therefore needed an investment . By an e-mail dated November 24, 2001, Gardner

informed Board members, including Nelson that, "[w]e would also insist upon accelerated

payment of the long-term receivables due us as a partial use of proceeds, that this would actually

benefit our cash position as well, we should do it . "

307. Nelson was involved in Peregrine's transactions with Critical Path in the second

quarter of fiscal year 2001 and learned of the details of these transactions, including that their

dollar volumes doubled shortly before the deals closed. He became aware of the SEC' s

investigation of the Critical Path transactions in the Summer of 2001 and the acknowledgment by

Gardner and others in the contemporaneous documentation that the deals were considered to be a


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barter transaction .

•308. In October 2001, Nelson learned c : an e-mail (later confirmed to be from Ron

Hall) of Peregrine's Asia Pacific division sent Gardner asserting that Peregrine's Asia Pacific

division had entered into sham trans-actions, :ith resellers that had improperly been recorded a s

revenue . Nelson participated in the plan tc terminate the e-mail sender ostensibly as part of a

lay-off, so that he would not contend he was terminated for blowing the whistle on Peregrine's

revenue recognition fraud .

309. In October 2001, Nelson met with Andy Cahill, Executive Vice President of

Peregrine, to discuss side letters that had been uncovered which excused payment by resellers .

On October 30, 2001, Nelson received an e-mail from Gless attaching a list of International Past

Due invoices as of 9/30'')1 greater than $500,000 which totaled $29 .8 million and which showed

this amount to be $49 million at 12131101 . Nelson took no steps to ensure that these amounts

were properly recorded . Nelson learned in November or December 2001 from Boonen by e-mail

that a number of side letters had been discovered in Europe that impaired the collectibility of a

substantial amount of accounts receivable on Peregrine's books . In November - December 2001,

Nelson spent ten days reviewing Peregrine's operations in Europe . Between November 6-10,

2001, Nelson met with Boonen at Peregrine's Paris office to discuss the side letters raised in the

Boonen e-mail . At this meeting, Boonen told Nelson that there were serious problems in the

business practices of the EMEA division, including huge uncollectible receivables and side

letters rendering the payment obligation on licenses unenforceable .

310 . Nelson knew that Peregrine signed an agreement with Prokom in June 2001 . In

December 2001, Nelson learned that a side letter had been signed with this reseller by Richard

Day, Vice President for Emerging Markets . Nelson ]earned that the side letter relieved Prokom

of payment obligations until Prokom had achieved a certain sell-through rate . In December

2001, Nelson also learned of a side letter with MGX which made contingent its obligation to pay

pursuant to a $12 million transaction . In April 2002, Nelson learned of a December 2000

agreement with BT Ignite which had a 30 day cancellation clause . When BT Ignite exercised its

cancellation clause, a second agreement was entered into purporting to cancel the cancellation ,


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modifying the original agreement by rescheduling payment terms and providing for Peregrine's

purchase of consulting services from this entity . These transactions rendered the BT Ignit e

obligations illusory.

311 . On November 14, 2001, Geoffrey Boonen, Assistant Vice President of

Commercial Operations for EMEA, forwarded to Nelson by e-mail a spreadsheet identifying

seven agreements which reflected material amounts of revenue that Boonen believed could no t

be properly recorded .

312. Nelson learned in February 2002 of the SEC's charges against Critical Path

involving the Peregrine transactions, and later that the SEC was intending to charge Gardner with

SEC violations stemming from the Critical Path transactions, yet made no public disclosure of

these material facts .

313 . Nelson made the following sales of Peregrine common stock during the Class

Period, while knowing of material adverse nonpublic information :


08/16/99 12,500 $33 .25 $ 415,625 .00

08/16/99 37,500 $33.00 $1,237,500 .0 0

08/23/99 25,000 $33 .50 $ 837,500.00

08/26/99 1,000 $35.25 $ 35,250.00

08/31/99 11,500 $32.63 $ 375,245 .00

02/15/01 200,000 $29.63 $5,926,000.00

Total 287,500 $8,827 ,120 .00Sold :

314. This insider selling was unusual and suspicious, both in timing and amount . The

sales came on the heels of Peregrine's various press releases falsely announcing "record" level s

of revenues and improving balance sheet metrics, including cash and DSO, which Nelson knew

or was deliberately reckless in not knowing , were materially false and misleading .

315 . Before the Class Period Nelson held 386 ,500 shares and sold 133 ,500, or 35% of

his holdings . During the Class Period , Nelson held 457,451 shares and sold 375 ,000, or 82% of


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his Class Period holdings. Approximately 90% of Nelson's proceeds from insider sales wer e

derived from sales during the Class Period .

F . Douglas S. Powanda

316. Powanda participated in the creation and dissemination of Peregrine's fals e

financial results throughout the Class Period until he resigned. Powanda did so by authorizing

sales personnel to enter into sales transactions which included written and oral side agreements,

whereby resellers were not obligated to pay Peregrine until they sold the product through to the

end user . Powanda knew through discussions with defendants Gardner, Gless, Nelson and

Spitzer that Peregrine improperly recognized revenue on such transactions .

317. Powanda knew that Peregrine set unrealistically aggressive growth targets an d

pressured its sales personnel each quarter to make the numbers . Powanda attended periodic sales

meetings in Peregrine's headquarters which were also attended by Gardner, CFO Farley (until his

death) and/or CFO Gless and Peregrine's top sales executives including defendant Powanda's

direct reports . The primary purpose of these meetings was to update and discuss the financial

outlook for the current quarter and to review large license agreements anticipated to close during

the quarter. Through these meetings and computerized reports received from defendant Gless

which tracked the Company's "burn," i . e., commitments from resellers not yet sold-through to

the end user, Powanda closely monitored the progress of these anticipated deals, as well as

Peregrine's progress towards meeting quarterly revenue targets .

318 . By January 1998, Powanda was Peregrine's Executive Vice President o f

Worldwide Sales reporting directly to Gardner. He served in that position until approximately

April 2000 . At that point, Gardner and Powanda negotiated a compensation plan providing

Powanda with substantial cash, approximately $750,000 in commissions, which was paid

pursuant to this plan on March 15, 2001 and April 30, 2001 . During fiscal year 2001, Powanda

led the "Get It!" sales team, helped negotiate the IBM/Tivoli Service Desk transactions and

worked with Gardner and other senior executives to close major deals with Peregrine's Alliance

partners, and other resellers . In April 2001, Powanda took a three (3) month sabbatical . Upon

his return, he was employed in the Office of the Chairman and acted as a consultant until he left


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the Company in the Spring of 2002 .

319 . Powanda was involved in multiple transactions whereby revenue was improperl y

recognized including agreements with Corporate Software & Technology, Cl Solutions, British

Telecom, Action, Systematics, and Barnhill . See Appendix E hereto . These transactions were

negotiated near the end of a quarter, were large in dollar volume and were designed to permit

Peregrine to equal or exceed its revenue and pro forma earnings forecasts to the investment

community . Powanda was a confidant of defendant Gardner and often was called upon by

Gardner to generate sales revenue for the Company, particularly when it appeared that Peregrine

might miss its earnings estimates . Powanda and Gardner, for example, often traveled to Europe

at the end of quarters to meet customers and "close" deals . One of Powanda's primary sale s

techniques was to entertain customers lavishly at strip clubs and then use his entertaining to later

call in chits for Peregrine business . Powanda kept a drawer in his office, known as the "magic

drawer," which was filled with contracts that he could pull out at quarter's end to purportedl y

i book revenue .

320. Powanda, along with defendant Spitzer, was an architect of the KPMG

relationship . Although the main interface with KPMG was Spitzer, Powanda was directly

involved in the KPMG/Morgan Stanley transaction . Powanda negotiated with Morgan Stanley

for an "enterprise license" agreement, a very large sale . Powanda claimed to have a letter

agreement . He asked Spitzer to have KPMG finalize the deal, and KPMG would receive a large

services contract . Powanda knew that KPMG had done similar "favors" for Peregrine in the past,

whereby it would sign agreements knowing it had no real payment obligation .

321 . At the meeting called by Reichner of Peregrine senior m anagement in early 2001,

where he tried to convince the group that Peregrine should " take the hit " and get rid of all the bad

receivables it was aware of, Powanda was among the most vocal opponents of this idea .

322. Powanda knew, or was deliberately reckless in not knowing , that revenues he

participating in creating for Peregrine were improperly recorded . On January 5, 2001, defendant s

Gardner, Gless and Powanda received an e-mail stating, "At the last second of the last hour of

the 37th of December" and proceeding to congratulate the sales team for obtaining a deal . The e-


0 •

1 mail is a clear reference to the closing of a large transaction after the end of the quarter on

2 December 31, 2001, but nonetheless to be recorded as if obtained in that quarter. Powanda

3 responded, "Congratulations to all on a spectacular team effort . This is truly the "A" team ." His

4 e-mail directed that it should be "deleted on Apri l 14, 2001 . "

5 323. As a reward for his success in obtaining deals whereby revenue could ostensibly

6 be recorded, and in Gardner's absence, on January 22, 2001 Powanda was appointed to an

7 "operating committee" to manage the Company consisting of himself and defendants Gless and

8 Nelson. Gardner stated in an e-mail, "This will be Doug's [Powanda's] first assignment in his

9 new Office of the Chairman role . "

10 324. On October 2, 2001 Powanda received an e-mail from Kevin Tumulty, Area Vice

1 I President, EMEA Alliances and Channels, stating "We're still trying to make the quarter."

12 However, the quarter had ended on September 30, 2001 . The e-mail went on to enlist Powanda's

13 help in closing deals with ICL and Computacenter . The e-mail also states "Hope to get $1 . 5

14 million from Merkandilidata in next hour or so ." Powanda knew such revenue, obtained outside

15 of the quarter, was improperly recorded in the already closed quarter .

16 325 . According to a former employee, Peregrine management fraudulently faxed

17 purchase orders and other accounting/audit-related documents from one Peregrine office to

18 another during end of quarter audits . Management would change dates and add new date stamps

19 so that they could include sales for the quarter after the quarter had closed . Powanda sanctioned

20 this practice and laughed about it .

21 326. An Area Vice President, E-business Programs reporting to Doug Powanda, has

22 stated: "Powanda told me in 1999 that the fax machine in his office on the second floor (at the

23 end of the mahogany row next to the accounting department in the old building), was 3 day s

24 back-dated so that customer contracts that were closed after the quarter could be faxed through to

25 his fax machine and back-dated . I sat in the office between Farley and Powanda . Those that had

26 direct knowledge of this machine was a tightly held secret . Powanda's fax machine was the

27 collection point for improperly booked Euro deals . "

28 327. In light of Powanda's education and extensive experience in the softwar e


0 •I business, he knew the criteria to determine whether revenue could be recognized on a particula r

2 transaction, and that the deals described herein did not satisfy the relevant criteria . Powanda

3 knew, or was deliberately reckless in disregarding, that Peregrine's reported revenues in fiscal

4 year 2000 and fiscal year 2001 were materially overstated .

5 328. Powanda made the following sales of Peregrine common stock during the Clas s

6 Period, while knowing of material adverse nonpublic information :

7 Date Number of Sales Proceeds8 Shares Price Received

08/16/99 10,000 $33 .00 $ 330,000 .009

08/16/99 6,250 $33 .00 $ 206,250 .0010

02/17/00 30,000 $45 .98 $ 1,379,400 .00

11 02/17/00 20,000 $46 .19 $ 923,800 .00

12 02/17/00 10,000 $45 .94 $ 459,400 .00

13 02/17/00 20,000 $46 .13 $ 922,600 .00

14 02/17/00 20,000 $46 .22 $ 924,400.00

02/17/00 10,000 $46 .44 $ 464,400 .0015

02/23/00 2,500 $44.94 $ 112,350 .0016

02/23/00 5,000 $45 .19 $ 225,950.0017

02/24/00 22,500 $45 .00 $ 1,012,500 .00

18 02/24/00 10,000 $45.13 $ 451,300.00

19 02/24/00 10,000 $46.00 $ 460,000.00

20 02/24/00 2,500 $45 .56 $ 113,900 .00

21 02/24/00 10,000 $46.38 $ 463,800.00

02/24/00 7,500 $45 .50 $ 341,250.0022

02/25/00 5,000 $47 .75 $ 238,750 .0023

02/25/00 10,000 $48 .13 $ 481,300.0024 02/25/00 5,000 $47 .00 $ 235,000.00

25 02/08/01 400,000 $28 .08 $11,232,000 .00

26 05/10/01 10,000 $28 .20 $282,000 .00

27 05/16/01 8,750 $26 .50 $231,875 .00

28 05/16/01 30,000 $26 .50 $795,000,00

FIRST AMENDED CONSOLIDATED COMPLAINT FO R VIOLATIONS OF THE FEDERAL SECURITIES LAWS -#105317 Master File No . 02-CV-0870 J(RBB) 117

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05/16/01 1,250 $26.50 $33,125 .0 0

05/21/01 20,946 $28.00 $586,488 .0 0

05/21/01 14,000 $28 .05 $392,700.00

05/21/01 10,000 $28.10 $281,000.00

05/21/01 10,000 $28.15 $281,500.0 0

05/21/01 1,900 $28.25 $53,675 .00

05/21/01 600 $28.25 $16,950 .0 0

05/21/01 2,500 $28 .25 $70,625 .00

05/21/01 10,000 $28 .30 $283,000.00

Total 736,196 $24,286 ,288 .00Sold :

329. This insider selling was unusual and suspicious, both in timing and amount . All

of the sales came on the heels of Peregrine's various press releases falsely announcing "record"

levels of revenues and improving balance sheet metrics, including cash and DSO, whic h

Powanda knew or was deliberately reckless in not knowing, were materially false an d

misleading .

330. Powanda was constantly advocating his removal from the list of Compan y

insiders subject to black-out periods . In an e-mail to Eric Deller on July 20, 2000, Powanda

pleaded, "get me off the 16B list!!!" 200,000 shares were sold by Powanda during Company

imposed black-out periods . Before the Class Period Powanda held 837,100 shares and sold

804,000, or 96% of his holdings . During the Class Period, Powanda held 862,446 shares and

sold 862,446, or 100% of his Class Period holdings . 78% of Powanda's proceeds from inside r

sales were derived from sales during the Class Period .

G . Frederic B. Luddy

331 . Defendant Luddy was involved in numerous major decisions regarding the

Company, including acquisitions, was in frequent and close contact with defendants Gardner and

Moores regarding Company business, and knew or recklessly disregarded that Peregrine's public

statements throughout the Class Period were materially false and misleading . On

October 3, 2001, Luddy received a copy of an e-mail from Ron Hall, a salesperson in Peregrine's


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Asia Pacific division , which attached several Peregrine license agreements and pointed out why

they did not represent legitimate revenues . The text of the e-mail is set fo rth in paragraph 336

hereof. This e-mail put Luddy on notice that Pereg rine was engaging in revenue recognition

fraud . Luddy took no steps to investigate or inquire about the subject of this e-mail, or to make

any public disclosure of the ma tters discussed therein .

332. Luddy made the following sales of Pereg rine common stock during the Class

Period , while knowing of mate ri al adverse nonpublic information :

Date Number of Sales Proceed sShares Price Received

08/11/99 3,224 $30.22 $ 97,429.28

08/25/99 6,250 $33 .63 $ 210,187 .5 0

02/15/00 22,500 $43 .50 $ 978,750 .00

02/16/00 10,000 $44.19 $ 441,900 .00

02/16/00 10,000 $44.25 $ 442,500 .00

02/16/00 25,000 $44.40 $ 1,110,000 .00

02/16/00 20,000 $44 . 81 $ 896 ,200.00

02/08/01 10,000 $28 .00 $ 280,000.00

02/09/01 56,000 $28 .01 $ 1,568,560 .00

02/09/01 50,000 $28 .53 $ 1,426,500 .00

02/12/01 20,924 $27.94 $ 584,616 .56

02/12/01 50,000 $28 .07 $ 1,403,500 .00

02/13/01 5,000 $28 .82 $ 144,100.00

02/14/01 33,000 $27.94 $ 922,020.00

08/01/01 16,000 $28 .16 $ 450,560 .00

08/01/01 10,891 $28 .10 $ 306,037 . 1

08/01/01 20,000 $28 .04 $ 560,800.00

Total 368,789 $11,823 ,660.44Sold :

333. This insider selling was unusual and suspicious, both in timing and amount . All

of the sales came on the heels of Peregrine's various press releases falsely announcing "record"

levels of revenues and improving balance sheet metrics, including cash and DSO, which Ludd y

FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWSMaster File No. 02-CV-0870 J(RBB) 119

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knew, or was deliberately reckless in not knowing, were materially false and misleading .

334. Before the Class Period Luddy held 416,144 shares and sold 397,196, or 95% of

his holdings . During the Class Period, Luddy held 465,763 shares and sold 465,763, or 100% o f

his Class Pe riod holdings . Approximately 75% of Luddy 's proceeds from insider sales wer e

derived from sales during Class Period .

H . John J. Moores

335 . Defendant Moores signed Peregrine's Forms 10-K filed with the SEC for th e

fiscal years ending March 31, 2000 and March 31, 2001 and the Peregrine registration statements

(on Forms S-3, S-4 and S-8) filed with the SEC during the Class Period . He also reviewed and

approved the issuance of quarterly financial results for fiscal years 2000 and 2001 and the first

three quarters of fiscal year 2002 .

336 . On October 3, 2001, Ron Hall, a Peregrine sales executive in its Asia Pacific

division, sent the following e-mail to defendants Gardner, Gless, and Luddy . In recognition that

the sender was knowledgeable of Peregrine's ongoing fraud and threatened to expose the fraud ,

Gardner immediately forwarded the e-mail to defendant Moores . The e-mail stated :

Attached are documents that should be of fundamental interest toyourself and all copied recipients .

They pertain directly to business activities in Asia Pacific, morespecifically Australia . In all likelihood also Europe, whereDominic O'Riley was previously engaged in executivemanagement capacity .

The attached `Schedule A' for Planwell Technology may well befamiliar , as $2 million AUD [Australian dollars] of revenue(perhaps more ) was booked on September 30'h, 2001 under #SCA-AU-002918V01 ,

The underpinning Partner Addendum, contract # 01AB300901 maynot be so familiar . I understand that you don't see all these partneragreements.

I strongly suggest you give these documents careful scrutiny,paying particular attention to page 8 of the `Partner Addendum,'the `Sales Guarantee' clause. Then inspect the overall wording andassociated legality of the contract, the implied Peregrineresponsibility and associated consequent acceptable non-paymentshould targets not be achieved due to failure to meet this contractedresponsibility . It might pay to look at the maintenance terms,payment terms, territory, support implications and other Peregrin e


responsibilities .

My legal background suggests that the overall contract worthinessis questionable . At the least, certainly not what a shareholder (oran analyst) would pin faith on .

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While in the process, it would be recommended you check theunderpinning contracts for the following Australian Partneragreements, where large revenue amounts have already beenrecognised :

IMS - booked for $10 million AUD in March , 2001 - $22 milliondollars gross sales required to achieve target .

Kinetica - booked for $1 million AUD in June, 2001 - $1 .4 milliongross sales required to achieve target .

TELE IP - booked for $2 million in September, 2001 - $3 . 2 milliongross sales required to achieve target .

Planwell Technology - attached , booked for $5 million inSeptember , 2001 - $10 million gross sales required to achievetarget .

That's $36 million gross sales required for these pa rtners tocollectively achieve target . With implied and/or contracted salesguarantees .

Of note, IMS ($22 million dollar AUD Target) haven't bookedONE SINGLE DEAL or burnt one dollar of revenue since theysigned in March, 2001 . 1 repeat, NO business in 6 months on a $22million AUD commit !

Without the IMS `sale' of $10 million nett AUD in March, 2001,Australia would only have sold some $4 million dollars grosssoftware for all of last year! They 're promising $36 million thisyear?

The above mentioned ` contracts ' have a few similarities :

1. They represent ludicrous and irresponsible targets andcommitments - little wonder that no ` Partner' has paid upfront, particularly when you consider the current economicclimate and last year 's `real ' software sales . I am reliablyinformed that these partners were touted figures between $30 and$40 million sales in Australia for last year .

2. The payment terms are extremely loose , extensively delayedand underpinned by the `guaranteed sales' clause, which anygood lawyer would use to avoid liability if things didn't workout as Peregrine have promised . Kinetica haven't yet paid fordeals that were booked in June, before their partner àgreement'was signed . Yet revenue has been booked and valuable resourcesare being expended supporting their activities . What's the chancesof them paying up if targets aren't met?


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3 . In the main, Partner Àddendums' - the real contract - aren'tsigned off by Peregrine US and are exposed to non-compliance andpotential litigation . Ùnconscionable Contract' comes to mind .

Yet Mr. Walsh and Mr . O'Riley are pressuring Sales Reps in AsiaPacific and Australia to find MORE Partners - so long as theycommit bookable dollars up front . Their war cry is "anything lessthan $10 million AUD isn't worth doing the business" .

Come on , what are Peregrine selling here , Amway?Vapourware? Where' s the commercial substance to these socalled `contracts' .

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For the record, the $10 million dollar IMS deal that Mr . Walsh`won his stripes for' in March, has yielded absolutely NOTHINGto date - not one cent worth of `real' business (apart from the initialrevenue booking) .

I also note he Mr. Walsh doesn 't manage the account and has noinvolvement in it's progress . It's been offloaded to a ve ryinexperienced Sales person . Next March should be interestingwhen Peregrine try to get IMS to reload - or PAY for that matter.Still, Peregrine have booked the revenue . What will this do toPeregrine ' s partnering credability? Or Stock value ?

Were the attached documents, any of the other `contracts'mentioned above, or this correspondence to fall into the handsof the `Wall Street Journal' or a curious analyst, PeregrineSystems will be under serious and immediate scrutiny. That isnot my intention , but as a well meaning Peregrine investorwith Peregrine's best interests at heart, I feel compelled todemand your attention to these contracts and the revenuebooked from them .

This is a blatant example of what can be termed `Channelstuffing', in their crudest form. The analysts have othernames .

Mr. Walsh and Mr . O'Riley have both been personally warned asto the lack of substance to these contracts, yet have chosen toignore those warnings . I can only assume that as responsibleexecutives and directors of Peregrine, you would have noknowledge of the underpinning contracts to the Schedule A'syou receive on Partnering agreements .

This type of contract should immediately cease and `real'revenue be recognised , ie ., where PRODUCT is actuallyDELIVERED and payment is probable .

Terry Walsh' and Dominic O'Riley' s contracts with Peregrineshould immediately be reviewed due to breach of fiduciary duty .

Reliable information suggests that a major Asia Pacific restructurewill be announced on October 8`h, 2001 . This will include thetermination of a number of staff, mainly sales related . I assume

FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS -M aster File No . 02-CV-0870 J(RBB) 122

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these staff will include anyone that has openly objected to theChannel stuffing . Àmway' approach outlined above .

I look forward to your urgent attention to this correspondence inthe hope that this is not the case . (Emphasis added) .

Sincerely Yours .

337. By this e-mail, defendant Moores was placed on specific , direct notice of

Peregrine's ongoing revenue recognition fraud . The bogus contracts referred to by the e-mail,

which were material in amount, involving in excess of $22 million AUD, were attached for

review. Further, the sender pointed out that the contracts were related to Dominic O'Riley who

had previously worked in management in EMEA . The e-mail sender urged that revenue

recognition fraud had likely occurred in Europe as well . At this time, in the Fall of 2001,

defendants Gardner, Gless, and Nelson were aware that significant revenue recognition fraud had

been uncovered in Europe . The e-mail notes that on one contract involving a $22 million AU D

commitment, not one dollar of sales had occurred. There were no real commitments and

Peregrine was selling "vaporware" pursuant to the attached contracts, which had no commercia l

substance. The e-mail sender further notes that the investing public would understand these

contracts to reflect accounting fraud within Peregrine . The sender also urged that such contracts

should cease being part of Peregrine's business and ones where "real" revenue with product

actually delivered and payment probable recognized as revenue . Less than an hour after receipt

of this e-mail, defendant Moores responded to Gardner as follows: "I can't figure out why (sic)

the hell is complaining about," and left it at that . Notwithstanding specific, credible information

set forth in the e-mail, including copies of contracts showing Peregrine's revenue recognition

fraud, Moores failed to take any follow-up steps or to make any disclosure of what he had

learned. Such conduct was, at a minimum, deliberately reckless .

338. Throughout calendar year 2001 and until the first public disclosure of accountin g

irregularities at Peregrine in May 2002, Moores repeatedly discussed at Board meetings and

otherwise the poor cash position of the Company and its ever increasing expenses. Moores knew

that the Company had insufficient cash to run its operations, and was dependent on the existence

of its bank line of credit and access to the capital markets to obtain needed funds . In November

FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS -Master File No. 02-CV- 0870 J (RBB) 123

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2001, Moores met with defendants Nelson and Luddy to discuss the need to significantly reduce

Peregrine's expenses . As a result of his keen awareness of the cash poor situation the Company

consistently found itself in during the Class Period, Moores knew that there was incentive for

senior management to be dishonest about the true financial performance of the Company . The

October 2001 e-mail put Moores on notice that, consistent with the Board approved revenue

recognition policy which he authorized, Peregrine routinely entered into bogus software license

sale transactions designed to create the illusion that significant revenue was being generated

when, in fact, there was no substance to such agreements .

339. Moores's knowledge of the Company's undisclosed cash crisis is highlighted i n

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an October 27, 2001 e-mail from defendant Nelson to defendants Gardner and Gless, an d

General Counsel Deller discussing the need to raise money through an equity offering :

In peppering [defendant] Charlie [Noell] stress to him the cashposition, which we've talked about many times at board meetings .You might share, verbally, Matt's cash forecast (the point beingthat cash is precariously low) . Finally, remind him of the cashconservation measures we're taking . Charlie already knows, in thewords of JJM [defendant John J . Moores] - we're the largestcompany in the world that lives hand to mouth . I think thepoint will be made with Charlie, without being stated . . . . . he has afiduciary duty to the company and shareholders to not let a cashdeath spiral happen .

Having done that, I think you call JJM [defendant John J . Moores]and talk through the issue, just in an inquiring/I'm not clearapproach. Tell him your not sure you see what's got Charlie'sdander, two things likely will happen . . . (1) John will shed somelight, and (2) John will laugh (I guess there are three) and saysomething like . . . Charlie's nuts, this makes all the sense in theworld . . . then he may carry the torch for you .

EACH OF YOU SHOULD DELETE THIS AFTERREADING .. . AND FROM YOUR DELETE FOLDER . (I'dmake you eat it but these monitors are hard to digest) .(Emphases added) .

340. In response, defendant Gardner advised Nelson that, "I've already made thos e

points by email but have no reply . John has also been on the email dialog but has now gon e

quiet ." (Emphasis added) .

341 . Moores knew that public disclosure of the constant cash crisis or accountin g

irregularities would lead to a severe diminution in the value of his enormous stock holdings an d


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could lead to possible bankruptcy, as in fact happened upon disclosure of the fraud . However, by

that time, Moores had liquidated the vast majority of his Peregrine stock holdings, obtainin g

hundreds of millions of dollars at the expense of public investors.

342 . In February 2002, Moores learned of the guilty plea by David Thatcher, CEO o f

Critical Path, and reports of Peregrine's involvement in the transactions giving rise to the guilty

plea, including the nature of the transactions, i.e ., a barter of goods without economic substance

for purposes of revenue recognition . Moores had prior dealings with Thatcher when Thatcher

served as Peregrine's Chief Financial Officer in 1995 . He had forced Thatcher's resignation

from Peregrine based on concerns about Thatcher's integrity. Moreover, Moores had experience

with so-called "reciprocal" transactions . In 1998, Moores had learned of a proposed transaction

between Peregrine and NEON Systems, a company in which Moores held a very substantial

(40%) equity stake . Defendant Gardner had worked on the proposal which Moores understood

was a contemporaneous purchase of software between the companies . Moores told investigators

that he believed this type of transaction "had the potential for self-dealing ." Thus, Moores was

familiar with the Critical Path-Peregrine type of barter transaction and knew it was improper and

was likely entered into for purposes of generating bogus revenue . Notwithstanding his

knowledge and experience with regard to both the type of transaction involved and the

individuals (Thatcher and Gardner), Moores failed to make any disclosure to Peregrine investors

as to his knowledge of this wrongful conduct . Instead, Moores arranged to retain his own

counsel to "investigate" the matter, and whose overriding goal was to protect Moores himself

from potential liability and embarrassment, including with regard to Moores's massive insider

selling . Disclosure of Moores's knowledge of this bogus Critical Path barter deal would have

cast Moores in a negative light . Instead, Moores hoped to be able to "manage" the problem

without having the bright light of public scrutiny trained on himself . Thus, he failed to disclose

his knowledge of Peregrine's improper accounting practices in February 2002 .

343 . Defendant Moores's knowledge of improper accounting transactions at Peregrin e

I was also obtained from his attendance at a special Audit Committee meeting held o n

February 12, 2002 . At that time, Audit Committee members (defendants Noell, Watrous, an d


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Dammeyer) and defendant Moores were told that the SEC had opened an inquiry into Peregrine's

role in the Critical Path transactions . Moores perceived at that time that defendants Gardner an d

Nelson were not treating the situation with the appropriate degree of seriousness given their

closeness to the improper transactions, and intervened to insist upon his own choice of a crimina l

defense attorney to continue handling the matter, so as best to protect himself while attempting to

divert blame to others . Moores at all times sought to protect himself and made no publi c

disclosures of the extent of his knowledge .

344. In the weeks following the February 12, 2002 meeting, Moores met repeatedly

with defendant Nelson. Moores learned that Nelson was opposing Moores's counsel's efforts

and Nelson told Moores "that an extensive investigation might suggest bad answers to questions

that had never been asked ." Further, Moores learned in late April 2002 that KPMG had

contacted the Chairman of Peregrine's Audit Committee, defendant Dammeyer, and reported the

existence of fraud in some of Peregrine's transactions, including use of side letters and extended

payment terms . Moores's counsel told Moores in late April 2002 that he believed Gardner,

Gless, and Nelson were dishonest .

345 . At a special Audit Committee meeting on April 29, 2002, Moores was informed

by KPMG as to its belief that fraudulent accounting had occurred at Peregrine . Moores

continued to fail to make any disclosure to the investing public . Instead, by the end of the Class

Period, he arranged to have himself re-appointed as Chairman of the Peregrine Board so that he

could better control events and protect himself.

346. Moores made the following sales of Peregrine common stock during the Class



07/26/99 1,522,719 $28 .50 $ 43,397,491 .50

07/26/99 970,923 $28 .50 $ 27,671,305 .50

02/17/00 1,143,016 $46.06 $ 52,647,31696

02/17/00 251,436 $46.06 $ 11,581,142.1 6

02/18/00 2,122,736 $43 .68 $ 92,721,108.48

FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS --Master File No. 02-CV-0870J(RBB) 126

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02/18/00 466,960 $43 .68 $ 20,396,812.80

02/28/00 408,220 $51 .35 $ 20,962,097 .00

02/28/00 89,799 $51 .35 $ 4,611,178 .65

02/29/00 89,799 $52.65 $ 4,727,917 .3 5

02/29/00 408,220 $52 .65 $ 21,492,783 .00

02/08/01 77,000 $30 .19 $ 2,324,630 .00

02/12/01 175,000 $28.00 $ 4,900,000 .00

02/13/01 385,000 $28.54 $ 10,987,900 .00

02/15/01 1,104,022 $29.67 $ 32,756,332 .74

02/16/01 280,000 $29.76 $ 8,332,800 .00

02/16/01 218,978 $28.91 $ 6,330,653 .9 8

02/20/01 210,000 $30.04 $ 6,308,400 .0 0

02/23/01 506,223 $30.52 $ 15,449,925 .96

02/26/01 360,000 $28.97 $ 10,429,200.00

02/27/01 50,000 $26.70 $ 1,335,000 .00

02/28/01 90,000 $25 .29 $ 2,276,100.00

Total 10,930,051 $401,640 ,096.08Sold :

347. This insider selling was unusual and suspicious, both in timing and amount .

Many of the sales came on the heels of Peregrine's various press releases falsely announcing

"record" levels of revenues and improving balance sheet metrics, including cash and DSO, whic h

Moores knew, or was deliberately reckless in not knowing, were materially false and misleading .

348 . Moores sold 4,980,186 shares during Company imposed black-out periods .

Before the Class Period, Moores held 39,098,756 shares and sold 17,123,768, or 44% of his

holdings . During the Class Period, Moores held 18,515,263 shares and sold 17,407,841, or 94%

of his Class Period holdings . 72% of Moores's total proceeds from insider sales of Peregrine

stock were derived from sales during the Class Period .

1 . Charles E . Noel] II I

349, In addition to the allegations regarding Noell previously made herein, the

following allegations further demonstrate Noell's knowledge and/or deliberate recklessness as t o


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the fraud at Peregrine during the Class Period .

350. In October 2001, defendant Nelson orally advised Noell about the e-mail receive d

I from the Australian whistleblower . Noel[ did nothing in response .

351 . In or about January 2002, Noell became aware of a detailed representation letter to

defendant Arthur Andersen signed by defendants Gless and Gardner . This letter indicated that

Arthur Andersen requested management to represent, among other things, that no side letters

existed excusing any payment obligation on license agreements for the sale of software. This

was a highly unusual term in a representation letter, had not been incorporated in the prior years'

representation letters, and was a "red flag" that Peregrine's auditor had become aware of th e

existence of side letters on transactions which rendered revenue recognition improper. Noel l

1 ignored these facts and made no disclosure or investigation of this matter .

352. On February 5, 2002, Noell e-mailed defendants Nelson, Gardner, Moores and

Gless asking if management had ever received any employee communications relating to

accounting or financial concerns . In response, Nelson informed Noell of the e-mail from th e

employee in the Asia Pacific region alleged in paragraph 336 which drew attention to Pereg rine's

improper revenue recognition practices .

353 . At a special Audit Committee meeting on February 12, 2002 which Noel l

attended, there was a discussion of "barter transactions" that Peregrine had entered into pursuant

to which revenue recognition was improper . NoelI was aware at this time that the SEC had

initiated an inquiry regarding Peregrine. He also learned in the ensuing weeks from defendant

Moores that defendants Gardner and Nelson were resisting factual inquiries made by Moore's

hand-picked counsel .

354. A few days before the April 29 , 2002 special Audit Committee meeting, Noell

was told of the existence of multiple side letters affecting potentially as much as $50 million i n

recorded revenue .

355 . At an Audit Committee meeting on April 29, 2002, Noell learned from KPMG of

fraudulent accounting at Peregrine including 21 potentially questionable transactions, including

side letters, channel sales with contingencies and swap transactions . Noell failed to make an y


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disclosure of these facts and did not insist on the Company making any such disclosure .

356. Noell made the following sales of Peregrine common stock during the Class



02/23/00 90,000 $43.31 $3,897,900 .00

02/15/01 68,978 $29.76 $2,052,785 .28

02/16/01 15,397 $28.91 $ 445 ,127.2 7

Total 174 ,375 $6,395,812.55Sold :

357. This insider selling was unusual and suspicious, both in timing and amount .

Many of the sales came on the heels of Peregrine's various press releases falsely announcing

"record" levels of revenues and improving balance sheet metrics, including cash and DSO, whic h

Noell knew, or was deliberately reckless in not knowing, were materially false and misleading .

358 . Noell sold 90,000 shares during a Company imposed black-out period . Before the

Class Period, Noell held 515,428 shares and sold 274,000 or 53% of his holdings. During the

Class Period, Noell held 187,543 shares and sold 174,375, or 93% of his Class Period holdings .

Approximately 74% of Noell's proceeds from insider sales were derived from sales during the

Class Period .

J. Christopher A. Cole

359 . In addition to the allegations regarding Cole previously made herein, the

following allegations demonstrate Cole's knowledge and/or deliberate recklessness as to the

fraud at Peregrine during the Class Period .

360 . Cole learned on February 5, 2002, of a Department of Justice press release

regarding the guilty plea of Critical Path's CEO relating to transactions- with Peregrine . By

February 8, 2002, Cole knew of an SEC investigation of Peregrine's involvement with Critical

Path from reading an article in the San Diego Union Tribune . On February 13 and 14, 2002, Col e

sold 300,000 shares of Peregrine stock based on the material adverse information he obtained

between February 5 and 12, 2002. On March 8, 2002, defendant Gardner receive an e-mail fro m


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Ron Hall with the subject line reading "What in the hell is Cole doing?" The text of the message

read: "You've just about got everything back to normal and this idiot [defendant Cole] decides to

sell hundreds of thousands of shares . Nice one Cole . . . you imbecile . The market's shaking .

Thanks to one fool . What are you doing about it Steve? Gardner forwarded the message the

same day to, among others, defendant Gless, with the message, "Good question ." Plainly, Cole

was trading on material nonpublic information with regard to the impropriety of Peregrine's

conduct vis-a-vis Critical Path, and his knowledge that defendant Moores had initiated a Special

Audit Committee meeting to investigate this and related accounting improprieties .

361 . Cole made the following sales of Peregrine common stock, during the Class

Period, while knowing of material adverse nonpublic information : .


07/27/99 35,000 $30.01 $1,050,350.00

07/28/99 15,000 $30 .10 $451,500 .00

08/02/99 1,000 $31 .00 $31,000.00

08/12/99 10,000 $31 .06 $310,600 .00

08/13/99 5,000 $32.00 $160,000 .00

08/16/99 15,000 $32.73 $490,950 .00

08/26/99 20,000 $34.72 $694,400 .00

02/15/00 30,000 $44.22 $1,326,600.00

02/16/00 80,000 $44.95 $3,596,000.00

02/17/00 10,000 $46.19 $461,900 .00

02/24/00 5,000 $46.75 $233,750 .00

02/24/00 5,000 $46.50 $232,500 .00

02/24/00 10,000 $46.13 $461,300 .00

02/25/00 130,000 $50.33 $6,542,900.00

02/08/01 13,500 $30.03 $405,405 .00

02/15/01 25,000 $30.10 $752,500 .00

02/20/01 61,500 $30.56 $1,879,440.00

11/20/01 56,000 $18 .14 $1,015,840 .0 0


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•11/27/02 56,000

02/05 /02 55,000

02/06 /02 35,000

02/07/02 110,000

02/13/02 100,000

02/14/02 200,00 0

Total 1,083,000Sold :

•$18 .58 $1,040,480.00

$7.05 $387,750.00

$6.53 $228,550.00

$6.67 $733,700.00

$7 .51 $751,000 .00

$7.62 $1,524,000 .0 0

$24,762,415.00

362 . This insider selling was unusual and suspicious, both in timing and amount . Cole

sold 270,000 shares during Company imposed black-out periods . Before the Class Period, Cole

held 2,523,284 shares and sold 330,000, or 13% of his holdings . During the Class Period, Cole

held 2,339,534 shares and sold 1,304,000 or 56% of his Class Period holdings . Almost 86% of

Cole's proceeds from insider sales were derived from sales during the Class Period .

K. Norris van den Berg

363. In addition to the allegations regarding van den Berg previously made herein, the

following allegations demonstrate van den Berg's knowledge and/or deliberate recklessness as to

the fraud at Peregrine during the Class Period .

364. Van den Berg engaged in the following insider selling of Peregrine shares during

the Class Period while knowing of material adverse information.


02/22/00 40,000 $43 .20 $1,728,000 .00

Total 40,000 $1 ,728,000.00Sold :

365 . All 40,000 shares were sold during a Company imposed black-out period . Before

the Class Period, van den Berg held 402,144 shares and sold 270,000, or 67% of his holdings .

During the Class Period, van den Berg held 78,744 shares and sold 40,000 or 51 % of his Class

Period holdings . Almost 42% of van den Berg's proceeds from insider sales were derived from

sales during the Class Period .


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L. Thomas G. Watrous

366. In addition to the allegations regarding Watrous previously made herein, the

following allegations demonstrate Watrous's knowledge and/or deliberate recklessness as to the

fraud at Peregrine during the Class Period.

367. Watrous engaged in the following insider selling of Peregrine shares during th e

j Class Period while knowing material adverse nonpublic information about the Company .


02/25/00 15,000 $54.08 811200 .0 0

Total 15,000 $811 ,200.00Sold :

368. All 15,000 shares were sold during a Company imposed black-out period . Before

the Class Period, Watrous held 20,000 shares and sold 10,000, or 50% of his holdings. During

the Class Period, Watrous held 25,000 shares and sold 15,000 or 60% of his Class Perio d

holdings . Almost 86% of Watrous's proceeds from insider sales were derived from sales durin g

the Class Period .

DEFENDANT JOHN J. MOORES CONTROLLEDPEREGRINE AND CERTAIN OF ITS OFFICERS AND DIRECTOR S

369. At all relevant times, Peregrine and certain officers and directors of the Company,

'including defendants Gardner, Gless, Nelson, Noell, van den Berg, and Hosley, were controlled

and dominated by defendant Moores . Moores first became involved with Peregrine in 1989

when it was struggling to sell its first software product . By 1990, Moores became Peregrine's

Chairman of the Board and took on the responsibility of raising financing for the Company

during its developmental stage . By early 1997, Moores arranged for Peregrine to commence its

IPO. By that time, total annual revenues of the Company were less than $24 million . At the time

of the IPO, Moores and his business partners (i.e ., defendants Noell, Hosley and van den Berg)

owned or had an interest in more than 11 million shares or in excess of 83% of the issued an d

outstanding shares of Peregrine common stock .

370. In addition, there were substantial related party transactions between Moores and

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Peregrine . The IPO prospectus disclosed these relationships and transactions as follows :

John J. Moores, the Chairman of the Company's Board of Directorsand the majority stockholder of the Company, is party to aContinuing and Unconditional Guaranty dated November 13, 1995(as subsequently amended) with NationsBank of Texas, N .A.("NationsBank"), pursuant to which Mr . Moores guaranteed theCompany's obligations under its bank line of credit agreement andterm loan with NationsBank. As of December 31, 1996, theCompany's outstanding obligations under such credit line and termloan were $4.3 million and $1 .7 million, respectively . TheCompany intends to repay the outstanding balance of the revolvingline of credit with a portion of the proceeds from this offering . . .

From time to time since becoming a stockholder of the Company,JMI Equity Fund, L .P . ("JMI") has made working capital loans tothe Company on an as-needed basis in amounts up to $250,000,typically bearing interest at the prime rate announced by majorcommercial banks . At December 31, 1996, the Company owed JMIapproximately $250,000 in connection with such advances . Mr.Moores is a limited partner of JMI and Charles E . Noell III, adirector of the Company, is General Partner of JMI . JMI holds,prior to this offering , more than 10% of the Company' s outstandingCommon Stock .

The Company and JMI are parties to a sublease pursuant to whichthe Company subleases approximately 13,310 square feet of officespace at its San Diego headquarters to JMI Services, Inc ., aninvestment management company ("JMI Services") . The term ofthe sublease is from June 1, 1996 through October 21, 2003 . Thesublease provides for initial monthly rental payments of $16,638 toincrease by $666 per month on each anniversary of the sublease .Mr. Moores serves as Chairman of the Board of JMl Services, andMr. Noell serves as President and Chief Executive Officer . . .

Pursuant to an Acquisition Agreement dated November 29, 1995among the Company, Skunkware, Inc . ("Skunkware") andPeregrine/Bridge Transfer Corporation, a database softwaresubsidiary of the Company ("PBTC"), the Company sold all theoutstanding shares of PBTC to Skunkware for an aggregatepurchase price of approximately $559,000. In addition, under theAcquisition Agreement, the Company receives a royalty on certainlicense sales of PBTC . The royalty payments to the Company arelimited to an aggregate of $677,000 . . . Mr. Moores is a controllingstockholder of Skunkware, and Mr . Noell was president ofSkunkware . Pursuant to the Acquisition Agreement, the Companyprovides certain computer and administrative resources to PBTCfor a monthly fee of $37,500 .

Pursuant to an Agreement and Plan of Merger dated as ofNovember 30, 1995, the Company acquired XVT Software , Inc ., adevelopment tools software comp any ("XVT"). In connection withthe acquisition , the Company issued approximately 2,018,808shares of its Common Stock in exchange for all of XVT's issuedand outstanding preferred and common stock. Mr. Moores and

FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS-Master File No. 02-CV-0870 J(RBB) 133

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persons and entities affiliated with Mr . Moores owned subst antiallyall of XVT' s outstanding capital stock, and in connection with theacquisition, the Company issued 1 ,579,436 shares of theCompany's Common Stock to Mr. Moores and affiliated personsand entities .

371 . The IPO prospectus also represented that Peregrine was controlled by Moores . In

this regard , the IPO prospectus stated :

Upon completion of this offering, the Company's officers, directorsand-their affiliates together will beneficially own approximately75.9% of the outstanding shares of Common Stock (73 .1 % if theUnderwriters' over-allotment option is exercised in full) . Inparticular, John J . Moores, Chairman of the Company's Board ofDirectors, and entities affiliated with Mr . Moores collectively willown approximately 67 .0% of the outstanding shares of CommonStock (64 .0% if the Underwriters' over-allotment option isexercised in full) . As a result, these stockholders will be able tocontrol most matters requiring stockholder approval, including theelection of directors and the approval of mergers, consolidationsand sales of all or substantially all of the assets of the Company .

372 . Even though Moores' title during the Class Period was that of a director, he

participated in the day-to-day activities of the Company and was a de facto officer of the

Company. Moores kept in constant contact with defendants Gardner, Nelson, Powanda, Noell,

van den Berg, and Hosley regarding Peregrine's affairs . At a meeting of the Peregrine Board on

January 20, 1998, Moores as Chairman, announced the resignations of Alan Hunt as an officer

and director, and Doug Garn, as Vice President, North America Sales . Defendant Gardner was

appointed by Moores and ratified by the Board to assume principal responsibility for the day-to-

day operations of the Company, and an Office of the Chairman was created to assist Gardner .

The members of the Office of the Chairman were defendants Moores, Gardner and Farley . At

this meeting, Moores was responsible for, initiated and led the discussion about promoting

Gardner . At a subsequent Board meeting on April 16, 1998, defendant Moores initiated and led a

discussion seeking the promotion of defendant Gardner to the position of President and CEO,

which appointments were made at the meeting . In 1999, a Peregrine PowerPoint presentation

identifies Moores as a member of the "Senior Management Team ." Moores was identified first

on the list, with his name listed above even those of Gardner and Farley . This document was

used to solicit business for the Company, as well as investment capital .


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373. By the beginning of the Class Period, Moores and his family trusts owned almost

1 I million shares of Peregrine common stock which, at that time, represented 22 .3% of all issued

and outstanding shares . Moores was Peregrine's largest shareholder. Throughout the Class

Period, Moores, as a result of his dominant shareholdings, sat on Peregrine's Board of Directors

and headed the Compensation Committee of the Board, and acted as Chairman of the Board from

March 1990 until July 2000. Three business partners of Moores, defendants Noell, van den Berg

and Hosley, represented Moores' interests on Peregrine's Audit Committee .

374. A further indication of Moores 's control of Peregrine is the fact that he chose t o

sublease space from Peregrine for his venture company, JMI Services . The purpose of locating

JMI Services and affiliated entities in space subleased from Peregrine was to keep a close

proximity to Peregrine and its executive officers so as to facilitate the monitoring of Peregrine's

operations by Moores and Noell, who was the President and Chief Executive Officer of JMI

Services and a General Partner of JMI Equity along with defendant van den Berg .

375 . Defendant Moores's day-to-day involvement in Peregrine's business is furthe r

shown by the fact that he installed key operating and executive personnel within the Company .

These individuals had significant roles in Peregrine's accounting, finance, legal, corporate,

technology, business development, mergers and acquisitions and customer service departments .

They kept Moores and his close business associates, including defendants Noell, van den Berg,

and Hosley, advised on key operating and financial issues at Peregrine . One former Vice

President, Product Marketing stated that "Moores's influence on Luddy was unbelievable and

Luddy knew everything that went on in the Company . Moores was hands on managing the

Company through Nelson, Luddy, and Farley before he died . Luddy had a personal relationship

with Moores ." A former Vice President, Marketing noted that Moores had substantial contact

with Gardner and Luddy and they were frequently on Moores's private jet . One former Peregrine

Vice President in Marketing recalled that Luddy had told him that : "All I want to do is work for

John Moores and fly around in his jet . "

376 . Moores obtained the services of Alan Hunt to be Peregrine's Chief Executive

Officer p rior to the Company's IPO in 1997 . Hunt resigned in early 1998 . Moores and his


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business partners (defendants Noell, van den Berg and Hosley) on the Peregrine Board then

caused defendant Gardner to be elevated to the position of Peregrine's Chief Executive Officer .

Prior to that time, Moores was instrumental in causing Peregrine to hire Gardner to work on

Peregrine's mergers and acquisitions .

377 . Former CFO Farley was a long-time business associate of Moores . From

December 1984 until October 1994, Farley held various accounting and financial positions at

BMC Software, a Houston based company founded by Moores . From November 1994 to

November 1995, Farley was Vice President, Finance, Chief Financial Officer and a director of

XVT Software, Inc . ("XVT"), a company controlled by Moores and which was acquired by

Peregrine in November 1995 in a related party transaction . Farley became Peregrine's Chief

Financial Officer in October 1995 a month prior to Peregrine's closing of the XVT acquisition .

Farley worked closely with defendants Gardner and Gless and kept Moores and Moores's

partner, defendant Noell, current on key operating and financial issues at Peregrine .

378. Defendant Gless was also a long-time business associate of Moores . Moores was

instrumental in installing Gless at Peregrine initially as its corporate controller . From 1990 to

April 1996, Gless held various accounting and financial positions at Houston based BMC

Software, a company founded by defendant Moores. Gless worked closely with defendant

Gardner and kept Moores and Moores's partner, defendant Noell, current on key operational and

financial issues at Peregrine . Defendant Gless's wife, Wendy Gless, also worked at BMC

Software and owed her job there to Moores.

379. Moores also caused Peregrine to hire defendant Nelson as its General Counsel in

1995 . Moores knew Nelson through a foundation he established for which Nelson worked . At

the time, Nelson was a Houston-based attorney . In June 2000, Nelson contacted Moore s

regarding his interest in obtaining a directorship in a private or public company . On December 3 ,

2001, Nelson told Moores of his intent to leave Peregrine . Moores wanted Nelson to stay with

Peregrine and used his control over defendant Gardner to have him offer Nelson responsibility

for the entire Xanadu product line. As a result, Nelson remained at Peregrine . In the fiscal year

2000, Nelson was promoted to the position of Vice President , Corporate Development . When


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the accounting irregularities at Peregrine were first disclosed publicly in May 2002, Moores

I appointed Nelson as interim Chief Executive Officer of Peregrine .

380. Moores caused the Company to hire defendant Luddy as Executive Vice President

for Research & Development and Chief Technology Officer . Moores knew Luddy from the

software business community .

381 . Moores arranged Peregrine's hiring of Taylor Barada, the nephew of defendan t

Noell, a key confidant of Moores on the Board . Barada worked closely with defendants Gardner,

Gless, and Nelson throughout most of the Class Period. Indeed, from June 2000 to May 2001,

Barada held the position of "Steve Gardner's Special Assistant," for which his annual

compensation was approximately $165,000. Barada was involved in Peregrine's busines s

development and mergers and acquisition program. Until he left the Company in December

2002, Barada kept Moores, Noell and van den Berg current on key operating issues at th e

Company .

382 . Moores was also instrumental in Peregrine's hiring of William G . Holsten

("Holsten") . During much of the Class Period, Holsten was Peregrine's Senior Vice President,

Customer Services . Prior to his employment at Pereg rine , Holsten was employed by XVT where

he was Vice President, Professional Services . XVT was a company controlled by Moores, which

was acquired by Peregrine in November 1995 in a related party transaction . Holsten kept Moores

and Noell current on key operating issues during the Class Period .

383 . Moores's control of, and day-to-day involvement in, Peregrine's affairs is furthe r

evidenced by his oversight of the integration of Remedy following its acquisition . Moores had a

particular interest in directing defendant Gardner's activities in this regard . As reflected in an e-

mail dated June 26, 2001 from Moores's cohort, defendant Noell, to defendant Gardner : "I

believe that John [Moores] and I can be helpful to you and should probably stay around to help

you with the Board through this transition year ."

384 . Defendant Moores's conduct following the point in time in February 2002 that he

learned of the guilty plead by David Thatcher, CEO of Critical Path and reports of Peregrine's

involvement in Critical Path transactions, further demonstrates the control exercised by Moore s

FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS -Master File No. 02-CV-0870 J(RBI3) 137

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1 over Peregrine and defendants Gardner, Gless, Nelson, and Noell . Moores completely controlled

2 the Company's conduct in response to the February 2002 events . Although not formally a

3 member of Peregrine's Audit Committee, Moores caused to be convened the February 12, 2002

4 special Audit Committee meeting . Over objections from defendants Gardner, Gless, and Nelson,

5 he demanded and put in place his personal choice of counsel to conduct an investigation .

6 Thereafter, Moores continued to dominate and control Peregrine through the investigatio n

7 conducted by his counsel . He attended an April 29, 2002 Audit Committee meeting at whic h

8 KPMG informed Moores and the other attendees of Peregrine management's lack of cooperation

9 in their work . Moores established an office inside Peregrine after this meeting . He personally

10 attended an Audit Committee interview of defendant Gless.

11 385 . To formalize what had been evident all along from Moores's conduct sinc e

12 February 2002, i.e., his domination and control of the Company's conduct, Moores was formally

13 appointed Chairman of the Board at a meeting on May 4, 2002. Moores continued in that

14 position through the ensuing revelations of accounting fraud and the Company's bankruptcy .

15 Moores's involvement during this period was designed to ensure that he could control the public

16 disclosures of Peregrine, and avoid blame for the massive fraud that occurred at Peregrine . On

17 November 18, 2002, defendant Watrous sent an e-mail to defendants Moores and Noell regarding

18 a suggestion Moores had made for a nominee to the Board: "[w]ouldn't we (sic) opening u p

19 ourselves to more criticism for bringing another of John Moores's cronies)?" As independent

20 investors in the Company represented by the Committee of Unsecured Creditors in Peregrine's

21 bankruptcy case began to scrutinize the factual record, they concluded that Moores ha d

22 culpability for the financial debacle at Peregrine, or at a minimum, had unlawfully profited from

23 his massive insider selling. After the Company's settlement with the Committee of Unsecured

24 Creditors was announced on February 28, 2003, Moores and his cohorts on the Board wer e

25 forced to relinquish control . Moores subsequently resigned as a Board member .

26 DEFENDANTS ARTHUR ANDERSEN AND AWSC ACTED AS ONE FIRM

27 386. Arthur Andersen was formed in Illinois in 1913 as an accounting and consulting

28 partnership under the name "Arthur Andersen & Co ." In 1977, as it increased its globa l


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presence, it created a new structure : the Andersen Worldwide Organization ("AWO"), comprised

of a Swiss cooperative entity, AWSC, which acts as an umbrella entity for the AWO member

firms, the partners of AWSC, and the individual partners of Arthur Andersen, including its

offices around the globe, which together, operated as a single global partnership or joint venture .

The model adopted by AWSC Partners was meant to preserve "The Heart of Partnership

Culture," including income sharing among the member firms of the two business units and

common governance model . The AWO structure was and is designed to maintain the "one firm"

concept, and was intended to foster the belief that the firm operated as a single entity . In its

promotional literature, including its Web site, the firm marketed itself as "one firm" "a single

worldwide operating structure" that "think[s] and act[s] as one . "

387. In fact, the Federal Election Committee Advisory Opinion No . 2000-36 dated

December 18, 2000, concluded :

Prior to the effective date of the arbitration order, AC [AndersenConsulting] and AA [Arthur Andersen] were signatories toMFIFA's [Member Firm Interfirm Agreements] entered into withthe AWSC [Andersen Worldwide Societe Cooperative] and werethereby subject to coordination and limited governance by the samebody . Such an arrangement may have been , in some way, akinto the relationship of subsidiaries of the same parent entity ,although neither partnership was owned by the AWSC. (Emphasisadded) .

388. AWO is the instrumentality through which the "one firm" concept became reality.

The guiding principle was that the member firms' practices shall be correlated and coordinate d

on an inte rnational basis . It was achieved in four distinct ways .

(a) Partner Overlap : AWO was a partnership made up of more than 4,80 0

partners from 390 offices in 84 different countries worldwide . Simultaneously, the partners of

AWO also were partners (or the equivalent) in the entities that make up those offices . Thus, all

of those offices were managed by individuals who were both local partners (or the equivalent)

and partners of AWO. Every member firm and its practice partners entered into a Member Firm

Inter Firm Agreement ("MFIFA") with AWSC .

(b) Sharing of Costs and Profits : AWO coordinated the sharing of costs and

allocation of revenues and profits among its partners and its offices around the world . As one of

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AWO's top clients, fees from Peregrine were distributed directly and indirectly around the world .

Profits were shared globally . In fact, fees from U .S. operations funded offices in Europe, Asia

and Australia for years . Compensation for AWO partners was based on units granted to partners .

Global earnings were added together and then divided by the number of units outstanding,

resulting in earnings per unit ("EPU") . Partners then were paid their share of profits by

multiplying the EPU by the number of units they hold .

(c) Global Setting of Professional Standards : AWO purported to establish

the professional standards and principles under which its offices operated . AWO international

offices entered into a standard agreement with AWO under which they agreed to be bound by

those professional standards and principles . An office of AWO that breached the agreement was

subject to removal from the organization . The Assurance Professional Standards Group had

firm-wide responsibility for providing guidance on the professional standards to be followed b y

AWO's offices .

(d) Infrastructure and Administration : AWO handled all borrowing on

behalf of its international offices, and maintained the financial records, payroll and employee and

health benefits of those international offices as well . All of AWO's offices also share global

computer operations , a worldwide tax structure and training facilities . By establishing a legal,

financial and administrative infrastructure , AWO enabled each of its offices around the world to

function as , and to appear to clients as , an extension of a single , global entity .

389. AWO instituted its "one-firm" concept through partner overlays, global setting of

standards, sharing ofcosts and pro fi ts and infrastructure and administration . Moreover, AWO's

news releases confirmed they functioned and operated as a single worldwide operation :

• Andersen refers to the brand identity adopted by memberfirms of the Andersen "global client service network. "

• "With world-class skills in assurance, tax, consulting andcorporate finance, Arthur Andersen has more than 77,000people in 84 countries who are united by a singleworldwide operating structure that fosters inventiveness,knowledge sharing and a focus on client success ."

• Andersen spokesman Dave Tabolt - "We conduct morethan 30,000 audits around the world every year . . . . "


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• "AA is already much more integrated globally than therest of the Big Five . As Mr. Berardino [the former CEO]points out, `there is one name over the door . We're not analphabet soup.' The cohesiveness of AA's culture has beena source of humor to outsiders, who have labeled its beancounters Àndroids .' While some rivals are stil lstruggling with a complicated array of nationalpartnerships , and thus different systems for sharingpay, AA partners enjoy a single, and possibly unique,system of remuneration : they receive a list of what eachof them has earned in the past year. "

AWO Web site (Andersen . com) confirmed that it was one worldwide organization :

• "Our 390 offices may be scattered amid 84 differentcountries, but our voice is the same . No matter whereyou go, or who you talk to, we act with one vision .Without boundaries ."

Arthur Andersen's 2001 recruiting brochure confirmed that it was one worldwide firm :

• "We will, in Arthur Andersen's own words, ` act as onefirm and speak with one voice . It is a united family thatoperates across hierarchies , geographical boundaries,client groupings , service lines and competencies and feelslike the kinship of understanding and sharedresponsibility . "

390. AWO managed, directed and controlled its inte rnational offices in two

I overlapping groups : by practice areas (also known as "lines of service") and by geographica l

location .

391 . Each practice group was managed by a global practice director who oversaw ,

directed and controlled the operations of each practice group worldwide . Regional practic e

directors reported to the global practice director and managed, directed and controlled th e

practice group within their regions .

392 . AWO also grouped its offices into several geographic regions and assigned a

managing partner to each region.

393 . In addition to overlapping partners, AWO and Arthur Andersen shared officers i n

common as well . For example, the former Chief Executive Officer and Managing Partner o f

AWO (Berardino), was also the Chief Executive Officer and M anaging Partner of A rthu r

Andersen .


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394. AWO and Arthur Andersen shared more than partners and officers . They shared

the same address . In its promotional literature, AWO stated that its headquarters were located at

33 West Monroe Street, Chicago, Illinois 60603 . That is the same address as the headquarters of

Arthur Andersen .

395 . The components of this organization ignored corporate formalities in referring to

themselves or to each other . This firm's worldwide personnel regularly exchanged

correspondence and a-mails that were labeled "Andersenwo" - short for "world organization ."

Andersen continually relied on and touted its global abilities to provide resources to its clients

and attract international and domestic business . Documents authored by Arthur Andersen often

bore the insignia and logos of AWO, including "Andersen-Worldwide," "Andersen," and

"Arthur Andersen ." In its promotional literature, Andersen used the names "Anderse n

Worldwide," "Andersen," and "Arthur Andersen LLP" interchangeably . In addition, Anderse n

' sometimes used only the name "Andersen" and did not differentiate between Arthur Anderse n

and its offices around the globe .

396. Financially, the firm operated as a "one firm" global enterprise . For fiscal 2000,

44% of its revenues derived from North America, 33% of its revenues from Europe, Middle East,

India and Africa, 13% from Asia/Pacific and 10% from Latin America . Of the $9 .3 billion in

revenues in 2001, North American operations contributed about half, or $4 .49 billion, and

Europe, Middle East, Africa, Asia/Pacific and Latin America operations contributed about half,

or $4 .85 billion .

ARTHUR ANDERSEN'S PARTICIPATION IN THE FRAU D

397. Paragraphs 208-229 above are incorporated in this section alleging the liability o f

Arthur Andersen as though fully set forth herein .

398 . In soliciting the Peregrine business, defendant Arthur Andersen boasted of its

expertise in the software industry . In its February 1996 proposal letter to Peregrine, Arthu r

Andersen wrote :

Our people understand the business, accounting and tax issues thatimpact emerging companies and will provide proactive creativesolutions. We pride ourselves on being similar to the clients w e


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serve - entrepreneurial, hands on, highly motivated and accessible .

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399 . At that time, Arthur Andersen also touted its diligence in performing audi t

I services for their clients :

Although it is believed that every accounting firm can perform anaudit, the value a client receives as part of that process varieswidely . We believe the difference between firms lies in theapproach, commitment, concern and competence of thoseindividuals who perform the audit. We audit the business, notjust the financial statements . Accordingly, we will devotesignificant time to planning, analyzing audit and business risks,supervising and reviewing the audit team's work . (Emphasisadded) .

400. Arthur Andersen also noted that its commitment to learning the "busines s

operations and controls" of the company and maintaining a continuous dialogue with

management throughout the year and not just during the audit . It stated :

We add value beyond the frame of the primary services we areproviding. We strive to understand the operational and financialissues that are important to your success and help you addressthose matters, as well as anticipate new issues . Our inquiries ofyour business operations and controls will extend beyond theaccounting and finance functions and include sales andmarketing , customer service, software development,administration and organization and information systems .Accordingly, we anticipate maintaining a continuous dialog withPeregrine throughout the year, not just at audit time . In short, wewant to be a partner of Peregrine throughout the year so that theyear-end audit is a non-event, with no last minute "surprises" orunanticipated accounting adjustments . (Emphasis added) .

401 . Based on the foregoing representations, Peregrine retained the services of Arthu r

Andersen in July 1996 .

402 . Arthur Andersen was engaged by Peregrine to provide independent auditing an d

accounting services throughout the Class Period . Arthur Andersen's San Diego office was

engaged to examine and issue opinions on Peregrine's fiscal 2000 and 2001 year-end financial

statements and to perform review services with respect to Peregrine's interim results in fiscal

years 2000, 2001 and the first three quarters of fiscal year 2002 . For fiscal year 2000, Dan

Bigelow was the audit engagement partner . For fiscal year 2001, defendant Stulac was the audit

engagement partner. Stulac had been the audit manager on the Peregrine account prior t o

becoming an Arthur Andersen partner in 2001 . Arthur Andersen extensively utilized the service s


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of defendan t AWSC in the course of performing its audit and review services for the Peregrine

engagements . In its audit opinions, Arthur Andersen falsely represented that Peregrine's

financial statements for fiscal years 2000 and 2001 were presented in accordance with GAAP and

that Arthur Andersen 's audits had been performed in accord ance with GAAS .

403. Arthur Andersen consented to the use of its false audit opinions on Pereg rine's

fiscal years 2000 and 2001 financial statements in Peregrine ' s annual reports on Form 10-K for

those years and in Pereg rine 's registration statements on Forms S -3, S-4 and S -8, which were

filed with the SEC during the Class Period. Arthur Andersen's issuance of materially false audit

opinions on Peregrine ' s fiscal 2000 and 2001 financial statements and Arthur Andersen's failure

to require revision of Peregrine ' s false interim financial statements in 2000 , 2001 and 2002 filed

with the SEC was in violation of GAAS .

404. Arthur Andersen knew, or recklessly disregarded, that Peregrine's financial

statements were false and prepared in violation of GAAP . Among other things, Arthur Andersen

knew , or recklessly disregarded (i) that Peregrine had improperly recorded over $500 million in

revenues ; ( ii) that the Company 's liabilities had been understated by up to $180 million ; (iii) that

the Company 's option compensation was understated by $100 million during the Class Pe riod ;

(iv) that the Company' s repo rted accounts receivable were consistently understated by a material

amount during the Class Period ; (v) that the Company's repo rted cash position was mate rially

overstated during the Cl ass Period ; (vi) that the Company' s liabilities were materially understated

throughout the Class Period ; and (vii) that the Company failed to disclose adequately the nature

of and the revenue recognized from product/service swaps which it entered into .

405. Arthur Andersen knew from its audit and review work, or was deliberately

reckless with regard to the fact that the Company had material weaknesses in its internal

accounting control structure such that no reliance could be placed on the Company's financial

reporting system . For example, Arthur Andersen knew that the Company's Audit Committee did

not function properly for several reasons . First, it failed to hold regular meetings in fiscal year

2000. Only one such meeting was conducted . Second, the Audit Committee and Arthur

Andersen routinely allowed defendants Gless and Nelson to participate in, and control the agend a


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for and substance of the meetings . This con travened the express purpose of the meetings, which

was to provide oversight of management . Third, Arthur Andersen knew that no minutes were

prepared and retained to document the activities of the Commi ttee . This was a deliberate attempt

to hide from scrutiny the Committee 's activities .

406. Arthur Andersen also knew of and approved the intentionally wrongful revenue

recognition practices engaged in by Peregrine . The firm explicitly approved of improper revenue

recognition on channel sales of at least 25% of the contract amount even where there was no

commitment from the reseller or an end user to pay . Arthur Andersen also was routinely

consulted by defendant Gless regarding how to structure transactions with customers so as to

permit current and improper revenue recognition . Arthur Andersen also knew of and approved

the failure of the Company to treat transactions with financial institutions as borrowings rather

than sales . Arthur Andersen also designed the Company's stock option plans and knew of and

approved the massive understatement of stock option compensation expense . Arthur Andersen

also knew of the wholesale unreliability of the Company's internal accounting controls which, in

light of the Company's tremendous growth, was a blatant "red flag" that Arthur Andersen chose

to ignore because of, among other things, its lack of independence from Peregrine and the

pressure put on Arthur Andersen partners by its management to increase revenue .

407. Arthur Andersen falsely endorsed the propriety of Peregrine's financial statement s

because it desired to retain Peregrine as a client, to continue generating substantial fees from its

engagement and to secure additional business from Peregrine, including lucrative consulting

business. The partners responsible for the Peregrine engagement were motivated to participate in

the wrongdoing alleged herein because their incomes were directly tied to the fees generated

from Peregrine .

408. In addition, Arthur Andersen was not independent of its client because certain

senior executives of Peregrine, such as Joseph G . Reichner, Louis Blatt, Gary Lenz, Thomas

Smith and two members of the Audit Committee, defendants Watrous and Dammeyer, were

former members of Arthur Andersen or an affiliate . Its compromised independence is further

demonstrated by the detailed background statement on Joseph G . Reichner, a former Arthu r

FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS --Master File No . 02-C V-0870J(RBB) 145

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Andersen partner, a former Board member of defendant AWSC and a former Senior Vic e

I President of Peregrine, as set forth in a press release announcing Reichner's employment wit h

UBmatrix . In pertinent part, the press release reads as follows :

Mr. Reichner spent 31 years with Arthur Andersen starting hiscareer in the Audit and Business Risk practice for the first elevenyears and then was admitted to the Worldwide Partnership todevelop a new consulting practice offering for a worldwiderollout . . .

After retiring from Andersen in 2000, he was recruited byPeregrine Systems, Inc . to be Senior Vice President Alliances,Verticals and Business Development . In that role he developedprograms that generated or influenced over 50% of worldwiderevenue . Joe also created and was President of a new business,Peregrine Financial Management to expand the B to B enablementbusiness offerings into the e-Finance marketplace and was servingas COO of the Integrated Solutions Group .

409. Arthur Andersen also earned substantial fees from Peregrine which were unrelate d

to its audit services. Thus, for fiscal year 1999, the firm was paid $181,000 for consultation

relating to business valuations, consultation related to tax matters, and assistance with due

diligence and acquisition-related matters . As of May 1, 2000, Arthur Andersen had completed

significant work assisting Peregrine in integrating Telco Research and Barnhill, and had begun to

support and would continue work on assisting with the Harbinger acquisition . This work

represented an additional $420,000 in fees, plus related out of pocket expenses . On

June 29, 2001, Arthur Andersen reported to Peregrine that it received during the fiscal year ended

March 31, 2001, $358,000 for tax consulting, $20,000 for tax return preparation, and $72,000 for

other business consulting services, or a total of $450,000 . On top of these amounts, the firm

billed $459,000 for the year end audit and related reviews, an additional $25,000 for an audit of

the Company's 401(k) Plan, and $119,000 for other services including assistance with due

diligence, SEC correspondence, and related matters .

410. With respect to Peregrine's audited financial statements for 2000, Arthur

Andersen represented, in its audit opinion dated April 25, 2000 , the following :

REPORT OF INDEPENDENT ACCOUNTANTSTo Peregrine Systems, Inc . :


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We have audited the accompanying consolidated balance sheets ofPeregrine Systems, Inc . (a Delaware corporation) and subsidiariesas of March 31, 2000 and 1999, and the related consolidate dstatements of operations, stockholders' equity (deficit) and cashflows for each of the three years in the period ended March 31,2000. These consolidated financial statements and the schedulereferred to below are the responsibility of the Company' smanagement. Our responsibility is to express an opinion on theseconsolidated financial statements and the schedule based on ouraudits.

We conducted our audits in accordance with auditing standardsgenerally accepted in the United States . Those standards requirethat we plan and perform the audit to obtain reasonable assuranceabout whether the financial statements are free of materia lmisstatement . An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financialstatements . An audit also includes assessing the accountingprinciples used and significant estimates made by management, aswell as evaluating the overall financial statement presentation . Webelieve that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above presentfairly, in all material respects, the financial position of PeregrineSystems, Inc . and subsidiaries as of March 31, 2000 and 1999, andthe results of their operations and their cash flows for each of thethree years in the period ended March 31, 2000 in conformity withaccounting principles generally accepted in the United States .

Our audits were made for the purpose of forming an opinion on thebasic financial statements taken as a whole . The schedule listed inthe index to the consolidated financial statements is presented forpurposes of complying with the Securities and Exchang eCommission's rules and is not part of the basic consolidatedfinancial statements . The schedule has been subjected to theauditing procedures applied in the audits of the basic consolidate dfinancial statements and, in our opinion, fairly states, in all materialrespects, the financial data required to be set forth therein inrelation to the basic financial statements taken as a whole .

411 . With respect to Peregrine's audited financial statements for 2001, Arthu r

Andersen represented, in its audit opinion dated April 26, 2001, the following :

REPORT OF INDEPENDENT PUBLIC ACCOUNTANT S

To the Stockholders of Peregrine Systems, Inc . :

We have audited the accompanying consolidated balance sheets ofPeregrine Systems, Inc . (a Delaware corporation) and subsidiariesas of March 31, 2001 and 2000, and the related consolidatedstatements of operations, stockholders' equity and cash flows foreach of the three years in the period ended March 31, 2001 . Theseconsolidated financial statements and the schedule referred tobelow are the responsibility of the Company's management . Our


Master File No. 02-CV-0870 J(RBB) 147

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responsibility is to express an opinion on these consolidatedfinancial statements and the schedule based on our audits .

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We conducted our audits in accordance with auditing standardsgenerally accepted in the United States . Those standards requirethat we plan and perform the audit to obtain reasonable assuranceabout whether the financial statements are free of materia lmisstatement . An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financialstatements . An audit also includes assessing the accountingprinciples used and significant estimates made by management, aswell as evaluating the overall financial statement presentation . Webelieve that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred toabove present fairly, in all material respects, the consolidatedfinancial position of Peregrine Systems, Inc . and subsidiaries as ofMarch 31, 2001 and 2000, and the results of their operations andtheir cash flows for each of the three years in the period endedMarch 31, 2001 in conformity with accounting principles generallyaccepted in the United States .

Our audits were made for the purpose of forming an opinion on thebasic consolidated financial statements taken as a whole. Theschedule listed in the index to the consolidated financial statementsis presented for purposes of complying with the Securities andExchange Commission's rules and is not part of the basicconsolidated financial statements . The schedule has been subjectedto the auditing procedures applied in the audits of the basicconsolidated financial statements and, in our opinion, fairly states,in all material respects, the financial data required to be set forththerein in relation to the basic consolidated financial statementstaken as a whole .

Is/ Arthur Andersen LL P

412. The foregoing audit opinions were materially false and misleading due to Arthu r

Andersen's failure to comply with GAAS and the fact that Arthur Andersen knew, or was

deliberately reckless with regard to the fact that Peregrine's financial statements were not

prepared in conformity with GAAP, causing Arthur Andersen's reports to be in violation of

GAAS and SEC rules . The SEC has stressed the importance of meaningful audits being

performed by independent accountants :

Moreover , the capital formation process depends in large pa rt onthe confidence of investors in financial repo rt ing . . . Accordingly,the audit function must be me an ingfully performed and theaccountants' independence not compromised .

SEC Accounting Series Release No . 296. Arthur Andersen did not meaningfully perform its


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I audit function with regard to Peregrine .

1 . Fiscal Year 2000

413. On April 25, 2000, Arthur Andersen signed an unqualified audit opinion o n

Peregrine's financial statement for the fiscal year 2000 ending March 31, 2000 which it knew

would be relied on by the market . This audit opinion was materially false and misleading

because it failed to note in either the textual portion of the opinion letter, or in any accompanying

footnotes to the financial statements, that Peregrine's Board had approved of a material change in

accounting policy, i.e., the change to sell-in, which change materially impacted the fourth quarter

of fiscal year 1999 results incorporated in the year end results, and continued to affect the

Company's results throughout the Class Period . The change was designed to provide Peregrine

with an immediate revenue and earnings boost so that it could meet its published expectations for

the quarter . It was known to Arthur Andersen that the policy had been changed for application to

the fourth quarter of fiscal year 1999, that it had been changed to provide for revenue recognition

immediately upon execution of a software license agreement with resellers even though ther e

was no commitment to pay and no identified end user committed to pay, and to allow the

Company to meet fourth quarter and year end published earnings and revenue forecasts . Arthur

Andersen knew the new policy would continue to be applied going forward . Further, Arthur

Andersen knew that the Company's published descriptions of its revenue recognition policy were

materially inaccurate in light of the change made at the April 1999 Board meeting.

414. Arthur Andersen advised the Company in April 1999 that it would b e

"uncomfortable" with any level of channel sales that exceeded 25% of revenue. Yet throughout

the Class Period, including in fiscal year 2000, the amount of channel inventory greatly exceeded

this level, as alleged in paragraph 232 herein . Arthur Andersen did not insist that its client reign

in this ballooning channel inventory and made no disclosure to the investing public that the

Company's newly adopted revenue recognition policy was improper and resulting in materially

overstated revenue . Arthur Andersen reviewed each of the quarterly financial statements and

press releases issued by Peregrine in fiscal year 2000 but failed to require disclosure of the

accounting policy change or to require disclosure or explanation of the artificial boost t o


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Peregrine's reported revenues and earnings caused by this accounting policy change. The fiscal

year 2000 audit opinion was also materially misleading for failure to make any disclosure of

serious accounting issues that arose from work performed by defendant AWSC and known to

Arthur Andersen with regard to Peregrine's German subsidiary . An e-mail message dated April

14, 2000 from Daniel Mair of AWSC in Frankfurt, Germany, to Nevanna Sacks, the audit

manager on the Peregrine account, reported several material problems in Peregrine's EMEA

division. First, the message noted that "the company had problems meeting their budget . Also,

according to Peregrine Germany, meeting the budget seems to be tight on Group level, therefore

Peregrine Germany has been instructed to record the least amount of expenses possible ." This

message went on to state as follows :

During our review we became aware of the following SOP 97-2[revenue recognition] relevant issues :

• "channel sales": the company uses resellers to market theirsoftware (in addition to their own sales force) . According to ourdiscussions with Mrs. Goetz some resellers only purchase whenthey also have a fixed customer order, others, though, order a largerquantity (to receive better prices) and then start marketing thesoftware . The latter category of resellers represents "badrevenue" in our opinion. . .

• "Due Dates large than 12 months": the company sometimesgrants due dates larger than 12 months which would cause "badrevenue" according to SOP 97-2 .

[A] significant amount of customers are resellers, whose ability topay their debts can not be judged . As you can see, more than 50%of AIR are overdue by more than 60 days . The company did notset up any bad debt provisions, as in the companies' opinion theywill collect the full amounts .

415. By this e-mail, both Arthur Andersen and AWSC were aware of material errors i n

the EMEA division' s revenue recognition.

416. The failure to insist on appropriate disclosure was particularly egregious give n

that in January 2000, Stulac raised directly with the Company Arthur Andersen 's concern abou t

the level of inventory in the channel , notwithstanding its knowledge that revenues were recorded

as if such inventory had been sold .

417. In the Summer of 2000, Arthur Andersen, working in conjunction with defendant


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Nelson, designed a stock option compensation plan for Peregrine employees that, when applied,

was an intentional violation of GAAP. This plan allowed for exercise prices on stock options

that were below the common stock market values on the dates options were gr anted . Pereg rine

recorded the related compensation cost applying this formulation developed by Arthur Andersen .

However, GAAP, specifically APB Opinion No. 25, required that stock option compensation

cost be recorded as the aggregate difference between the fair value of the stock and the exercise

price of the options granted . The plan , devised and approved by A rthur Andersen , was known to

both it and defendant Nelson to be contra ry to stock option compensation plans typically in place

at comparable comp anies. In addition , with the approval of Arthur Andersen, Peregrine

accelerated the vesting period for certain options which had been previously gr anted to

employees . Under FASB Interpretation No. 44 , acceleration of vesting of options a fter

June 30 , 2000 caused an accounting charge for the affected options . Arthur Andersen's

intentional and/or deliberately reckless design of stock option plans and the accounting therefor

that violated GAAP contributed to $100 million of Peregrine's accounting restatement

announced in February 2003 .

2 . Fiscal Year 200 1

418. On April 26, 2001, Arthur Andersen signed an unqualified audit opinion o n

Peregrine's financial statement for fiscal year 2001 ending March 31, 2001 which it new would

be relied upon by the market. This audit opinion was materially false and misleading because it

continued to fail to disclose in either the textual portion of the opinion letter, or in an y

accompanying footnote disclosure to the financial statements, that Peregrine's revenues and

earnings were artificially boosted by application of the sell-in accounting method as approved by

the full Board in April 1999 for use beginning in the fourth quarter of fiscal year 1999 .

419. In the March 2001 calendar quarter , B .J . Rassam , Vice President of Fin ance and

Controller began looking closely at the Company's accounting for consolidations and in the

EMEA division . He became concerned over what he was seeing, and could not understand how

the Company had accounted for its accounts receivable . Rassam raised these issues with

defendant Gless, who did not adequately respond . Rassam tried to obtain a detailed account s

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receivable subledger that tied to the balance sheet, but was told one did not exist. He was told

that Arthur Andersen had not been concerned about the lack of an accounts receivable subledger

that did not tie to the balance sheet . Rassam was told that one could not be prepared because of

lack of information from EMEA. This was confirmed to Rassam by defendant Cappel .

420. Rassam was concerned because he understood the accounts receivable to be th e

most critical component for the auditors and the biggest area of audit risk . As a result, Rassam

contacted Arthur Andersen audit engagement partner Stulac and complained that he could not

understand the Company's accounting for accounts receivable . In January 2001, Stulac had met

Rassam and gave him certain Arthur Andersen memos on Peregrine's process flows and internal

controls . He also gave Rassam a listing of "audit differences" for fiscal year 2000 . Rassam was

stunned to learn that there were only $200,000 in audit differences and that Arthur Andersen's

corrections actually increased revenue . Stulac told Rassam at that time that Arthur Andersen had

not seen the need for a management letter in years . Stulac said to Rassam at this time, "[alt

Peregrine, you've got to go along to get along ."

421 . Arthur Andersen audit manager Nevanna Sacks told Rassam that the firm had no t

seen an accounts receivable detailed subledger for at least two years . Still attempting to

understand the receivables, Rassam was shown a spreadsheet that tracked channel receivables

worldwide . This document showed $106 million in outstanding channel accounts receivable . It

was not reconciled to an accounts receivable subledger .

422 . In April 2001, when Arthur Andersen was about to give Pereg rine an unqualifie d

audit opinion on its financial statements, Rassam asked at a meeting with Stulac and Sacks how

they could issue the audit opinion without seeing an accounts receivable subledger . Stulac

showed Rassam a one page summary prepared by Treasury which identified the total amount of

accounts receivable adjustments to get to the balance sheet number, but which had no details and

no breakdown by country or customer.

423 . After this meeting , Sacks came to Rassam and "spilled her guts ." She tol d

Rassam she felt like a lone person voicing concerns regarding Peregrine's lack of an account s

receivable subledger . She said that Arthur Andersen had virtually no communication with the


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Treasurer and that other Peregrine personnel had been argumentative and tried to intimidate her .

Although Sacks complained of this to Stulac, nothing was done about it . Stulac promised to talk

with defendant Gless about the problem, and would go out drinking and smoking cigars with

Gless, but nothing was resolved . Sacks told Rassam that she and Leslie Sadoff, the Arthur

Andersen senior staff auditor, felt like they were on an island by themselves in trying to

understand Peregrine's accounting .

424. On July 23, 2001, Rassam sent an e-mail to , among others, defend ants Gless ,

Nelson, and Stulac regarding "Disclosure of Impairment and Related Charges." He informed

these defendants as follows :

Not meant to be preaching , but just to ensure everyone is on thesame page .

When the above events begin to appear at issue, they requiredisclosure . As a result you can expect the SEC to review theadequacy of disclosures in the current and earlier filings, to helpensure that such charges do not occur òut of the blue' and withoutdetailed warning to the average investor .

It is not unusual for the Division of Corp Fin and the Office ofChief Accountant to look at the disclosures made to a company'sBoard and Audit Committee re : these events . Information that hasbeen requested by the SEC includes budgets, operating CFforecasts, strategic business plans, level of revenues from majorcustomers, and analysts' reports in order to assess whether they areconsistent with and support the financial reporting and disclosuresto investors .

As you know we wrote-off - $600 million during Q4'01 . Additionwrite-offs during FY `02 may occur . Without being overlypessimistic, please help ensure that our upcoming and other futurefilings are compliant w/the above and that communications w/theBoard and Audit Committee are all consistent w/that provided the3rd parties . Thanks, B .J .

Rassam's plea to defendants Gless, Nelson, Stulac and, through Stulac, Arthur Andersen an d

AWSC , for full and truthful disclosure of the write offs which Peregrine bu ried in the

"acquisition and other" line item, were ignored .

425 . At a dinner in July 2001 with Stulac and Sacks, Rassam told them that Peregrin e

had an internally generated spreadsheet showing accounts receivable of between $80-$ 100

million at December 31, 2000 . Peregrine ' s published financial statements did not reflect thi s


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I material fact, nor were they corrected to reflect this information .

2 426. In the June-July 2001 timeframe, Sacks told Rassam that in the Fall of 2000,

3 Peregrine had obtained financing in the amount of approximately $270 million from privat e

4 investors. She told Rassam that a "due diligence" issue arose because Peregrine did not have a

5 detailed accounts receivable subledger tied to the general ledger. Arthur Andersen assisted

6 Peregrine in obtaining these funds by "going along" with Peregrine's false statements to help

7 ensure the financing would be accomplished .

8 427. In April 2001, Rassam worked with Gless on the March 2001 quarterly write off,

9 which ultimately was $15 million. At Gless's instruction, and with the knowledge and approval

10 of Stulac, this write off was made against the reserve for "acquisition cost and other expense,"

I I rather than as a bad debt expense or directly against revenue . Rassam questioned Stulac as to the

12 propriety of this accounting as Rassam knew it was wrongful . Stulac said to Rassam that as long

13 as the amount of the write off was less than 5% of the "acquisition cost" line item, then it was not

14 material and could be written off in this manner . Stulac stated that if the revenue was "good "

15 when booked and later went "bad," it could be booked as an expense and not as a direct reduction

16 of revenue . Rassam disagreed with Stulac, but did not insist on the proper accounting for fear of

17 losing his job . Moreover, Rassam was in the awkward position of observing the chief accounting

18 officer of the Company, defendant Gless, actually working with the auditor, defendant Arthu r

19 Andersen, to cook the Company's books . Similar bad debt write offs had been taken and

20 acquiesced in by Stulac and Arthur Andersen at the quarters ending June 30, 2000 ,

21 September 30, 2000, and December 31, 2000 as "accrued acquisition expenses . "

22 428. Rassam directly questioned Arthur Andersen about the December 2000

23 transaction involving IBM/Tivoli . He believed this was a concurrent "swap" type of transaction .

24 He questioned Stulac how the two transactions could be treated separately, and Stulac tol d

25 Rassam that he had personally structured the transaction for defendant Gless . When Gless

26 learned that Rassam had questioned Stulac, Rassam was thereafter excluded by Gless from

27 further involvement in revenue recognition oversight .

28 429. By an e-mail dated April 12, 2001, the Arthur Andersen team in San Diego


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assigned to Peregrine, consisting of audit engagement pa rtner Stulac and senior staff auditor

Leslie Sadoff were warned of serious problems in EMEA by AWSC . The subject of the e-mail

was "Early Warning Peregrine Systems Germany ." By this e-mail, the auditors assisting from

defendant AWSC reported that "we have visited with Peregrine Systems GmbH today and

identified revenue recognition issues that we would like to inform you about . . ." The e-mail

identified contracts with CENITH AG Systemhaus for 1,000,000 EUR, GE CompuNet Compute r

AG & Co. for 2,000,000 EUR and Systematics AG with contracts totaling $12,000,000 as

involving improper revenue recognition . The e-mail sated "In all cases fees are not fixed an d

determinable (payments - in part - are due in over 12 month), the customers are all resellers an d

delivery has not occurred. Therefore it is not appropriate to recognize any revenue from these

contracts at March 31, 2001 ." The message also makes reference to preliminary information tha t

EURO 14 .6 million was recognized, improperly, on these contracts . Ominously, the memo went

to state "[w]e are awaiting further license contracts for our review, so there could potentially

come up more revenue recognition issues once we receive further information next week ." This

e-mail also identified problems with aged receivables : "[w]e have preliminary information about

aged accounts receivables, mainly towards resellers that in our opinion should be reversed

against revenue . They amount to approximately EURO 1 .8 mill . "

430. By e-mail dated April 25, 2001 from representatives of AWSC to Stulac and

Sacks, serious problems within EMEA continued to be reported . It was reported to the Arthur

Andersen personnel that, "[d]ue to serious problems concerning information flow and quality we

can only report our preliminary findings today. As the implementation of Peoplesoft for PS

Germany was very problematic, the company was not able to provide the necessary

documentation for our work ." This e-mail went on to repeat the concerns previously

communicated regarding "bad revenue" and failure to set up sufficient bad debt reserves .

431 . On May 30, 2001, the AWSC representatives in Germany e-mailed the Arthur

Andersen audit engagement team (Stulac, Sacks and Sadoff) with a summary of thei r

management recommendations . It stated that :

. . . [a]ccounting and financial reporting information quality is poor .

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Namely, subledgers for Accounts Receivables and AccountsPayables do not tie into the General Ledger . During the audit itwas not possible to get a detailed revenue listing from the system,nor was it possible to get detailed reports for other significantaccount balances such as deferred revenue, prepaid expenses andother, or similar. Therefore it is not possible to obtain thenecessary information in order to assess the correctness of anumber of significant account balances . . . .During our audit webecame aware of a number of revenue recognition issues (e .g.channel sales, due dates larger than 12 months , missing datesand signatures on contracts ) ." . . . Summarizing the above,company's accounting and financial reporting need significantimprovement and immediate a ttention . (Emphasis added) .

432 . By e-mail dated August 1, 2001, Philippe Turowski and Mair of AWSC repeated

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all of the serious issues and concerns in their prior e-mail of May 30, 2001, and specifically

reported that license revenue of 2,720,314 EUR on several transactions (with Matema

Information & Communications GbmH, Arxes Network Communication Consulting AG,

Detsche Bank AG, MSE Middleware Sorewae Engineering GmbH, and HAN DATAPORT

Software GmbH) was misstated . Among the reasons for this conclusion were that "Arxes, MSE

and HANB Dataport are all initial orders by resellers, where no end-user has been specified .

Therefore we believe that revenue should not have been recognized ." This was an

acknowledgment that Peregrine's entire Board-authorized revenue recognition policy since the

fourth quarter of fiscal year 1999 based on sell-in resulted in improperly recognized revenue . As

to accounts receivable totaling 13,473,500 EUR, AWSC reported that "more than 32% of AIR

are overdue by more than 90 days, 28% overdue by more than 120 days . The company did not

set up any bad debt provisions ." (Emphasis added) . The AWSC personnel concluded that a

bad debt reserve should be set up, but "company's management believes that no bad debt

allowance is necessary ." The e-mail concluded by listing several accounts receivable

(Systematics, Network Constul, GE Compunet, Maiks, Fleet and Arxes) for a total of 18,695,701

EUR as "questionable revenue ." An e-mail dated October 19, 2001 from AWSC representatives

in Germany to Stulac, Sacks and Sadoff repeated all of the concerns highlighted in the August 1,

2001 e-mail. These e-mail reports to Arthur Andersen in San Diego reflect actual knowledge of

numerous material deficiencies in the accounting in Peregrine's EMEA division which

constituted a red flag that Peregrine was violating fundamental accounting rules and practice s


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and was engaging in an accounting fraud .

433 . Through the assistance of AWSC in its audits and reviews of Pereg rine's financial

statements, Arthur Andersen learned of numerous accounting irregularities in Peregrine's EMEA

division . According to Dorothy Trill, European Financial Controller, the auditors from Arthur

Andersen - United Kingdom, who conducted the statutory audits for EMEA, were "very

surprised" by the revenue recognition practices that the San Diego office of Arthur Andersen

permitted, and "raised their eyebrows" at these practices . In particular, they frowned on the San

Diego auditors approving booking of contracts as revenue which had extended payment terms .

They believed the Arthur Andersen audit team was "out to lunch" because there was never any

follow-up with regard to the serious accounting issues raised in EMEA, especially Germany .

434. In the Fall and in December 2001, from conversations with defendant Gless ,

including conversations over drinks at the Doubletree Hotel near Peregrine's office, Stulac was

made aware of the existence of side letters applicable to agreements entered into by Peregrine's

EMEA division, which letters excused and/or made contingent payment by resellers with whom

Peregrine had entered into license agreements and pursuant to which revenue had bee n

recognized . By this knowledge, Arthur Andersen was provided with yet further evidence that its

client was engaging in a revenue recognition fraud and that representations of its management

regarding matters directly relevant to financial reporting could not be relied upon .

435 . In response to the information about side letters, Arthur Andersen took no action ,

failed to correct its previously issued audit opinions, failed to require that its client disclose an y

of these matters , and failed to itself inform the investing public of its client's fraud .

3 . Fiscal Year 2002

436. In the first quarter of fiscal year 2002 ending June 30, 2001, Rassam discussed

with Stulac Peregrine's "off balance sheet risk" in connection with the sale of accounts

receivable to banks . Stulac told Rassam that it was acceptable to keep these transactions off the

balance sheet. In May 2001, Rassam had learned that the Company had bought back receivables

from banks . He believed this created real "off balance sheet risk ." Rassam obtaine d

spreadsheets dated May 2001 which showed that Peregrine had repurchased receivables . One


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spreadsheet is in the form of an e-mail listing seven receivables repurchased from Wells Fargo

Bank and Fleet Bank totaling more than $17 million, on which customers had never paid .

Another spreadsheet listed receivables that had been sold to Fleet Bank, Wells Fargo, and Silicon

Valley Bank as of March 31, 2001 totaling over $130 million. Rassam forwarded these

spreadsheets to Arthur Andersen on July 12, 2001 . In the accompanying e-mail Rassam stated "I

think this supports my assertion that we disclose off B/S risk . Please advise ." After a meeting

with Peregrine's Treasurer, Benjamin, about these receivables, Arthur Andersen personnel Sacks

and Sadoff came out of the meeting "white as ghosts" because it confirmed for them that their

client's personnel were liars, including defendant Gless . Rassam asked Stulac why bank

financing of accounts receivable had not been disclosed in Peregrine's public filings pursuant to

FAS 140 and Stulac told Rassam that it was because "Gless did not want it disclosed ." In

deferring to its client's fraud, Arthur Andersen itself committed fraud . Arthur Andersen

deliberately chose to conceal the truth and played a significant role in Peregrine's ability to

misrepresent its financial condition to investors .

437 . In the quarter ending September 30, 2001, Arthur Andersen conducted a firmwid e

review of its top 20 riskiest clients worldwide, and was considering whether to fire them .

Peregrine was on the list, as was Enron . As a result of this ongoing review, Arthur Andersen

replaced Stulac with a new audit engagement partner . The new partner, Ross Baldwin, told

Sacks that the Arthur Andersen partner reviewing the client was ashamed at the quality of the

workpapers relating to the Peregrine audits and reviews, and believed that the absence of an

accounts receivable subledger was unforgivable .

438. In July 2001, Rassam sent an e-mail to Stulac and Sacks complaining that he stil l

had not seen an accounts receivable detailed subledger tying to the general ledger . In his e-mail,

Rassam questioned the difference between a spreadsheet Arthur Andersen had seen in December

2000 and the spreadsheet Rassam had told the Andersen personnel about . Rassam demanded

that Stulac inform the Audit Committee . Stulac resisted .

439. Peregrine wrote off approximately $40 million in receivables in the quarter endin g

September 30, 2001 . Of this amount, $25 million was written off as "acquisition expense and


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other" consistent with prior write offs since June 2000 . Stulac maintained that this accounting

treatment was acceptable as long as the write off was less than 5% of the line item, and because

there was an overlap of channel partners between Peregrine and Remedy, which had recently

been acquired. Rassarn knew this accounting treatment was wrong, but Stulac and Gless insisted

on it . They effectuated this accounting treatment through post-closing journal entries made by

Gless in the presence of and in conjunction with Stulac . Subsequently, in a letter dated April 5,

2002, from Arthur Andersen to defendant Gless, the firm acknowledged that there should have

been disclosures of the purchase accrual write offs. Peregrine's write offs of accounts receivable

should were required under GAAP to have been recorded as reversals of revenue .

440. On July 20, 2001, Rassam forwarded an e-mail received from Jim Ingram, a

Peregrine employee, to defendants Gless, Stulac, and through Stulac, Arthur Andersen an d

AWSC , referring to ,

"[t]he absolute mess I inherited from the old regine (sic) (e .g . localcurrency ledgers out of balance; intercompany accounts whichhave not been reconciled ; an aging report which has not, and stilldoes not tie-in to the G/L, ad nauseum) . . .I'm a little frightened bythis inasmuch as I can ill afford to loose (sic) my license to practiceshould forensic auditors ever decide to pay us a visit .

Even Peregrine's own employees mocked the work, or absence of work, of the Company' s

auditors, Arthur Andersen, and highlighted the Company's abysmal lack of internal controls .

441 . Arthur Andersen assigned a new audit engagement partner , Ross Baldwin, to th e

Peregrine account beginning with the review of the second quarter of fiscal year 2002 (the

quarter ending September 30, 2001) . Baldwin moved to San Diego in August 2001 from the

firm's Sacramento office . Baldwin had first encountered Peregrine when he visited in April or

May of 2001 to meet with Stulac and Sacks, the Peregrine audit manager, to learn more about his

impending assignment as the audit engagement partner for the Peregrine account . Defendants

Gardner, Gless, and Nelson resisted the change in audit engagement partners from Stulac to

Baldwin as they knew from working with him closely that Stulac was malleable and readily

willing to allow Peregrine to violate accounting rules to help the Company achieve the financial

results it wanted . Stulac rarely questioned Peregrine's accounting decisions and focused o n


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I making the client happy, rather than challenging management's accounting decisions .

442. During Baldwin' s tenure as engagement partner, he observed deficiencies in the

prior reviews and annual audits and sought to make changes . For example, he requested

management representation letters from Peregrine's sales department because of the information

that came to his attention in the Fall of 2001 that certain sales transactions contained unusual

terms, including side letter agreements eliminating or deferring the obligation to pay, which

rendered revenue recognition improper . Defendant Nelson nevertheless prevailed upon Baldwin

to back off this request . The refusal of management to allow the sales department to provide

representation letters was a red flag to Arthur Andersen that there were purported revenue

generating transactions which Peregrine relied on which in fact did not consist of revenue that

could properly be recognized under GAAP .

443 . In light of the knowledge Baldwin obtained regarding the existence of side letter s

and the resulting improper revenue recognition, Baldwin changed the form of management

representation letters from that which were used in prior quarters and in connection with the

2001 audit . Specifically, he included a line item in the representation letters stating that there

were no side letters in existence . Baldwin knew that side letters existed and incorporated this

language in the representation letters to provide cover for Arthur Andersen in an attempt to

protect the firm in the event that the side letters became public . Baldwin knew that Arthur

Andersen's client was dishonest and would sign the false representation letters, and concluded

that the existence of these false management representation letters would purportedly give Arthur

Andersen a legal defense in the event of exposure of its client's fraud .

444. During the course of his work on the Peregrine reviews, Baldwin observed tha t

there was a low return rate on confirmation letters that Arthur Andersen had sent to customers in

connection with the 2001 year end audit . Baldwin believed the return rate on such confirmation

letters was too low, was inadequate to give comfort as to the validity of many of the transactions

that Peregrine engaged in, and needed to be increased . This was yet another red flag that many o f

Peregrine's transactions were not properly documented and could not be considered to have

generated legitimate revenue .

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1 445. Several Arthur Andersen personnel participated in the October 24, 2001 Audit

2 Committee meeting in connection with the second quarter of fiscal year 2002, including Baldwin .

3 One such person was Arthur Andersen Western Region National Practice Director Robert S .

4 Shanley. He attended the meeting because Arthur Andersen had learned of material issues with

5 regard to the propriety of Peregrine's revenue recognition, specifically, that several materia l

6 transactions involved revenue recognized where there were side letters which made paymen t

7 illusory, or significantly delayed payment . In light of this awareness of Peregrine's accounting

8 manipulations, the Arthur Andersen personnel anticipated a difficult and antagonistic meeting .

9 In fact, there was significant conflict at this meeting between the Peregrine personnel and the

10 Arthur Andersen personnel . Baldwin went over 6-7 transactions where Arthur Andersen ha d

11 detected improper revenue recognition on contracts, including Fujitsu, Total Infosystems, Unisys,

12 CMS Energy, and Aetna. In addition, Baldwin discussed examples of internal "control

13 breakdowns" that had been observed by Arthur Andersen in the recording of revenue from these

14 transactions . Gless admitted that there had been control breakdowns . Such "control

15 breakdowns" included a reference to clauses in license agreements which contained "non-

16 standard" terms relieving the customer of any payment obligation, and further noting some

17 agreements which were undated . Baldwin handed out a sheet entitled "Types of Potential

18 Misstatements" which was a detailed analysis of how violations of SOP 97-2 arise, the GAAP

19 standard governing recognition of revenue for software sales, which Baldwin stated had been

20 violated in numerous instances by Peregrine .

21 446. Defendants Gless and Nelson aggressively challenged Baldwin . Gless claimed

22 that Baldwin did not have sufficient experience with software accounting and that he wa s

23 "overstepping" his role in challenging the revenue recognition from these contracts . The highly

24 aggressive and defensive reaction of Peregrine management to the auditors' discussion o f

25 Peregrine's revenue recognition practices was yet another red flag that Peregrine management

26 was engaged in deliberate accounting manipulations for which they would brook n o

27 disagreement . Further, during this meeting, defendants Gless and Nelson pressed for the

28 reinstatement of Stulac as audit engagement partner .

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447. Notwithstanding the clearly intentional and repeated violations of GAAP which

Arthur Andersen had observed in the transactions discussed with defendants Gless and Nelson at

this meeting, it nonetheless abandoned its role as "public watchdog" and bowed to the wishes of

its client, agreeing to accept the "significant accounting judgments " made by the Company.

Arthur Andersen thereby acquiesced in Peregrine 's accounting fraud .

448 . Arthur Andersen conducted a review of the financial results for the third quarte r

of fiscal year 2002 ending December 31, 2001 . In connection with its review, Arthur Andersen

continued to note material deficiencies in Peregrine's accounting practices . At a

January 22, 2002 Audit Committee meeting these issues were raised. In addition to the members

I of the Audit Committee as of that date (defendants Noell, Watrous, and Dammeyer), Peregrine

I management was represented by defendants Gless and Nelson, and General Counsel Deller als o

participated .

449. Among the material accounting issues which Arthur Andersen knew of an d

discussed at this meeting were the following . Several contracts pursuant to which revenue was

being recognized lacked any dates . A transaction with Smith Barney that was recognized as

revenue at December 31, 2001 was dated January 3, 2002, beyond the end of the third quarter .

Baldwin further identified the following as areas where Arthur Andersen had become aware o f

accounting deficiencies : (i) the presence of numerous contracts with 30 day rights of return,

which rendered revenue recognition improper ; (ii) multiple errors in quarterly debit entries from

Europe; (iii) several Xanadu transactions that were to include a deferred transaction fee to b e

recorded on a monthly b as is only , but which were immediately recognize as revenue ; (iv)

transactions with accept ance clauses without the proper acceptance documentation ; and (v) two

large reseller deals that were improperly recognized as revenue on a sell -in basis, i.e. Prokom and

MGX. Thus, Arthur Andersen continued to have knowledge of continuing improper accounting

engaged in by Peregrine but took no steps to correct Peregrine 's misstated quarterly fin ancial

statements or to otherwise disclose the accounting irregularities, or insist on correction of

misstated amounts .

450. As a result of its review procedures with regard to the third quarter of fiscal yea r


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1 2002, Arthur Andersen was aware of an accumulation of Peregrine receivables in the amount of

2 $87 million, yet the Company recorded a bad debt reserve of only $14 million . Arthur Andersen

3 knew, or was deliberately reckless in disregarding, that the recorded amount of bad debt reserve

4 was materially inadequate, which rendered the third quarter financial statement false an d

5 misleading .

6 451. On February 2, 2002, Baldwin participated in a conference call with defendants

7 Gless and Nelson regarding various open accounting matters that existed even after the thir d

8 quarter press release and Audit Committee meeting . Peregrine issued its press release before

9 resolution of numerous open items which were subject to further audit procedures . The

10 Company's premature release of its results before its auditors had resolved open issues was yet

11 another red flag to Arthur Andersen that its client was engaged in an accounting fraud and could

12 not be relied upon to provide truthful and accurate information or to report its transactions in

13 accordance with applicable accounting rules .

14 452. In February 2002, Baldwin had a conversation with Rassam, during which the fact

15 that Peregrine had a large amount of impaired receivables was discussed . Baldwin stated to

16 Rassam that 100% of the impaired receivables would have to be written off at the end of the

17 quarter, whereas Rassam suggested that the write off be taken over a "number of quarters ."

18 Rassam further told Baldwin at this time that he did not want to "crash the bus and kill all the

19 passengers ." This conversation was further evidence for Arthur Andersen that its client was

20 committing accounting fraud, yet it did nothing to disclose its client's fraud . Instead, the firm

21 continued to allow the public to rely on financial statements it knew were materially false and

22 misleading .

23 453. At a special meeting of the Audit Committee conducted on February 12, 2002

24 which Baldwin attended, the issue of Peregrine's transactions with Critical Path was raised .

25 Although this matter had first been raised at the July 2001 Audit Committee meeting, Arthu r

26 Andersen had not completed a final analysis of the transactions for revenue recognition purposes .

27 Nonetheless, at the February 2002 meeting, defendant Gless falsely represented to the Audi t

28 Committee that Arthur Andersen had reached a final conclusion that the transactions were


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appropriately accounted for. Baldwin knew this to be untrue, as the analysis previously initiated

by Arthur Andersen was incomplete and had not been reviewed by a partner . As of this meeting,

and based on defendant Gless's false representation to the Audit Committee, Arthur Andersen

knew that its client was dishonest and, given the history of multiple material issues with its

accounting practices, was engaged in accounting fraud . Further, on March 11, 2002, Arthur

Andersen communicated to defendants Gardner and Gless that the Company's accounting for the

Critical Path transactions did not meet the requirements of SOP 97-2 .

454. Baldwin authored a memorandum dated March 29, 2002 . In it he discusse d

consideration of possible restatement of the prior year's financial statements based on the fact

that Peregrine had used the "acquisition and other" line item in its balance sheet for the improper

purpose of writing off $25 million of Peregrine's, rather than acquired companies', receivables .

In other words, Arthur Andersen knew that Peregrine had defrauded readers of its financial

statements by incorporating inappropriate amounts in the "acquisition and other" line item .

Notwithstanding this knowledge, Arthur Andersen failed to require a restatement, failed to

withdraw its prior years' unqualified audit opinions, and made no disclosure to the investing

public of its knowledge of this fraud .

455. Arthur Andersen also knew as of March 2002 that Peregrine was recordin g

revenue pursuant to agreements that were signed after the close of the quarter in which the

revenue was recorded. The March 2002 Baldwin memorandum indicated that the firm's cut-off

testing had generally occurred 9 to 15 days after period end . Based on the knowledge gained

through its review work, Arthur Andersen knew that it needed to test the cut-off much closer to

the end of the period because of recurring examples of agreements without dates, or dates that

fell outside of the period in which the revenue was recorded . Rassam objected to this plan,

providing yet further indication that Peregrine did not want its auditor to review its end of period

transactions in time for the results to be incorporated in the quarterly or year end financial

statements . This was another red flag to Arthur Andersen that its client was engaged in

accounting fraud and manipulation .

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AWSC'S PARTICIPATION IN THE FRAUD

456. AWSC assisted in both the year-end fiscal 2000 and 2001 audits of Peregrine an d

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all of the quarterly reviews during the Class Period . Ross Baldwin, the Arthur Andersen audit

engagement partner beginning September 1, 2001, told investigators that for the quarterly

reviews beginning for the second quarter of fiscal year 2002, the San Diego Arthur Andersen

audit team "requested that Arthur Andersen World Wide (i .e ., defendant AWSC), assist in

support of the Peregrine reviews and audits ." AWSC did so . For each period under review or

audit, Arthur Andersen in San Diego would send a memo to the appropriate AWSC office

describing the scope of procedures to be conducted by the AWSC foreign office .

457. As alleged in paragraphs 413-455 above , which are incorporated herein by

reference , AWSC knew of Peregrine 's accounting fraud through its accounting work o n

Peregrine's EMEA division, in particular, Peregrine Germany . As a result of its work, AWSC

auditors learned (i) that a major division of Peregrine was engaged in revenue recognition fraud,

(ii) that many of the contracts pursuant to which it reported revenue were undated and/or outside

of the relevant period, (iii) that there were materially deficient internal accounting controls such

that it was not possible for the auditors to completely understand EMEA's accountin g

transactions; and (iv) there were materially deficient bad debt reserves an d that Compan y

personnel actively resisted establishing approp riate reserves .

458 . Notwithstanding AWSC' s knowledge of Pereg rine' s accounting fraud , it took no

steps to insist on correction of misleading financial statements or otherwise make disclosure o f

Peregrine's accounting fraud.

459. Both Arthur Andersen and AWSC violated GAAS in connection with their audi t

and review work . GAAS, as approved and adopted by the American Institute of Ce rt ified Public

Accountants ("AICPA"), relate to the conduct of auditors in performing and report ing on audit

engagements. Statements on Auditing Standards are recognized by the AICPA as the

interpretation of GAAS . Arthur Andersen 's representations concerning Peregrine ' s fiscal 2000

and 2001 financial statements were materially false and misleading when made, because Arthur

Andersen knew that those financial statements were not prepared in accordance with GAAP no r


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had Arthur Andersen or AWSC conducted their audits in accordance with GARS . Arthur

Andersen knew that its reports would be relied upon by potential investors in Peregrine

securities . Moreover, Arthur Andersen and AWSC' s failure to require Pereg rine to revise its

false interim financial reports was a violation of GAAS due to Arthur Andersen and AWSC's

knowledge of factors indicating Peregrine 's deviation from GAAP in the presentation of its

interim results for each of the quarterly periods in 2000 , 2001 and for the first three quarters of

fiscal 2002 . As to the published interim fin ancial results , which they reviewed and approved,

Arthur Andersen and AWSC also knew that such results would be relied upon by potential

investors in Peregrine securities and that such materially inaccurate results would be incorporated

in the Company ' s announced year end results .

460. Under GAAS, as set forth in AICPA AU §326, Evidential Matter , the auditor i s

required to obtain sufficient, competent evidential matter through inspection , observation,

inquiries , and con firmations to afford a reasonable basis for an opinion regarding the financial

statements under audit. AU §326 . 01 . When an auditor believes that financial statements contain

material departures from GAAP, the auditor should express a qualified or adverse opinion . See

AU §508 .20, §508 .35-.60 .

461 . In violation of GAAS and contrary to the representations in its opinions o n

Pereg rine ' s fiscal 2000 and 2001 financial statements, Arthur Andersen did not obtain sufficient

competent evidential matter to support Peregrine's assertions regarding its financial statements

for fiscal 2000 and 2001 and failed to modify its reports to express a qualified or adverse

opinion. In fact, Arthur Andersen was aware of several factors which contradicted or gave rise t o

serious questions regarding Peregrine's internal accounting controls :

a . Peregrine had weak and/or non-existent internal accounting controls an d

thus no ability to generate reliable financial statements under GAAP ;

b . The absence of any minutes of the Audit Committee ;

c . The existence of numerous significant manual adjustments to software

license and maintenance revenue ;

d. The failure to record the deferred tax effects for accruals recorded i n


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I Peregrine's various business combinations ;

e . The inability to quantify the amount of sales to resellers (and their identity)

during particular accounting periods ;

f. The existence of side letters or license agreements which rendered revenue

recognition pursuant thereto improper ;

g . Substantial delays in providing, or an inability to provide, information

such as trial balances, general ledgers and subledgers that would customarily be readily availabl e

from a comp any 's accounting systems ; and

h. Pereg rine did not have a functioning Audit Committee independent o f

Peregrine senior management .

462. In addition, Arthur Andersen and AWSC violated AU §316 concerning

Consideration of Fraud in a Financial Statement Audit and AU §317, Illegal Acts by Clients by

failing to expand audit procedures in the face of numerous "red flags" concerning the reliability

of Peregrine's financial statements . AU §316 requires that the auditor plan and perform an audit

to obtain reasonable assurance about whether the financial statements are free of materia l

misstatement, whether caused by error or fraud . AU §317 requires the auditor to give

consideration to the possibility of illegal acts by a client in an audit of financial statements . For

the reasons alleged above, in conducting its audits of Peregrine's fiscal 2000 and 2001 financial

statements and reviews of the interim quarterly results for those periods and the first three

quarters of fiscal year 2002, Arthur Andersen and AWSC knew or recklessly disregarded facts

and circumstances which showed Peregrine and its senior management was committing a frau d

and/or committing illegal acts which rendered the financial statements unreliable and materiall y

2311 misstated .

463 . In November 1998, the AICPA circulated to public accounting firms Practice

Alert 98-3 entitled "Revenue Recognition Issues." The Practice Alert identified various issues

which required "special consideration" by auditors. Among the issues identified were the

following : (i) significant sales or volume of sales that are recorded at or near the end of the

reporting period ; (ii) unusual volume of sales to distributors/resellers ; (iii) barter transactions ;


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I and (iv) the existence of "side agreements ." Each of these conditions existed at Peregrine durin g

the Class Period and required Arthur Andersen and AWSC to employ heightened scrutiny .

464. The Practice Alert also put auditors on notice that a "company constantly

increasing sales that àlways meets or exceeds' budgeted sales targets and that result in the `buil d

up' of accounts receivable may warrant extra attention . When a substantial portion of the

company's sales occur at the end of the accounting period, extra caution in auditing revenue

transactions is appropriate ." Despite notice of specific types of problems which were occurring

at Peregrine, Arthur Andersen and AWSC knowingly or with deliberate recklessness failed to

employ "extra caution," "extra attention" or "special consideration" as dictated by the facts and

circumstance of the Peregrine engagements .

465. Given these factors, Arthur Andersen and AWSC knew or recklessly disregarded

that Peregrine's audited financial statements for fiscal years 2000 and 2001 were misstated an d

Arthur Andersen should have modified its reports to be adverse or withdrawn from the

engagement . Similarly, Arthur Andersen and AWSC knew or with deliberate recklessnes s

disregarded that Peregrine's unaudited interim financial statements for each of the reporting

quarters of 2000, 2001 and the first three quarters of 2002 were misstated and not prepared i n

I accord ance with GAAP. However, in order to keep Peregrine as a client and continue to generat e

lucrative consulting business from Peregrine, Arthur Andersen issued unqualified opinions on

April 25, 2000 and April 26, 2001, falsely representing that Peregrine's audited financial

statements were presented in conformity with GAAP and that Arthur Andersen' s audits had been

I conducted in conformity with GAAS .

466. Peregrine and Arthur Andersen have since admitted that Peregrine's fiscal 2000

I and 2001 audited financial statements as well as Peregrine's interim financial results for fiscal

years 2000, 2001 and the first three quarters of fiscal 2002 were materially misstated and cannot

be relied on .

467. Arthur Andersen and AWSC had a duty under GAAS to insist on revision o f

I Peregrine's false interim financial reports for fiscal years 2000 and 2001 and the first thre e

quarters of fiscal year 2002 when they became aware that the results were misstated . Arthur


•Andersen and AWSC knowingly part icipated in Peregrine ' s false financial repo rt ing by its failure

I to require such revisions on a timely bas is , which was in violation of GAAS .

468. Arthur Andersen and AWSC reviewed and approved of each of the financia l

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statements reflecting Peregrine's interim quarterly results which were issued during the Class

Period . As to the interim results for the quarters in fiscal 2001 and 2002, SEC Rule 10-0 1 of

Regulation S-X, 17 CFR §210.10-01(d) required Arthur Andersen and AWSC to review

Peregrine's interim financial information prior to the Company filing its quarterly reports on

Form 10-Q, using professional standards and procedures for conducting such reviews, as

established by GAAS .

469. GAAS, as set forth in AU §§722 . 20- .22 states :

.20 As a result of performing the services described in paragraph

.05, the accountant may become aware of matters that cause him orher to believe that interim financial information, filed or to be filedwith a specified regulatory agency, is probably materially misstatedas a result of a departure from generally accepted accountingprinciples . In such circumstances, the accountant should discussthe matters with the appropriate level of management as soon aspracticable .

.21 If, in the accountant's judgment, management does notrespond appropriately to the accountant's communication within areasonable period of time, the accountant should inform the auditcommittee, or others with equivalent authority and responsibility(hereafter referred to as the audit committee), of the matters assoon as practicable . This communication may be oral or written . Ifinformation is communicated orally, the accountant shoulddocument the communication in appropriate memoranda ornotations in the working papers .

.22 If, in the accountant's judgment, the audit committee doesnot respond appropriately to the accountant's communicationwithin a reasonable period of time, the accountant should evaluate(a) whether to resign from the engagement related to interimfinancial information, and (b) whether to remain as the entity'sauditor or stand for reelection to audit the entity's financialstatements . The accountant may wish to consult with his or herattorney when making these evaluations.

470. Due to Arthur Andersen and AWSC 's knowledge of Peregrine's internal contro l

structure obtained from auditing procedures and reviews performed during Peregrine's audits ,

and from its other work performed for Peregrine, as well as the Arthur Andersen and AWSC' s

frequent contacts with Pereg ri ne personnel , Arthur Andersen and AWSC knew or with deliberat e


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1 recklessness disregarded that Peregrine was falsely reporting its results in the Company's interim

2 financial statements during fiscal years 2000 and 2001 and the first three quarters of fiscal yea r

3 2002. Statement on Auditing Standards No . 71, Interim Financial Information (AU§722), sets

4 forth the professional standards and guidance for conducting interim reviews . Among the

5 analytical review procedures to be implemented, based on the auditor's knowledge of financial

6 reporting practices and significant accounting matters, are : (i) inquiries concerning internal

7 controls ; (ii) analytical review procedures ; and (iii) reading the interim financial information for

8 conformity with GAAP. Based on the foregoing, Arthur Andersen and AWSC knew, or wer e

9 deliberately reckless in not knowing, of Peregrine's misstated interim financial results for fiscal

10 years 2000 and 2001 and the first three quarters of fiscal year 2002, and failed to insist o n

11 revision of the false interim financial statements .

12 471 . Based on Arthur Andersen's false audit opinions and the failure to qualify and/or

13 modify its reports to identify Peregrine's false financial reporting, Arthur Andersen violated the

14 following GAAS standards, among others :

15 a. The second general standard which requires that the auditors should

16 maintain an independence in mental attitude in all matters relating to the engagement ;

17 b. The third general standard which requires that due professional care is to

18 be exercised in the performance of the audit and preparation of the report ;

19 c. The first standard of field work which requires that the audit is to be

20 adequately planned and that assistants should be properly supervised ;

21 d. The second standard of field work which requires that the auditor should

22 obtain a sufficient understanding of internal controls so as to plan the audit and determine the

23 nature, timing and extent of tests to be performed ;

24 e. The third standard of field work which requires that sufficient competent

25 evidential matter is to be obtained to afford a reasonable basis for an opinion on the financial

26 statements under audit ; and

27 f. The third standard of reporting which requires that informative disclosures

28 are regarded as reasonably adequate unless otherwise stated in the report .


C -_Ij472. SEC Regulation S -X (17 C .F.R. §210 .4-01(a) (1)) provides that financial

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statements filed with the SEC which are not prepared in compliance with GAAP are presumed to

be misleading and inaccurate , despite footnote or other disclosure . Regulation S-X requires that

inte rim financial statements must also comply with GAAP, with the exception that interim

financial statements need not include disclosure which would be duplicative of disclosures

accompanying annual financial statements. 17 C .F.R. §210.10-01(a) . The responsibility for

preparing financial statements that conform to GAAP rests with corporate management as set

forth in Section 110 . 03 of the AICPA Professional Standards :

The financial statements are management's responsibility . . .Management is responsible for adopting sound accountingpolicies and for establishing and maintaining internal controlthat will, among other things, record, process, summarize, andreport transactions (as well as events and conditions) consistentwith management's assertions embodied in the financialstatements . The entity's transactions and the related assets,liabilities, and equity are within the direct knowledge and controlof management . . .Thus, the fair presentation of financialstatements in conformity with [GAAP] is an implicit and integralpart of management's responsibility . (Emphasis added) .

473. Pursuant to these requirements, Peregrine represented in its annual reports o n

Form 10-K and quarterly reports on Forms 10-Q filed with the SEC during the Class Period as

detailed below, that its financial results were presented appropriately, in accordance with GAAP,

in substantially these terms :

Revenues from direct and indirect license agreements arerecognized, provided that all of the following conditions are met : anoncancellable license agreement has been signed ; the product hasbeen delivered ; there are no material uncertainties regardingcustomer acceptance ; collection of the resulting receivable isdeemed probable ; risk of concession is deemed remote ; and noother significant vendor obligations exist .

474. Contrary to these representations, Peregrine inflated its revenues and net income

during the Class Pe riod by improperly recognizing revenue on the types of tr ansactions set forth

above . AICPA SOP 97-2, entitled Software Revenue Recognition , which governs the accounting

for the product license sales by Peregrine during the Class Pe riod , sets fo rth the criteria under

which a software vendor is permi tted to recognize revenue derived from software license

agreements . Specifically , 1 .08 of SOP 97-2 precludes recognition of revenue from license sales,

FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS-Master File No. 02-CV-0870J(RBB) 171

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1 where the contract "does not require significant production, modification, or customization o f

2 software," unless all of the following criteria are met : (i) persuasive evidence of an arrangement

3 exists ; (ii) delivery has occurred ; (iii) the vendor's fee is fixed or determinable; and (iv)

4 collectability is probable (i.e ., is likely to occur) .

5 475. Each of these requirements for revenue recognition must be met regardless o f

6 whether the software is sold directly to the end user, or through a reseller . For example, ¶ .18 of

7 this SOP expressly provides that the delivery requirement "applies whether the customer is a user

8 or a reseller." Further, SOP 97-2 expressly precludes recognition of revenue from produc t

9 license sales to resellers where the fee is not fixed and determinable, or collectability is not likely

10 to occur . In such circumstances, if the sale to the reseller is not final but, in reality, is contingent

11 upon the reseller's subsequent sale of the product to the end user, no revenue generatin g

12 transaction has occurred .

13 476. Thus, ¶ .30 of SOP 97-2 requires consideration of the following factors, among

14 others, to evaluate whether product license sales to resellers are legitimate, final sales, an d

15 recognition of revenue from the agreement is appropriate :

16 i. Business practices, the reseller's operating history,competitive pressures, informal communications, or other factors

17 indicate that payment is substantially contingent on the reseller'ssuccess in distributing individual units of the product .

18ii . Resellers are new, undercapitalized, or in financial

19 difficulty and may not demonstrate an ability to honor acommitment to make fixed or determinable payments until they

20 collect cash from their customers .

21 iii. Uncertainties about the potential number of copies to besold by the reseller may indicate that the amount of future returns

22 cannot be reasonably estimated on delivery ; examples of suchfactors include the newness of the product or marketing channel,

23 competitive products, or dependence on the market potential ofanother product offered (or anticipated to be offered) by the

24 reseller.

25 iv. Distribution arrangements with resellers require thevendor to rebate or credit a portion of the original fee if the vendor

26 subsequently reduces its price for a product and the reseller still ha srights with respect to that product (sometimes referred to as price

27 protection) . . .

28 477. As detailed above, Arthur Andersen and AWSC knowingly or with deliberate


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recklessness caused Peregrine to recognize revenue from sales to both resellers and end users

where one or more conditions for proper recognition of revenue under GAAP were not met,

including the following : (i) the product was never delivered to the purchaser ; (ii) the purchaser's

obligation to pay for the product was not fixed and determinable ; (iii) collectability of the fee was

not probable; or (iv) the reseller's obligation to pay for the product was contingent upon

subsequent sale of the product to the end user .

478 . Defendants sought to conceal these facts by entering into multiple agreement s

with respect to each product license sale : (i) a primary contract, which provided for the reseller to

take delivery of the product, and providing no right of return ; and (ii) a verbal or written side

agreement designed to make the sale of the product contingent upon performance of additional

obligations .

479. The falsification of Peregrine's DSO resulted from Peregrine understating its

accounts receivable in violation of the following GAAP principles including Statement of

Financial Accounting Concepts ("Concepts Statement") No . 5, ¶83 ; Concepts Statement No . 2 ,

¶¶58-59; Concepts Statement No. 2, ¶¶95-97; and Concepts Statement No. 2, ¶79 . . Peregrine's

overstatement of its reported cash position also violated the GAAP principles including Concepts

Statement No. 2, ¶¶58-59, 79 and 95-97 .

480. Further, Peregrine's ultimate disclosure that it would restate its previously

reported financial results during the Class Period constitutes an admission that each of these

statements, as included in the Company's press releases and Forms 10-K and 10-Q, were

materially false and misleading when issued . Indeed, under Statement of Financial Accounting

Standards No . 16, Prior Period Adjustments, restatements are only permitted, and are required,

for the correction of errors or fraudulent financial reporting .

481 . Peregrine's announced restatement confirms that the Company's financial result s

for fiscal years of 2000 and 2001 and for the first three quarters of fiscal year 2002 wer e

materially false and misleading when disseminated .

482 . As a result of these accounting improprieties, Arthur Andersen and AWSC cause d

Pereg rine ' s repo rted financial results to violate at least the following provisions of GAAP fo r


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Cwhich each defendant is necessarily responsible :

a. the principle that revenues must be realizable (collectible) and earned prio r

to recognition (Statement of Financial Accounting Concepts ("Concepts Statement"), No. 5 ,

1 ¶83) ;

b. the principle that financial reporting should provide information that is

useful to present and potential investors and creditors and other users in making rational

investment, credit and similar decisions (Concepts Statement No . 1, ¶34);

c . the principle that financial reporting should be reliable in that it represents

what it purports to represent . That information should be reliable as well as relevant is a notio n

that is central to accounting (Concepts Statement No . 2, ¶¶58-59) ;

d. the principle of completeness, which means that nothing is left out of th e

information that may be necessary to ensure that it validly represents underlying events and

conditions (Concepts Statement No . 2, ¶79) ;

e. the principle that conservatism be used as a prudent reaction to uncertainty

to try to ensure that uncertainties and risks inherent in business situations are adequately

considered. The best way to avoid injury to investors is to try to ensure that what is reported

represents what it purpo rts to represent (Concepts Statement No. 2, ¶195, 97) ;

f. GAAP' s requirement of the disclosure of an existing condition , situatio n

or set of circumstances involving an uncertainty when there is at least a reasonable possibility

that a loss or an additional liability may have been incurred . (Statement of Financial Accounting

Standards No . 5 (Accounting for Contingencies .)) ;

g . the principle that financial reporting should provide information about an

enterprise's financial performance during a period . Investors and creditors often use information

about the past to help in assessing the prospects of an enterprise . Thus, although investment and

credit decisions reflect investors' expectations about future enterprise performance, thos e

expectations are commonly based at least partly on evaluations of past enterprise performance

(Concepts Statement No . 1, ¶42) ;

h . the principle that financial reporting should provide information abou t


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how management of an enterprise has discharged its stewardship responsibility to owners

(stockholders) for the use of enterprise resources entrusted to it . To the extent that management

offers common stock of the enterprise to the public, it voluntarily accepts wider responsibilities

for accountability to prospective investors and to the public in general . (Concepts Statement

No. 1, ¶50) ; and

i. the p rinciple that financial reporting should provide information about the

I economic resources of an enterprise, the claims to those resources, and the effects of transactions ,

events and circumstances that change resources and claims to those resources . (Concept s

Statement No. 1, 140) .

483. The magnitude , duration and pervasiveness of the accounting m an ipulations

alleged herein, all of which violated the foregoing provisions of GAAP, compels the conclusion

that these improper accounting methods were implemented by Peregrine knowingly, and that as

alleged hereinabove, Arthur Andersen and AWSC directly participated in Peregrine's accounting

fraud. They knew of improper revenue recognition (manipulation and failure to disclose change

in accounting policy, multiple, repeated violations of SOP 97-2 including side letters and holding

open quarters after the cut-off for purposes of recording sales), improper accounting for stock

option expense, improper accounting for bad debt reserves, improper recording of sales of

receivables to banks, but nevertheless knowingly consented to the falsification of Peregrine's

financial statements . At best, Arthur Andersen's conduct was an egregious refusal to see the

obvious, i.e ., that its client was perpetrating an accounting fraud . No reasonable accountant

would have made the same decisions that were made by Arthur Andersen if confronted with the

same facts, as is borne out by the conclusions reached by KPMG upon becoming successor

accountant in April 2002 . Based on the same facts available to Arthur Andersen, KPMG

concluded that Peregrine had committed accounting fraud and that its financial statements

required restatement . Arthur Andersen was heavily involved in the day-to-day accounting

practices of the Company, it had actual knowledge of specific improper transactions and

accounting for such transactions, it acquiesced in accounting judgments of its client which it

knew to be wrong, and nonetheless issued unqualified audit opinions certifying Peregrine' s


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• •publicly filed fin ancial statements complied with GAAP and that its auditing complied with

GAAS, as well as allowing publication of, and failing to correct , interim financial statements i t

I knew were materially inaccurate .

KPMG'S PARTICIPATION IN THE FRAUD

484. Defendants KPMG LLP, BearingPoint, and Rodda (collectively, "KPMG" )

directly participated in Peregrine's fraud . They did so by engaging in transactions with Peregrine

so Peregrine could book revenue before deals with anticipated end users were completed . In

doing so, KPMG deliberately chose to conceal the truth and played a significant role i n

Peregrine's ability to misrepresent its financial condition to investors . In exchange for its

participation in the scheme, KPMG was awarded lucrative services contracts .

485 . Peregrine's partnership relationship with KPMG began to form in late 1998, when

KPMG was providing consulting services to Microsoft Corporation . Defendant Spitzer had

several meetings with defend an t Rodda, a KPMG principal based in KPMG' s Sacramento office .

Rodda, Spitzer, and others at Peregrine negotiated an "alliance" arrangement between Peregrine

and KPMG. The April 1, 1999 letter agreement provided that Peregrine would provide KPMG

with $500,000 to fund the hiring, training, and certification of staff to sell and install Peregrin e

software and that KPMG agreed to "an up-front license commitment" of $2 .5 million in

Peregrine software over a two year period .

486. After the "alliance" arrangement was in place, Peregrine frequently approached

KPMG at the end of a quarter and asked to "park" software with KPMG . This occurred when

Peregrine knew it could not complete a direct sale in time to record revenue for that quarter bu t

needed the revenue to help it meet its publicly announced revenue projections . In such instances,

Peregrine asked KPMG whether it would enter into a deal for the anticipated amount of the sale

to the end user . Peregrine would then immediately book the revenue from the transaction with

KPMG even though the deal with the end user had not yet been completed. In return, KPMG

received the service portion of the contract, which often was worth hundreds of thousands of

dollars . Peregrine also assured KPMG that it would not enforce the payment terms as against

KPMG. Examples of transactions where "parking" occurred include deals in which Sodexh o


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Marriott, Citigroup Global Technology, Inc . ("Citigroup"), Avnet, Inc ., and Morgan Stanley Dean

Witter ("Morgan Stanley"), who were identified as the potential end users . Defendant KPMG

knew that Peregrine proposed these "parking" arrangements so it could falsely represent to

investors that it had obtained revenue from such unfinished deals.

487. The documentation for various transactions between Peregrine and KPMG

evidences the fact that the deals had no commercial substance . For instance, in a transaction in

which Sodexho Marriott was identified as the intended end user, there were multiple sets of

inconsistent paperwork . Peregrine had in its files two different Schedule A attachments to the

license agreement and a Product Registration Agreement . These documents reflect different

dollar amounts and structure the deal differently . One Schedule A is dated December 31, 1999

and reflects the sale of $4 million in software to reseller KPMG . The Product Registration Form

also is dated December 31, 1999 and reflects the sale of $6 .5 million to reseller KPMG . It

appears that Peregrine was able to complete its transaction directly with Sodexho Marriott in the

following quarter because there is also a Schedule A directly between Peregrine and Sodexho

Marriott without using KPMG as a reseller . That document is dated March 31, 2000 and is for

just $2 million in software .

488. Defendant Spitzer has confirmed to investigators that the Sodexho Marriott

transaction was a "parking" transaction . Spitzer said he learned that the transaction would not be

completed by the end of December 1999 . Thus, Spitzer called Larry Rodda at KPMG to inquire

whether KPMG would participate in the scheme and, in return, get the service portion of the

contract when the deal was actually completed with Sodexho Marriott . Rodda told Spitzer that

KPMG would participate . Defendant Gless structured the deal so there would be a Schedule A

between Peregrine and KPMG dated December 31, 1999 . When the deal between Peregrine and

Sodexho Marriott was eventually completed, KPMG's payment obligation to Peregrine was to be

offset by Sodexho Marriott's contract . Indeed, attached to a December 30, 1999 e-mail from

Spitzer to Rodda is a handwritten note stating : "Payments directly to PSI [Peregrine Systems,

Inc .] to clear KPMG payments. "

489 . In February 2000, KPMG received a le tter from Pereg rine asking it to confirm to


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I Peregrine's auditors "the balance due us as of Dec . 31, 1999 and certain terms regarding your

2 recent purchase ." It also asked KPMG to "describe any unfulfilled obligations or contingencies

3 under this contract at December 31, 1999." Attached was the Schedule A signed in December

4 1999. Rodda wrote "no exceptions" on the letter and signed his name . He did so even though he

5 knew the December 31, 1999 Schedule A was phony and did not reflect a real transaction .

6 490. KPMG was also awarded a significant services contract for assisting Peregrine

7 with a transaction for intended end user Citigroup . KPMG knew from the beginning tha t

8 Peregrine sought its help so Peregrine could falsely represent that it had closed the deal in the

9 June 2000 quarter even though it had not yet been completed . As with the Sodexho Marriott

10 transaction, defendant Spitzer called defendant Rodda to inquire whether KPMG would sign the

11 contract in the June quarter in exchange for receiving the $500,000 services portion of the

12 contract . Rodda told Spitzer that KPMG would participate . KPMG knew that the transaction

13 was not completed by June 30, 2000 . This is evidenced by an e-mail from Jim Mowrer of

14 KPMG to Spitzer dated August 30, 2000, two months after revenue was booked by Peregrine, in

15 which Mowrer inquired about when the deal with Citigroup would be completed .

16 491. KPMG and defendant Rodda knew that there was never any intention for KPMG

17 to pay for the Citigroup deal . An e-mail dated September 26, 2000, apparently sent by defendant

18 Spitzer to the accounting department, states :

19 VM [voicemail] from Larry Rodda, this is a pass through invoice.KPMG has an identical invoice posted with Peregrine fo r

20 7,526,150. This was arranged by Larry [sic] Spitzer for a sale withCitiGroup. Per Sch A Peregrine will act as KPMG's agent t o

21 invoice & and [sic] collect with respect to all products . (Emphasisadded . )

22

23 492. Peregrine also improperly recorded $2,285,128 in revenue from a transactio n

24 where the end user was identified as Avnet, Inc . ("Avnet") in the first quarter of fiscal year 2000 .

25 The money was never paid. Defendant Rodda signed the Schedule A on behalf of KPMG .

26 Defendant Spitzer confirmed to investigators that the Avnet transaction was similar to the one

27 involving Citigroup. Toward the end of the first quarter of fiscal year 200I, Bill Moor e

28 (Peregrine's Vice President of North American Sales) told Spitzer that the Avnet contract was


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1 stuck in Avnet's purchasing or procurement department, and that the deal would not get done by

2 the end of the quarter. Moore asked Spitzer to see if KPMG would allow the software to b e

3 "parked" with KPMG in the meantime so Peregrine could recognize the revenue immediately .

4 As with the Citigroup arrangement, Moore said that Peregrine would give KPMG part of the

5 servicing revenue. Spitzer recalled that the invoicing was to work as it had in the Sodexho

6 Marriott deal, i.e ., when a contract was signed with Avnet it would offset the KPMG deal .

7 493. KPMG's knowledge that the Avnet deal was a phony transaction is evidenced by a

8 June 30, 2000 e-mail message Spitzer received from Shane Eliason (a Peregrine senior accoun t

9 representative) . Eliason provided the following "Avnet Update :"

10 The site visit went as expected yesterday (Thursday) for Avnet .They have an offsite budget meeting today (the last day of their

11 FY) and due to the holidays, we will not get feedback until nex tWednesday . Bill Moore has suggested an out clause an d

12 backdating that we are aggressively pursuing . The commitmentis there to sign as soon as budgets are agreed to, but Avnet has to

13 get their budget piece finished . I will keep you posted . (Emphasisadded . )

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15 In other words, the terms that made the KPMG/Avnet revenue not immediately recognizable

16 were expressly discussed and negotiated with defendant Rodda .

17 494. KPMG's knowledge that the Avnet deal was a sham is also evidenced i n

18 documents from its own files . Among KPMG's documents was a letter dated August 1, 200 0

19 from Kathlene Pizzoferrato (a contracts administrator at Peregrine) to defendant Rodda enclosing

20 two Schedule As. An undated handwritten Post-It note attached to the letter states : "The Avnet

21 transaction is paper only. No cash flow. No license flow. No revenue ." (Emphasis added . )

22 The handwriting on the Post-It is defendant Rodda's . Indeed, the Avnet deal had no substance .

23 Peregrine wrote off the entire contract value of $2,285,128 in the second quarter of fiscal year

24 2002 to "accrued liabilities" in connection with Peregrine's acquisition of Remedy .

25 495. Peregrine also entered into a transaction with KPMG wherein Morgan Stanley

26 was identified as the end user . Peregrine's records contain a Schedule A dated

27 September 29, 2000 . It reflects a licensing fee of $10 million and maintenance fees of $1 .5

28 million . The Schedule A was signed by Rodda for KPMG Consulting .


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496. Defendant Spitzer received a call from defendant Powanda who said he was

negotiating a very large sale with Morgan Stanley . Powanda said he had a letter agreement with

the company . Powanda told Spitzer that if KPMG could finalize the deal, KPMG would receive

a large services contract . Spitzer then called defendant Rodda, who said that KPMG would sign

the agreement . Spitzer told investigators that Rodda's revenue target had been increased by

KPMG and, therefore, Rodda wanted to structure the revenue flow the same way they had

structured the Citigroup transaction, i.e ., to flow the cash through KPMG . A copy of the

Schedule A for the deal which came from KPMG's files has a Post-It note stating :

Jim - Here is $11 .5M revenue potential for you . You will need towork with Spitzer to flow the cash so you get credit for therevenue. (Emphasis added . )

The Post-It note is signed with defendant Rodda's initials . The entire $11 .5 million was

recognized as revenue by Peregrine . Rodda, as an experienced auditor, knew this was wrongful .

497. Other phony transactions were also made between Peregrine and KPMG. KPMG

signed at least nine software license agreements with Peregrine during the Class Period, as

summarized in the chart below :

Fiscal Qtr KPMG Entity End user

4Q 99 KPMG LLP noneidentified

3Q 00 KPMG LLP SodexhoMarrio tt

4Q 00 KPMG HHSConsulting

1Q 01 KPMG LLP Citigroup

1Q 01 KPMG AvnetConsulting

2Q 01 KPMG MorganConsulting Stanley

Schedule License Payment DefendantsA amount Revenue Received who

participated

$2.5m $1 .4m $0 Powanda,Spitzer,Gless ,Gardner ,Rodda

$4.Om $4.1m $2.Om Powanda,Spitzer

$2.3m $2.Om $2.3m Powanda ,Spitzer, Gless

$7.I m $6 .1 in $0 Spitzer ,Gless ,Rodda

$2 .3m $2.Om $0 Spitzer ,Gless ,Rodda

$11 .5m $10 .Om $0 Spitze rRodda


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3Q 01 KPMG Honeywell $1 .4m $1 .2m $0 Spitzer, GlessConsulting

3Q 01 KPMG Boeing $2.4m $2 .0m $0 Spitzer, GlessConsulting

3Q 01 KPMG Honeywell $2 .1m $1 .8m $0 GlessConsultin g

1Q 02 KPMG JP Morgan $1 .7m $1 .5m $0Consulting

TOTAL: $37.3m $32.1m $4.3 m

498 . KPMG's deliberate decision to conceal the truth and to play a significant role in

Peregrine's misrepresentation of its financial condition is also evidenced by its payment history.

As indicated above, KPMG paid Peregrine for only one transaction in full (HHS) and for only

half of another transaction (Sodexho Marriott) . No payments at all were ever made on any of the

other transactions. Nonetheless, Peregrine recorded $32 .1 million in license revenue from these

transactions during fiscal years 2000-2002 . It subsequently had to write off $30 .8 million, or

96%, of this amount .

499 . As an accounting firm, KPMG was fully aware that Peregrine's conduct was a

deliberate violation of GAAP. Defendant Rodda, the primary KPMG representative in several

of the phony deals, worked in KPMG's Risk and Advisory Services practice, which advised

KPMG clients regarding accounting and auditing matters . Further, in connection with at least

some of the transactions, Rodda sought the approval and consent of others at KPMG to enter into

the "parking" transactions .

500 . When Peregrine entered into the September 2000 KPMG/Morgan Stanley

transaction for $11,500,000, KPMG already owed Peregrine $12,221,000. When the

$11,500,000 was due in December 2000 (resulting in a total amount owed to Peregrine of

$23,721,000), Peregrine nevertheless entered into the December 2000 KPMG/Honeywell and

KPMG/Boeing transactions for an additional $5,912,000 . With only one transaction fully paid,

one transaction partially paid, and an outstanding balance due of $35,633,000, Peregrine entered

into the KPMG/JP Morgan Stanley deal in June 2001 for an additional $1,710,000 .

501 . SOP 97-2 requires the fee to be fixed or determinable before revenue may b e

Master File No . 02-CV-0870 J(RBB) 181

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recognized . It also requires that collectibility be probable at the time revenue is recognized .

KPMG's huge accounts receivable balance was evidence that future sales would not be collected .

As an accounting firm, KPMG was fully aware that Peregrine was using the phony "sales" to

KPMG to recognize revenue before all requirements of SOP 97-2 were satisfied . Nonetheless,

KPMG chose to conceal the truth and play a significant role in Peregrine's ability to misrepresent

its financial condition to investors so it could obtain lucrative service contracts through

I Peregrine .

502 . Based on the foregoing allegations, the following statements issued during the

Class Period were materially false and misleading .

THE FALSE STATEMENTS

1 2000

503. On July 21, 1999, Peregrine issued a press release stating that Peregrine had

achieved "record" quarterly revenues of $51 .6 million for the first quarter of fiscal year 2000

which ended on June 30, 1999, a 137% increase in revenues over revenues reported in the

first fiscal quarter of the prior year . Peregrine stated that "[o]verall results were driven by a 131

percent increase in license revenue over the comparable quarter in the prior year ." Defendant

Gardner was quoted in the release as saying : "We are extremely pleased with the outstanding

growth in both our software license sales and our professional services activity in the first fiscal

quarter . . . "

504 . The individually named defendants (other than defendants Rodda, Savoy, and

Dammeyer) read and approved the issuance of Peregrine's July 21, 1999 false press release . As

part of its quarterly review work, Arthur Andersen read and approved of the foregoing Peregrine

press release . These defendants knew, or were deliberately reckless in not knowing, that the

financial information contained in the foregoing statement was materially false and misleadin g

for the reasons set forth above .

505 . On July 21, 1999, Peregrine management, led by defendant Gardner, held a

conference call with investors and securities analysts . The purpose of the conference call was to

give Pereg rine management the opportunity to discuss with investors the Company 's first quarte r


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results . During the conference call, Peregrine management reported on Peregrine's previousl y

released financial results for the quarter . In addition, Peregrine management stated that it sa w

strength in its product lines, distribution channels and geographic regions, that international

revenues had increased 195% or 47% of total reported revenue and that DSO finished the quarte r

at 76 days within Company expectations .

506. On July 22, 1999, the brokerage firm CIBC World Markets ("CIBC") issued a

report based on the conference call with Peregrine management . In its report, CIBC repeated

Peregrine's previously released financial results and noted that Peregrine management had

indicated that : "Peregrine saw strength across its product lines, distribution channels and

geographies ." The report also stated that "International revenues soared an incredible 195% to

make up 47% of the mix as Peregrine focused its attention on the world market" and that DSO

finished the quarter at 76 days . Relying on management's representations and Peregrine's

publicly released financial results, CIBC raised its earnings estimates and rated Peregrine's stock

a "strong buy."

507. On July 22, 1999, First Union Capital Markets ("First Union") also issued a repo rt

on Peregrine based on the prior day's conference call with Peregrine management. In its report,

First Union repeated Peregrine's previously released financial results and raised its earnings

estimates in reliance on Peregrine's publicly released financial results and management' s

representations . As a result , First Union rated Pereg rine a "buy" in its repo rt dated July 22, 1999.

508. In response to the information disseminated by Peregrine and the contents of the

analyst reports based on information provided by Peregrine management, Peregrine's stock

closed at $15 .34 per share on July 22, 1999 .

509. The individually named defendants (other than defendants Rodda, Savoy, and

Dammeyer) either knew or were deliberately reckless in not knowing that the financial

information provided to investors and securities analysts in the foregoing conference call was

materially misleading for the reasons set forth above . These defendants knew that securitie s

analysts would rely on their materially false and misleading statements in writing their research

reports which would be disseminated to the investing public .


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510. On August 13, 1999, the Company filed its Form I0-Q for the first quarter of

fiscal year 2000 with the SEC . The Form 10-Q reported the false financial statements that were

included in the July 21, 1999 press release . Defendant Gless signed the Form 10-Q in his

capacity as Vice President of Finance and Chief Accounting Officer .

511 . The 10-Q also contained the following statement on revenue recognition :

Revenues from direct and indirect license agreements arerecognized currently, provided that all of the following conditionsare met : a noncancelable license agreement has been signed ; theproduct has been delivered; there are no material uncertaintiesregarding customer acceptance ; collection of the resultingreceivable is deemed probable; risk of concession is deemedremote; and no other significant vendor obligations exist .

512 . The foregoing statements were materially false and misleading because

Peregrine's reported revenue was materially overstated, there was no disclosure of a material

change in its accounting policy as applied to the first quarter of fiscal year 2000, its accounts

receivable were understated, its cash balances were overstated, its liabilities were understated and

its DSO were understated for the reasons set forth above .

513 . The individually named defendants (other than defendants Rodda and Savoy) and

Arthur Andersen and AWSC read and approved the filing of the foregoing Form 10-Q with the

SEC. Each of these defendants either knew, or were deliberately reckless in not knowing, that

the financial information contained in the Form I0-Q was materially false and misleading for the

reasons set forth above .

202000

514. On October 20, 1999 , Peregrine issued a press release announcing that the

Company had achieved "record" quarterly results for the second quarter of fiscal year 2000 ended

September 30, 1999. Peregrine stated that total revenues "increased 95 percent to a record $57 .8

million" compared to revenue reported in the comparable prior year period . Peregrine credited a

121 % increase in software license revenues over the prior year comparable period . Defendant

Gardner was quoted as saying :

We are delighted with our continued rapid growth and with the on-going development of customer demand for our end-to-endInfrastructure Management solutions . . . . This quarter marked a


i •1 significant maturation of our alliances on a global basis, leading to

both increased software license sales via alliances and a shift i n2 some service revenue growth to some of our partners . . . .

3 515. The individually named defendants (other than defendants Rodda, Savoy, and

4 Dammeyer) read and approved the issuance of Peregrine's October 20, 1999 false press release .

5 As part of its quarterly review work, Arthur Andersen and AWSC read and approved of th e

6 foregoing Peregrine press release . These defendants knew, or were deliberately reckless in not

7 knowing, that the financial information contained in the foregoing press release was materially

8 false and misleading for the reasons set forth above .

9 516. On October 20, 1999, Peregrine management, led by defendant Gardner, held a

10 conference call with investors and securities analysts . The purpose of the conference call was to

11 give Peregrine management the opportunity to discuss with investors the Company's secon d

12 quarter results . During the conference call, Peregrine management reported on Peregrine' s

13 previously released financial results for the quarter . In addition, Peregrine management state d

14 that they continued to see strength for all of Peregrine's products in all geographical regions, that

15 the Company was working on a number of very large orders which would have a materia l

16 positive impact on future revenues and earnings and that the balance sheet had improved this

17 quarter with $24 .9 million in cash on hand .

18 517. On October 21, 1999, CIBC issued and disseminated a report based on the

19 conference call with Peregrine management . In its report, CIBC repeated Peregrine's previously

20 released financial results and noted that Peregrine management had indicated that the Company

21 "executed flawlessly in the quarter with strength across all product lines and geographies . "

22 Management was also reported as representing that there were a number of "mega deals" tha t

23 were likely to close and which would have a "material positive impact on the top-and-bottom line

24 in the quarter in which they close" and that there was improvement in the balance sheet . Relying

25 on management's representations and Peregrine's publicly released financial results, CIB C

26 continued its "strong buy" rating .

27 518. On October 21, 1999, First Union issued a report on Peregrine based the prio r

28 day's conference call with Peregrine management . In its report, First Union repeated Peregrine's


•previously released financial results and noted management's statements concerning the "mega

deals," and that they were being described as between 20% to 25% of a quarter's revenue. As a

result, First Union reiterated its assessment on Peregrine as a "strong buy" in its report date d

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I October 21, 1999 .

519. In response to the information disseminated by Peregrine and the contents of the


closed at $20.875 per share on October 22, 1999 .




materially misleading for the reasons set forth above . These defendants knew that securitie s



521 . On November 14, 1999, the Company filed its Form 10-Q for the second quarter

of 2000 with the SEC. It incorporated the financial statements that were included in th e

October 20, 1999 press release . Defendant Gless signed the Form 10-Q in his capacity as Vice

President of Finance and Chief Financial Officer .

522. The 10-Q also included the following statement on revenue recognition :

Revenues from direct and indirect license agreements arerecognized currently, provided that all of the following conditionsare met : a noncancelable license agreement has been signed ; theproduct has been delivered; there are no material uncertaintiesregarding customer acceptance ; collection of the resultingreceivable is deemed probable ; risk of concession is deemedremote; and no other significant vendor obligations exist .

523 . The foregoing statements were materially false and misleading becaus e


change in its accounting policy as applied to the second quarter of fiscal year 2000, its accounts




FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS -M as ter File No . 02-CV-0870 J (RBB) 186

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Dammeyer) and Arthur Andersen and AWSC read and approved the filing of the foregoing Form

10-Q with the SEC. Each of these defendants either knew, or were deliberately reckless in no t

knowing, that the financial information contained in the foregoing Form 10-Q was materially

false and misleading for the reasons set forth above .

30 2000

525. On January 20, 2000, Peregrine issued a press release announcing "record"

quarterly results for the third quarter of fiscal year 2000 ended December 31, 1999 . Peregrine

stated that the Company had achieved total revenues of $67 . 5 million, a 67% increase compared

with revenues reported in comparable prior year period . Defendant Gardner was quoted a s

saying :

"[W]e had a number of large transactions and a remarkably strongsurge of both interest and initial sales from our new Get .It! andGet .Resources! employee self service and c-procurement products .In addition, we exceeded our expectations for the launch of ournew midrange solution, InfraCenter for Workgroups . "


Dammeyer) read and approved the issuance of Peregrine's January 20, 2000 press release . As

part of its quarterly review work, Arthur Andersen and AWSC read and approved of the

foregoing Peregrine press release . These defendants knew, or were deliberately reckless in not

knowing, that the financial information contained in the foregoing press release was materially


527. On January 20, 2000, Peregrine management, led by defendant Gardner, held a

conference call with investors and securities analysts . The purpose of the conference call was t o

give Peregrine management the opportunity to discuss with investors the Company's quarterly

results . During the conference call, Peregrine management reported on Peregrine's previously

released financial results for the quarter . In addition, Peregrine management stated that customer

acceptance Peregrine's new Get .It! e-products far surpassed expectations and that the balance

sheet remained strong with cash increasing and DSO remaining steady at an acceptable level o f

79 days .

528. On January 21, 2000, CIBC issued a report based on the conference call wit h


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•Peregrine management . In its report, CIBC repeated Peregrine's previously released financial

results and noted that "[t]he enthusiastic reception of Peregrine's New Get .It! e-procurement

products far exceeded management's expectations, and generated $5 million in sales in just three

weeks of release ." The report also indicated "that the deal pipeline was more active than usual ."

CIBC also noted that :

The balance sheet remained strong this quarter, increasing$300,000 to $25 .2 million with cash remaining at $0 .38 per share .Accounts receivable rose $8 .5 million $59 .6 million, with DSOremaining steady at 79, also within what management regards as anacceptable range . Deferred revenues grew $9 .8 million to $31 .3million, and were made up solely of customer support .

529 . Relying on management's representations and Peregrine's publicly release d

financial results, CIBC continued to rate Peregrine as a "strong buy ." On January 21, 2000, First

Union also issued a report on Peregrine based on the prior day's conference call with Peregrine

management . In its report, First Union repeated Peregrine's previously released financial results

and reiterated its rating on Peregrine as a "strong buy ."

530. In response to the information disseminated by Peregrine management and th e

I contents of the analyst reports based on information provided by Peregrine management ,

Peregrine's stock rose to $44 .53 per share at the close of trading on January 24, 2000 .

531, The individually named defendants (other than defendants Rodda, Savoy, and



materially false and misleading for the reasons set forth above . These defendants knew that

securities analysts would rely on their materially false and misleading statements in writing their

research reports which would be disseminated to the investing public .

532 . On February 11, 2000 , the Company filed its Form 10-Q for the third quarter o f

I fiscal year 2000 with the SEC . It incorporated the financial statements that were included in th e

January 20, 2000 press release . Defendant Gless signed the Form 10-Q in his capacity as Vice

President of Finance and Chief Accounting Officer .

533. The Form 10-Q also included the following statement on revenue recognition :


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Revenues from direct and indirect license agreements arerecognized currently, provided that all of the following conditionsare met : a noncancelable license agreement has been signed ; theproduct has been delivered ; there are no material uncertaintiesregarding customer acceptance ; collection of the resultingreceivable is deemed probable ; risk of concession is deemedremote; and no other significant vendor obligations exist .

534. The foregoing statements were materially false and misleading becaus e


change in its accounting policy as applied to the third quarter of fiscal year 2000, its accounts



535 . The individually named defend an ts (other than defendan ts Rodda, Savoy, and

Dammeyer) and Arthur Andersen and AWSC read and approved the filing of the foregoing Form

10-Q with the SEC. Each of these defendants either knew, or were deliberately reckless in not

knowing, that the financial information contained in the foregoing 10-Q was materially false and

misleading for the reasons set forth above .

.402000

536. On April 26, 2000, Peregrine issued a press release regarding Peregrine 's fourth

quarter of fiscal year 2000 and fiscal year 2000 financial results . It stated that the Company had

"record" quarterly revenues of $76 .3 million (a 66% increase compared with revenues in the

comparable prior year period) and "record" annual revenue of $253 .3 million (a 83% increase

over prior year revenues) . Defendant Gardner was quoted as saying that "[t]he market remains

strong" and the "our products continue to lead in their respective areas . "

537. The individually named defend ants (other th an defendants Rodda , Savoy, and

Dammeyer) read and approved the issuance of Peregrine's April 26, 2000 press release. As part

of its audit procedures, Arthur Andersen and AWSC read and approved of the foregoing

Peregrine press release . These defendants knew, or were deliberately reckless in not knowing,

that the financial information contained in the foregoing statements was materially false and


538. On April 26, 2000, Peregrine management, led by defendant Gardner, held a


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give Peregrine management the opportunity to discuss with investors the Company's fourth

quarter and fiscal year 2000 results . During the conference call, Peregrine management reported

on Peregrine's previously released financial results for the quarter . In addition, Peregrine

management stated that the Company had closed a very large order with EDS, that the Company

had excellent visibility into the next quarter and that the Company expected a $40-$50 million

dollar revenue contribution from Get .It! for the year.

539. On April 27, 2000, CIBC issued a report based on the conference call wit h

Peregrine management . In its report, CIBC noted that Peregrine management had indicated that :

Peregrine's 4Q00 results indicate that its core business remainsstrong . During the quarter, the company closed a particularly largedeal with EDS ; the size of the deal was not disclosed, butmanagement implied that the company has "great visibility into thenext quarter ." We regard this as an extremely positive sign thatthere is no slowdown in Peregrine's business, which was a concernlast quarter.

The report also stated that "management comments referring to a $40-50 million revenue

contribution from Get .It! for the year [which] would imply a significant ramp-up must be in

store," as well as management's indication "that it was seeing a strong rebound in mid-size deal

flow ($100,000 - $300,000) . . ." Relying on management's representations and Peregrine's

publicly released financial results, but expressing concern over possible logistical and integration

difficulties associated with the acquisition of Harbinger, CIBC rated Peregrine's stock as "Hold . "

540. In response to the information disseminated by Peregrine and the contents of th e


closed at $24 .06 per share on April 28, 2000 .

541 . The individually named defendants (other than defendants Rodda, Savoy, and



materially misleading for the reasons set forth above . These defendants knew that securities




•

1 542. On May 10, 2000, the Company filed its Form 10-K for the fiscal year 2000 with

2 the SEC. It incorporated the financial statements that were included in the April 26, 2000 press

3 release .

4 543. The Form 10-K also included the following statement on revenue recognition :

5 Revenues from direct and indirect license agreements arerecognized currently, provided that all of the following conditions

6 are met: a noncancelable license agreement has been signed, theproduct has been delivered, there are no material uncertaintie s

7 regarding customer acceptance, collection of the resultingreceivable is deemed probable ; risk of concession is deemed

8 remote, and we have no other significant obligations associatedwith the transaction.

9

10 544. Defendant Gless signed the Form 10-K in his capacity as Vice President of

11 Finance and Chief Accounting Officer and defendant Gardner signed in his capacity as President,

12 Chief Executive Officer, and a director of the Company . In addition, defendants Moores, Noell,

13 van den Berg, Watrous and Hosley signed the Form 10-K for fiscal 2000 as directors of th e

14 Company. The Form 10-K contained an unqualified audit report by defendant Arthur Andersen

15 on Peregrine's year end financial statements for fiscal 2000 .

16 545. The foregoing statements were materially false and misleading becaus e

17 Peregrine's reported revenue was materially overstated, there was no disclosure of a material

18 change in its accounting policy as applied to the fourth quarter of fiscal year 2000, its account s

19 receivable were understated, its cash balances were overstated, its liabilities were understated and

20 its DSO were understated for the reasons set forth above .

21 546. The individually named defendants (other than defendants Rodda, Savoy, and

22 Dammeyer) and Arthur Andersen and AWSC read and/or signed Peregrine's Form 10-K fo r

23 fiscal 2000 . Each of these defendants either knew, or were deliberately reckless in not knowing,

24 that the financial information contained in the foregoing 10-K was materially false an d

25 misleading for the reasons set forth above .

26 547. On May 22, 2000, Peregrine filed Amendment No . 1 to its Form S-4 Registration

27 Statement with the SEC. The Amendment contained a Joint Proxy Statement and Prospectus, the

28 purpose of which was to solicit proxies from Harbinger shareholders to approve of the propose d


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merger of Peregrine and Harbinger . The Joint Proxy contained a discussion of Peregrine's

business, and incorporated Peregrine's audited financial statements for the fiscal year ending

March 31, 2000 . The Joint Proxy also stated that Peregrine's "selected consolidated financial

data derives from the consolidated financial statements of Peregrine Systems, Inc . and its

subsidiaries," and that "[t]hese financial statements have been audited by Arthur Andersen LLP,

independent public accountants ." The Amendment was signed by defendants Gardner, Gless,

Moores, Cole, Hosley, Noell, van den Berg and Watrous . Arthur Andersen and AWSC

consented to the use of the false audit report for the fiscal year ending March 31, 2000 .

548. Each of the individually named defendants who signed Amendment No . I

identified in the prior paragraph, and Arthur Andersen and AWSC, either knew or were

deliberately reckless in not knowing, that the financial information contained in the Joint Proxy

was materially false and misleading for the reasons set forth above .

1 2001

549. On July 19, 2000, Peregrine issued a press release announcing "record" quarterl y

financial results for the first quarter of fiscal year 2001 ended June 30, 2000 which, according to

Peregrine, were "driven by a 95 percent increase in software license revenues ." Peregrine

announced that total revenues had increased by 83% "to a record $94 .3 million" compared to

revenues reported in the comparable prior year period . Defendant Gardner was also quoted in the

release as saying :

Growth in the Get .lt! Business was very strong this quarter, andcontinued to reflect customer recognition that Get .Resources!TMoffers a unique lifecycle approach to the e-procurement processassociated with assets used inside our customers' businesses . . .We were also very pleased to see strong performance from ourInfrastructure Management products, including several largetransactions and some key competitive wins[ . ]

550. The individually named defendants (other than defendants Rodda , Hosley, and

Dammeyer) read and approved the issuance of Peregrine's July 19, 2000 press release . As part of

its quarterly review work, the Arthur Andersen and AWSC read and approved of the foregoing

Peregrine press release . Each of these defendants either knew or were deliberately reckless in not

knowing that the financial information contained in the foregoing statement was materially fals e


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and misleading for the reasons set forth above .

551 . On July 19, 2000, Peregrine management, led by defendant Gardner, held a


give Peregrine management the opportunity to discuss with investors the Company's first quarter

results of operations. During the conference call, Peregrine management reported on Peregrine's

previously released financial results for the quarter . In addition, Peregrine management stated

that the Company's cash position more than doubled to $70 million and that the increase in

accounts receivable (to $128 million) and DSO (to 122 days) was attributable to the Harbinger

acquisition .

552 . On July 20, 2000, CIBC issued a report based on the conference call wit h

Peregrine management. In its report, CIBC repeated Peregrine's previously released financial

results and noted that Peregrine's earnings per share of $0 .10 had beaten CIBC's estimate o f

$0.09 and that Peregrine management had indicated that .

On the balance sheet, cash more than doubled to $70 million from$34 million, which equates to $0.57 per share, up from $0 .29 .Accounts receivable rose significantly to $128 million from $70million, with the increase attributed to Harbinger . As a result, dayssales outstanding rose to 122 from 82 . Management indicated thatit intends to address the receivables issue ; consequently, DSOshould trend down sharply in the next quarter .

Relying on management's representations and Peregrine's publicly released financial results ,

CIBC gave Peregrine's stock a "buy" rating .

553 . In response to the information disseminated by Peregrine management and th e

contents of the analyst reports based on information provided by Peregrine management ,

Peregrine's stock closed at $29 .25 per share on July 21, 2000 .

554 . The individually named defendants (other than defendants Rodda, Hosley, and






FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS -Master File No. 02-CV-0870 3(RBB) 193

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555 . On August 14, 2000, the Company filed its Form 10-Q for the first quarter o f

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fiscal year 2001 with the SEC . It incorporated the financial statements that were included in the

July 19, 2000 press release . Defendant Gless signed the Form I0-Q in his capacity as Vic e

President of Finance and Chief Accounting Officer .

556 . The Form 10-Q also included the following statement on revenue recognition :

Revenues from license agreements are recognized currently,provided that all of the following conditions are met : anoncancelable license agreement has been signed, the product hasbeen delivered, there are no material uncertainties regardingcustomer acceptance ; collection of the resulting receivable isdeemed probable, risk of concession is deemed remote, and noother significant vendor obligations exist .

557 . The foregoing statements were materially false and misleading because






Dammeyer) and the Arthur Andersen and AWSC, read and approved the filing of the foregoing

Form 10-Q with the SEC. Each of these defendants either knew , or were deliberately reckless in

not knowing , that the financial information contained in the foregoing statement was mate rially


20 2001

559. On October 3, 2000, Peregrine issued a press release stating that Peregrine's

financial results for the second quarter of fiscal year 2001 ended September 30, 2000 would

"meet or exceed consensus earnings per share estimates of $ .11 per share and total revenue of

$142 million ." Peregrine issued another press release on October 24, 2000 that announced

"record" quarterly results for the second quarter of fiscal year 2001, with revenues of $ 142 .7

million. The press release noted that "[t]he record second quarter results were driven by a 136%

increase in software license revenues over the comparable prior year period ." The release also

noted that "total revenues for the second quarter increased 147%" . . . compared with revenues in


0 0 .I the comparable prior year period . In addition, defendant Gardner was quoted in the release as

2 saying:

3 We had a remarkable quarter of growth in our infrastructuremanagement solutions and Get .It! employee self service solutions .

4 This quarter saw a large number of new products, technology, andalliances come to fruition, further establishing the basis for

5 continued growth into the future .

6 560 . The individually named defendants (other than defendants Rodda, Hosley, an d

7 Dammeyer) read and approved the issuance of Peregrine's October 3 and October 24, 2000 press

8 releases (except as to defendant van den Berg with regard to the October 24, 2000 press release) .

9 As part of its quarterly review work, Arthur Andersen and AWSC read and approved of th e

10 October 24, 2000 Peregrine press release . These defendants knew, or were deliberately reckless

11 in not knowing, that the financial information contained in the foregoing statements wa s

12 materially false and misleading for the reasons set forth above .

13 561 . On October 24, 2000, Peregrine management, led by defendant Gardner, held a



16 quarter fiscal year 2001 results . During the conference call, Peregrine management reported on

17 Peregrine's previously released financial results for the quarter . In addition, Peregrine

19 management stated that the Company expected to be cash flow positive during the second h alf of

19 the year and that accounts receivable rose to $165 million while DSO fell from 122 days to 106

20 days .

21 562. On October 25, 2000, CIBC issued a report based on the conference call with

22 Peregrine management . Relying on management's representations and Peregrine's publicly

23 released financial results, CIBC rated Peregrine's stock a "buy ."

24 563 . In response to the information disseminated by Peregrine management and the

25 contents of the analyst reports based on information provided by Peregrine management ,

26 Peregrine's stock closed at $23 .00 per share on October 26, 2000 .

27 564. The individually named defendants (other than defendants Rodda, Hosley, and

28 Dammeyer) either knew or were deliberately reckless in not knowing that the financia l


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565 . On November 14, 2000, the Company filed its Form 10-Q for the second quarte r

I of fiscal year 2001 with the SEC . It incorporated the financial statements that were included i n

the October 24, 2000 press release . Defendant Gless signed the Form 10-Q in his capacity a s

Vice President of Finance and Chief Accounting Officer .

566. The Form 10-Q also included the following statement on revenue recognition :


567. The foregoing statements were materially false and misleading because


change in its accounting policy as applied to the second quarter of fiscal year 2001, its accounts



568 . The individually named defendants (other than defendants Rodda, Hosley, van

den Berg, and Dammeyer) and Arthur Andersen and AWSC, read and approved the filing of

Peregrine's Form 10-Q with the SEC . Each of these defendants either knew, or were deliberately

reckless in not knowing, that the financial information contained in the foregoing 10-Q was

materially false and misleading for the reasons set forth above .

30 2001

569. On January 24, 2001, Pereg rine issued a press release that announced "record"

quarterly financial results for the third quarter of fiscal year 2001 ended December 31, 2000, wit h

total revenues of $156 .6 million . The release stated that "[t]otal revenues . . . climbed by 132%"

~ compared with revenues in the comparable prior period . Peregrine stated that these results were

FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS -M as ter File No . 02-CV-0870 J (RBB) 196

1 "driven by a 114% increase in software license revenues over the comparable prior year period .

2 . ." Defendant Gardner was quoted as saying that "[djespite uncertainty and turbulence in th e

3 economy, particularly in the United States, we exceeded our objectives for the December

4 quarter . "

5 570. The individually named defendants (other than defendants Rodda, Hosley, van

6 den Berg, and Dammeyer) read and approved the contents of Peregrine's January 24, 2001 press

7 release . As part of their quarterly review work, Arthur Andersen and AWSC read and approved

8 of the foregoing Peregrine press release . These defendants knew, or were deliberately reckless in

9 not knowing, that the financial information contained in the foregoing statement was materially


11 571. On January 24, 2001, Peregrine management, led by defendant Gardner, held a


13 give Peregrine management the opportunity to discuss with investors the Company's thir d

14 quarter fiscal year 2001 results. During the conference call, Peregrine management reported on

15 Peregrine's previously released financial results for the quarter. In addition, Peregrine

16 management stated that the balance sheet improved as DSOs fell to 97 days from 106 days last

17 quarter and that the Company expected to make additional progress on this front by the end of

18 the fourth quarter and that international revenues had increased over 37% .

19 572. On January 25, 2001, CIBC issued a report based on the conference call with

20 Peregrine management . In its report, CIBC repeated Peregrine's previously released financial

21 results and noted that Peregrine management had indicated that :

22 During the quarter the balance sheet strengthened . Accountsreceivables were flat at $165 million while DSOs fell to 97 from

23 106 last quarter as the company stepped up its collection activities .Management expects to make additional progress on this front and

24 expects DSOs to fall to the low 90s by the end of the fourth-quarter . Deferred revenue increased 22% sequentiall y

25 ($15 million) to $83 million . Management attributed the increaseto some recent wins in its EMG operation .

26

27Internationally, Peregrine knocked the cover off the ball . License

28 revenue increased over 37% sequentially to $40 .8 million. Driving


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this growth were several large deals in the quarter in theinfrastructure and e-markets groups . Management believes thatwhat the company witnessed in the quarter is quite sustainable andis shifting resources to Europe and Asia .

Relying on management's representations and Peregrine's publicly released financial results ,

CIBC rated Peregrine's stock a "buy . "

573 . In response to the information disseminated by Peregrine management and th e

contents of the analyst reports based on information provided by Peregrine management,

Peregrine's stock rose to $29 . 81 per share at the closing of trading on Janua ry 29, 2001 .

574. The individually named defendants (other than defendants Rodda, Hosley, van

den Berg, and Dammeyer) either knew or were deliberately reckless in not knowing that the

financial information provided to investors and securities analysts in the foregoing conference

call was materially misleading for the reasons set forth above . These defendants knew that





576. The foregoing statements were materially false and misleading becaus e






den Berg, and Dammeyer) and Arthur Andersen and AWSC read and approved the filing of th e

foregoing Form 10-Q with the SEC. Each of these defend ants either knew , or were deliberatel y

reckless in not knowing , that the financial information contained in the foregoing 10-Q was

FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS -Master File No . 02 - CV-0870 J(RBB) 198

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I materially false and misleading for the reasons set forth above .

1 40 2001

578. On April 4, 2001, Pereg rine issued a press release stating that its revenues and

earnings per share for the fourth quarter of fiscal year 2001 ended March 31, 2001, would be

consistent with guidance previously provided to investors by the Company . Specifically, it stated

that "€fjor the fiscal fourth quarter ended March 31, 2001, the Company expects to report license

revenues of approximately $105 million, total revenues of approximately $170 million and

earnings per share of $0 .16 . . ." Defendant Gardner is quoted as saying that "[d]espite

challenging economic conditions worldwide, we were able to meet our objectives for the quarter

and deliver strong profitable results, the sixteenth consecutive quarter we have done so ." After

this press release was issued, Peregrine's stock gained $5 .25 per share, closing at $19 .06 per

share on April 5, 2001 .


den Berg, and Dammeyer) read and approved the issuance of Peregrine's April 4, 2001 press

release. These defendants knew, or were deliberately reckless in not knowing, that the financial

information contained in the foregoing statement was materially false and misleading for the


580. On April 26, 2001, Peregrine issued a press release confirming the preliminary

results it had announced on April 4 . It stated that revenue for the fourth quarter of fiscal year

2001 was "a record $171 .0 million, an increase of 124 percent from the same quarter a year ago ."

For fiscal year 2001, the press release states that revenue totaled $564 .7 million an increase of

123% from the prior year . In the April 26 release, defendant Gardner was also quoted as saying :

Our results this quarter in the face of challenging economicconditions demonstrate the value of our solutions . . . As we enterfiscal 2002, we remain confident in our market position and theopportunity we address . . .

We were particularly pleased with the strength of our sales throughmanaged services providers and our professional services partners .As we continue to meet major milestones in our corporatedevelopment and build our solutions portfolio, these relationshipsbecome increasingly important to our ability to extend our reach tonew customers and markets .


S

1 581. Peregrine's stock closed at $25 .60 per share on April 27, 2001 .

2 582. The individually named defendants (other than defendants Rodda, Hosley, van

3 den Berg, and Dammeyer) read and approved the issuance of Peregrine's April 26, 2001 press

4 release. As part of its audit procedures, Arthur Andersen and AWSC read and approved of the

5 foregoing Peregrine press release . These defendants knew, or were deliberately reckless in not

6 knowing, that the financial information contained in the foregoing statements was materiall y


8 583. On April 26, 2001, Peregrine management, led by defendant Gardner, held a


10 give Peregrine management the opportunity to discuss with investors the Company's fourt h

11 quarter fiscal year 2001 results . During the conference call, Peregrine management reported on

12 Peregrine's previously released financial results for the quarter . In addition, Peregrine

13 management stated that the Company met its earnings per share guidance and that key balance

14 sheet metrics improved or remained steady (such as a cash increase of $38 million) with DSOs

15 remaining essentially flat at 95 days .

16 584. On April 27, 2001, CIBC issued a report based on the conference call wit h

17 Peregrine management . In its report, CIBC noted that Peregrine management had indicated that :

18 Not only was the company able to meet its EPS expectation, butkey balance sheet metrics also improved or held steady . Even

19 though accounts receivables showed a moderate $15 millionincrease in the quarter, DSOs were essentially flat at 95 . Deferred

20 revenue, which consists almost exclusively of service relatedactivities (maintenance, network usage, etc .) climbed $12 million

21 $14% sequentially) to $95 million . Cash increased in the quarterby about $38 million to $287 million . Management attributed the

22 growth to financing activity in the quarter, option exercises,acquisitions (Extricity brought some cash) as well as a moderat e

23 amount of cash flow from operations .

24 Relying on management's representations and Peregrine's publicly released financial results,

25 CIBC rated Peregrine's stock a "strong buy . "

26 585. In response to the information disseminated by Peregrine and the contents of the

27 analyst reports based on information provided by Peregrine management, Peregrine's stoc k

28 closed at $25.78 per share on April 30, 2001 .


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den Berg, and Dammeyer) either knew or were deliberately reckless in not knowing that the

financial information provided to investors and securities analysts in the foregoing conference

call was materially misleading for the reasons set forth above . These defendants knew that



FISCAL YEAR 2001 ANNUAL REPORT

587. On June 29, 2001, the Company filed its Form 10-K for fiscal year 2001 with th e

SEC. It incorporated the financial statements that appeared in the April 26, 2001 press release .

Defendant Gless signed the Form 10-Kin his capacity as Vice President of Finance and Chief

Accounting Officer, defendant Gardner signed it in his capacity as Chief Executive Officer and

Chairman of the Board of Directors and defendants Moores, Noell, Watrous and Savoy signed it

as directors of the Company .

588. Peregrine's financial statements contained in the Form 10-K were audited by th e

Arthur Andersen and AWSC and contained Arthur Andersen's unqualified audit report o n

Peregrine's fiscal 2001 financial statements .

589 . The Form 10-K also included the following statement on revenue recognition :




change in its accounting policy as applied to the fourth quarter of fiscal year 2001, its accounts



591 . The individually named defendants who signed the Form 10-K read and approve d

its contents and approved its filing with the SEC . Each of these defendants and Arthur Anderse n


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and AWSC either knew , or were deliberately reckless in not knowing , that the financial

information contained in the Form 10-K was materially false and misleading for the reasons se t

forth above .

REMEDY PROXY STATEMEN T

592. On July 23, 2001, Peregrine filed Amendment No . 1 to its Form S-4 Registration

Statement with the SEC . The Amendment contained a Joint Proxy Statement and Prospectus, th e

purpose of which was to solicit proxies from Remedy Corporation shareholders to approve of th e

proposed merger of Peregrine and Remedy . The Joint Proxy contained a discussion of

Peregrine's business, and incorporated by reference Peregrine's financial statements (and audit

reports) for the three years ended March 31, 2001 . The Joint Proxy also stated that :

Peregrine's selected consolidated financial data is presented belowas of March 31, 2001, 2000, 1999, 1998 and 1997 and for each ofthe years in the five-year period ended March 31, 2001, and derivesfrom the consolidated financial statements of Peregrine Systems,Inc. and its subsidiaries, which financial statements have beenaudited by Arthur Andersen LLP, independent public accountants .

593 . The Amendment was signed by each of the individual defendants who were

Peregrine directors at that time . Arthur Andersen and AWSC consented to the use of the false

audit reports for the fiscal years ending March 31, 2000 and 2001 . Each of these defendants and

Arthur Andersen and AWSC either knew, or were deliberately reckless in disregarding, that the

financial information for the fiscal years ending 2000 and 2001 contained in or incorporated into

the Joint Proxy was materially false and misleading for the reasons set forth above .

.102002

594. On July 24, 2001, Peregrine issued a press release announcing its financial results

I for the first quarter of fiscal year 2002 ended June 30, 2001 . Peregrine stated that revenues for

the quarter were a "record $172 .0 million, an increase of 82% from the same quarter a year ago ."

In the release, defendant Gardner was quoted as saying : "We were pleased to post significant top-

line [revenue] growth in this challenging economic environment[.] "

595. The individually named defendants (other than defendants Rodda, Hosley, an d

I van den Berg) read and approved the issuance of Peregrine's July 24, 2001 press release . As part


of its quarterly review work, Arthur Andersen and AWSC read and approved of the foregoing

Peregrine press release . These defendants knew, or were deliberately reckless in not knowing,

that the financial information contained in the foregoing statement was materially false and


596. On July 24, 2001, Peregrine management, led by defendant Gardner, held a

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give Peregrine management the opportunity to discuss with investors the Company's first quarter

fiscal year 2002 results of operations . During the conference call, Peregrine managemen t

reported on Peregrine's previously released financial results for the quarter . In addition,

Peregrine management stated that it was comfortable with analysts projections of 30%-40%

revenue growth and 25%-35% earnings per share growth based on the strength of its business

and that DSOs were 99 days and expected to decrease in the next quarter to 80-90 days .

597. On July 24, 2001, Bear Stearns & Co ., Inc . ("Bear Stearns") issued a report based

on the conference call with Peregrine management . In its report, Bear Steams repeated

Peregrine's previously released financial results and noted that Peregrine management had

indicated that it saw "positive growth in Asia Pacific, Africa, and Eastern Europe ." The report

also stated that :

In sharp contrast to the norm, management reiterated revenue andEPS guidance of 30-40% top line growth and 25-35% EPS growthfor the full FY02, citing strength in all areas of business (productmix, geographic mix, and a return to strength in key vertica lmarkets) .

Relying on management's representations in the conference call and Peregrine's publicl y

released financial results, Bear Steams gave Peregrine a "buy" rating .

598 . On July 25, 2001, CIBC also issued a report based on the prior day's conference

call with Peregrine management . In its report, CIBC repeated Peregrine's previously released

financial statements and noted that Peregrine management had indicated that : "Peregrine's

revenues of $172 million came in ahead of expectations, which the Street had pegged at $165

million ." The report also stated that "Management noted that the strong verticals during the

quarter were financial, telecom, high tech, and government and that the mix was a return to a


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I more typical mix, after the financial vertical was very weak in the March quarter . Excludin g

I acquisitions, the company indicated that year over year revenue growth was about 50% . "

Accordingly, CIBC rated Peregrine a "strong buy " in its repo rt dated July 25, 2001 .

599. On July 25, 2001, U .S. Bancorp Piper Jaffray (" Piper Jaffray") issued a report

based on the prior day's conference call with Peregrine management . In its report, Piper Jaffray

noted that Peregrine management had exceeded the revenue expectations and that Peregrine

management indicated that "[t]he Company expects to approach DSOs of 80-90 days in the

coming quarter ." Relying on management's representations and Peregrine's publicly released

financial results, Piper Jaffray rated Peregrine's stock a "strong buy . "

600 . In response to the information disseminated by Peregrine and the contents of th e

I analyst reports based on information provided by Peregrine management, Peregrine stock rose to

$27 per share at the close of trading on July 26, 2001 .

601 . The individually named defendants (other than defendants Rodda, Hosley, an d

van den Berg) either knew or were deliberately reckless in not knowing that the financial





602. On August 14, 2001, the Company filed its Form I0-Q for the first quarter o f

fiscal year 2002 with the SEC . It incorporated the financial statements that were included with

the July 24, 2001 press release . Defendant Gless signed the Form 10-Q in his capacity as

Executive Vice President and Chief Accounting Officer .


Revenues from direct and indirect license agreements arerecognized, provided that all of the following conditions are met : anoncancelable license agreement has been signed ; the product hasbeen delivered; there are no material uncertainties regardingcustomer acceptance ; collection of the resulting receivable isdeemed probable ; risk of concession is deemed remote ; and noother significant vendor obligations exist .


FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS -Master File No. 02-CV-0870 !(RBB) 204

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605 . The individually named defendants (other than defendants Rodda, Hosley, an d

van den Berg) and Arthur Andersen and AWSC read and approved the filing of Peregrine's I O-Q

for the first quarter of fiscal year 2002 with the SEC . Each of these defendants either knew, or

were deliberately reckless in not knowing, that the financial information contained in the

foregoing I0-Q was materially false and misleading for the reasons set forth above .

.202002

606. On October 3, 2001, Peregrine issued a press release announcing the Company's

preliminary financial results for the second quarter of fiscal year 2002 ended

September 30, 2001 . It stated that "Peregrine expects to report quarterly revenue of

approximately $175 million . Based on these revenues, the company expects to report net income

of approximately $ .05 per share, excluding acquisition costs and restructuring charges ." The

press release quotes defendant Gardner as saying :

Like many companies in our industry, the tragic events ofSeptember 11 and the subsequent effect on the global economyimpacted our September quarter results . However, even duringthese challenging times, we were able to generate approximately$175 million in total revenue, demonstrating the strength of ourproduct portfolio and the value proposition we deliver to ourcustomers . . .

607. The individually named defend ants (other than defendan ts Rodda, Hosley, and

van den Berg) read and approved the issuance of Peregrine's October 3, 2001 press release .

These defendants knew, or were deliberately reckless in not knowing, that the financial

information contained in the foregoing statement was materially false and misleading for the


608. On October 24, 2001, Peregrine issued a press release confirming the preliminary

financial results it had previously announced for the second quarter of fiscal year 2002 . It stated

that total revenues were a "record" $175 million, an increase of 23% from that reported in th e



0

1 second quarter of fiscal 2001 .


3 van den Berg) read and approved the issuance of Peregrine's October 24, 2001 press release . As

4 part of its quarterly review work, Arthur Andersen and AWSC read and approved of th e

5 foregoing Peregrine press release . These defendants knew, or were deliberately reckless in no t

6 knowing, that the financial information contained in the foregoing statement was materially false

7 and misleading for the reasons set forth above .

8 610. On October 24, 2001, Peregrine management, led by defendant Gardner, held a



1 l quarter fiscal year 2002 results of operations . During the conference call, Peregrine management

12 reported on Peregrine's previously released financial results for the quarter . In addition ,

13 Peregrine management stated that guidance for the remainder of the current and following year

14 remain unchanged, that the Company expected to finish the fiscal year with $140-$150 million in

15 cash and that DSOs for Peregrine on a stand alone basis were 99 days and 113 days when

16 including recently acquired Remedy .

17 611. On October 24, 2001, CIBC issued a report based on the conference call with

18 Peregrine management. In its report, CIBC repeated Peregrine's previously released financial

19 results and noted that Peregrine management had indicated that ,

20 Guidance for the remainder of this year and next year remainunchanged. The Company expects revenue of $450 million in the

21 second half and a snap back in operating margins, which were 8%this quarter, vs . 17% last year . Management indicated tha t

22 operations appeared to be returning to a more normal pace after avirtual standstill in late September . Peregrine expects to finish the

23 fiscal year with $140 million to $150 million in cash .

24 612. On October 24, 2001, Bear Steams issued a report based on the conference call

25 with Peregrine management . In its report, Bear Steams repeated Peregrine's previously released

26 financial results and noted that Peregrine management had indicated that :"Management affirmed

27 guidance -- we are maintaining estimates . "

28 613. On October 25, 2001, Thomas Weisel Partners ("Weisel") issued a report based


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• •on the conference call with Peregrine management . In its report, Weisel repeated Peregrine' s

previously released financial results and noted that Peregrine management had indicated tha t

"management commentary was encouraging . "

614. On October 25, 2001, Piper Jaffray issued a repo rt based on the conference call

with Peregrine management . In its report, Piper Jaffray repeated Peregrine's previously released

financial results and noted that Peregrine management had stated that the Company reported

revenues in line with expectations, finished the quarter with $142 million in cash and DSOs for

Peregrine, excluding Remedy, remained essentially flat at 99 days .

615 . Relying on management's representations and Peregrine's publicly released

financial results, CIBC, Bear Stearns, Weisel and Piper Jaffray each rated Peregrine a "buy . "

616. In response to the information disseminated by Peregrine and the contents of th e


closed at $16 .46 per share on October 26, 2001 .

617. The individually named defendants (other than defendants Rodda, Hosley, an d






618. On November 21, 2001, Peregrine filed its Form 10-Q for the second quarter o f

fiscal year 2002 with the SEC . It incorporated the financial statements that appeared in the

October 24, 2001 press release . Defendant Gless signed the Form 10-Q in his capacity a s


619 . The Form 10-Q also stated the following on revenue recognition :

Revenues from direct and indirect license agreements arerecognized, provided that all of the following conditions are met : anoncancelable license agreement has been signed ; the product hasbeen delivered ; there are no material uncertainties regardingcustomer acceptance ; collection of the resulting receivable isdeemed probable ; risk of concession is deemed remote ; and noother significant vendor obligations exist .


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620. The financial statements in the Form I 0-Q for the second quarter of fiscal year

2002 were materially false and misleading when made because Peregrine's reported revenue was

materially overstated, there was no disclosure of a material change in its accounting policy as

applied to the second quarter of fiscal year 2002, its accounts receivable were understated, its

cash balances were overstated, its liabilities were understated and its DSO were understated fo r

the reasons set forth above .


van den Berg) and Arthur Andersen and AWSC read and approved the issuance of Peregrine's

filing of the 10-Q with the SEC . Each of these defendants either knew, or were deliberately

reckless in not knowing, that the financial information contained in the foregoing statements

were materially false and misleading for the reasons set forth i above .

302002

622. On January 2, 2002, Peregrine issued a press release announcing the Company' s

preliminary results for the third quarter of fiscal year 2002 ended December 31, 2001 . It stated

that Peregrine anticipated total revenues of approximately $175 million .


van den Berg) read and approved the issuance of Peregrine's January 2, 2002 press release .

These defendants knew, or were deliberately reckless in not knowing, that the financia l

information contained in the foregoing statement was materially false and misleading for th e


624. On January 3, 2002, Peregrine management , led by defendant Gardner, held a


give Peregrine management the opportunity to discuss with investors the Company's third

quarter fiscal year 2002 preliminary results . During the conference call, Peregrine management

reported on Peregrine's previously released preliminary financial results for the quarter .

625 . On January 3, 2002, CIBC issued a report based on the conference call with

Peregrine management . In its report, CIBC repeated Peregrine's previously released preliminary

financial results . Relying on management's representations and Peregrine's publicly release d


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financial results , CIBC gave Peregrine's stock a "buy" rating .

626. On January 3, 2002, Piper Jaffray issued a report based on the conference cal l

with Peregrine management. In its report, Piper Jaffray repeated Peregrine's previously released

preliminary financial results and gave Peregrine's stock a rating of "outperform ."

627. On January 3, 2002, Bear Steams issued a report based on the conference call with

Peregrine management . In its report, Bear Steams repeated Peregrine's previously released

financial results and rated Peregrine's stock as "attractive . "

628 . In response to the information disseminated by Peregrine and the contents of the


closed at $9 .40 per share on January 4, 2002 .

629. The individually named defendants (other than defendants Rodda, Hosley, and



materially misleading for the reasons set forth above. These defendants knew that securitie s



630 . On January 24, 2002, Peregrine issued a press release confirming that total

revenues for the third quarter of fiscal year 2002 were $175 .2 million .


van den Berg) read and approved the issuance of Peregrine's January 24, 2002 press release . As

part of its quarterly review work, Arthur Andersen and AWSC read and approved of the

foregoing press release. These defendants knew, or were deliberately reckless in not knowing,

that the financial information contained in the foregoing statement was materially false an d


632. Such statements were materially false and misleading because Peregrine's

reported revenue was materially overstated, its accounts receivable were understated, its cash

balances were overstated, its liabilities were understated and its DSO were understated for th e



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1 633. On January 24, 2002, Peregrine management held a conference call with investors

2 and securities analysts . The purpose of the conference call was to give Peregrine managemen t

3 the opportunity to discuss with investors the Company's third quarter fiscal year 2002 results .

4 During the conference call, Peregrine management reported on Peregrine's previously release d

5 financial results for the quarter. In addition, Peregrine management stated that its DSO remained

6 essentially flat at 100 up one day from the prior quarter and that the Company finished th e

7 quarter with approximately $107 million in cash .

8 634. On January 24, 2002, CIBC issued a report based on the conference call with

9 Peregrine management. In its report, CIBC repeated Peregrine's previously released financial

10 results and noted that the "Company appears to be on the right track ." Relying upon

11 management's representations and Peregrine's publicly released financial results, CIBC rated

12 Peregrine's stock a "buy . "

13 635. On January 24, 2002, Piper Jaffray and Bear Stearns also issued reports based on

14 the conference call with Peregrine management . Piper Jaffray and Bear Stearns each repeated

15 Peregrine's previously released financial results and rated Peregrine's stock as "outperform" and

16 "attractive," respectively .

17 636. In response to the information disseminated by Peregrine and the contents of the

18 analyst reports based on information provided by Peregrine management, Peregrine's stoc k

19 closed at $7 .95 per share on January 25, 2002 .


21 van den Berg) either knew or were deliberately reckless in not knowing that the financia l

22 information provided to investors and securities analysts in the foregoing conference call was

23 materially misleading for the reasons set forth above . These defendants knew that securitie s

24 analysts would rely on their materially false and misleading statements in writing their research

25 reports which would be disseminated to the investing public .

26 638. On February 14, 2002, Peregrine filed its Form i 0-Q for the third quarter of fiscal

27 year 2002 with the SEC . It incorporated the financial statements that appeared in th e

28 January 24, 2002 press release . The Form 10-Q was signed by defendant Gless in his capacity as


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Peregrine's reported revenue was materially overstated, there was no disclosure of a materia l


receivable were understated, its cash balances were overstated, its liabilities were understated an d

I its DSO were understated for the reasons set forth above .

640. The individually named defendants (other than defendants Rodda, Hosley, and

van den Berg) and Arthur Andersen and AWSC read and approved the filing of Peregrine's Form

I0-Q with the SEC . Each of these defendants either knew, or were deliberately reckless in not

knowing, that the financial information contained in the foregoing Form 10-Q was materially


THE TRUTH BEGINS TO EMERGE

641 . On April 5, 2002, Peregrine issued a press release announcing that it was

replacing Arthur Andersen as its independent auditor with KPMG . It quoted defendant Gardner

as saying that "we have the highest regard for our audit team's work ethic," but "in light of th e

current uncertainties at Arthur Andersen [relating to Enron], we felt it was in the best interest of

our company and shareholders to retain KPMG as our independent auditors at this time ."

642. After the close of trading on April 30, 2002, Peregrine issued a press release

announcing that it would delay the release of its financial results for the fourth quarter and year-

end 2002. The results were supposed to have been announced on May 2, 2002, but now would

be delayed until the week of May 6, 2002 due to the "continued audit activities by KPMG, th e

company's independent auditors . "

643. Before the market opened on May 6, 2002 (and approximately thirty (30) days

after the engagement of KPMG), Peregrine issued a press release announcing (i) the discovery of

accounting irregularities ; (ii) an internal accounting investigation ; and (iii) the resignation of

defendants Gardner and Gless .

644. Peregrine's stock price fell approximately 67% in response to this disclosure . On

May 3, 2002, Peregrine stock closed at $2 .57 per share . On the next trading day (May 6, 2002),

FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS -Master File No . 02-CV- 0870 J(RBB) 211

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Peregrine common stock closed at $0 .89 per share on extremely heavy volume .

645 . On May 28, 2002, Peregrine filed a Form 8-K with the SEC stating that its Board

I of Directors had terminated its engagement of KPMG as its auditor . Approximately $35 million

of the then estimated $100 million in improperly recognized revenue came from questionable

transactions with KPMG' s consulting arm .

646. In a Form 8-K filed with the SEC on June 3, 2002 (which was date d

May 24, 2002), Peregrine stated that, in the course of its engagement, KPMG had informed th e

Company's Audit Committee and other Board members that :

a . Information had come to the attention of KPMG that hadled it to no longer be able to rely on representations by somemembers of management. This information consisted principally ofcustomer documentation and accounting information provided bypersonnel within the company's sales and finance organizationswhich, when taken together, pointed out accountinginconsistencies, errors and irregularities, principally in thecompany's indirect channel sales ; and

b. KPMG had concluded the information provided to it duringthe course of its audit activities would impact the fairness andreliability of the company's audited financial statements for fiscal2000 and 2001 and for each of the three subsequent unauditedquarterly periods reported by the company for fiscal 2002 . On May23, 2002, the Company announced that it would be restating itsfinancial statements for fiscal 2000 and 2001 and each of the firstthree quarters of fiscal 2002 .

647. In the Form 8-K, Peregrine stated that the "questions and issues" raised about

Pereg rine' s financial statements by KPMG fell into four categories :

a. Revenue recognition irregularities, principally arising in thecompany's indirect channel sales and, to a lesser extent, arising inconnection with commercial transactions involvin gcontemporaneous product purchase activities and investments oracquisitions . KPMG has advised that correcting these irregularitieswould have the effect generally of delaying to later periods, ornullifying, revenue recognized from product sales ;

b. Accounting and transparency-of-presentation issuesassociated with the accounting treatment for impaired accountsreceivable . KPMG has advised that some write-offs of impairedaccounts receivable should have been accounted for as errors in theprevious recognition of revenue . KPMG also advised that wherewrite-offs of impaired accounts receivable were appropriatelymade, reclassification of those adjustments as bad debt or as areversal of revenue would be appropriate ;

FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS -Master File No. 02-CV- 0870 J (RBB) 212

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c . The appropriateness, from an accounting perspective, of themanner in which the company recorded on its balance sheet thefinancing of some of its accounts receivable with three banks ; and

d. KPMG has advised that the financing of some of theseaccounts receivable should be recorded for balance sheet purposesas loan transactions and not as sales of accounts receivable .

648. On June 5, 2002, Peregrine filed a Form 8-K/A for the purpose of filing a lette r

from KPMG to the SEC . In its letter, KPMG noted that the prior statements made by Peregrine

in the June 3, 2002 Form 8-K were inaccurate or incomplete in that KPMG had determined that it

was necessary to significantly expand the scope of the fiscal 2002 audit, and recommended an

internal investigation by forensic auditing experts "into the various indicators of possible fraud ."

649. On June 27, 2002, Peregrine issued a press rele ase announcing that the NASDAQ

Stock Market had notified the Company of its intention to delist the Company at the opening of

trading on August 30, 2002 because it had not filed periodic reports with the SEC. On

August 16, 2002 Peregrine announced in a press release that it had been given further notification

of noncompliance by the NASDAQ based on the stock's failure to maintain a bid price over

$1 .00 per share .

650. On August 29, 2002 Pereg rine issued a press release announcing that it was

"restructuring" its accounts receivable, and that management now estimated the overstatement of

revenue during the eleven quarter period (ending the third quarter of fiscal year 2002) to be $250

million. In this release, Peregrine also quantified the amount of debt not reflected on its financia l

statements ( up to $180 million) and the amount by which it had understated stock optio n

compensation ($100 million) .

651 . On August 29, 2002 Peregrine issued another press release announcing that

NASDAQ would delist the Company from the NASDAQ National Market at the opening o f

trading on August 30, 2002 because the Company "had not filed periodic reports with the

Securities and Exchange Commission."

652. On September 22, 2002 Peregrine, "[c]iting the financial and legal issues raised

by the company's inability to file audited financial reports for the 2000, 2001 and 2002 fiscal

years, among other reasons ," announced in a press release that it had filed a voluntary petition to

FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS--Master File No. 02-CV-0870 J(RBB) 213

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reorganize under Chapter 11 of the U .S. Bankruptcy Code .

653 . On February 28, 2003, Peregrine filed with the SEC its restatement of its financial

statements for fiscal years 2000 and 2001 and the first three quarters of fiscal year 2002 .

BASIS OF FACTUAL ALLEGATION S

654. The basis for Lead Plaintiffs' factual allegations as alleged herein consists of th e

following : (i) review of documents produced by Peregrine to the SEC and the U .S. Department

of Justice in connection with those authorities' investigation of Peregrine and certain former

officers and directors of Peregrine including investigatory interviews of witnesses ; (ii) a review

of Peregrine press releases ; (iii) a review of Peregrine SEC filings ; (iv) a review of BMC

Software's SEC filings ; (v) a review of Peregrine's website; (vi) a review of securities analysts'

reports on Peregrine ; (vii) a review of reports, articles and discussions concerning Peregrine

and/or its accounting irregularities contained in the print and electronic media ; (viii) interviews

of witnesses; (ix) a review of the trading volume and pricing of Peregrine ; (x) consultations with

expert consultants ; (xi) a review of complaints filed in other pending actions ; (xii) a review of

pleadings filed in Peregrine's bankruptcy case ; and (xiii) a review of the guilty pleas of

defendants Gless, Spitzer and Cappel .

DEFENDANTS' CONCEALMENT OF WRONGDOIN G

655 . Defendants actively concealed their wrongdoing as alleged herein such that no

reasonable investor would have been put on inquiry or actual notice of Peregrine's wrongdoing

as alleged herein until, at the earliest, May 6, 2002 when Peregrine announced the resignations of

defendants Gardner and Gless and the commencement of an investigation into potential

accounting irregularities . These consolidated actions were filed within one year of May 6, 2002 .

As to defendants KPMG, KPMG Consulting, Rodda, and Dammeyer, Lead Plaintiffs were

unaware of the facts supporting the allegations against these defendants until they had access to

and were able to review Peregrine's document production to the SEC and U .S. Department o f

Justice beginning in December 2003 .

/I

11


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1 THERE IS NO STATUTORY SAFE HARBO RAPPLICABLE TO THE ALLEGATIONS OF THIS COMPLAINT

2

3 656. The statutory safe harbor provision for forward-looking statements under certain

4 circumstances does not apply to any of the allegedly false statements plead herein . The vas t

5 majority of the statements plead herein as being false are not "forward-looking statements" but

6 are statements of financial results which are statements of historical fact and which are no t

7 protected by the statutory safe harbor. To the extent that there are any forward-looking fals e

8 statements alleged, there were no meaningful cautionary statements identifying important factors

9 that could cause actual results to differ materially from those in the purportedly forward-looking

10 statements . Alternatively, to the extent that the statutory safe harbor does apply to any forward-

11 looking statements plead herein, defendants are liable for those false forward-looking statements

12 because at the time each of those forward-looking statements was made the particular speake r

13 knew that the particular forward-looking statement was false .

14 COUNTI

15 (Violations Of Section 10(b) Of The Exchange Act And Rule 10b-5Promulgated Thereunder And Of Section 20(a) Of The Exchange Act)

1 6

17 657. Plaintiffs incorporate by reference Paragraphs 1 through 656, as though fully set

18 forth herein .

19 658. This Count with regard to the claim under Section 10(b) of the Exchange Act and

20 SEC Rule I Ob-5 promulgated thereunder is asserted by Lead Plaintiffs the Loran Group and the

21 Class against all defendants .

22 659. These defendants carried out a plan, scheme, and course of conduct which was

23 intended to and did :

24 (a) deceive the investing public, including plaintiffs and other Class

25 Members ;

26 (b) artificially inflate and maintain the market price of Peregrine securities ;

27 and

28 (c) cause Class members to acquire Pereg rine secu ri ties at art ificially inflated


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I prices.

660. In furtherance of this unlawful scheme, these defendants employed devices ,

f schemes and artifices to defraud plaintiffs and Class members . They made untrue statements of

I material fact and/or omitted to state material facts necessary to make the statements made no t

misleading . In addition, these defendants engaged in acts, practices, and a course of business that

operated as a fraud and deceit upon plaintiffs and Class members . These defendants did so to

maintain a rtificially in flated market p rices for Peregrine 's securities in violation of Section 10(b)

of the Exchange Act and Rule I Ob-5 promulgated thereunder .

661 . In addition to the duties of full disclosure imposed on defend an ts as a result o f

their making or approving of affirmative statements and reports, or their participation in the

making of affirmative statements and reports to the investing public, the defendants had a duty to

promptly disseminate truthful information that would be material to investors in compliance with

the integrated disclosure provisions of the SEC as embodied in SEC Regulation S-X (17 C .F.R .

210.01 et seq.) and S-K (17 C .F .R. 229.10 et seq.) and other SEC regulations, including accurate

and truthful information with respect to the Company's operations and performance so that the

market price of the Company's securities would be based on truthful, complete and accurate

information .

662. The liability of the individually named defendants (other than defendant Rodda)

arises from the following facts as more specifically alleged above :

(a) they were high-level executives at the Company and were members of th e

Company' s senior management team or were members of the Company 's Audit or Compensation

Committees ;

(b) by virtue of their responsibilities and activities as senior officers and

directors of the Company, they were privy to and participated in the drafting, reviewing and/or

approving the misleading statements, press releases, reports and other public representations

about Peregrine, and/or were engaged in authorizing or entering into the fraudulent transactions

alleged herein, and/or signed the Company's public filings with the SEC which contained the

materially misleading statements as alleged herein ;

FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS--Master File No . 02-CV-0870 J (RBB) 216

(c) they knew of or had access to the material, adverse, nonpublic informatio n

about Peregrine's financial results and business, which were materially at odds with reported

financial results ; and

(d) they were aware of the Company's dissemination of information to th e

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investing public which they knew or were deliberately reckless in not knowing was materially

false and misleading .

663 . Arthur Andersen and AWSC were engaged by Peregrine to provide the auditing

and accounting services to Peregrine and to audit Peregrine's annual financial results and t o

review Peregrine's quarterly financial results during fiscal year 2000 and 2001 and the first three

quarters of fiscal 2002 . Defendant Stulac was the engagement or concurring partner for Arthur

Andersen on the Peregrine engagements . Stulac and Arthur Andersen used the services of

AWSC in connection with the Peregrine engagements . As a result, Arthur Andersen and AWSC

owed a duty of full and complete disclosure to shareholders and prospective shareholders of

Peregrine . Arthur Andersen and AWSC breached that duty by failing to fully and adequately

disclose Peregrine's true financial condition through the issuance of unqualified audit reports on

Peregrine's audited financial statements for fiscal years 2000 and 2001 and by failing to cause

Peregrine to revise or withdraw materially false interim financial statements as alleged herein .

Arthur Andersen's and AWSC's actions or inactions, as alleged herein, violated GAAS as set

forth above .

664. Defendants KPMG, BearingPoint , and Rodda directly part icipated in Peregrine' s

fraud . They did so by engaging in transactions with Peregrine so Peregrine could book revenue

before deals with anticipated end users were completed . In doing so, the KPMG Defendants

deliberately chose to conceal the truth and played a significant role in Peregrine's ability to

misrepresent its financial condition to investors . In exchange for its participation in the scheme ,

the KPMG Defendants were awarded lucrative services contracts . At the end of a quarter, the

KPMG Defendants frequently agreed to have Peregrine software "parked" with them . This

occurred when Peregrine knew it could not complete a direct sale in time to record revenue fo r

that quarter but needed the revenue to meet its publicly announced revenue projections . In such


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instances, the KPMG Defendants would enter into a deal for the anticipated amount of the sale to

the end user . The KPMG Defendants knew that Peregrine would immediately book revenue

from such transactions even though a deal with the end user had not yet been completed . The

KPMG Defendants further knew that Peregrine proposed the "parking" arrangements so it could

falsely represent to investors that it had obtained revenue from such incomplete transactions .

665 . The defendants named herein had actual knowledge of the misrepresentations an d

omissions of material facts set forth herein, or acted with deliberate recklessness in that they

failed to ascertain and to disclose such facts, even though such facts were readily available to

them. These defendants' material misrepresentations and/or omissions were done knowingly or

with deliberate recklessness to conceal Peregrine's true financial condition from the investing

public and to support the artificially inflated price of its securities .

666 . As a result of the dissemination of the materially false and misleading informatio n

and failure to disclose mate rial facts , the market price of Peregrine securities was artificiall y

inflated throughout the Class Period . In ignorance of the fact that the market price of Peregrine

securities was artificially inflated, and relying directly or indirectly on the false and misleading

statements by these defendants, or upon the integrity of the market in which Peregrine securities

trade, plaintiffs and Class members purchased Peregrine securities at artificially inflated price s

and were damaged thereby .

667. At the time of the alleged misrepresentations and omissions , plaintiffs and Clas s

members were ignoran t of their falsity, and believed them to be true . Had plaintiffs and the other

Class members known of the defendants' false statements as alleged herein they would not hav e

purchased Peregrine securities .

668. As a direct and proximate result of defendants' wrongful conduct, plaintiffs an d

Class members suffered damages in connection with their purchase or acquisition of Peregrin e

securities during the Class Period .

669. This Count with regard to the claim under Section 20(a) of the Exchange Act is

asserted by Lead Plaintiffs the Loran Group and the Class against defendants Gardner, Gless ,

Moores, Nelson, Noel], Cole, van den Berg, Hosley, Watrous, Savoy, and Dammeyer based o n


Master File No . 02-CV- 0870 J (RBB) 218

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1 their control of Peregrine . In addition, this control person claim is asserted against defendan t

2 Moores based on his control of defendants Gardner, Gless, Nelson, Luddy, Noell, van den Berg,

3 and Hosley, and against defendant AWSC based on its control of Arthur Andersen .

4 670. Defendants Gardner, Gless, Moores, Nelson, Noel], Cole, van den Berg, Hosley,

5 Watrous, Savoy, and Dammeyer were controlling persons of Peregrine within the meaning o f

6 Section 20(a) of the Exchange Act . By virtue of their executive positions, Board membership,

7 and stock ownership (as more specifically alleged above), these defendants had the power t o

8 influence and control (and did influence and control, directly or indirectly) the decision-making

9 of the Company, including the content and dissemination of the various statements whic h

10 plaintiffs contend are materially false and misleading . These defendants were provided with or

11 had unlimited access to the Company's internal reports, press releases, public filings and other

12 statements alleged by plaintiffs to be misleading prior to and/or shortly after these statements

13 were issued and had the ability to prevent the issuance of the false statements or cause the false

14 statements to be corrected .

15 671. Peregrine violated Section 10(b) and Rule I Ob-5 by the issuance of materially

16 false and misleading statements as alleged herein . By virtue of their positions as controlling

17 persons of Peregrine, defendants Gardner, Gless, Moores, Nelson, Noell, Cole, van den Berg ,

18 Hosley, Watrous, Savoy, and Dammeyer are liable to plaintiffs and the Class pursuant to Section

19 20(a) of the Exchange Act .

20 672. Defendant Moores was a controlling person of defendants Gardner, Gless, Nelson,

21 Luddy, Noel], van den Berg, and Hosley, within the meaning of Section 20(a) of the Exchang e

22 Act . By virtue of his long standing business entanglements with these defendants and his

23 instrumental role in placing them in senior executive and director positions at Peregrine ,

24 defendant Moores had the power and influence to control, and did influence and control, directly

25 and indirectly, the conduct of these defendants in connection with their Peregrine-relate d

26 activities .

27 673. By vi rtue AWSC's relationship to A rthur Andersen with respect to accounting and

28 auditing work performed for Peregrine, as more fully alleged above, defendant AWSC was a


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control person of Arthur Andersen within the meaning of Section 20(a) of Exchange Act .

AWSC had the power and influence to control, and did influence and control, directly and

indirectly, the contents of Arthur Andersen's audit reports and quarterly review work both o f

which are alleged to have caused damage to the Class .

674. Arthur Andersen violated Section 10(b) and Rule I Ob-5 by the issuance of

materially false and misleading statements as alleged herein . By virtue of its position as a

controlling person of Arthur Andersen, AWSC is liable to plaintiffs and the Class pursuant to

Section 20(a) of the Exchange Act .

675 . As a direct and proximate cause of defendants' wrongful conduct, plaintiffs an d

Class Members suffered damages in connection with their purchase or acquisition of Peregrin e

securities .

COUNT Il

(Violations Of Section 14(a) Of The Exchange Act AndRule 14a-9 Promulgated Thereunder And Of

Section 20(a) Of The Exchange Act - Harbinger Acquisitio n

676. Plaintiffs Waga and Sutliff incorporate by reference, as though fully set forth

herein, Paragraphs 4, 6, 8, 10-11, 13, 18-19, 24 (bullet points only), 28-30, 31(1) - (o), 32, 36(a) -

(b), (h) - (1), (n), 37, 40-48, 54-58, 60-70, 72-82, 84, 87, 90, 92-94, 100, 103, 137-146, 148-151,

153-156, 159, 167, 171-172, 178-179, 181, 185, 187-190, 232 (bullet points only), 369-385, 547,

592 and 642-654 above .

677. This Count is asserted by Plaintiffs Waga and Sutliff on behalf of all those who

held Harbinger common stock on May 22, 2000 and still held those shares on June 16, 2000 and

exchanged those shares for shares issued by Peregrine in connection with Peregrine's acquisition

of Harbinger Corporation (the "Harbinger Sub-Class") .

678 . This Count is asserted against defendants Gardner, Gless, Moores, Cole, Hosley,

Noell, van den Berg and Watrous on behalf of the Harbinger Sub-Class, for violations o f

Section 14(a) of the Exchange Act, 15 U .S.C. §78n, and Rule 14a-9, 17 C .F .R. §240.14a-9. This

Count is based solely on those defendants' negligent conduct .

679 . Each defendant named in this Count solicited proxies by means of the Joint Prox y


• 0

1 Statement and Prospectus filed on or about May 22, 2000 as part of Amendment No . I to

2 Peregrine's Form S-4 Registration Statement (the "Harbinger Joint Proxy") . The Harbinger Joint

3 Proxy was distributed by defendants named herein to Harbinger shareholders . They each

4 permitted the use of their names in the Harbinger Joint Proxy .

5 -680. The Harbinger Joint Proxy was a "proxy solicitation" within the meaning of

6 Section 14 of the Exchange Act, and Rule 14a-9 promulgated thereunder.

7 681. Each of the defendants named in this Count signed Amendment No . 1 to th e

8 Peregrine Registration Statement which contained the Harbinger Joint Proxy, thus allowing it to

9 be filed with the SEC . These defendants were members of Peregrine's Board of Directors at all

10 relevant times .

11 682. The Harbinger Joint Proxy contained or incorporated by reference Peregrine's

12 audited financial statements for the fiscal year ending March 31, 2000 . These financia l

13 statements were materially false and misleading for the reasons set forth above .

14 683. The Harbinger Joint Proxy was materially false and misleading, in that i t

15 contained the foregoing false and misleading statements of material fact and failed to disclose

16 material facts necessary to make the statements made not false and misleading .

17 684. The defendants named in this Count sought to secure Harbinger shareholder

18 approval of the Peregrine/Harbinger merger by means of the materially false and misleading

19 Harbinger Joint Proxy and permitted the use of their names to solicit proxies from the Harbinger

20 Sub-Class .

21 685. The facts herein referenced in paragraph 676 and the following facts give rise to a

22 strong inference that each of the defendants named in this Count acted with the requisite state of

23 mind for liability under Section 14(a) and Rule 14a-9, i.e ., negligence, at the time they issued or

24 caused to be issued the Harbinger Joint Proxy and permitted the use of their names in th e

25 Harbinger Joint Proxy . As detailed more fully above, these defendants were negligent in not

26 knowing that the Harbinger Joint Proxy contained misstatements of material fact and that i t

27 omitted to state material facts necessary in order to make the statements made therein not false or

28 misleading .


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1 686. The defendants named in this Count (except Gless) were members of the

2 Peregrine Board on April 14, 1999 when the Company implemented a radical change . It was at a

3 meeting on that date that the Board approved of the use of the sell-in method of accountin g

4 although they were told that the sell-in method was not the preferred method. The Board

5 members were informed that only by using that method would Peregrine meet its quarterl y

6 revenue goals . Thus, the Board should have been aware that a weakness existed in Peregrine's

7 sales efforts, which needed to be watched consistently . Moreover, the Board was informed that

8 the Company's auditors would be uncomfortable if the channel activity accounted for more than

9 25% of the Company's revenue . From that point forward, the members of the Board were o n

10 notice that they needed to scrutinize the Company's revenue closely, along with the Company's

11 revenue recognition policies, and to satisfy themselves that the sell-in method was not bein g

12 utilized improperly and that revenue was being recognized appropriately .

13 687. The members of the Board were given a further reason to assure themselves that

14 the Company's revenue was proper by their receipt of the quarterly Review and Outlook reports

15 send by defendant Gardner . These reports, as detailed above, consistently painted a bleak picture

16 of Peregrine's anticipated revenue while the Company incredibly was able to meet analys t

17 expectations at the last moment of almost every quarter . Thus, while Gardner was reporting

18 severe trouble with the Company's "bread and butter" business, and informing the Board that

19 channel activity was a cause for concern and that the Company was borrowing from the future,

20 the Board did not take actions necessary to correct the problems. Even when Gardner reported

21 that channel inventory had reached a level that made the auditors uncomfortable, the Board took

22 no appropriate action .

23 688. Indeed, as detailed above, as channel sales increased quickly and dramatically ,

24 inventory was also becoming overly bloated -- sure signs that the Company was having problems

25 selling to end users -- yet the Company was purportedly making its revenue number . The

26 defendants named in this Count were sophisticated businessmen, many of whom had years of

27 experience in the software industry and, their failure to miss these warning signs was negligent .

28 689. Defendants named in this Count acted as controlling persons of Peregrine withi n


1 the meaning of Section 20(a) of the Exchange Act as alleged herein . By virtue of their high-level

2 positions, and their ownership and contractual rights, participation in and/or awareness of th e

3 Company's operations and/or intimate knowledge of the false financial statements contained in

4 the Harbinger Joint Proxy, these defendants had the power to influence and control and di d

- 5 influence and control, directly or indirectly, the decision-making of Peregrine, including the

6 content and dissemination of the various statements which plaintiffs contend are false an d

7 misleading . These defendants were provided with or had unlimited access to Peregrine' s

8 misleading financial statements contained in the Harbinger Joint Proxy alleged by plaintiffs to be

9 misleading prior to and/or shortly after these statements were issued and had the ability t o

10 prevent the issuance of the statements or cause the statements to be corrected .

11 690. In particular, each of these defendants had direct and supervisory involvement in

12 the day-to-day operations of the Company and, therefore, is presumed to have had the power to

13 control or influence the particular transactions giving rise to the securities violations as alleged

14 herein, and exercise the same .

15 691. As detailed above, the defendants named in this Count controlled Peregrine .

16 Certainly, for purposes of the distribution of the Harbinger Joint Proxy, the Board had control of

17 whether such distribution should be made and the contents thereof.

18 692. Beyond the Harbinger transaction, Moores also had control of Peregrine through

19 his control and domination of the Board . As stated in detail above, almost every Board member

20 had ties to Moores, which allowed Moores to have a great deal of influence over those Boar d

21 members . Moreover, by his control of these Board members, Moores and these Board members

22 effectively controlled Peregrine .

23 693. The Merger required and received the affirmative vote of the Harbinger

24 shareholders at the Special Meeting of Harbinger shareholders held on June 16, 2000 .

25 Accordingly, the materially false and misleading Harbinger Joint Proxy was an essential link in

26 the accomplishment of Peregrine's acquisition of Harbinger .

27 694. Based on the foregoing, the defendants named in this Count have violate d

28 Section 14(a) of the Exchange Act and SEC Rule 14a-9 promulgated by the SEC thereunder and


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by virtue of their positions as controlling persons, these defendants have violated Section 20(a) of

the Exchange Act .

695 . As a direct and proximate result of these defendants' wrongdoing, Plaintiffs Waga

and Sutliff and the other members of the Harbinger Sub-Class have sustained injury and damages

by reason of these defendants' misrepresentations contained in the Harbinger Joint Proxy in

connection with the Peregrine's acquisition of Harbinger .

COUNT II I

(Violations Of Section 14(a) Of The Exchange Act And Rule 14a-9Promulgated Thereunder And Of Section 20(a) Of Th e

Exchange Act - Harbinger Acquisition - Arthur Andersen , AWSC And Stulac)

696. Plaintiffs Waga and Sutliff incorporate by reference, as though fully set forth

herein, the paragraphs referenced in Paragraph 676 above and Paragraphs 36(p) - (r), 95, 132,

208-212, 217-219, 386-396, 398-403, 411-412, 429-433, 460-461, 470-472, 476, and 482 above .

697 . This Count is asserted by Plaintiffs Waga and Sutliff on behalf of the Harbinge r

Sub-Class .

698 . This Count is asserted against Arthur Andersen, AWSC and Stulac on behalf of

the Harbinger Sub-Class for violations of Section 14(a) of the Exchange Act, 15 U .S .C. §78n,

and Rule 14a-9, 17 C .F.R. §240.14a-9 .

699. The Joint Proxy which was included in Peregrine's May 22, 2000 Amendment 1

to its S-4 Registration Statement filed with the SEC and distributed to Harbinger shareholders

(the "Harbinger Joint Proxy") was a "proxy solicitation" within the meaning of Section 14 of the

Exchange Act, and Rule 14a-9 promulgated thereunder . This Count is based solely o n

defendants ' negligent conduct .

700. Arthur Andersen and AWSC consented to the use of Arthur Andersen' s name in

the Harbinger Joint Proxy to solicit proxies from Plaintiffs Waga and Sutliff and other members

of the Harbinger Sub-Class .

701 . Arthur Andersen and AWSC also consented to the inclusion and/or the

incorporation by reference , in the Harbinger Joint Proxy , of Arthur Andersen's unqualified audit

repo rt on Peregrine 's fiscal year 2000 financial statements, as set fo rth in Pereg rine's Form 10-K


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for the year ending March 31, 2000, and consented to all references to Arthur Andersen in the

registration statement , which included a reference to it under the caption "Experts," and under

the caption "Pereg rine Selected Consolidated Financial Data," where it was noted that the

consolidated financial data was based upon financial statements audited by Arthur Andersen .

Stulac was the representative of Arthur Andersen and AWSC for the Peregrine account .

702. Arthur Andersen's audit report on Peregrine's financial statements for the year

ending March 31, 2000, which was included and/or incorporated by reference into the Harbinger

Joint Proxy, was materially false and misleading for the reasons set forth above .

703 . The following facts and the facts referenced in paragraph 696 above give rise to a

strong inference that Arthur Andersen, AWSC and Stulac acted with the requisite state of mind

for liability under Section 14(a) and Rule 14a-9, i .e ., negligence, in permitting Arthur Andersen' s

name to be used in conjunction with the solicitation of proxies pursuant to a proxy statement that

contained material misrepresentations and omissions. As detailed more fully above, Arthur

Andersen, AWSC and Stulac should have known at the time that consent to the use of Arthur

Andersen's name in the Harbinger Joint Proxy was given that Arthur Andersen's audit report on

Peregrine's financial statements for the year ending March 31, 2000, which were included and/or

incorporated by reference to in the Harbinger Joint Proxy, was materially false and misleading .

704. Arthur Andersen, AWSC and Stulac were aware that when the Company adopte d

the sell-in method, it did so in order to meet its quarterly revenue estimates . Moreover, these

defendants knew that the sell-in method was an aggressive revenue recognition procedure, which

was not the preferred method .

705. Arthur Andersen had informed the Comp any when it adopted the sell - in method

that it would be uncomfortable if channel activity reached 25% of the Company 's revenue, yet

even when that number was far exceeded , Arthur Andersen, AWSC and Stulac consented to

Arthur Andersen's unqualified audit report to be included in the Harbinger Joint Proxy .

706. As detailed above, plenty of warning signs existed that should have alerted Arthu r

Andersen, AWSC and Stulac that severe problems existed with the Company 's accounting .

Auditor guidelines for items that should receive special consideration identified almost the exac t


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type of situation as the one that existed at Peregrine, such as significant sales volume occurring

near the end of the quarter, unusual volume of sales to resellers, barter transactions and sid e

agreements . Messages about "bad revenue," inquiries from the SEC, and complaints about

revenue recognition were either provided to Arthur Andersen, discovered by it or readily

available to it had it sought to look . Instead , Arthur Andersen, AWSC and Stulac ignored the

I warning signs and allowed the Company to continually spiral downward into a deeper revenue

hole .

707. In addition , Arthur Andersen, AWSC and Stulac should have been aware that

problems existed at the Company that required further investigation on their part because of the

lack of Audit Committee minutes, the failure to hold regular meetings during fiscal year 2000 ,

j and the participation of members of management in the Audit Committee deliberations . The

failure to respond to the above repeated warning signs demonstrates Arthur Andersen 's, AWSC's

and Stulac's negligence .

708. Arthur Andersen and Stulac were also involved in designing the Company's stock

option compensation plan, which allowed for the exercise prices to be below the common stock

market values when the options were granted . This plan was also a part of Peregrine's

restatement, and a further sign that should have alerted Arthur Andersen, AWSC and Stulac tha t

a problem existed at Peregrine .

709. The Merger required and received the affirmative vote of the H arbinger

shareholders at the Special Meeting of Harbinger sh areholders held on June 16, 2000 .

Accordingly, the mate rially false and misleading Harbinger Joint Proxy was an essential link i n

the accomplishment of the Peregrine 's acquisition of Harbinger .

710. Based on the foregoing , A rthur Andersen , AWSC and Stulac violated

Section 14 (a) of the Exchange Act and SEC Rule 14a-9 promulgated by the SEC thereunder.

711 . As a direct and proximate result of Arthur Andersen , AWSC' s and Stulac' s

wrongful conduct, plaintiffs and other members of the Harbinger Sub-Class have sustained injury

and damages by reason of defendants ' misrepresentations contained in the Harbinger Joint Prox y

in connection with the Peregrine's acquisition of Harbinger.


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1 712. Defendants AWSC and Stulac acted as controlling persons of Arthur Andersen

2 within the meaning of Section 20(a) of the Exchange Act as alleged herein . By virtue of their

3 control of and/or interlocking officers, partners and finances and/or awareness of the Arthur

4 Andersen's operations and/or intimate knowledge of the false financial statements contained in

5 the Harbinger Joint Proxy, these defendants had the power to influence and control and di d

6 influence and control, directly or indirectly, the decision-making of Arthur Andersen, including

7 the content and dissemination of the various statements which plaintiffs contend are false an d


9 misleading financial statements contained in the Harbinger Joint Proxy alleged by plaintiffs to be

10 misleading and had the ability to prevent the issuance of the statements or cause the statements to

11 be corrected .


13 the day-to-day operations of the Arthur Andersen and, therefore, is presumed to have had the

14 power to control or influence the particular transactions giving rise to the securities violations as

15 alleged herein, and exercised the same .

16 714. As set forth above, defendants AWSC and Stulac, by virtue of their positions as

17 controlling persons, these defendants are liable pursuant to Section 20(a) of the Exchange Act.

18 As a direct proximate result of these defendants' wrongful conduct, plaintiffs named in this Count

19 and other members of the Harbinger Sub-Class suffered damages in connection with thei r

20 acquisition of shares of Peregrine.

21 COUNT IV

22 (Violations Of Section 14(a) Of The Exchange Act AndRule 14a-9 Promulgated Thereunder And Of

23 Section 20(a) Of The Exchange Act - Remedy Acquisition

24 715 . Plaintiffs Balch and Hylton incorporate by reference, as though fully set fort h

25 herein, Paragraphs 36(m), 36(o), 686-688, and all paragraphs referenced in Paragraph 676 above

26 except Paragraphs 36(k) and 36(l) .

27 716. This Count is asserted by Plaintiffs Balch and Hylton on behalf of all those who

28 held Remedy common stock on July 23, 2001 and still held those shares on August 27, 2001 and


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exchanged those shares for shares issued by Peregrine in connection with Pereg rine 's acquisition

of Remedy Corporation ( the "Remedy Sub-Class") .

717. This Count is asserted against defendants Gardner, Gless , Moores , Savoy, Cole ,

Noell, Watrous, and Dammeyer on behalf of the Remedy Sub-Class, for violations of

Section 14(a) of the Exchange Act, 15 U .S.C. §78n, and Rule 14a-9,17 C .F.R. §240.14a-9 . This

Count is based solely on those defendants' negligent conduct .

718 . Each defendant named in this Count solicited proxies by means of the Joint Prox y

Statement and Prospectus filed on or about July 23, 2001 as part of Amendment No . 1 to

Peregrine's Form S-4 Registration Statement (the "Remedy Joint Proxy") . The Remedy Joint

Proxy was distributed to Remedy shareholders by defendants named herein . They each permitted

the use of their names in the Remedy Joint Proxy .

719 . The Remedy Joint Proxy was a "proxy solicitation" within the meaning of

Section 14 of the Exchange Act, and Rule 14a-9 promulgated thereunder .

720 . Each of the defendants named in this Count signed Amendment No . 1 to the

Peregrine Registration Statement which contained the Remedy Joint Proxy allowing it to be filed

with the SEC . These defendants were members of Peregrine's Board of Directors at all relevan t

times .

721 . The Remedy Joint Proxy contained or incorporated by reference Peregrine's

audited financial statements for the fiscal years ending March 31, 2000 and March 31, 2001 .

Each of these financial statements were materially false and misleading for the reasons set fort h

above .

722 . The Remedy Joint Proxy was materially false and misleading in that it contained

false and misleading statements of material fact and failed to disclose material facts necessary t o

make the statements made not false and misleading .

723 . The defendants named in this Count sought to secure Remedy shareholder

approval of the Peregrine/Remedy merger by means of the materially false and misleading

Remedy Joint Proxy and permitted the use of their names to solicit proxies from the Remedy

Sub-Class .

FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS -M aster File No. 02-CV-0870 J(RBB) 228

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1 724. The following facts and the facts referenced in paragraph 715 above give rise to a

2 strong inference that each of the defendants named in this Count acted with the requisite state of

3 mind for liability under Section 14(a) and Rule 14a-9, i.e ., negligence, at the time they issued or

4 caused to be issued the Remedy Joint Proxy and permitted the use of their names in the Remedy

5 Joint Proxy . As detailed more fully above, these defendants were negligent in not knowing that

6 the Remedy Joint Proxy contained misstatements of material fact and that it omitted to stat e

7 material facts necessary in order to make the statements made therein not false or misleading .

8 725. Defendants named in this Count acted as controlling persons of Peregrine withi n

9 the meaning of Section 20(a) of the Exchange Act as alleged herein. By virtue of their high-level

10 positions, and their ownership and contractual rights, participation in and/or awareness of the

11 Company's operations and/or intimate knowledge of the false financial statements contained in

12 the Remedy Joint Proxy, these defendants had the power to influence and control and did

13 influence and control, directly or indirectly, the decision-making of Peregrine, including the

14 content and dissemination of the various statements which plaintiffs contend are false an d


16 misleading financial statements contained in the Remedy Joint Proxy alleged by plaintiffs to be

17 misleading prior to and/or shortly after these statements were issued and had the ability t o

18 prevent the issuance of the statements or cause the statements to be corrected .


20 the day-to-day operations of the Company and, therefore, is presumed to have had the power to

21 control or influence the particular transactions giving rise to the securities violations as alleged

22 herein, and exercise the same .

23 727. As detailed above, defendants named in this Count controlled Peregrine.

24 Certainly, for purposes of the distribution of the Remedy Joint Proxy, the Board had control of

25 whether such distribution should be made and the contents thereof .

26 728. Beyond the Remedy transaction, Moores also had control of Peregrine through his

27 control and domination of the Board . As stated in detail above, almost every Board member had

28 ties to Moores, which allowed Moores to have a great deal of influence over those Boar d


. •

1 members . Moreover, by his control of these Board members, Moores and these Board members

2 effectively controlled Peregrine .

3 729. The Merger required and received the affirmative vote of the Remedy

4 shareholders at the Special Meeting of Remedy shareholders held on August 27, 2001 .

5 Accordingly, the materially false and misleading Remedy Joint Proxy was an essential link in the

6 accomplishment of Peregrine's acquisition of Remedy .

7 730. Based on the foregoing, the defendants named in this Count have violate d

8 Section 14(a) of the Exchange Act and SEC Rule 14a-9 promulgated by the SEC thereunder an d

9 by virtue of their positions as controlling persons, these defendants have violated Section 20(a) of

10 the Exchange Act .

11 731. As a direct and proximate result of these defendants' wrongdoing, plaintiffs and

12 the other members of the Remedy Sub-Class have sustained injury and damages by reason of

13 these defendants' misrepresentations contained in the Remedy Joint Proxy in connection with

14 Peregrine's acquisition of Remedy .

15 COUNT V

16 (Violations Of Section 14(a) Of The Exchange Act And Rule 14a-9Promulgated Thereunder And Of Section 20(a) Of Th e

17 Exchange Act - Remedy Acquisition - Arthur Andersen AWSC And Stula c

18 732. Plaintiffs Balch and Hylton incorporate by reference, as though fully set forth

19 herein, the paragraphs referenced in Paragraphs 696 and 715 above .

20 733. This Count is asserted by Plaintiffs Balch and Hylton on behalf of the Remedy

21 Sub-Class .

22 734. This Count is asserted against Arthur Andersen, AWSC and Stulac on behalf of

23 the Remedy Sub-Class, for violations of Section 14(a) of the Exchange Act, 15 U .S.C. §78n, and

24 Rule 14a-9, 17 C .F .R. §240 .14a-9. This Count is based solely on defendants' negligent conduct .

25 735. The Joint Proxy which was included in Peregrine's July 23, 2001 Amendment 1 to

26 its S-4 Registration Statement filed with the SEC and distributed to Remedy shareholders (th e

27 "Remedy Joint Proxy") was a "proxy solicitation" within the meaning of Section 14 of the

28 Exchange Act, and Rule 14a-9 promulgated thereunder .


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•736. Arthur Andersen and AWSC consented to the use of Arthur Andersen' s name i n

I the Remedy Joint Proxy to solicit proxies from Plaintiffs and other members of the Remedy Sub-

I Class .

737. Arthur Andersen and AWSC also consented the inclusion and/or to the

incorporation by reference, in the Remedy Joint Proxy, of Arthur Andersen's unqualified audit

reports on Peregrine's consolidated financial statements as of March 31, 2000 and March 31,

2001, and consented to all references to Arthur Andersen in the registration statement, which

included a reference to it under the caption "Experts," and under the caption "Peregrine Selected

Consolidated Financial Data," where it was noted that the consolidated financial data was audite d

by Arthur Andersen . Stulac was the representative of Arthur Andersen and AWSC for the

Peregrine account

738. Arthur Andersen's audit reports on Peregrine's financial statements for the years

ending March 31, 2000 and March 31, 2001, which were included and/or incorporated by

reference in the Remedy Joint Proxy, were materially false and misleading for the reasons se t

forth above .

739. The following facts and the facts referenced in paragraph 732 above give rise to a

strong inference that Arthur Andersen, AWSC and Stulac acted with the requisite state of mind

for liability under Section 14(a) and Rule 14a-9, i .e., negligence, in permitting Arthur Andersen' s

name to be used in conjunction with the solicitation of proxies pursuant to a proxy statement that

contained material misrepresentations and omissions . As detailed more fully above, Arthur

'Andersen, AWSC and Stulac should have known at the time that consent to the use of Arthur

Andersen's name in the Remedy Joint Proxy was given that Arthur Andersen's audit reports on

Peregrine's financial statements for the years ending March 31, 2000 and March 31, 2001, which

were included and/or incorporated by reference in the Remedy Joint Proxy, were materially fals e

and misleading .

740. Arthur Andersen, AWSC and Stulac were aware that when the Company adopted

the sell-in method, it did so in order to meet its quarterly revenue estimates . Moreover, these

defendants knew that the sell-in method was an aggressive revenue recognition procedure, whic h



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I was not the preferred method .

741 . Arthur Andersen had informed the Company when it adopted the sell-in metho d

that it would be uncomfortable if channel activity reached 25% of the Company's revenue, yet

even when that number was far exceeded, Arthur Andersen, AWSC and Stulac allowed Arthu r

Andersen's unqualified audit report to be incorporated or included in the Remedy Joint Proxy .

742. As detailed above, plenty of warning signs existed that should have alerted Arthur

Andersen, AWSC and Stulac that severe problems existed with the Company's accounting .

Auditor guidelines for items that should receive special consideration identified almost the exact

type of situation as the one that existed at Peregrine, such as significant sales volume occurrin g

near the end of the quarter, unusual volume of sales to resellers, barter transactions and side

agreements. Messages about "bad revenue," inquiries from the SEC, and complaints about

revenue recognition were either provided to Arthur Andersen, discovered by it or readily

available to it had it sought to look . Instead, Arthur Andersen, AWSC and Stulac ignored the

warning signs and allowed the Company to continually spiral downward into a deeper revenue

hole .

743 . In addition, Arthur Andersen, AWSC and Stulac should have been aware that

problems existed at the Company that required further investigation on their part because of the

lack of Audit Committee minutes, the failure to hold regular meetings during fiscal year 2000 ,

and the participation of members of management in the Audit Committee deliberations . The

failure to respond to the above repeated warning signs demonstrates Arthur Andersen's, AWSC's

and Stulac's negligence .

744. Arthur Andersen and Stulac were also involved in designing the Company's stock

option compensation plan, which allowed for the exercise prices to be below the common stock

market values when the options were granted . This plan was also a part of Peregrine's

restatement, and a further sign that should have alerted Arthur Andersen, AWSC and Stulac that

a problem existed at Peregrine .

745. The Merger required and received the affirmative vote of the Remed y

I shareholders at the Special Meeting of Remedy shareholders held on August 27, 2001 .


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Accordingly, the materially false and misleading Remedy Joint Proxy was an essential link in the

accomplishment of Peregrine's acquisition of Remedy .

746 . Based on the foregoing, Arthur Andersen, AWSC and Stulac violated

Section 14(a) of the Exchange Act and SEC Rule 14a-9 promulgated by the SEC thereunder .

747. As a direct and proximate result of Arthur Andersen, AWSC and Stulac' s

wrongdoing, plaintiffs and other members of the Remedy Sub-Class have sustained injury and

damages by reason of Arthur Andersen and AWSC's misrepresentations in connection with th e

Peregrine's acquisition of Remedy .

748 . Defendants AWSC and Stulac acted as controlling persons of Arthur Andersen

within the meaning of Section 20(a) of the Exchange Act as alleged herein . By virtue of their

control of and/or interlocking officers, partners and finances and/or awareness of the Arthur

Andersen's operations and/or intimate knowledge of the false financial statements contained in

the Remedy Joint Proxy, these defendants had the power to influence and control and did

influence and control, directly or indirectly, the decision-making of Arthur Andersen, including

the content and dissemination of the various statements which plaintiffs contend are false and

misleading. These defendants were provided with or had unlimited access to Peregrine's

misleading financial statements contained in the Remedy Joint Proxy alleged by plaintiffs to be

misleading and had the ability to prevent the issuance of the statements or cause the statements to

be corrected .

749 . In particular, each of these defendants had direct and supervisory involvement in

the day-to-day operations of the Arthur Andersen and, therefore, is presumed to have had the

power to control or influence the particular transactions giving rise to the securities violations as

alleged herein, and exercise the same .

750. As set forth above, defendants AWSC and Stulac, by virtue of their positions as

controlling persons, are liable pursuant to Section 20(a) of the Exchange Act . As a direct

proximate result of these defendants' wrongful conduct, plaintiffs named in this Count and other

members of the Remedy Sub-Class suffered damages in connection with their acquisition o f

shares of Peregrine .


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COUNT VI

(Violations Of Section 11 Of The Securities Act - The Harbinger Acquisition)

751 . Plaintiffs Waga and Sutliff incorporate by reference, as though fully set fort h

herein, Paragraphs 6, 28-30, 31(1) - (o), 32, 36(a), 36(b), 36(h) - (1), 36(n), 36(p), 36(r), and 40-4 8

above .

752. This Count is asserted against defendants Gardner, Gless, Moores, Cole, Hosley,

Noell, van den Berg, Watrous, Arthur Andersen and AWSC . This Count is based solely on

defendants' negligent conduct .

753 . This Count is asserted by Plaintiffs Waga and Sutliff on behalf of a Sub-Class

consisting of all persons and entities who acquired Peregrine registered common stock in

connection with Peregrine's acquisition of Harbinger Corporation which was consummated on or

about June 16, 2000 (the "Harbinger Sub-Class") .

754. On or about May 22, 2000, the defendants named herein issued, caused the

issuance, and/or signed Amendment No . I to its Form S-4/A Registration Statement that was

filed with the SEC (the Harbinger Registration Statement) in connection with Peregrine's

acquisition of Harbinger . The Harbinger Registration Statement included a Proxy/Prospectus,

which provided, inter alia, for special meetings to be held on June 16, 2000 in which

shareholders of both Peregrine and Harbinger were solicited to vote to approve the

consummation of the proposed merger between the two companies . Under the terms of the

proposed merger, each outstanding share of Harbinger common stock would be exchanged for

0.75 of a share of Peregrine common stock, and each option to purchase Harbinger common

stock would be exchanged for an option to purchase Peregrine common stock at the sam e

exchange ratio .

755 . Defendants Gardner, Gless, Moores, Cole, Hosley, Noell, Van Den Berg and

Watrous signed the Harbinger Registration Statement . The Harbinger Registration Statement

contained untrue statements of material fact and/or omitted to state material facts necessary to

make statements therein not misleading .

756. In particular, the Proxy/Prospectus contained Peregrine financial statements fo r


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the Company's fiscal year ended March 31, 2000 along with an unqualified audit opinion on

those financial statements issued by Peregrine's auditor, Arthur Andersen, dated April 25, 2000 .

Defendant AWSC consented to Arthur Andersen being named as having certified its opinion as

to Peregrine's financial statements . The Proxy/Prospectus included a "Consolidated Statements

Of Operations" for Peregrine for its fiscal year ended March 31, 2000 which reported, among

other things that Peregrine had achieved Total Revenues of $253,300,000 ($168,467,000

attributed to Licenses Revenues and $84,833,000 attributed to Services Revenues), and that

Peregrine had a Net Loss of $25,070,000 for that fiscal year .

757. The Proxy/Prospectus included a section entitled "Notes To Consolidate d

Financial Statements ." Under the caption "Company Operations And Summary Of Significant

Accounting Policies" the Proxy/Prospectus provided Peregrine's revenue recognition policy an d

stated :

REVENUE RECOGNITION

We generate revenues from licensing the rights to use oursoftware products primarily to end-users . We also generaterevenues from post-contract support (maintenance), consulting andtraining services performed for customers who license ourproducts . We do not provide professional services unrelated to ourproducts .

Revenues from direct and indirect license agreements are

[Emphasis added. ]

758. The "Management ' s Discussion And Analysis Of Financial Condition And

Results Of Operations" section of the Proxy/Prospectus stated with respect to revenue that :

Our revenues are derived from product licensing and services .Services are comprised of maintenance, professional services, andtraining. . .

Revenues from license agreements are recognized currently,provided that all of the following conditions are met : anoncancelable license agreement has been signed, the product has


regarding customer acceptance, collection of the resultingreceivable is deemed probable, risk of concession is deemedremote and we have no other significant obligations associatedwith the transaction . . .

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been delivered, there are no material uncertainties regardingcustomer acceptance, collection of the resulting receivable isdeemed probable, the risk of concession is deemed remote, and noother significant vendor obligations exist . . .

REVENUES . Total revenues were $253 .3 million, $138 .1million and $61 .9 million for the fiscal years ended 2000, 1999 and1998, representing period-to-period increases of 83% and 123% forthe fiscal 2000 and 1999 periods . . .

LICENSES. License revenues were $168 .4 million, $87 .4million and $38 .8 million in fiscal 2000, 1999 and 1998,representing 67% of total revenues in fiscal 2000 and 63% in bothfiscal 1999 and 1998 . Total license revenues increased 93% and125% period-to-period for fiscal 2000 and 1999 . Domestic licenserevenues increased 73% in fiscal 2000 and 135% in fiscal 1999,while international license revenues increased 125% and 111 % infiscal 2000 and 1999 . The increases in license revenues areattributable to increased demand for new and additional licenses ofour infrastructure resource management applications, from newand existing customers, larger transaction sizes, expansion of ourdomestic and international sales forces, and acquisitions . Weexpect larger transaction sizes from a limited number of customersto account for a large percentage of license revenues for theforeseeable future . Management believes these trends willfluctuate period to period in absolute dollars and as a percentage oftotal revenues .

During the past three years, we have increased the numberof channels that we use to distribute our products . The majority ofour products are distributed through our direct sales organization .The balance is derived through indirect sales channels and alliancepartners, including value added resellers and systems integrators .Revenues derived through indirect channels now comprise asignificant portion of our total license revenues . . .

SERVICES. Services revenues consist of support,consulting and training services . Service revenues were $84 .8million, $50 .7 million and $23 .1 million for fiscal years 2000,1999 and 1998, representing 33% of total revenues in fiscal 2000and 37% in both fiscal 1999 and 1998. Total services revenuesincreased 67% and 120% period-to-period for fiscal 2000 and1999. Domestic services increased 63% in fiscal 2000 and 111 %in fiscal 1999, while international services revenues increased 78%and 140% in fiscal 2000 and 1999, respectively . The dollarincreases are attributable to maintenance agreements and relatedbillings from our expanded installed base of customers and anincrease in consulting and training revenues related to theimplementation of our software from initial license agreements andrelated expansion . . .

[Emphasis added . ]

759. The above mate rial statements of fact contained in the Harbinger Registratio n


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•Statement were untrue for among other reasons :

(a) Peregrine's fiscal 2000 financial statements were false as its reported

revenue was materially overstated and its reported net loss was materially understated ;

(b) revenue was improperly recognized on software contracts that were

subject to cancellation and therefore collection of that revenue was not probable ;

(c) the rate of revenue growth was materially overstated due to, among other

things, improper recognition of revenue ;

(d) the fiscal 2000 financial statements were not presented in accordance wit h

GAAP; and

(e) the fiscal 2000 financial statements were not audited in accordance wit h

GAAS .

760. On May. 24, 2002, Arthur Andersen withdrew its audit opinion on Peregrine's

fiscal 2000 financial statements because that opinion could not be relied upon.

761 . On February 28, 2003, Peregrine issued restated financial statements for, among .

other periods, its fiscal year ended March 31, 2000 . The restated figures relative to those

contained in the Harbinger Registration Statement are as follows (in thousands) :

As Contained in Registration Statement As Restated(In $000) (In $000)

License Revenue $168,467 $53,329Services Revenue $ 84,833 $78,303Total Revenue $253,300 $131,632

Net Loss ($ 25,070) ($217,418)

762. Defendants' false statements, misrepresentations, and omissions caused the

market price of Peregrine securities to be artificially inflated at the time of the merger with

Harbinger. On June 16, 2000, the date of the merger with Harbinger, the market price of

Peregrine common stock closed at $25 .56 per share .

763 . The defendants named herein from Peregrine's board each had a duty to make a

reasonable and diligent investigation of the truthfulness and accuracy of the statements contained

in the Harbinger Registration Statement . They had a duty to ensure that such statements wer e


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true and accurate and that there were no omissions of material facts that would make th e

I statements made misleading . These defendants failed to do so.

764. Arthur Andersen and AWSC each had a duty to make a reasonable and diligent

investigation of the truthfulness and accuracy of the Peregrine financial statements contained in

the Harbinger Registration Statement . They had a duty to ensure such statements were true and

there were no omissions of material facts that would make the statements made misleading .

Arthur Andersen and AWSC failed to do so . Instead, Arthur Andersen and AWSC consented t o

the inclusion of its materially false and misleading audit report on Pereg rine ' s fiscal year 2000

financial statements. Arthur Andersen and AWSC audit repo rt was contained in the Harbinger

Registration Statement with the knowledge and consent of Arthur Andersen and AWSC .

765 . None of the defendants named herein made a reasonable investigation or

possessed reasonable grounds for the belief that the statements contained in the Harbinger

Registration Statement were true and without omissions of any material facts and were not

misleading . The defendants named herein, in the exercise of reasonable care, should have know n

of the misstatements and omissions contained in the Registration Statement and Prospectus as se t

forth above .

766 . Plaintiffs and the Sub-Class Members who acquired Peregrine common stock

pursuant to the Harbinger Registration Statement did so without knowledge of the materiall y

untrue statements or omissions in the Registration Statement . As a direct and proximate result of

the defendants' wrongdoing, the Harbinger Sub-Class Members have suffered substantia l

damages .

COUNT VI I

(Violations Of Section 15 Of The Securities Act - The Harbinger Acquisition)

767. Plaintiffs Waga and Sutliff incorporate by reference, as though fully set fo rth

herein, the paragraphs referenced in Paragraphs 676, 696 and 751-772 above, only to the extent

that they allege negligence only .

768 . This Count is asserted against defendants Gardner, Gless, Moores, Cole, Hosley,

Noell, van den Berg, Watrous, Arthur Andersen and AWSC . This Count is based solely o n


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•defendants' negligent conduct.

769. Each of the individual defendants named in this Court was a controlling person of

Peregrine within the meaning of Section 15 of the Securities Act at the time of the Harbinger

Registration Statement and had the power and authority to cause the issuer to engage in the

wrongful conduct complained of herein, including the issuance of the false and misleading

statements and omissions in the Prospectus . In addition, defendants AWSC and Stulac were

controlling persons of Arthur Andersen within the meaning of Section 15 of the Securities Act at

the time of the Harbinger Registration Statement and had the power and authority to cause the

issuer to engage in the wrongful conduct complained of herein, including the issuance of the false

and misleading statements and omissions in the Harbinger Joint Proxy .

770. Certainly, for purposes of the dist ribution of the Harbinger Joint Proxy, the Board

members named in this Count had control of whether such dis tributions should be made and the

contents thereof. Beyond the Harbinger transaction, Moores also had control of Peregrine

through his control and domination of the Board. As stated in detail above, almost every Board

member had ties to Moores, which allowed Moores to have a great deal of influence over thos e

Board members . Moreover, by his control of these Board members, Moores and these Board

members effectively controlled Peregrine .

771 . None of the individual defendants mentioned in this Count or defendants AWS C

or Stulac made a reasonable investigation or possessed reasonable grounds for the belief that the

statements contained in the Harbinger Joint Proxy were true and devoid of any omissions of

material facts . Therefore, by reason of their positions of control, as alleged herein, each of these

defendants is jointly and severally liable to plaintiffs bringing this Court and other members of

the Harbinger Sub-Class as a result of the wrongful conduct alleged herein .

772. Plaintiffs and the Sub-Class Members who acquired Peregrine common stock

pursuant to the Harbinger Registration Statement did so without knowledge of the materiall y

untrue statements or omissions in the Registration Statement . As a direct and proximate result of

the defendants' wrongdoing, the Harbinger Sub-Class Members have suffered substantia l

damages .


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COUNT VIII

(Violations Of Section 11 Of The Securities Act - The Remedy Acquisitio n

773. Plaintiffs Balch and Hylton incorporate by reference, as though fully set forth

herein , Paragraphs 6, 28-30 , 31(1) - (o), 32, 36(a), 36(b), 36(h) - (j), 36 (m) - (n), 36(p), 36(r), and

1 40-48 above .

774. This Count is asserted against defendants Gardner, Gless, Moores, Savoy, Cole,

Noell, Watrous, Arthur Andersen and AWSC. This Count is based solely on defendants '

j negligent conduct .

775. This Count is asserted by Plaintiffs Balch and Hylton on behalf of a Sub-Class

consisting of all persons and entities who acquired Peregrine registered common stock in

connection with Peregrine's acquisition of Remedy Corporation which was consummated on or

about August 27, 2001 (the "Remedy Sub-Class") .

776. On or about July 23, 2001, the defendants issued, caused the issuance, and/or

signed Amendment No . 1 to a Form S-4 Registration Statement that was filed with the SEC (the

"Remedy Registration Statement") in connection with Peregrine's acquisition of Remedy . The

Remedy Registration Statement included a Proxy/Prospectus which provided, inter alia, for a

special meeting of Remedy stockholders to be held on August 27, 2001 in which shareholders of

Remedy were solicited to vote to approve the consummation of the proposed merger of Peregrine

and Remedy . Under the terms of the proposed merger, each outstanding share of Remedy

common stock would be exchanged for $9 .00 in cash and 0.9065 of a share of Peregrine commo n

stock, and each option to purchase Remedy common stock would be exchanged for an equivalent

amount of Peregrine common stock based on the value of stock and cash which each share o f

Remedy common stock was to receive in the merger .

777 . Defendants Gardner, Gless, Moores, Savoy, Cole, Noell and Watrous signed the

Remedy Registration Statement . The Remedy Registration Statement contained untrue

statements of material fact and/or omitted to state material facts necessary to make statement s

therein not misleading .

778. In particular, the Proxy/Prospectus, under the heading "Peregrine Selecte d


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Consolidated Financial Data," contained consolidated operating results for, inter alia, the

Company's fiscal years ended March 31, 2001 and March 31, 2000 . The financial dated included

the following :

YEAR ENDED MARCH 31, 2001 2000(in 000s ) ( in 000s)

STATEMENT OF OPERATIONS DATA :Revenues : Licenses $ 354 , 610 $168,467

Services $ 210,073 $ 84,83 3Total revenues $ 564,683 $ 253,300Total costs and expenses $ 1,378,090 $ 261,956Income (loss) from operations $ (813,407) $ (8,656)Net income ( loss) $ (852 ,241) $ (25,070)Net income ( loss) per share diluted $ (6 .16) $ (0 .24)

779. The Remedy Registration Statement also incorporated by reference Peregrine's

Annual Report on Form 10-K for the fiscal year ended March 31, 2001, which contained, inter

alia, Peregrine's consolidated financial statements as of March 31, 2000 and as of

March 31, 2001, including an unqualified audit opinion of Arthur Andersen on those financial

statements. Defendant AWSC consented to Arthur Andersen being named as having certified its

opinion as to Peregrine's financial statements .

780 . Peregrine's Form IO-K for the fiscal year ended March 31, 2001 stated as follow s

I in connection with the Company's revenue recognition :

Revenues from direct and indirect license anreements arerecognized currently, provided that all of the following conditionsare met : a noncancellable license agreement has been signed, theproduct has been delivered, there are no material uncertaintie sre ag rding customer acceptance collection of the resultingreceivable is deemed probable, risk of concession is deemedremote. and we have no other significant obligations associate dwith the transaction . Revenues from post-contract support servicesare recognized ratably over the term of the maintenance period,generally one year. Maintenance revenues which are bundled withlicense agreements, are unbundled using vendor specific objectiveevidence . Professional services revenues are primarily related toimplementation services most often performed on a time andmaterial basis under separate service agreements for the installationof our products . Revenues from professional services andcustomer training are recognized as the respective services areperformed.

[Emphasis added. ]

781 . The Remedy Registration Statement also included a Consent of Independen t


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2 As independent public accountants, we hereby consent to theincorporation by reference in this registration statement of our

3 report dated April 26, 2001 included in Peregrine Systems, Inc .Form 10-K for the year ended March 31, 2001 and to all references

4 to our Firm included in this registration statement .

5 782. The above material statements of fact contained in the Remedy Registration

6 Statement were untrue for among other reasons :

7 (a) Peregrine's fiscal 2000 and 2001 financial statements were each false as its

8 reported revenue was materially overstated and its reported net loss was materially understated ;

9 (b) revenue was improperly recognized on software contracts that were

10 subject to cancellation and therefore collection of that revenue was not probable ;

11 (c) the rate of revenue growth reflected in the fiscal 2000 and 2001 data was

12 materially overstated due to, among other things, improper recognition of revenue ;

13 (d) the fiscal 2000 and 2001 financial statements were not presented in

14 accordance with GAAP ; and

15 (e) the fiscal 2000 and 2001 financial statements were not audited in

16 accordance with GAAS .

17 783. On May 24, 2002, Arthur Andersen withdrew its audit opinion on Peregrine's

18 fiscal 2000 and 2001 financial statements as its opinions with respect to those financia l

19 statements could not be relied upon .

20 784. On February 28, 2003, Peregrine issued restated financial statements for, among

21 other periods, its fiscal years ended March 31, 2000 and March 31, 2001 . The restated figures

22 relative to those contained in the Remedy Registration Statement are as follows (in thousands) :

23 As Contained in Registration Statement As Restate d(in $000) (in $000)

24Fiscal 2000 Fiscal 2001 Fiscal 2000 Fiscal 2001

25License Revenue $168,467 $ 354,610 $53,329 $ 94,918

26 Services Revenue $ 84,833 $ 210,073 $78,303 $ 118,435Total Revenue $253,300 $ 564,683 $131,632 $ 213,35 3

27 Net Loss $(25,070) $(852,241) $(217,418) $(1,844,517)

28 785 . As a result of the defendants' false statements, misrepresentations, and omissions,


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•the price of Peregrine securities was artificially inflated at the time of the merger with Remedy .

On August 27, 2001, the date of the merger with Remedy, the market price of Peregrine stock

closed at $23 .01 per share.

786. The defendants who were members of Peregrine's board of directors name d

herein each had a duty to make a reasonable and diligent investigation of the truthfulness and

accuracy of the statements contained in the Remedy Registration Statement, They had a duty to

ensure that such statements were true and that there were no omissions of material facts tha t

would make the statements made misleading . These defendants failed to do so . These

defendants signed the Remedy Registration Statement .

787. Arthur Andersen and AWSC each had a duty to make a reasonable and diligent

investigation of the truthfulness and accuracy of the Peregrine financial statements contained i n

the Remedy Registration Statement . They had a duty to ensure such statements were true and

there were no omissions of material facts that would make the statements made misleading .

'Arthur Andersen and AWSC failed to do so . Instead, they consented to the inclusion of the

materially false and misleading audit reports on Peregrine's fiscal year 2000 and fiscal year 2001

financial statements . These audit reports were contained in the Remedy Registration Statement

with the knowledge and consent or the acquiescence of defendants Arthur Andersen and AWSC .

788. None of the defendants named herein made a reasonable investigation or

possessed reasonable grounds for the belief that the statements contained in the Remedy

Registration Statement were true and without omissions of any material facts and were not

misleading .

789. The defendants named herein, in the exercise of reasonable care, should have

known of the misstatements and omissions contained in the Remedy Registration Statement as

set forth above .

790. Plaintiffs and the Remedy Sub-Class Members who acquired Peregrine common

stock pursuant to the Remedy Registration Statement did so without knowledge of the materially

untrue statements or omissions in the Registration Statement . As a direct and proximate result o f

the defendants' wrongdoing, the Remedy Sub-Class Members have suffered substantia l


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damages.

COUNT IX

(Violations Of Section 15 Of The Securities Act - The Remedy Acquisition )

791 . Plaintiffs Balch and Hylton incorporate by reference, as though fully set forth

herein, the paragraphs referenced in Paragraphs 715, 732 and 773-790 above, only to the extent

that they allege negligence only.

792. This Count is asserted against defendants Gardner, Gless, Moores, Savoy, Cole,

Noel[, Watrous, Arthur Andersen and AWSC . This Count is based solely on defendants '

I negligent conduct .

793 . Each of the individual defendants named in this Court was a controlling person of

Peregrine within the meaning of Section 15 of the Securities Act at the time of the Remedy

Registration Statement and had the power and authority to cause the issuer to engage in the

wrongful conduct complained of herein, including the issuance of the false and misleading

statements and omissions in the Prospectus . In addition, defendants AWSC and Stulac were

controlling persons of Arthur Andersen within the meaning of Section 15 of the Securities Act at

the time of the Remedy Registration Statement and had the power and authority to cause the

issuer to engage in the wrongful conduct complained of herein, including the issuance of the false

and misleading statements and omissions in the Remedy Joint Proxy .

794. Certainly, for purposes of the distribution of the Remedy Joint Proxy, the Board

members named in this Count had control of whether such distributions should be made and th e

contents thereof. Beyond the Remedy transaction, Moores also had control of Peregrine through

his control and domination of the Board . As stated in detail above, almost every Board member

had ties to Moores, which allowed Moores to have a great deal of influence over those Board

members . Moreover, by his control of these Board members, Moores and these Board members

effectively controlled Peregrine .

795 . None of the individual defendants mentioned in this Count or defendants AWSC

or Stulac made a reasonable investigation or possessed reasonable grounds for the belief that th e

statements contained in the Remedy Joint Proxy were true and devoid of any omissions o f


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material facts . Therefore, by reason of their positions of control, as alleged herein, each of these

defendants is jointly and severally liable to plaintiffs bringing this Court and other members of

the Remedy Sub-Class as a result of the wrongful conduct alleged herein .

796. Plaintiffs and the Sub-Class Members who acquired Peregrine common stock

pursuant to the Remedy Registration Statement did so without knowledge of the materially

untrue statements or omissions in the Registration Statement . As a direct and proximate result o f

the defendants' wrongdoing, the Remedy Sub-Class Members have suffered substantial damages .

PRAYER FOR RELIEF

WHEREFORE Plaintiffs, on behalf of themselves and the Class, demand judgment

against defendants, and each of them, as follows :

A. Determining that this action is properly maintainable as a class action pursuant to

Rule 23 of the Federal Rules of Civil Procedure and certifying the Class and Sub-Classes ;

B. Declaring and determining that the defendants violated the federal securities law s

by reason of their conduct alleged herein ;

C. Awarding monetary damages against all of the defendants, jointly and severally,

in favor of plaintiffs and the Class and Sub-Classes for the damages suffered as a result of th e

wrongdoing complained of herein together with prejudgment interest from the date of the

wrongdoing to the date of the entry of judgment ;

D. Awarding plaintiffs their costs, expenses, and disbursements incurred in this

action, including reasonable attorneys' and experts' fees and costs ;

E. Granting extraordinary equitable and/or injunctive relief as permitted by law,

equity and federal and state statutory provisions sued on hereunder, including attaching,

impounding, imposing a constructive trust upon or otherwise restricting the proceeds of

Defendants' trading activities or their other assets so as to assure that plaintiffs and the Class

have an effective remedy ; and

F. Awarding plaintiffs and the Class such other relief as the Court may deem just an d

proper .

11


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JURY DEMAND

Plaintiffs hereby demand a trial by jury .

Dated: April 3, 2004 GOLD BENNETT CERA & SIDENER LL P

By:Solom B. Cera

Attorneys for Section 10(b) Lead Plaintiff TheLoran Group And All Others Similarly Situated

- and -

STULL, STULL & BROD Y

By: &vmd fHoward T . Longman

ABRAHAM & ASSOCIATES

By_ Ce,J tLawrence D. Levi

t Attorneysfor Section 11 Lead PlaintiffHeywood Waga And All Others SimilarlySituated


M tTABLE OF CONTENTS FOR APPENDICES

Document

APPENDIX A

Page

Plea Agreement of Matthew C . Gless . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1-25

APPENDIX B

Plea Agreement of Steven S . Spitzer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26-43

APPENDIX C

Plea Agreement of Isle Cappel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44-59

APPENDIX D

Peregrine Class Period Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60

APPENDIX E

Transaction Summaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61-11 6

#105770

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281

•CAROL C . LAYUnited States AttorneyGEORGE D. HARDYAssistant U .S. AttorneyCalifornia State Bar No . 086037BARBARA L. MORAssistant U.S. AttorneyCalifornia State Bar No .131812SANJAY BHANDARISpecial Assistant U.S . AttorneyCalifornia State Bar No,181920Federal Office Building880 Front Street, Room 6293San Diego, California 92101-8893Telephone : (519) 557-6197

Attorneys for PlaintiffUnited States of America -

i14

2083 APR 16 FM 12~ 55

UNTIED STATES DISTRICT COURT

SOUTHERN DISTRICT OF CALIFORNIA

UNITED STATES OF AMERICA, ) Criminal Case No . 03crl090W

Plaintiff,

v. ~P ~ AGREEMENT

MATTHEW C. GLESS, )

Defendant.

IT IS HEREBY AGREED between the plaintiff, UNITED STATES OF A CA,

through its counsel, CAROL C .' LAM, United States Attorney, GEORGE D . HARDY and

BARBARA L. MAJOR, Assistant United States Attorneys, and SANJAYBHANDARI, Special

Assistant United States Attorney, and defendant, MATTBEW .C. GLESS, with the advice and

consent of JAMES D . RIDDET, counsel for defendant, as follows :

THE PL A

Defendant MATTHEW C, GLESS ("defendant") agrees to waive indictment and plead

guilty to an infomiation charging defendant with one count of conspiracy, in violation of Title

k

APPENDIX AA I A 11 -1 6 \/ntpV

1 18, United States Code, Section 371, and one count of fraud in connection with thepurchase and

2 sale of securities in violation of Title 15, United States Code, Section ?8j(b) and 78f and Title

3 17, Code of Federal Regulations, Section 24O .10b-S .

4 In exchange for defendant's guilty plea to the above charge and subject to the conditions

s set forth herein, the government agrees to bring no further criminal charges against defendant

6 relating to his conduct relating to Peregrine Systems, Inc .

7 I ~`w

B NATURE o H O N

9 A. ELEMENTS EXPLAINED

10 Defendant understands that the offense of conspiracy (Count 1) to which defendant is

11 pleading guilty has the following elements :

la I. Beginning on a date unknown to the United States Attorney but no later than

13 June, 1999, two or more persons entered an unlawful agreement and conspiracy

14 to commit offenses against the United States, in this case to commit securities

15 fraud, mail fraud, wire fraud ; add bank fraud, to falsify books and records, and

16 to make false and misleading statements to auditors and the U .S . Securities and

17 Exchange Commission ("SEC");

18 2. Defendant knowingly and wiffullybecame amemberofthis conspiracy knowing

19 its objectives and intending to help accomplish it ; and

20 3. At least one member ofthe conspiracy committed at least one overt act to further

23. some objective of the conspiracy.

22 Defendant understands that the offense of fraud in connection with the purchase and sale

23 of securities (Count 2) to which defendant is pleading guilty has the following elements :

as 1. In connection with the purchase and sale of any security, the defendant did one

25 or more of the following :

26 a. employed a device, scheme or a rtifice to defraud;

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2 2

APPENDIX A

03~1A117C Vf~W}I IN,J{~~ W 7 '7 1NUd

z b. made an untxve statement of a material fact or omitted to state a materia l

• 2 fact which made what was said under the circumstances misleadutg or

3 c. engaged in an act , practice, or course of business which operated o r

4 would operate as a fraud or deceit upon a purchaser or se ller;

s 2. In connection with the purchase and sale of any sectffity , defendant knowingly

s used or caused to be used any means or instrumentality of interstate commerc e

7 or of the mails, or of any facility of and national security exchange; and

a 3, Defendant acted willfully, knowingly, and with the intend to defraud.

9 B . ELEMENTS UNDFRSTDOD AN,D AD)MLTTB . FACTUAL BASI4

ro Defendant has fully discussed the facts of this case with defense counsel . Defendant has

i1 committed each of the elements of-the crime, and admits that there is a factual basis for No

z2 guilty plea. The following facts are true and undisputed :

13 The'COm ny

14 - 1. Pereg rine Systems , Inc. CTereg ne") is a computer software compan y

z5 headquartered in San Diego, California. Peregrine was incorporated in California in 1981 an d

1-6 reincorporated in Delaware in 1994 . From its initial public offering ("IPO") in April 1997 until

17 -it was delisted cn August 30, 2002, Peregrine was a publicly held corporation whose shares wer e

z e registered securities traded under the symbol "PRGW' on the National Association of Securitie s

19 Dealers Automated Quotation system ("NASDAQ'), g national securities exchangethatused the

20 means and instrumentali ties of interstate commerce and the mails .

21 2. Peregrine developed and sold business so ftware and related services .

22 Software license fees accounted forthebulk ofPeregrine's publicly reportedrevenue. Peregrine

23 sold its software direc tly through its own sales organization and indirectlytbrough resellers suc h

24 as value added resellers and systems integrators . These indirect sales (also known as "resellee '

25 or "chael" sales) became a critical component of Peregrine' s revenue.

• : .3

28 3 APPENDIX A

n71TA 2c VfI WA AI :c c - 1 uw

I2

3

11

13

15

16

17

~~II

19

20

21

22

23

24

25

26

2 7

ae

0 10

3. From its IPO in April 1997. through the quarter ended June 2001,

Peregrine reported 17 consecutive quarters of revenue growth, always meeting or beating

securities analysts' expectations . Peregrine stock price soared from its April 1997 IPO price of

approximately $2 .25 per share (split adjusted) to almost $80 in March 2000 . Outing this time

period, Peregrine issued over 192 million shares to the investing-public .

• 4. In May 2002, Peregrine disclosed that its prior public reports had been

materially false and that it had employed a variety of devices, schemes and fraudulent accounting

practices over an extended period of time in order to portray itself as far more healthy and

successful that it actually was . After Peregrine restated its financial results and condition, its

stock p rice dropped precipitously and it now trades at below $1 per share .

The Defendant

5. Defendant MATTHEW C. GLESS was hired by Peregrine in April 1996

as its controller and, in October 1998, he was promoted to Chief Accounting Officer and Vice

President ofFinanee . InNovember 2000, defendant GLESS was named Cbief financial Officer

and made a Director on the Board. In May 2001, Peregrine gave defendant GL3SS the

additional title of Executive Vice President . On May 5, 2002, defendant GLESS resigned from

Peregrine . As Chief Accounting Officer and Chief Fin2mcial Officer, defendant GLESS was

responsible for maintaining accurate books, records and accounts that fairlyreflected Peregrine's

transactions and dispositions of assets and for ensuring that Peregrine's financial records and

public reports and statements were accurate , truthful and complied with Generally Accepted

Accounting Principles ("GAAfl.

Peregne 's Public eaortin a

6. As a public company, Peregrine was required to comply with the

Securities Act of 1933, the Securities Exchange Act of 1934, and the regulations of the United

States Securities and Exchange Commission (the "SEC'). These laws and regulations are

designed to protect the investing public by ensuring that companies like Peregrine fairly,

r 44

APPENDIX A

1

1

02

3

4

. 5

s7

e

9

io

xl

12

13

~ 141s

16

17

is

19

20

21

22,

23

24

25

2 6

2 7

2e

00

accurately, and timely teport their financial results and condition. To ensure fair, accurate and

timely reports to the investing public, the securities laws and SEC regulations required Peregrine

and its directors and officers to, among other things ;

(a) make and keep books, records and accounts which in reasonable

detail accurately and fairly reflected Peregrine's transactions and

dispositions of assets;

(b) devise and maintain alsystem of internal accounting controls

sufficient to provide reasonable assurances that the company's .

tr ansactions were executed in accordance with management's

policies, and recorded as necessary to permit preparation of

reliable financial statements in 'accordance with applicable

accounting norms;

(c) file regular public reports including quarterly reports (on Form

10-Q) and annual reports (on Form 14-K) with the SEC ; and

(d) make fair and accurate representations to auditors preparing .

public reports ofPeregrine, includ ing all material facts necessary .

to make management representations to auditors not misleading.

From 1997 through December 2001, Peregrine filed regular financial reports with the SEC,

Dining this entire period, Arthur Andersen LLP, which was at the time a public accounting firm,

served as the outside auditors of Peregrine 's financial reports.

The Conspiracy

7. To make Peregrine's financial condition appear significantly better than

it actually was, to ensure that Peregrine met or exceeded the securities analysts' expectations,

to keep the Peregrine stock price artificially bigb, and to induce the public to purchase and hold

Peregrine stock, defendant MATTHEW GLESS conspired with other Peregrine executives,

Peregrine employees, and individuals to use a variety of schemes, devices, and artifices, to make

55

APPENDIX A

w i l I :c C( 1 ~ i

I

2

3

4

5

s

7

8 .

9

1 L7

12

13

sa

~.5

16i

17

1. 8

20

21

22

23

24

25

26

i 1false and misleading statements and omit material facts intheir statements, andto engage in acts,

practices and courses of business which would operate as a fraud or deceit upon a purchaser or

seller of Peregrine's stock, including the following : .

(a) recognizing and maintaining as revenue, and causing to - be

recognized and maintained as revenue, software license

transactions that could not berecognized as revenue under GA .AP

and Peregrine's stated revenue recognition policy, including

reporting revenue from transactions that were not yet complete

and those that may never be completed ;

(b) selling and causing to be sold uncollectible, falsified and invalid

accounts receivable to banks to fraudulently manipulate

Peregrine's Days Sales Outstanding (DSO), which is a formula

used by securities analysts to measure the quality'and quantity of

a company's outstanding debts or "accounts receivable" and

which reflects on a company's financial condition and stock

value;

(c) hiding and causing to be hidden in financial statements

uncollectible accounts receivable and invalidrevenuerecognition

as acquisition and other one-time costs to fraudulently enhance

Peregrine's financial condition;

(d) making aid causing to be made materially false statements to

-Peregrine's auditors, the SEC, and the investing public, and

omitting and causing to be omitted material facts from statements

to Peregrine's auditors, the SEC, and the investing public, in

order to deceive these groups regarding Peregrine's policies,

transactions and condition; and,

27

2e 6

6APPENDIX A

. .- •••, •••• .u 1 1 1 - r r nb .e

1 .11 creating and causing to be created false records including false

2 contracts and invoices in order to continue , maintain , and conceal

3 their deceitful schemes.

4 8. The American Institute of Certified Public Accountants ' Statement of

s Position ("SOP") 97-2, Software Revenue Recognition, and subsequent clari fications are the

r, Generally Accepted Accounting Principles ("GAAP") that apply to recording or "recognizing"

7 revenue in publicly fried financial statements from transactions involving' so ftware licenses .,

e These accounting principles require that revenue is notrecognizable unless a transaction satisfies

s four criteria: (a) persuasive evidence of a transaction exists, (b) delivery has occurred, (c) the

'io vendor's fee is fixed or determinable, and (d) collectibility is probable, in essence, these

ii principles require that a company publicly recognize revenue only when and to the extent that

12 a transaction has resulted in actual economic gain .

13 9. In the financial reports filed with the SEC from August 14,1998 to March

14 4, 2002, Pereg rine claimed to recognize revenue in accordance with GAAP . Defendant

15 MATTHEW C . GLESS signed nine Quarterly Reports on Form l0-Q and two Annual Report s

on Form 10-K between August 1999 and February 2002 fraudulently asserting that Peregrine

17 recognized revenue is accordance with GAAP . For example, defendant GLESS signed and

18 submitted the following financial reports , knowing that they contained materially false

ig statements and omissions and intending to deceive and defraud the securities analysts, the SEC,

20 the investing public, and others who rely upon them:

21 (a) On or about November 14, 2000, defendant GLESS, as

22 Peregrine's Vice President and Chief Financial Officer, signed

23 and submitted to the SEC a Form 1O-Q in which defendant

24 GLESS falsely represented that Peregrine 's "[r)evenues from

25 license agreements are recognized currently, provided that all of

26 the following conditions are met : a noncancellable license

27

28 7 7

APPENDIX A

1

1 2

3

4

5

6

7

9

10

11

12

13

• IA

155

16

17

is

1.9

20

21

23

24

2 $

as

27

28

agreernem has been signed, the product has been delivered, there

arc no material uncertainties regarding customer acceptance,

collection of the resulting receivable is deemed probable and the

risk of concession is deemed remote , and no other significant

vendor obligations exist. "

(b) On or about June 29, 2001, Peregrine's Chief Executive Officer

and Chairman of the"a Board of Directors and defendant

MATTHEW C. GLESS, as Peregrine's Executive Vice President

and Chief Financial Officer, signed and submitted to the SEC a

Form i4-K in which defendant GLESS falsely represented that

Peregrine 's "[r)evenues from direct and indireef license

agreements are recognized, provided that all of the following

conditions are met ; a noneancellab]e license agreement has been

signed ; the product has been delivered ; there are no material

uncertainties regarding customer acceptance ; co llection of the

resulting receivable is deemed probable ; risk of concession is

deemed remote ; and no other significant vendor obligations

11

10. Defendant GLESS and his co-conspirators also signed more than nine

manage rent representation letters that Peregrine presented to its independent auditors its, which

defendant GLESS, on behalf ofPeregrine , asserted that Peregrine ' s financial statements were in

accordance with GAAP . For example , on January 22, 2002, Pereg rine 's Chairman and Chief

Executive Officer and defendantMATTHEW C, GLESS, as Executive Vice President , Finance

and Chief Financial Officer, signed a letter to Peregrine 's auditor, Arthur Andersen LU', in

which the following false and misleading misrepresentations were made , among others :

8

ntnl 4 tIA V/111fi

SAPPENDIX A

w .- i ,,

I (a) "We are not aware of any side agreements, whether written or

2 oral, to its [Peregrine's] software revenue arrangements . "

3 (b) "The Company has recognizzed revenue in accordance with the

4 provisions of SOP 97-2 and other authoritative literature "

5 11 . Despite having filed and caused to be filed these public reports that

6 peregrine would recognize revenue in accordance with GAAP, defendant GLESS and his co -

7 conspirators structured and booked as revenue, azrcl` caused to be structured and booked ,

e transactions that violated some or all of the provisions of GA.A,P and/or Peregrine's stated

9 revenue recognition policy, including :

so (a) transactions that were still under negotiation or were otherwis e

11 incomplete in the quarter in which they were booked as revenue;

.12 (b) transactiobsthat were subject toside letters orothercontingencies

13 that allowed forpartial or complete cancellation ofthe customer' s

14

•

obligation to pay Peregrine; and

is (c) barter and swap transactions in which Peregrine would provid e

16 cash, stock, or a purchase order for the customer's products o r

17 services in order to secure the customer's wmmitmerrt ,

ze 12. To perpetuate this fraudulent conspiracy, defendant GLESS and his co -

19 conspirators, including other members of Peregr'ine's management team, would meet or talk at .

20 or near the end of each quarter to determine bow much revenue Peregrine needed to book tha t

21 quarter in order to meet or exceed the securities analysts' expectations . Defendant GLESS and

22 his co-conspirators would then devise, structure or create fraudulent and misleading transactions,

23 as described above, and the resulting "revenue" would be recognized in that quarter in order t o

2 4 mislead the securities analysts and investing public into believing that Peregrine's financial

25 condition was significantly better than it really was and to maintain'Peregrine's inflated stoc k

,26 price .

27 9

29APPENDIX A

ca1IANI-q Xfj I : r c(1fl '7 %VW

I

3

4

5

6

7

e

9

10

12

1, 3

14

15

16

17

is

19

20

21

22

23

24

25

26

I

13 . To further fraudulently enhance Peregrine's financial health, defendant

GLES5 and his co-conspirators also would deceitfully manipulate Peregrine 's "DSO", which

stands for "Days Sales Outstanding ." DSO is a formula used by securities analysts to measure

how many days it takes a company to collect outstanding debts or "accounts receivable" from

its customers . The larger the number, the more likely it is that analysts would call into question

the quality of a company's receivables and therefore the related revenue that had been

recognized. Securities analysts pay attention to a coh parry's DSO in judging the health of a

company and the value of its stock ,

14,- Peregrine's management was very concerned about keeping its DSO

below a certain number in part because management had previously provided guidance t o

I analysts about the expectedDSO number and impart because ahigh DS0 could alert the analyst s

to the fact that peregrine had improperly recognized revenue . However, it was difficult for

peregrine to keep the DS 0 low because, as set forth above, Peregrine had a practice of recording

contingent sales (e .g . sales to resellers or channel .partners who were not required to pay

Peregrine unless and until the product was sold-through to an end user) as revenue before .

satisfaction of the.contingency an which payment to Peregrine depended. These revenues, once

improperlyrecorded, would remain uncollected receivables for extended periods, raising concern

among securities analysts and possibly exposing Peregrine's improper revenue . practices .

1 I S, To avoid this and to give the impression that Peregrine's customers wer e

timely paying Peregrine, defendant GLESS directed- Peregrine employees to remove aging

receivables from Peregrine's balance sheet by selling them to banks at quarter end . The bans,

however, would purchase the accounts receivable onlyiftheywere told that the receivables were

valid, enforceable and based on completed transactions . To further the fraudulent conspiracy ,

defendantGLESS repeatedly falsely represented to the banks that the receivables were valid an d

collectible .

•27

28

10APPENDIX A

10

1 A 7 , 11 ,A .,--

16. To further perpetuate the fraud, defeadant GLESS and his co-conspirator s

2 . gave the batiks recourse on the receivables if Peregrine, who was supposed to collect from th e

3 channel partner, did not timely pay the basks . Despite his intimate knowledge of the nature o f

4 the bank transactions, defendant GLESS denied in Form 10-Q filings with the SEC tha t

s Peregrine sold receivables with recourse by stating that Peregrine "may market certain clien t

6 receivable balances without recourse."

7 17. When receivables were not available to sell to banks, defendant GLES S

e instructed certain Peregrine employees including ESE CAPPEL (charged elsewhere) to prepar e

s false invoices corresponding to deals that had not yet closed, and to sell those false invoices to

10 banks before the deals were even reported to be closed . In the quarter ending June 30, 1999, .

11 defendant GLESS caused Peregrine personnel to prepare false invoices for transactions that ha d

12 not closed, totaling several million, and to sell them to a bank before the deals had closed .

13 19, On or before June 29, 2001, defendant MATTHEW C. GLESS instructed

14 ILSE CAYPEL to fabricate a Peregrine invoice to KPMG Consulting LLC, dated June 29,2001 P

1s for s 19,580,596.00 that was sold to Wells Fargo }ISBC Trade Bank, . N .A., as if it were a valid ,

3.6 enforceable account receivable, based on a completed transaction with KPMG Consulting, whe n

17 in actual fact, it was not because Peregrine had no valid contract with KPMG Consulting at that

ie time for that amount under those tern-;s . In addition, defendant GLESS, as Peregrine's vic e

19 President and ChiefFinancial Officer, executed aForm of Sale and Assig=ent, wbichhe caused

. 20 to be transmitted to Wells Fargo Bank, in which he fraudulently represented that the KPM G

21 invoice represented a valid and enforceable account receivable . Defendant GLESS admits tha t

22 he thereby defrauded a bank, the deposits of which were insured by the Federal Deposi t

23 Insurance Corporation .

24 19. To further perpetuate the fraudulent conspiracy, on or about April 12 ,

2s 2001, defendantGLESS, as Peregrine's ChiefFinancial Officer, signed and submitted to the SE C

26 a letter containing Peregrine's response to the SEC's Comment Letter in which defendant

2 7

~e ~~ 11 11

APPENDIX A

z GLESS made the following representations, among others, that were false, and misleading and

2 omitted facts necessary to render them not false and misleading :

3 (a) "Peregrine has demonstrated that under the revenue recognition

4 runes of SOP 97-2, the price of their products is fixed and

5 determinable at the date of the sale. Peregrine has a policy of

6 deferring revenue where this requirement is called into question"

7 (b) The payment is never'contiugent upon resale and any and . al3 .

sales to indirect partners fall under the same payment structure."

s 20. In a further attemptto reduce the DSO and disguise the amount and extent

xo of fraudulent, uncollectible and aging receivables, defendant GLESS conspired with others to

1l. improperly remove the receivables from Peregrine's balance sheets by writing them off as part

12 of unrelated acquisition and other0one-time costs . At the time that he authorized the write-offs,

13 defendant GLDSS knew that the receivables were uncdllectible and that the write-off would

14 further mislead the securities analysts and investingpublic as to the status ofPeregnne's financial

xs condition.

16 21. Defendant GLESS adrrmits that in committing the charged crimes, be used

17 and caused to be used instrumentalities of interstate commerce, the mails, and the facilities of

is national security exchanges, .

1s 22. Defendant GLESS admits that he and others knowingly, wmfuully, and

2o with an intent to defraud, used the above-described schemes, devices and artifices to create the

21 false impression that Peregrine was financially sound, to artificially increase the value of

22 Peregrine's stock, to induce the public to purchase and bold Peregrine's stock, to defraud

23 securities analysts and the public, and to enhance their reputation and enrich themselves through

24 compensation, stock options, and other means ,

2 5

26

27 12

2012 APPENDIX A

}

2 PENALTIE S

3 Defendant understands that the crime of conspiracy (Count 1) carries the following

4 penalties :

s A. a maxim= term of five years in prison (18 U .S.C. § 371) ;

6 a maximum fine of the greatest of 5250,000, twice the gross pecuniary gai n

7 derived from the offense, or twice the gloss pecuniary loss to a person other tha n

s the defendant as a result of the offense (18 U.S.C. § 3571) ;

9 C. a mandatory special'assessment of 8100 (18 U .S .C. § 3013) ;

20 D . a term of supervised release of at least two years but not more than three year s

xi (USSG § 5DI .1-5D1 .2). Defendant understands that failure to comply with an y

22 of the conditions of supervised release may result in revocation of supervise d

13 release, requiring defendant to serve in prison all orpart of the term of supervise d

14 release; and

a5 E. an order from the court pursuant to Title 18, United States Code, Section 3663 A

16 that defendant make mandatory restitution to the victim(s) of the offense o f

17 conviction, or the estate(s) of the victims(s) in an amount to be specified by the .

Court in accordance with 18 U,S .C. §§ 3663, 3663A and 3664 . This amount

2s shall be paid according to a plan established by the Court ,

20 Defendant understands that the crime of fraud in the purchase and sale of securitie s

21 (Count 2) carries the following penalties :

22 A. a maximum term of ton years in prison (15 U .S.C. § -78ff(a)) ;.

23 B. a maximum fine of the greatest of $250,000, twice-the gross pecuniary gai n

24 derived from the offense, or twice the gross pecuniary loss to a person other than

25 the defendant as a result of the offense (18 U .S.C. § 3571);

26 C. a mandatory special assessment of $100 (18 U .S .C. § 3013) ;

27

1320 13 APPENDIX A

A-In1jul + VALIV W,l71 :c cn n7 •7 AV

I D. a term of supervised release of at least two years but not more than three year s

Z (USSG § 5D1 .1-SD1 .2) . Defendant uiaderstands that failure to comply with any

3 of the conditions of supervised release may result in revocation of supervised

4 release, requiring defendant to serve in prison all or part ofthe term of supervise d

s release; and

6 E, an order from the court pursuant to Title 18, United States Code, Section 3663 A

7 that defendant make mandatory restietion to the victim(s) of the offense of

a conviction, or the estate(s) of the victims(s)in an amount to be specified by th e

9 Court in accordance with 18 . U.S.C. §§ 3663, 3663A and 3664, This amoun t

10 shall be paid according to a plan established by the Court .

11 Defendant understands that by pleading guilty to the above offense(es) defendant ma y

la become ineligible for federal benefits .

1.3 IV

14 DE1 DA rS w R of TEAL LUG$T ,

is Defendant understands that this guilty plea waives the right to :

16 A. continue to plead not guilty and require the government to prove the elements of

x 17 the crime beyond a reasonable doubt ;

ae B. a speedy and public trial by jury;

19 C. the assistance of counsel at all stages of trial ;

20 D, confront and cross-examine adverse witnesses;

21 E. present evidence and to have witnesses testify an behalf of defendant ;

22 F. not testify or have any adverse inferences drawn from the failure to testify.

23 V

24 DEFENDANT ACKNOWLEDGES NO PRETRIAL RIGHT TO B EpVID D C WEDS NSE RMA Q

25

The government represents that any information establishing the factual innocence o f26

defendant ]mown to the undersigned prosecutor in this case has been turned over to defendant ,2 7

28 I 14 14

APPENDIX A

VfM V Ilid71'CA67'7 •tuw

2,1

3

4

6

7

1D

12

13

0 14

1s

16

17

1B

19-

20

21

22

23

24

25

26

27

26

The government will continue to provide such information establishing the factual innocence of

defendant.

Defendant understands that if this case proceeded to trial, the government would be

required to provide impeachment information relating to any informants or other witnesses . In

addition, if defendant raised an affirmative defense, the government wouldbe required to provide

information in its possession that supports such a defense . Defendant acknowledges, however,

that by pleading guilty defendant willnot be provide&this information, if any, and Defendant

also waives the right to this information . Finally, defendant agrees not to attempt to withdraw

the guilty plea or to file a collateral attack based on the existence of this information .

VI

DEFENDANT'S REPRESENTATION THAT GUILTYT.E IS !(NOW NG ANP VO U

Defendant represents that ;

A. Defendant has had a full opportunity to discuss all the facts and circumstances of

this case with defense counsel, and has a clear understanding of the charges and

the consequences of this plea;

B, No one has made any promises or offered any rewards in return for this guilty

plea, other than those contained in this agreement;

C. No one has threatened defendant or defendant's family to induce this guilty plea ;

and

D. Defendant is pleading guilty because in truth and in fact defendant is guilty and

for no other reason .

VII .

AGREEMENT LIMITED TO U.S. ATTORNEY'S OFI+ICESOUT ERN DJST ICI OF CALIFORNIA

This plea agreement is limited to the United States Attorneys Office for the Southern

District ofCalifornia and cannot bind any other federal, state or local prosecuting, administrative,

15

6 1RTAube VfIJ

'5APPENDIX A

A :c W717 iwim

2

3

4

5

6

7

] .o

12

13

• 14

z~

16

17

is

is

20

21

22

23

24

25

2 6

27

28

or regulatory authonties. The government, however, will bring this plea agreement to the

attention of other authorities, if requested by defendant .

Yf

E C1NG GUIDEL S

Defendant understands-the sentence will be governed by the United States Sentencing

Commission Guidelines ("Guidelines") . Defendant has discussed the Guidelines with defense

counsel, and understands that the sentence cannot be 'ètermined until a presentence report has

been prepared by the U .S . Probation Office .and defense counsel and the government have had

an opportunity to review and challenge the presentence report . Defendant understands that,

under some circumstances, the Court may "depart" from the guidelines and impose a sentence

more severe or less severe than the guidelines, up to the maximum in the statute of conviction ,

The United States Attorney's Office will fully advise the District Court and the U .S .

Probation Office of all of defendant's relevant conduct for sentencing . Nothing in this plea

agreement shall be construed as limiting the information that the government may provide to the

Court or the Probation Office .

IX

SEh2ENCE IS WITHIN SOLE DISCRETION DF JUDGE

This plea agreement is made pursuant to Federal Rule ofCriminal Procedure 11(e)(1)(A) .

Defendant understands that the sentence is within the sole discretion of the sentencing judge.

The government has not made and will not make any representation as to what sentence

defendant will receive . Defendant understands that the sentencing judge may impose the

maximwn sentence provided by statute, and is also aware that any estimate of the probable

sentence by defense counsel is a prediction, not a promise, and is not binding on the court.

Likewise, the recommendation made by the government is not binding on the court, and it i s

uncertain at this time what defendant's sentence will be .

1616 APPENDIX A

n,ArIuin vngv UIJ7I :C CA A7 '7 '1um

1

2

3

4

s

6

7

e

9

10

12

1s

• lg

is

16

17

is

19

20

2 1

22

23

24

23

as

2 7

20 {,

I

Defendant also has been advised and understands that if the sentencing judge does not

follow the parties' sentencing recommendations, defendant nevertheless has no right to withdraw

the plea .

X

PARTIES' SENTENCING RECOMENIDAnQN S

A. G LINES MANUAL AND THE OF ALE C0

The parties will jointly recommend that the Court apply the United States Sentencing

Commission Guidelines Manual ["USSG' ] that was effective November 2002 , in its entirety to

all counts . The parties will further jointly recommend that the Court find that Counts I and 2

group under USSG § 3D1 .2(b), and that Counts 1 and 2 should run consecutively if necessary

to produce a sentence equal to the total punishment required after all adjustments and departiues,

per USSG § 5G1 .2(d) .

B. BASE_OMNSE LEVEL AND ADTUSTTMEN'S

The parties will jointly make the following sentencing recommendations :

1, Base offense level [§ 2B1 .1)

Speci fic Offense Characteristics

a. Loss greater than $100 million 2B 1 .1(b)(1)(N)] +26

b. 50 or more victims [$ 2B1 .1(b)(2)(B)] +4

c. Substantial part of scheme committed abroad /use of sophisticated means [§ 2B I . 1(b)(8)(B)-(C')] +2

3 . Accede of resgonsib tv H ME . 1

Adjusted Offense Leve' 35

The parties will propose a loss measurement system based upon shareholder loss and

specifically agree that the loss exceeds $100 million . See, ems U 'ted States v. a1 bi 218 F .

Supp .2d 1232 (C.D . Cal . 2002) . The government estimates total loss at we ll in excess of $2

bi on.

17APPENDIX A

17

e31TAuac Yn~y wll.I :F Tool 'I 'Am

1

2

3

4

S

6

7

9

10

11

12

13

141is

16

17

18

is

20

211

22

23

24

25

2 6

O 27

28

00

C. ACCEPT,M CE OF RESPONSiILTTY

Notwithstanding paragraph B,3 . above, the government will Dat recommend any

adjustment for &ceptance ofResponsibil ity if defendant :

1 . Fails to admit a complete factual basis for the plea at the time it i s

entered, or

2. Denies involvement in the offense, gives conflicting statements about that

involvement, or is untruthful wi the court or probation officer, o r

3. Fails to appear in cow't, o r

4. Engages in additional criminal conduct, or

5. Attempts to withdraw the plea, or

6. Refuses to abide by any lawful court order .

D. PTO OTHER ADJUSTMENTS

As set forth above, the parties jointly will recommend that the base offense level be

increased by 26 levels pursuant to USS G § 2B 1 . l (b)(1)(N) for a loss greater than S 100 million.

Although the United States estimates that the loss exceeds $2 billion, the United States agrees

for purposes of this plea agreement that it will not seek an upward adjustment or departure for

the]ossabove $100million (other than the 26 levels required by USSG § 2B 1 .1 (b)(1)(N)) . Both

parties agree that they will oppose any loss adjustment recommendation other than the 26 level

enhancement set forth above ,

The parties further agree that neither party will seek any adjustment other than those

referenced above.

E . PTO AGREEMENT AS TO AFEAR R_E_5

The parties agree that defendant may argue for departure on any basis permitted by law

except that defendant may not argue that the loss is less than $100 million . The parties further

agree that'the United States may oppose all of defendant's departure requests . The United States

agrees that it will not seek, and will oppose, any upward departure and that it may seek a

181g APPENDIX A

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I 0 .downward departure under section SK1 .1, as set forth below. The government remains free to

defend on appeal any upward adjustments or departures imposed by the Court .

F . NO AGRE .MENT AS TO CRIMINAL HISTORY CAThGO$V

There is no agreement as to defendant 's Ciiminal History Catego ry.

R 4A1FIONG. "RELEVANT CONDUCT INFO

Defendant agrees thaithe facts contained in the "factual basis " section are t ue, and may

be considered as "relevant conduct" under USSG § 1B .3 .

CMRNIETTT'S REM DATON REARDTG CUSTODY

The government will recommend that defendant be sentenced to the low end of th e

guideline range if the guideline range found by the Court is at or above the range suggested by

the government . If the Court employs a guideline range below that suggested by the governm ent,

the government may recommend a term anywhere withi n that range .

I . SPECIAL A.SSE SMEN iFINL

gpecial Assess amer~t . The parties will jointly recommend that defendant pay a special

assessment in the amount of $200 to be paid forthwith at the time of sentencing . The special

assessment shall be paid through the ofce of the Clerk of the District Court bybank or cashier's

check or money order payable to the "Clerk, United States District Court. "

mac. The parties have no agreement with respect to the app licable fine that may be

imposed. Both parties are free to assert any argument they feel is appropriate.

7. RESTtLU 9N

Defendant agrees that the amount of restitution ordered by the court may include

defendant ' s total offense conduct, and is not limited to the count(s) of conviction . While the

parties do not have any agreement with respect to the appropriate restitution order, defendant

acknowledges that restitution is normally mandatory and that the United States retains the right

to argue for complete restitution . Defendant shall pay any such court-ordered restitution

(according to his financial abi lity as determined by the Court) through the Inmate Responsibility

fr 1919

APPENDIX A

h~~rAv]e vnuv ~ ► a7! ;F Fflfl? 'I 'AVW

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pro and during period of supervised release . Defendant's itution shall be aidgram nS paid by

bank or cashier's check or money order payable to the "Clerk, United States District Court."

Defendant's restitution liability will be joint and several to the restitution liability any

coconspirators subsequently convicted and sentenced .

Financial Statement. Defendant agrees that, before sentencing, defendant shall provide

to the United States, under penalty of perjury, a financial disclosure form listing all of

defendant's assets and financial interests valued at nit a than $1,000 . Defendant understands

that-these assets and financial interests include all assets and financial interests in which

defendant has an interest (or had an interest prior to May 6, 2002), direct or indirect, whether

held in defendant's own name or in the name of another, in any property, real or personal.

Defendant shall also identify all assets valued at more than $5000 whicbhave been transferred

to third parties since May 6, 2002, including the location of the assets and the identity ofthe third

party(ies) .

'The parties will jointlyrecoinmend that as a condition ofprobation or supervised release,

defendant will notify the Collections Unit, United States Attorney's Office, of any interest in

properly obtained, directly or indirectly, including any interest obtained under any other name,

or entity, including a trust, partnership or corporation after the execution of this agreement until

any fine or restitution ordered is paid in full .

Ile parties will also jointly recommend that as a condition of probation or supervised

release, defendant will notify the Collections Unit, United States Attorneys Office, before

defendant transfers any interest in property owned directly or indirectly by defendant, including

any interest held or owned under any other name or entity, . including trusts, partnerships and/or

• corporations .

11

11

rni.n *nu

20 20APPENDIX A

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NA NT's S APP AL COLLATERAL A

In exchange for the government's concessions in this plea agreement, defendant waives,

to the full extent of the'law, any right to appeal or to collaterally attack the conviction and

sentence, unless the court imposes a custodial sentence greater than the high and of t' a guideline

range (or statutory mandatory minimum term, if applicable) recommended by the government

pursuant to this plea agreement at the time of sentencing If the custodial sentence is greater then

the high end of that range, defendant may appeal, but the government will be free to support on

appeal the sentence actually imposed. Ifdefendantbelieves the government's recommendation

is not in accord with this agreement, defendant will object at the time of sentencing ; otherwise,

the objection will be deemed waived.

X~

coo ERA IO

A. Defendant has expressed a desire to provide substantial assistance to the

government in the investigation and prosecution of others, after entering a guilty plea . The

government has made no evaluation whether the cooperation, if any, will be "substantial," or

whether it will merit a downward departure from the Sentencing Guidelines .

B. Defendant agrees to be interviewed by federal and state law enforcement agents

and attorneys and to tell everything defendant knows about every person involved presently or

in the past in the incident which gave rise to these charges as well as. other violations of law .

Defendant also agrees to produce all documents and other evidence in defendant's possession or

control related to these violations .

C . Defendant agrees not to do any undercover work or tape record any conversations

or gather evidence unless instructed by the agent assigned to defendant . Defendant can be

prosecuted for any criminal activity undertaken without i nstructions.

27

26 21

11 , 11 7 A%,IA Vnkw

21APPENDIX A

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p. Defendant agrees to provide statements under penalty of perjury and to testify

before any federal or state grand jury, and at any pretrial, trial or post-trial proceedings .

Defendant will provide complete, truthful and accurate infomtation and testimony. Defendant

agrees to submit to a polygraph examination to test the truthfulness of defendant's statements ,

upon request by the government.

E. The government agrees that, if defendant fully complies with this agreement, it

will not make use of any statements made by defendant during the period of post-plea

I cooperation in any further prosecution of defendant for any offense, or in defendant's sentencing

as provided in Guideline section 1B1 .8. If defendant does not fully comply with this agreement,

all statements made by defendant before, during and after this agreement, and any leads or

evidence derived from such statements can be used against defendant .

F. Statements made by defendant pursuant to this agreement are not statements

"made in the course of any proceedings under Rule 11 of the Federal Rules of Crimina l

Procedure" and are not statements "made in the course of plea discussions . "

G. If the United States Attorneys Oi ce decides that the defendant has provided

substantial assistance, itmay, in its sole discretion, file a motion fora downward departure under

1 8 U.S.G. § 3553, or § SKI .] of the United States Sentencing Guidelines, The defendant

acknowledges that evezaifthe government makes amotion, the court mayrejectthe government' s

recommendation and refuse to depart downward.

H. If the United States Attorney's Office decides to make a substantial assistanc e

motion, it will infomn the sentencing judge of (1) this plea agreement ; (2) the nature and extent,

of defendant's activities in this case ; (3) the full nature and extent ofd6endant's cooperation wit h

I the government and the date when such cooperation commenced ; and (4) all information in the

possession of the government relevant to sentencing.

L. If defendant provides materially false, incomplete, or misleading testimony or

information, or breaches this agreement in any other way, the government may prosecutey the

27

2 8 22

n1#%T ► v :c YAWN

22APPENDIX A

w A zl .x FOOZ 'Z 'Abw

3. defendant in connection with all offenses in the present information as well as for any othe r

2 federal criminal violation of which it is aware, including false statements, pcrjuryand obstructio n

3 of justice, and defendant's sentencing guidelines may be adjusted for making false statement s

4 (e .g., § 3C1 .I and § 3E1•l) . Any prosecution and sentence may be based on informatio n

s provided by defendant . In addition, the government may move to set aside this plea agreement ,

6 and prosecute defendant on the underlying charges . However, if the government elects not t o

i set aside the plea agreement, defendant agrees thatthe government may recommend any sentenc e

e without restriction by this agreement

9 • J. The parties will request that the court continue the sentencing in this case beyon d

1o the normal period to allow defendant to cooperate under this plea agreement. Defendant

ii acknowledges that the court may deny this request and require that sentencing proceed accordin g

12 to the court's schedule .

13 u

14 CRIMES AFTER ARREST OR BREACH OF THE AGREEMENTWILL PERMIT THE GOVERNMENT TO RECOI%MND A

25 HIGEER SENTENCE OR'SET ASIDE THE PLEA

16 This agreement is based on the understanding that defendant has not committed or bee n

3 .7 arrested for any offense not known to the government at the time of this agreem=t, Thi s

3-8 agreement is further based on the understanding that defendant has committed no crimina l

1s conduct since May 6, 2002, and that defendant will commit no additional criminal conduct

20 before sentencing. If defendant has engaged in or engages in additional criminal conduct durin g

21 this period, orbreaches any of the terms of this agreement, the government will not be bound b y

22 the recommendations in this agreement, and may recommend any iawfW sentence, In addition ,

23 at its option, the government may move to set aside the plea .

24

25 11

26 \\

27

28

2323 APPENDIX A

-- - ------ n I n 7 11! 1/1 'V!1t1 V CA I1Z -/. 'Ap

)av2 =AGREE►

3 This plea agreement embodies the entire agreement between the parties and supersedes

4 any other agreement, written or oral .

5 xv

6 DEFENDANT AND COUNSEL FULLY UNIDERSTAND AGREEMEN T

7 By signing this agreement , defendant certifies ttat defendant has read it in its entirety and

e discussed its terms with defense counsel and fully understands its neaning and effect. .

9 XVI

10 DEFENDANT SATJS 'I D WITH COUNSEL

11 Defendant has consulted with counsel and is satisfied with counsel's representation

12CAROL C. LAM

13 United States Attorney

14•

?A,/L o3

xs G]rOR D.Assistant U,S, Att

la

3.7 --BARBARA L. MAJ

18 Assistant U.S. Attorney

19

ZQ

21

4/1X 0322 DA J S . . RIDDET

Defense Counsel for23 MATMEW C. GLESS

24

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24

211 24 APPENDIXA

, .fn, I% t „nl , V - iAIJCI •C CAA7 -?~ •AVW

IN AUDITI ON TO THE FOREGOING 'ROI1SIONS TO'4 CII I AGREE, I SWEARUNDER PENALTY OF FERJ(JRY TEAT THE FACTS IN THE "FACTUAL BASIS" .

2 PARAGRAPH ARE TRUE AND CORECT.

3

D E MATTHEW C. GLESSs Defendant

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27 2528 25 APPENDIX A

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CAROL C . LAMUnited States AttorneyGEORGE D. HARDY 20 03AN 16 PM 12:59Assistant U.S . AttorneyCalifornia State Bar No . 086037BARBARA L. MAJORAssistant U.S . AttorneyCalifornia State Bar No . 131812SANJAY BHANDARISpecial Assistant U.S. AttorneyCalifornia State Bar No . 181920Federal Office Buildin g880 Front Street , Room 629 3San Diego, California 92101-8893Telephone: (619) 557-6197

Attorneys for PlaintiffUnited States of Ame rica


SOUTHERN DISTRICT OF CALIFORNI A

UNITIED -STATES OF AMERICA, Criminal Case No . 03cr] 665W

Plaintiff, ))

V. )~ `'AGREEM-EN~'

STEVEN S . SPITZER,PLE

Defendant,

IT IS HEREBY AGREED between the plaintiff, UNITED STATES OF AMERICA,

through its counsel , CAROL C. LAM, United States Attorney, GEORGE 1) . HARDY and

BARBARA L. MAJOR, Assistant United States Attorneys, and SANJAY BHANDARI, Special

Assistant United States Attorney, and defendant , STEVEN S . SPITZER, with the advice and

consent ofDAN MARMALEFSKY and JAN L. HANDZLIK, counsel for defendant, as follows :

!1

11

. r_1OD26

APPENDIX B

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Defendant STEVEN S. SPITZER ("defendant") agtecs to waive indictment and plead

guilty to an information charging defendant with one count of conspiracy to commit securities

fraud, in violation of Title 18, United States Code, Section 371 .

In exchange for defendant's guilty plea to the above charge and subject to the conditions

set forth herein, the government agrees to bring no further criminal charges against defendant

relating to his conduct at Peregrine Systems, Inc.

. n

NATURE W THE OFFENSE

A. S,.EMENTS EXPLAINED

Defendant understands that the offense of conspiracy to commit securities fraud, to which

defendant is pleading guilty, has the following elements :

Beginning on a date unknown to the United States Attorney but no later than

December 1999, two or more persons entered an unlawful agreement and

conspiracy to commit offenses against the United States, in this case to commit

securities fraud by falsifying books and records and making false and misleading

statements to auditors ;

2 . Defendant knowingly and willfullybecame a memb cr of this conspiracyknowing

its objectives and intending to help accomplish it ; and

3. At ]east one member of the conspiracy committed at least one overt act to further

some objective of the conspiracy .

B. ELEMENTS UNDERSTO D LAND ADMITTED - FACTUAL BASIS

Defendant has fully discussed the facts of this case with defense counsel, Defendant has

committed each of the elements of the crime, and admits that there is a factual basis for this

guilty plea . The following facts are true and undisputed :

2811 2

27APPENDIX B

AIM 1 111% vn ►iU uiu4,l A l'CA7 '3,7 Bunn

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e man

1 . Peregrine Systems, lncr ("Peregrine"j is a computer software company

headquartered in San Diego, Califomia Peregrine was incorporated in California in 1981 and

reincorporated in Delaware in 1994, From its initial public offering ("IP0") in April 1997 until

it was delisted on August 30, 2002, Peregrine was a publiclyheld corporation whose shares were

registered securities traded under the symbol "PRGN" on the National Association of Securitie s

Dealers Automated quotationsystem ("NASDAQ"}, a national securities exchange that used the

means and instrumentalities of interstate commerce and the mails .

2. Peregrine developed and sold business software and related services . Software

license fees accounted for the bulk of Peregrine's publicly reported revenue. peregrine sold its

software directly through its own sales organization and indirectly through resellers such as valu e

added resellers and systems integrators .

3. From its IPO in April 1997 through the quarter ended June 2001, Peregrine

reported 17 consecutive quarters of revenue growth, always meeting or beating securities

analysts' expecta tions. Peregrine's stock price soared from its April 1997 IPO price of

approximately $2.25 per share (split adjusted) to approximately $80 per than in March 2000,

By March 2002, Peregrine bad issued over 192 million shares .

4. In May 2002, Peregrine disclosed that its prior public reports had b een materially

false and that it had employed a variety of devices, schemes and fraudulent accounting practices

over an extended period of time in order to portray itself as far more healthy and successful than

it actually was, After Peregrine disclosed its true financial results and condition, its stock price

dropped precipitously and it now trades at below $1 per share,

Th f

3. Defendant STEVEN S . SPITZRR was hired by Peregrine in August 1997 as a

Vice President in its Sales bepartment, in charge of developing Peregrine's relationships with

its indirect sales partners. From August 1997 through approximately April 2000, defendan t

ze~ 3

28

APPENDIX B

3

4

5

6

7

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• ~.Sp1I'ZEA worked on building sales alliances with entities who could serve as promoters of

Peregrine's products in North America . These entities were frequently identified as Peregrines

"Channel Partners ." From approximately April 2000 through April 2001, defendant SPITZBR

focused on North American Sales ofPe egrine's Get .It! product . Thereafter, defendant SPITZER

focused on direct sales to managed service providers, until he left Peregrine in June 2002 .

Peregrine's Pub l ' RMgr6ng

6. As a public company, Peregrine was required to comply with the Securities Act

of 1933, the Securities Exchange Act of 1934, and the regulations ofthe United States Securities

and Exchange Commission (the "SEC") . These laws and regulations are designed to protect the

investing public by ensuing that companies like Peregrine fairly, accurately, and timely report

their financial results and condition . To ensure fair, accurate and timely reports to the investing

public, the securities laws and SEC regulations required Peregrine and its directors and officers

to, among other things:

(a) make and keep books, records and accounts which in reasonable detai l

16

17

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24

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26

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0 ;18 11

accurately and fairly reflected Peregrine's transactions and dispositions

of assets ;

(b) devise and maintain a system of in temal accounting controls sufficient to

provide reasonable assurances that the company's transactions were

executed in accordance with management's policies, and recorded as

necessary to permit preparation of reliable financial statements in

accordance with applicable accounting norms ;

(c) file regular public reports including quarterly reports (on Form 10-Q) and

annual reports (on Form l0•K) with the SEC; and

(d) make fair and accurate representations to auditors preparing public

reports of Peregrine, including all material facts necessary to make

management representations to auditors not misleading .

4

29APPENDIX B

. . . . . . . . . .++ . A I FAA •] .'?

IFrom 1997 through December 2001, Peregrine filed regular financial reports with the SBC .

2 During this entire period, Arthur Andersen LLP, which was at the time a public accounting tit,

3 served as the outside auditors of Peregrine's financial reports .

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Th QO-risDiracy

7. From at least December 1999 through April 2001, defendant STEVEN S.

SPITZER knowingly and willfully became a member of a conspiracy to commit securities fraud

through the falsification of Peregrine' s books and records and the making of false statements to

its auditors.

8. The American Institute of Cer tified Public Accountants' Statement of Position

("SOP") 97-2, Software Revenue Recognition , and subsequent clarifications are the Generally

Accepted Accounting Principles ("GAAP') that apply to recording or''ecogniaing" revenue in

publicly filed financial statements from transactions involving software licenses . These

accounting p rinciples require that revenue not be recognized on a transaction unless : (a)

persuasive evidence of a transaction exists, (b) deliveryhas occurred, (c) the vendor ' s fee is fixed

or determinable , and (d ) collectibili ty is probable, In essence , these principles require that a

company publicly recognize revenue only when and to the extent that a transaction has resulted

in actual economic gain.

9. Throughout the conspiracy, Peregrine claimed to recognize revenue in accordance

with GA,AP. In truth, however, during this time, defendant SPITZER and his co-conspirators

structured and booked as revenue, and caused to be structured and booked, transactions that

violated some or all of the provisions of GAAP and Peregrine's stated revenue recognition

policy, including :

(a) transactions that were still under negotia tion or were otherwise

incomplete in the quarter in which they were booked as revenue ;

0 x81130

APPENDIX B

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C 0(b) transacytions that were subject to side letters or other contingencies-that

allowed for partial or complete cancellation ofthe customer's obligation

to pay Peregrine; and ,

(c) barter and swap transactions in which Peregrine would provide cash,

stock, or a purchase order for the customer's products or services in order

to secure the customer's commitment .

10. As part of this conspiracy, conspirators amongst Peregrine's senior most

management would meet or talk at or near the end of each quarter to determine how much

additional revenue Peregrine needed to book that quarter in order to meet or exceed securities

analysis' expectations. Defendant SPITZER and his conspirators would then devise, structure

or create fraudulent and misleading transactions, as described above, and the resulting "revenue"

would be recognized in that quarter in order to mislead securities analysts and the investing

public into believing that Peregrine's financial condition was significantly better than it really

was and to maintain Peregrine's inflated stock price .

11 . In furtherance of this conspiracy and to effect its objects, acting at the direction

and behest of Peregrine's senior management, defendant STEVEN S . SPITZER committed the

following overt acts, among others, within the Southern District of California and elsewhere :

(a) In or about December 1999, defendant SPITZER caused to be created

documents that falsely described a sale ofPeregrine software to a certain

entity. Defendant Spitzer told the entity that Peregrine was close to

consummating a software transaction with a specific end user, and asked

the entity to sign an agreement to purchase that software before the end

of the present quarter, in order to allow Peregrine to book that revenue

immediately rather than waiting for the anticipated transaction with the

end user. SPITZER told the ebtity that Peregrine would not expect the

entity to pay for the software it had supposedly purchased according to

t =•tl 6

31APPENDIX B

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i 2611

the terms of the sales agreement ; Peregrine would either credit the entity

with the sale Peregrine was negotiating with the cad user, or Peregrine

would replace that sale with another sale that Peregrine itself would

generate, or Peregrine would wait until the entity resold the software.

(b) In or about June 2000, defendant SPTFZl~R caused to be created

documents that falsely described two sales of Peregrine software to a

certain entity, through the means described above.

(c) In or about September 2000, defendant SPITZER caused to be created

documents that falsely described a sale of Peregrine software to acerttain

entity, through the means described above .

(d) In or about March 2002, defendant SPITZER caused to be created

documents that falsely described two sales of Peregrine software to two

different entities, through the means described above.

12. Defendant .SPTTZER admits that in committing the charged crimesshe and others

used and caused to be used instrumentalities ofinterstate commerce, the mails, and the facilities

of national eccurity exchanges.

13 . Defendant SPITZER admits that he and others knowingly, willfully, and with an

intent to defraud, used the above-described schemes, devices and artifices to create the false

impression that Peregrine's financial condition was significantly better than it really was,

resulting in the artificial inflation of the value of Peregrine's stock, false inducement of the

public to purchase and hold Peregrine's stock, fraud on securities analysts and the public, and

unjust enrichment of the conspirators through compensation, stock options, and other means .

U

PENALTIES

Defendant understands that the crime of conspiracy carries the fo llowing penalties :

A. a maximum term of five years in prison (18 U.S.C. § 371);

7

32

APPENDIX B

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r •B. a maximum fine of the greatest of $250 ,000, twice the gross pecuniary gain

derived from the offense, or twice the gross pecuniary loss to a person other than

the defendant as a result of the offense (18 U.S .C. § 3571);

C. a.mandatory special assessment of $100 (18 U.S .C. § 3013) ;

D. a term of supervised release of at least two years but not more than three years

(USSG § 5D 1 .1 .5D 1 .2) . Defendant understands that failu re to complywith any

of the conditions of supervised release may result in revocation .of supervised

release, requiring defendant to se rve in prison all or part of the term of supervised

release; and

E. an order from the court pursuant to Title 18 , United States Code, Section 3663A

that defendant make mandatory restitution to the victim(s) of the offense of

conviction , or the estate(s) of the victims(s) in an amount to be specified by the

Court in accordance with 18 U . S.C. §§ 3663 , 3663A and 3664 . This amount

shall be paid according to a plan established by the Court .

Defendant understands that by pleading guilty to the above offense defendant may

become ineligible for federal benefits .

rvDEFFND_ANT!,S3YA

-M QF TRIAL RIGHTS

Defendant understands that this guilty plea waives the right to:

A. continue to plead not guil ty and require the government to prove the elements of

the crime beyond a reasonable dniibt;

B. a speedy and public trial by jury;

C the assistance of counsel at all stages of the criminal proceedings ;

D. confront and cross-examine adverse witnesses;

E. present evidence and to have witnesses testify on behalf of defendant ;

F. not testify or have any adverse inferences drawn from the failure to testify.

8

33APPENDIX B

^ ~ n ~ ► ~ 3 z n vn~iv w ( 7 'Iti CAA7 '; 7 'unr

U •2

V

DEFENDANT ACKNOWLEDGES NO PRETRIAL RIGHT TO B Ep WDED W]T IMPE A EFENSEINFO O

3The government represents that any information establishing the factual innocence of

4defendant known to the undersigned prosecutor in this case has been turned over to defendant .

sThe government will continue to p rovide such information establishing the factual innocence of .

6defendant.

7Defendant understands that if this case proceeded to trial , the government would b e

srequired to provide impeachment information relating to any informants or other witnesses, In

9addition , ifdefendant raised an affirmative defense, the government would berequired to p rovide

isinformation in its possession that supports such a defense. Defendant acknowledges, however,

1].that by pleading guilty defendant will not be provided this information , if any, and Defendant

12also waives the right to this information . Finally, defendant agrees not to attempt to withdraw

13the guilty plea or to file a collateral a ttack based on the existence of this information.

3. 4

15

DEFENDANT 'S REPRESENTATION THAT GUILTY16 PLEA IS XN GANDVOL X

17 Defendant represents that :

1$ A. Defendant has had a full opportunity to discuss all the facts and circumstances o f

19 this case with defense counsel , and has a clear understanding of the charges and

20 the consequences of this plea;

21 B, No one has made any p romises or offered any rewards in return for this guilty

22 plea. Other than those contained in this agreement ;

23 C. No one has threatened defendant or defendant 's family to induce this guilty plea ;

as and

2 5 D. Defendant is pleading guilty because in truth and in fact defendant is guilty an d

26 for no other reason.

27

28 9

34

APPENDIX B

~,,,, ► ,~,n ~~ ► ~~ IM urr'AI cnn7 '+, i 'unr

1 Vil

2 AGREEMENT LThIJTED TO U.S. ATTORNEY'S OFFICESOU ERN DISTRICT IF0 A

3This plea agreement is limited to the United States Atto rney's Office for the Southern

District of Califbrnia and cannot bind any other federal, state or local prosecuting, administrative ,

or regulatory authorities, The government, however, will bring this plea agreement to th e6

attention of other authorities, if requested by defendan t7

of8

SENTEMI-N-G GUIDELINE S9

Defendant understands the sentence will be gove rned by the United States Sentencingto

Commission Guidelines ("Guidelines"), Defendant has discussed the Guidelines with defens ex1

counsel, and understands that the sentence cannot be determined until a presentence report has12

been prepared by the U .S . Probation Office and defense Counsel and the government have had13

an opportunity to review and challenge the presence ce report . Defendant understands that,14

under some circumstances, the Cou rt may "depart" from the Guidelines and impose a sentencei 15i imum n the statute of conviction .more severe or less severe than the guidelines, up to the max

16The United States Attorney's Office will fully advise the District Court and the U.S .

17

Probation Office of all of defendant 's relevant conduct for sentencing . Nothing in this plea18

agreement shall be construed as limiting the information that the government may provide to th e19

Court or the Probation Office.20

1x21

SENTENCE JS M TM SPLE DISCRETION QE JUDGE22

This plea agreement is madepursuantto Federal Rule of Criminal Procedure 11(c)(1)(B) .13

Defendant understands that the sentence is within the sole discretion of the sentencing judge.as

The government has not made and will not make any representation as to what sentence26

defendant will receive. Defendant understands that the sentencing judge may impose the26

maximum sentence provided by statute, and is also aware that any estimate of the probabl e2 7

28 10

35APPENDIX B

-- . •--- . .•,- ,,- . . wur7•Ai rnn7 L •iirte%

•i sentence by defense counsel is a prediction, not a promise, and is not binding on the court.

2 Likewise, the recommendation made by the govemment is not binding on the work, and it i s

3 uncertain at this time what defend'ant's sentence will bc .

4 Defendant also has been advised and understands that if the sentencing judge does no t

5 follow the parties' sentencing recommendations, defendant nevertheless has no rigbtto withdraw

6 the plea.

7 X

JARTIES SENTENV rNG RECOMMENDATIONS

s A. G L .

sa The parties will jointly recommend that the Court apply the United States Sentencin g

it Commission Guidelines Manual ["USSG") that was effective November 2000 .

12 B. B OFFENSE L

13 The government will make the following sentencing recommendations :

24 1 . Base offense level [§ 2F1 .1) 6

3 .5 2 . Specific offense characteristics

16 a . Loss Beater than $80 million [§ 2F1 .1(b)(1)(S)j +1 8

r7 b. Multiple victims [§ 2FI,I(6)(2)]

is c. Mass marketing [§ 2F1.l(b)(3)] ** +2

19 3 . Acceptance of re?pondility r§ 3E1 .1 . 3

20 Adjusted Offense Level 25

21 Defendant will j oin in each ofthese sentencing recommendations, except that defendan t

2 2 may oppose application of the adjustment for mass marketing on the grounds that the plain

23 langnge, legislative history, and/or interpretive caselaw of § 2F1.1(b)(2) do not allow its

24 application in this case, The parties will propose a loss measurement system based upon

25 shareholder loss and specifically agree that the loss exceeds $80 million .

26 ff

77

28 11

36

APPENDIX B

• • • _ • • , • , n • • •• , • • • m 1 r • Al r n n 7 • L 7 i n n

. • !x C. ACCEPTANCE QE RESPONEMRM

2 Notwithstanding paragraph B .3 . above, the government will not recommend an y

3 adjustment for AccUlance n ibi ' if defendant;

4 1 . Fails to admit a complete factual basis for the plea at the time it i s

5 entered, or

6 2. Denies involvement in the offense, gives conflicting statements about that

7 involvement, or is untruthful with the court or probation officer, o r

e 3. Fails to appear in court, or

9 4 . Engages in additional criminal conduct, or

10 S. Attempts to withdraw the plea, o r

11 6 . Refuses to abide by any lawful court order .

12 D. 7'ME

13 The parties agree th at .neither party will seek any adjustment other than those referenced

14 above, except that defendant may seek a two-level adjustment for minor role, Which th e

• is Government may oppose . The government remains free to defend on appeal any adjustments

16 imposed by the Court.

17 B. DEPARTURES

is The government agrees that it will not seek, and will oppose, any upward departure, and

19 that it may seek a downward departure under USSG § 5(l .1 as specified in section XII, below,

20 Defendant is free to make any motion for downward departure on any basis that may b e

22 permitted by law. The government may oppose any such departures . The government restrains

22 free to defend on appeal any depa=es imposed by the Court,

23 F. NO AGREEMENT AS TO CRIMINAL HI TORY CATEGORY

24 There is no agreement as to defendant's Criminal History Category .

25 ~f

26 I!

2 7

28 12

37APPENDIX B

._ . . . . ., ., ., . im i,r•ni rnn at •. .7 •xi,

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G, "RUM U IdN

Defendant agrees that the facts contained in the "factual basis " section are true, andmay

be considered as "relevant conduct" under USSG § 1BI3 .

H. GOVERN V !NTS1 ECO ATION REGARflJNGCUSTODY

.The government will recommend that defendant be sentenced to the low end of the.

guideline range if the guideline range found by the Cowl is at or above the range suggested by

the government at the time of sentencing, If the Court employs a guideline range below that

suggested by the government, the goverment may recommend a term anywhere within that

range .

L SPECIAL ASSESSMENT/FINE

Special Assessment, The parties will jointly recommend that defendant pay a special

assessment in the amount of $100 to be paid forthwith at the time of sentencing . The special

assessment shall be paid through the officeof the Clerk of the District Court bybank orcashier's

check or money order payable to the "Cleric, United States District Court ."

'ne. The. parties have no agreement with -respect to the applicable fine that maybe

imposed . Both parties are free to assert any argument they feel is appropriate .

J. RES1ON

Defendant agrees that the amount of restitution ordered,by the court may include

defendant's total offense conduct, and is not limited to the count ofeonviction . While the parties

do not have any agreement with respect to the appropriate restitution order, defendant

acknowledges that restitution is normally mandatory and that the United States retains the right

to argue for complete restitution. . Defendant shall . pay any such court-ordered restitution

(according to his financial ability as determined by the Court) through the inmate Responsibility

program and during the period of supervised release . Defendant's restitution shall be paid by

bank or cashier 's check or money order payable to the "Clerk, United States l)istrict Court "

1338

APPENDIX B

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11 1 0 . 0Defendant's restitution liability will be joint and several to the restitution-liability of any

coconspirators.

Financial Statement . Defendant agrees that, before sentencing, defendant shall provide

to the United States, under penalty of perjury, a financial disclosure form listing all of

defendant's assets and financial interests valued at more than 51,000 . Defendant understands

that these assets and financial interests include all assets and financial interests in which

defendant has an interest (or had an interest prior to May 6, 2002), direct or indirect, whether

held in defendant's own name or in the name of another, in any property, real or personal .

Defendant shall also identify all assets valued at more than $5000 which have been transferred

to third parties sinceMay 6, 2002, including the location ofthe assets and the identityof the third

party(ies).

The parties will jointly recommend that as a condition ofprobationor supervised release,

defendant will notify the Collections Unit, United States Attomey's Office, of any interest in

property obtained, directly or indirectly, including any interest obtained under any other name,

or entity, including a trust, partnership or corporation after the execution of this agreement until

any fine or restitution ordered is paid in full.

The parties will also jointly recommend that as a condition of probation or supervised

release, defendant will notify the Collections Unit, United States Attorney's Office, before

defendant transfers any interest in property owned directly or indirectly by defendant, including

any interest held or owned under any other name or entity, including trusts, partnerships and/or

corporations .

xJ

RSIDANT WAIVES APPEAL AND COLLATERAL ATTAC K

In exchange for the government's concessions in this plea agreement, defendant waives,

to the full extent of the law, any right to appeal or to collaterally attack the conviction and

sentence, unless the court imposes a custodial sentence greater than the high end of the guideline

0 2811 1439

APPENDIX B

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range (or statutory mandatory minimum terns, if applicable) recommended by the government

pursuant to this plea agreement at the time of sentencing . if the custodial sentence is greater than

the high end of that range, defendant may appeal, but the government will be free to support on

appeal the sentence actually imposed . If defendant believes the government's recommendation

is not in accord with this agreement, defendant will object at the time of sentencing, otherwise,

the objection will be deemed waived,

XII

"0 FERATION

A. Defendant has expressed a desire to provide substantial assistance to the

government in the investigation and prosecution . of others, after entering a guilty plea. The

government has made no evaluation whether the cooperation, if any, will be "substantial," or

whether it will merit a downward departure from the Sentencing Guidelines .

B. Defendant agrees to be interviewed by federal and state law enforcement agents

and attorneys and to tell everything defendant knows about every person involved presently or

in the past in the incident which gave the to these charges as well as other violations of law .

Defendant also agrees to produce all documents and other evidence in defendant's possession or

control related to these violations.

C. Defendant agrees not to do any undercover work or tape record any conversations

or gather evidence unless instructed by the agent assigned to defendant. Defendant can be

prosecuted for any criminal activity undertaken without instructions .

D. Defendant agrees to provide statements under penalty of perjury and to testify

before any federal or state grand jury, and at any pretrial, trial or post-trial proceedings .

Defendant will provide complete, truthful and accurate information and testimony . Defendant

agrees to submit to a polygraph examination to test the truthfulness of defendant's statements,

upon request by the government,

is40

APPENDIX B

I ,

I B. The government agrees that, if defendant fully complies with this agreement, it

2 will not make use of any statements made by defendant during the period of post-plea

3 cooperation in any further prosecution of defendant for any offense, or in defendant's seatin g

4 as provided in Guideline section 1 B I .S . Ifdefendant does not fully complywith this agreement ,

s all statements made by defendant before, during and after this agreement, and any leads o r

6 evidence derived from such statements can be used against defendant .

7 F. Statements made by defendant pursuant to this agreement are not statements

e "made in the course of any proceedings under Rule 11 of the Federal Rules of Criminal

9 Procedure" and are not statements "made in the course of plea discussions, "

20 G. If the United States Attorney's Office decides that the defendant has provide d

11 substantial assistance, it may, in its sole discretion, file amotion for a downward departure uuder

12 . IS U.S.C. § 3553, or 5KI .I of the United States Sentencing Guidelines . The defendant

13 acknowledges that even ifthe government makes a motion, the court mayreject the government' s

14 recommendation and refuse to depart downward .

15 H. If the United States Attorneys Office decides .to make a substantial, assistance

6 motion, it will inform the sentencing judge of: (1) this plea agreement; (2) the nature and extent

17 of defendant's activities in this case; (3) the full nature and extent of defendant's cooperation wit h

1 s the government and the date when such cooperation commenced ; and (4) all information in the

19 possession of the government relevant to sentencing .

20 I. If defendant provides materia lly false, incomplete, or misleading testimony or21 Information, or breaches this agreement in any other way, the government may prosecute th e

22 defendant in connection with all offenses in the present information as well as for any othe r

23 federal criminal violation of which it is swam, including false statements, perjiuy and obstruction

24 of justice, and defendant's sentencing guidelines maybe adjusted for mating false statement s

25 (e.g , § 3C1.1 and § 3E1,1) . Any prosecution and sentence may be based on informatio n

26 provided by defendant. In addition, the government may move to set aside this plea agreement,27

aB 16

4 1APPENDIX B

._ . . . . . t~„ ., ., .,u.,unr .ni rnn7 4i7 • .nn

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ao

a i

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•

• 0

and prosecute defendant on the underlying charges, However, if the government elects not to

so asidetheplea agreement, defendant agrees that the government may recommend any sentence

without restriction by this agreement .

J. The parties will rcquest that the court continue the sentencing in this case beyond

the normal period to allow defendant to cooperate under this plea agreement . Defendant

acknowledges that the court may deny this request and require that sentencing proceed according

to the court's schedule.

XAI

CRIMES AV ER ARREST OR BREACH OF THE AGREEMEN TWILL PERMIT THE GOVERNMENT TO RECOMMEND A

RICHER SENTENCE OR_SET ASIDE THE PLEA

This agreement is based on the understanding that defendant has not committed or been

arrested for any offense not known to the government at the time of this agreement . This

agreement is further based on the understanding that defendant has committed no criminal

conduct since agreeing to cooperate with the government's investigation , and that defendant will

commit no additional criminal conduct before sentencing . If defendant has engaged in or

engages in additional criminal conduct during this period , or breaches any of the terms of this

agreement, the government will not be bound by the recommendations in this agreement, and

may recommend any lawful sentence . In addition, at its option, the government may move to

set aside the plea.

xw

ENTIRE AGREEMENT

This plea agreement embodies the entire agreement between the parties and supersedes

any wher agreement, written or oml .

IJ

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is

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a7

2e17 42

APPENDIX B

Q31TANIQ yr u C : AI W7 1,7 UP

•

1 xv2 DEFENDANT AND COUNSEL LY 11NAERSTAND A GREEMENT

3 By signing this agreement, defendant ccrdfies that defendant has read it in its entirety and

4 discussed its terms with defense come] and fully understands its me an ing and effect.

s xvi

6 DEFENDANT S

7 Defendant has consulted with counse l and is satisfied with counsel' s representation.

8CAROL C. LAM

s United States Attorney

1 0

i1 D T BARBARA L. MAJOR/Ass' t U.S . Attorney

23 C11&10 3DATED DANMMDTE-FSff

14 Defense Counsel forSTEVEN S. SPTIYER

is 6116103 ___DATED JAN L. HANDZL1K

17 Defense Counsel forSTEVEN S . SPITZER

3. e

19 IN ADDITION TO THE FOREGOING PROVISIONS TO WHICH I AGREE , I SWEARUNDER PENALTY OF PER JURY THAT THE FACTS IN THE "FACTUAL BASIS"

20 PARAGRAPH ARE TRUE AND CORRECT.

22- 61103 //Alf

22 DA EVEN S. SPITDefendant

2 3

ad

25

26

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29 19

43APPENDIX B

QY11 AUQ YflJ MC : Al c(7 %7 'unr

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CAROL C . . LAMUnited States AttorneyGEORGE D . HARDYAssistant U .S . AttorneyCalifornia state Bar No . 86037SANJAY BHANDARIAssistant U .S . AttorneyCalifornia State Bar No . 181920Federal Office Building980 Front Street, Room 629 3San Diego, California 92101.-8893Telephone : (619) 557-6787

Attorneys for Plaintif fUnited States of America

0 FILED2 J52 ► : ;122 Pit h . 17

a4XI CSoft


SOUTHERN DISTRICT OF CALIFORNIA,

UNITED STATES OF AMERICA, ) Criminal Case No . 02 Coe 3lo410J

Plaintiff ,

v .F1 EA ARMEWT

ILSE CAPPEL,

Defendant .

IT IS HEREBY AGREED between the plaintiff, UNITED STATES OF

A ICA, through its counsel, CAROL C . LAM, united States Attorney,

and GEORGE D . HARDY and SANJAY BI;ANDARI, Aaeistafit United States

Attorneys, and defendant, ILSE CAPPEL, with the advice and consent of

COUGHLAN, SEMMER & LIPMAN, LLP, by MICHAEL L . LIPMAN, counsel for

defendant, as follows :

I

Defendant agrees to waive Indictment and plead guilty to an

Information charging defendant with :

CONSPIRACY TO COMMIT SANK FRAUD

J~ 44APPENDIX C

srtr .1•r rnn, •i t„m.

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E

• •In exchange for Defendant's guilty plea the Government agrees not

to bring any further charges against the Defendant for criminal

conduct related to Defendant's activities at Peregrine Syetems, Inc .

zr

A P O F S

A . LL I EXPLAINED

Defendant understands that the offense to which defendant is

pleading guilty has the following elements :

First, beginning at a date unknown, but no later tha n

June, 1999, and continuing thereafter to in or about June, li

2002, there was an agreement between two or more persons to

commit the offense of Bank Fraud ( 1 8 V .S .C . fi i344), the

elements of which are :

knowingly, and with intent to defraud, carrying

out a scheme or plan to defraud, or to obtain

money or property from a federally insured bank

by making false statements or promises, knowing

that the statements or promises are false and

material ,

Second, the defendant became a member of the

conspiracy knowing of at least one of its objects and

intending to help accomplish it ; and

Third, one of the members of the conspiracy performed

at least one overt act for the purpose of carrying out the

conspiracy .

B . ELEMENTS UNDERSTOOD- z.M A01=-- FACnM BASE

Defendant has fully discussed the facts of this case with defense

counsel . Defendant has committed each of the elements of the crime ,

2 45APPENDIX C

J V

i •I and admits that there is a factual basis for this guilty plea . The

2 following facts are true and undisputed :

3 1 . Peregrine Systems, Inc . is a cottputer software company

4 headquartered in San Diego, California . From April 1997

5 through August 30, 20,02, . Peregrine's stock was publicl y

6 traded on the NASDAQ stock market . Following its initial

7 public offering in April 1997, Peregrine Systems, Inc .

8 reported 17 consecutive quarters of revenue growth through

9 and including the quarter ending June 30, 2001 . During -

10 this period, Peregrirne'e reported financial results always

11 met or exceeded analysts, expectations, and the company' s

12 stock price rose dramatically . Beginning in May 2002 ,

13 Peregrine disclosed that it had engaged in large-scal e

14 accounting irregularities over an extended period of tim e

15 to make k'eregrine'e financial condition and busines s

16 performance appear far healthier than they were .

17 Peregrine's stock price dropped precipitously .

18 2 . Among the accounting irregularities engaged in by

19 peregrine was the manipulation of the "AS01, which stand s

20 for Days Sales Outstanding . This is a numerical

21 calculation that, in essence, reveals how many days i t

22 takes a company to collect its accounts receivable, Th e

23 larger the number, the more likely analysts will call into

24 question the quality of the receivables, and the related

25 revenue, Securities analysts pay attention to a company' s

26 DSO in judging the health of the company, and the value o f

27 its stock .

28 3 . - Peregrine's management was very concerned about

3 46APPENDIX C

keeping its DSO below a certain number in part becaus e

2 management had previously provided guidance to analyst s

3 about the expected DSO number, Keeping the DSO. low was

4 problematic for management in part because of Peregrine' s

5 practice of recording contingent sales (e .g . sales to

6 resellers who were allowed to delay payment until thei r

7 sell-through to an end user) as revenue before satisfactio n

8 of the contingency on which payment to Peregrine depended .

9 These revenues, once improperly recorded, would remai n

10 uncollected receivables for extended periods, raisin g

11 Peregrine's DSO beyond normal levels, thereby raising

12 concern among' securities analysts and possibly exposing

13 Peregrine's improper revenue recognition practices . To

14 avoid this, Peregrine sold accounts receivable to banks .

15 By doing so, the DSO could be lowered significantly . The

16 banks, however, would purchase the accounts receivable onl y

17 if they were valid, enforceable, and based on completed

l8 transactions .

19 4 . For the purpose of improperly manipulating the DSD ,

20 Peregrine sold accounts receivable to Wells Fargo HSH C

21 Trade Bank, N,A., that were not valid, enforceable and

22 based on completed transactions . Peregrine thereby

23, defrauded a bank, the deposits of which were insured by th e

24 Federal Deposit Insurance Corporation .

25 5 . Defendant ILSE CAPPEL began working in Peregrine' s

26 accounting department in 1993 . After peregrine went publi c

27 in 1997, CAPPEL became the Treasury Manager, and wa s

28 responsible for cash management and forecasting,

4

47APPENDIX C

m ir`7 • r r n n 7 ) ivw

I collection , and accounts receivab le, among other things .

2 Although her responsibilities changed somewhat over time ,

3 CAPPEL remained responsible for the sale of account s

4 receivable until she left Peregrine in Ju ne, 2002. Her

5 title at the time was Assistant Treasurer .

6 6 . Between in or about June 1999 and June 2002, defendan t

7 ILSE CAPPEL conspired with others at Peregrine to

8 improperly manipulate Peregrine ' s DSO by creating

9 fictitious Invoices with various transaction partners that

10 were sold to the bank as if they were valid , enforceable

11 accounts receivable ,

12 7, As part of this conspiracy and scheme to defraud,

13 defendant ILSE CAPPEL , Assistant Treasurer of Peregrine ,

14 and others , fabricated a Peregrine invoice to . KPMG

15 Consulting LLC, dated June 29, 2001 , for $19 , 580,596 .00 ,

• 16 that was sold to Wells Fargo HSBC Trade Bank, N.A., as if

I7 it were a valid, enforceable account receivable , based on

is a completed transaction with KPMG Consulting, when i n

19 actual fact , it was not , because Peregrine had no vali d

20 contract with XPMG Consulting LLC at that time for that

21 amount under those terms .

22 II I

23 PENA___

24 Defendant understands that the crime to which defendant i s

'25 pleading guilty carries the following penalties :

26 A . a maximum 5 years in prison ;

27 B . a maximum $250 , 000 fine ;

28 C . a mandatory special assessment of $100 ; and

• s48

APPENDIX C

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ED . , a term of supervised release of not more than 3 . years .

Defendant understands that failure to comply with any of

the conditions of supervised release may result in

revocation of supervised release, requiring defendant to

serve in prison all or part of the term of supervised

release .

E . an order from the court pursuant to. Title 28, united States

Code, Sections 3663 that defendant make restitution to the

victim(s) of the .offense of conviction .

Defendant further understands that by pleading guilty defendant may

become ineligible for federal benefits .

xv

D A1+TT! S_ WAIVER OF TRIAL RIGHTS

Defendant understands that this guilty plea waives the right to :

A . continue to plead not guilty and require the Government to

prove the elements of the crime beyond a reasonable doubt ;

B . a speedy and public trial by jury =

C . the assistance of counsel at all stages of trial ;

D. confront and cross - examine adverse witnesses =

E . present evidence and to have witnesses testify on behalf of

defendant ; and

F . not testify or have any adverse inferences drawn from the

failure to testify .

V

DEFENDANT ACKNOWLEDGES NO PRETRIAL RIGHT TO BEPROVJDED WITH PEACF [9 _ AND AFFIRMATIVE DEFENSE jMMMT.ON

The Government represents that any information establishing the

factual innocence of defendant known to the undersigned prosecutor in

this case has been turned over to defendant . The Government will

6 49APPENDIX CkI

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continue to provide such information establishing the factual

innocence of defendant .

Defendant understands that if this case proceeded to trial, the

Government would be required to provide impeachment information

relating to any informants or other witnesses . In addition, if

defendant raised an affirmative defense, the Government would be

required to provide -i nformation in its possession that supports such

a defense . Defendant acknowledges, however, that by pleading guilty

defendant will not be provided this information, if any, and

Defendant also waives the right to this information . Finally,

defendant agrees not to attempt to . withdraw the guilty plea or to file

a collateral attack based on the existence of this information .

1TI

DEFENDANT ' S REPRESENTATION THAT GUILTYELM Is -KNOWING ND QLUNTARY

Defendant represents that :

A. Defendant has had a full opportunity to diBcuss all the

facts and circumstances of this case with defense counsel,

and has a clear understanding of the charges and -the

consequences of this plea ;

B . No one has made any promises or offered any rewards in

return for this guilty plea , other than those contained in

this plea agreement or otherwise disclosed to the court ;

C . No one has threatened defendant or defendant's family to

induce this guilty plea ; and

D . Defendant is pleading guilty because in truth and in fact

defendant is guilty and for no other reason .

7

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APPENDIX C

w vo , r c n r17 •i •vu,~r

1 VII

2 AGREEMENT LIMITED TO U . S . ATTORNSY'S OFPICBSD RN DISTRICT F CUIEMIA

3This plea agreement is limited to the United States Attorney' s

4Office for the Southe rn District of California, and cannot bind any

5other federal , state or local prosecuting, administrative, or

6regulatory authorities , although the Government will bring this plea

7agreement to the-attention of other authorities if requested b y

8defendant .

9VIII

10nENTENCING GU LI S

11 Defendant understands the sentence will be governed by the Unite d12

states Sentencing Guidelines (Guidelines ) . Defendant has discusse d13

the Guidelines with defense counsel, and understands that the sentence14

cannot be determined until a presentence report has been prepared b yli

the U . S . Probation Office and defense counsel and the Government have1b

had an opportunity to review and challenge the presentence report .17

Defendant understands that, under some circumstances , the court may18

' depart" from the Guidelines and impose a sentence more severe or les s19

severe than the Guidelines , up to the maximum in the statute of20

conviction .21

Ix22

SENTENCE IS WI IN SOLE DISCRETION OF J U23

This plea agreement is made pursuant to Federal Rule of Crimina l24

Procedure 11 (e) (1 ) (B) . Defendant understands that the sentence i s25

within the sole discretion of the sentencing judge . The Government26

has not made and will not make any representation an to what'sentence21

defendant will receive , Defendant understands that the sentencing28

judge may impose the maximum sentence provided by statute, and is also

8 51APPENDIX C

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• •aware that any estimate of the probable sentence by defense counsel

is a prediction, not a promise, and is not binding oa the court .

Likewise, the recommendation made by the Government is not binding on

the court, and it is uncertain at this time what defendant's sentence

will be .

Defendant also has been advised and understands that if thei

sentencing judge does not follow any of the parties' sentencing

recommendations, defendant nevertheless has no right to withdraw they

plea .

X

PARTIES' SENTENCING RECOMNfPTDATIQNS

A . BASE OFF SE L£,yEL AND ADJ US1'11F)

The parties will jointly recommend the following Base Offense

Level and Adjustments under the GuidelinesV :

1 . Base Offense Level' [5 281 .1(a)] 6

2 . Sophisticated Means (6 2B1 .1(b)(8)] +6

3 . Acceptance of Responsibility 1 5 3E1 .1 1 -2

The parties also agree that with respect to the fabricated

$19,580,596 .00 invoice,-Wells Fargo HSBC Trade Bank, N .A. did not

suffer a lose because Peregrine paid the receivable for KPMG

Consulting during the second succeeding quarter, without revealing to

the bank that XPMG Consulting was not the payor . Because the money

was returned before the offense was detected, the defendant is

entitled to a credit against lose . [8 221 .1, Application Note 2(E)]

The parties have no agreement with respect to possible other losses

that may have resulted from the criminal conduct .

.' The parties utilized the Sentencing Guidelines effectiveNovember 1, 2002, believed to be the Guidelines that will be in effectat the time of sentencing . [S 181 .11] .

9 32APPENDIX C J

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••

B . ACCEPTANCZ QE RESPOXSIBILITY

Notwithstanding paragraph A .3 above, the Government will

recommend any adjustment for Acc ance af_ RgsoOneibility if

defendant :

1 . Fails to admit a complete factual basis for the plea

at the time it is entered, or

2 . Denies involvement in the offense , gives conflicting

statements about that involvement, or is untruthful

with the Government , the court or probation officer ,

or

3 . Fails to appear in court, or

4 . Engages in additional criminal conduct, or

S . Attempts to withdraw the plea, or

6 . Refuses to abide by any lawful court order, o r

7.. In any enforcement action filed by the Securities and

Exchange Commission against defendant, takes a

position inconsistent with the terms and

representations of this plea agreement .

C . NQ QIM ME _AR& CP_EZQMKgM=

The parties agree not to. recommend any upward or downward

adjustments other than those referenced above .

D . $10 AGREEMENT AS TO CRrMINAL HISTORY CATEGOR Y

There is no agreement as to defendant's -Criminal History

Category .

8 .' PTO ~EPARTtJRESAR RECON ND~s'D

The Government agrees not to recommend any upward or downward

departures . The Defendant is free to make any motion for downward

departure that may be appropriate under the. Guidelines . The

10 53~ APPENDIX C

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• •Government is free to oppose any such departure motion .

F T"-INEQRMATION

Defendant agrees that the facts in the "factual basis" paragraph

of this plea agreement are true, and may be considered a s

"relevant conduct" under 5 191 .3 .

G, GOVERNMENT'S RECD- M MATION REGARDING CUSTODY

The Government will recommend- that defendant be sentenced to the

low end of the guideline range found by the court . However, if the

court adopts an offense level or downward adjustment or departure

below the Government's recommendations "in this plea agreement, the

Government will recommend a sentence as near as possible to what the

sentence would have been if the Government's recommendations had been

followed .

1 . ,SPECIAL ASSESSMENT/ F NEIRESTITUTION

men . The parties will jointly recommend that

defendant pay a .special aseeaement in the amount of $100 to be paid

forthwith at time of sentencing . The special assessment shall be paid

through the office of the Clerk of the District Court by bank or

cashier's check or money order made payable to the "Clerk, United

States District Court, "

F_ine/Restitution . The parties have no agreement with respect to

a fine,' or order of restitution, that may. be imposed .-

XI.

PEFE1DANT WAIVES AFPEU AND _COLLATERAL ATTACK

In exchange for the Government's concessions in this plea

agreement, defendant waives, to the full extent of the law, any right

to appeal or to collaterally attack the conviction and sentence,

including .any restitution order, unless the court imposes a custodia l

- _ rr rA ' AST

11 54APPENDIX C A .A

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sentence greater than the high end of the guideline range (or

statutory mandatory minimum term, if applicable) recommended by the

Government pursuant to this plea agreement at the time of sentencing .

If the custodial sentence is greater than the high end-of that range,

defendant may appeal, but the Government will be free to support on

appeal the sentence actually imposed . If defendant believes the

Governments recommendation is not in accord with this plea agreement,

defendant will object at the . time of sentencing ; otherwise the

objection will be deemed waived .

XI I ..

CRIMES AFTER ARREST OR BREACH OF THE AGREEMENT WILL PERMITTHE GOVERNMENT TO RECOMMEND A HIGHER SENTENCE ORSEA' ASIDE THE PLEA - - -

This plea agreement is based on the understanding that , prior to

defendant ' s sentencing in this case, defendant has not committed or

been arrested for any offense not known to the Government prior. to

defendant ' s sentencing . This plea agreement is further based on the

understanding that defendant has committed no criminal conduct since .

defendant's arrest on the present charges , and that defendant will

commit no additional criminal conduct before sentencing . if defendant

has engaged in or engages in additional criminal conduct during this

period , or breaches any of the terms of any agreement with the .

Government , the Government will not be bound by the recommendations

in this plea agreement , and may recommend any lawful sentence, In

addition, at its option, the Government may move to set aside the

plea .

XIII

ooP Q

A . Defendant has expressed a desire to provide substantia l

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12 55APPENDIX C

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0 •1 assistance to the Government in the investigation and prosecution of

2 others, after entering her guilty plea . The Government has made noel

3 evaluation whether the cooperation, if any, will be "substantial," or

4 whether it will merit a downward departure from the Sentencing

5 Guidelines .

6 B. Defendant agrees to be interviewed by federal and state law

7 enforcement agents and attorneys and to tell 'everything defendant

8 knows about 'every person involved presently or in the past in bank

9 fraud, securities fraud, and insider trading, as well as other

10 violations of law, at Peregrine Systems, Inc . Defendant also agrees

11 to produce all documents and other evidence in defendant's possession

12 or control related to these violations .

13 C . - Defendant agrees not to do any 'undercover work or tape

14 record any conversations or gather evidence unless instructed by the"

15 agent assigned to defendant . Defendant can be prosecuted for any

16 criminal activity undertaken without instructions .

17 D. Defendant agrees to provide statements under penalty of

18 perjury and to testify before any federal or state grand jury, and at

19 any pretrial, trial or post-trial proceedings . Defendant will provide

20 complete, truthful and accurate information and testimony . 'Defendant

21 agrees to submit to a polygraph examination to test the truthfulness

22 of defendant's statements, upon request by the Government .

23 E. The Government agrees that, if defendant fully complies with

24 this plea agreement, it will not make use of any statements made by

25 defendant during the period of post-'plea cooperation in any further

26 prosecution of defendant for any offense, or in defendant a sentencing

27 as provided in Guideline 5 lel,e . If defendant does not fully comply

28 with this plea agreement, all statements made by defendant before,

13 56APPENDIX C

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during and after this plea agreement, and any leads or evidence

derived from such statements can be used against defendant and are

admissible in court .

F . Statements made by defendant pursuant to this plea agreement

are not statements "made in the course of any proceedings under Rule

11 of the Federal Rules of Criminal Procedure" and are not statements

"made in the course of plea discussions . "

0 . If the United States Attorney's Office decides that

defendant has provided substantial assistance, and has fully complied

with this plea agreement, it will file a motion for a downward

departure under 18 U .S .C . S 3553, or I 5K1 .1 of, the Sentencing

Guidelines . Defendant acknowledges that even if the Government makes

a motion, . the court may reject the Government's motion and

recommendation for departure and refuse to depart downward, and

defendant. would not be allowed to withdraw her guilty plea .

H, If the United States Attorney's office decides to make a

substantial assistance motion, it will inform the sentencing judge of ;

(1) this plea agreement ; (2) the nature and. .extent'of defendant's

activities in this case ; (3) the full nature and extent of defendant's

cooperation with the Government and the date :when such cooperation

commenced ; and (4) all information in the possession of the Government

relevant to sentencing .

1 . If defendant provides materially false, incomplete,' or

misleading testimony or information, or breaches this plea agreement

in any other way, the Government may prosecute defendant in connection

with all federal criminal violations of which it is aware, including

false statements, perjury and obstruction of justice, and defendant's

sentencing guidelines may be, adjusted for making false statement s

14 57APPENDIX C

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0 . 0(e .g ., 6 3C1 .1 and § 381 .1) . In addition, the Government may move to

set aside this plea agreement, and prosecute defendant on all charges

in the indictment in this case . However, if the Government elects not

to set aside the plea agreement, defendant agrees that the Government

may recommend any lawful aentetce without restriction by this plea

agreement . .Any. prosecution and sentence resulting from a breach of

this plea agreement may be based on information provided by defendant .

J . The parties will request that the court continue the

sentencing'in thin case to allow defendant to cooperate under this

plea agreement . .Defendant acknowledges that the court may deny this

request and require that sentencing proceed according to the court's

schedule . The time may be further extended upon consent of both,

parties and the approval of the court .

xIv

EN'T'IRE - AgREEMENT

This plea agreement embodies the entire plea agreement between

the parties and supersedes any other plea agreement , written or oral .

xv

M0DIFICATroN OF AGREEMENT MUST BE IN WRITING

No modification of this plea agreement shall be effective unless

in writing signed by all parties .

xvI

DEFENDANT AND COUNSEL FULLY UNDERSTAND AGtEEbF~

By signing this plea agreement , defendant certifies that

defendant has read it . Defendant has discussed the terms of this plea

agreement with defense counsel and fully. understands its meaning and

effect .

/1

5815 APPENDIX C

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DEFENDANT SATISFIED WITH COUNSE L

Defendant has consulted with counsel and is satisfied with

Counsel ' s representation .

CAROL C . LAMUnited States Attorney

DA7ED

iize?o -0DATED

DATED

GECRG D . HARDAssistant U.S . torney

SANJAY BHANDARIAssistant U .S . Attorney

AGHLANO & LIPMAN, LLP

by MICHAEL LI PMANAttorney for Defendant

IN ADDITION TO THE FOREGOING PROVISIONS TO WHICH I AGREE, I SWEARUNIEA PENALTY OF PERJURY THAT THE PACTS IN TSB "FACTUAAL BASIS"PARAGRAPH ABOVE ARE TRUE .

DATED IL 4E CAPPELDefendant

16 59APPENDIX C ~ ► }

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0 4

APPENDIX D

PEREGRINE CLASS PERIOD ACQUISITIONS

Company Acquired Date Cash Peregrine Shares Total Consideratio n

KnowlixCorporation

September 29, 1999 706,000 $17.8 millio n

Telco ResearchCorporation Limited

March 23, 2000 2,563,000 $123 . 9 million

Barnhil lManagementCorporation

March 24, 2000 273,000 $32.2 millio n

HarbingerCorporation

June 16, 2000 30,157,000 $1 .48 billion

Loran NetworkHoldingCorporation, Inc .

September 1, 2000 2,861,000 $109 .8 million

Tivoli Service DeskSuite

December 29, 2000 $45 million 3,015,000 $133 .1 million

Extricity, Inc. March 23, 2001 707,000 $202.5 million

Remedy Corporation August 27, 2001 $280 million 28 ,300,000 $1 .2 billion

XTRA On-LineCorporation

November 30, 2001 114,90 8

Bodha.com, Inc . December 24, 2001 54,662

Goldmine SoftwareCorporation

$74 . 5million

SupplyAccess , Inc . $9.1 million

60APPENDIX D

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APPENDIX E

Page

A. Prokom Software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

(Gardener, Gless )

B. BullS.A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

(Gardener , Gless )

C . International Computers Limited/Fujitsu . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

D. eXchangeBridge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 0

(Nelson)

E. British Telecom . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2

(Gardner, Luddy, Nelson )

F . Critical Path . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 7

(Gardner , Gless, Cappel, Nelson)

G. RTC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

(Gardner)

H. Barnhill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

(Powanda)

1 . O/E Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

(Spitzer)

J . Systematics AG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

(Gardner, Gless, Powanda , Spitzer)

#105632 -i-

61APPENDIX E

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APPENDIX E(Continued)

PageI

#105632

K. Corporate Software & Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

(Gardner, Gless, Spitzer)

L . FM International . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

(Spitzer)

M . Action Computer Supplies . . . . . . . . . . . . . . . . . . . . . . . 36

(Gless, Spitzer, Powanda)

N . MGX Enterprise Solutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

(Gardner, Gless)

0. IBM/Tivoli . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42

(Gardner, Cappel, Nelson, Powanda)

P . CI Software Solutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50

(Gardner, Gless, Spitzer, Nelson )

Q. Hyperion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

(Gardner, Gless, Powanda)

-H 1 -

62APPENDIX E

APPENDIX E

A. Prokom Software

•

Prokom Software, S .A., a Polish company, was a reseller of Peregrine software in

Europe. In September 2000, Peregrine entered into a transaction with Prokom . The Schedule A

to the software license agreement provided as follows :

Peregrine's commitment : I - to replicate the Peregrine hubs inAtlanta and Karisruhe and offer ASP Portal infrastructure servicesto Electronic Marketplaces providing the following e-marketcapabilities in Poland, targeting customers who have the need toexchange large volumes of standardized business transactions . . .

2- to deliver a solution for the near-term opportunity to build amarketplace for non-ferrous metals community . . .

3 - to provide the full asset lifecycle management, employee self-service with e-procurement solutions through connection to emarketplaces and providing business community connectivity andintegration via an ASP Service: e-ServiceCenter, Facility Center . . .

In November 2000, Peregrine and Prokom entered into a le tter of intent which set forth

Peregrine's role in support of Prokom's operation of the ASP model . The letter of intent was

signed by Richard Day, head of Peregrine's Emerging Markets business in East Europe an d

Africa. It provided for a total set-up cost of $3,900,000, which consisted primarily of a licens e

for the full suite of Market Enablement products. The letter further provides that Peregrine wil l

make a "capital investment of 100% of the set-up cost ," i.e., $3,900,000 .

This transaction contained several terms that rendered Peregrine's revenue recognition

#105632

inappropriate . Most significantly, the Schedule A does not provide that Prokom was licensin g

any software. It identifies Prokom's commitment as that described in the November 2000 letter

of intent . This arrangement is fundamentally not a license of software products but merely an

63

APPENDIX E

0 0

agreement between Peregrine and Prokom to further develop an ASP infrastructure . Such a

commitment does not meet any of the criteria for revenue recognition .

In June 2001, Peregrine and Prokom entered into another deal in which Prokom agreed to

take $12 million in Peregrine software for future sale to end-users . Richard Day signed a side

letter that stated that Prokom did not have to pay Peregrine if it could not resell the software to an

end-user . The side letter stated :

PROKOM Software SA will pay Peregrine Systems the net valueof $12,000,000 for software licenses sold to their customers. In theunlikely event that the level of software licenses sold, net toPeregrine Systems, does not meet or exceed the figures from thepayment schedule (Schedule A), PROKOM Software SA will onlybe liable for the net value of software licenses that have beensold. PROKOM Software SA will not be liable for software usedinternally . (Emphasis added . )

A former Peregrine employee , who was a product specialist in the InfraTools business

unit, recalled the Prokom sidI letter and the general use of side letters in Europe as follows :

. . . Chip Shore was the sales person for the Prokom account ; andRichard Day was the sales director responsible for EmergingMarkets who had replaced Dominic O'Reilly . It was O'Reilly andJerry Crook that started the practice of side letters in Europe -anything that Day would have done he would have learned fromworking with O'Reilly.

A side letter basically confirmed to the re-seller account that theyonly had to pay the difference between what they actually soldregarding the purchase order specific to the appropriate date andwhat was committed for - this came into play only if the accountfailed to meet its commitment by the time date specified on theP.O .

One quarter before Alan Kerr was brought on to clean up the U .Koperation, Jerry Crook dismissed both Chip Stone and Richard Dayregarding accusations of stuffing the channel and the use of sideletters . I believe that Crook knew and condoned the side letters

#105632 -2-

64APPENDIX E

• •

and fired Stone and Day to protect his position . Day was firedaround the time that the Prokom commitment was expiring andthey would be forced to pay the difference between what theycommitted to and what they actually sold . When Prokom waspushed to pay-up they showed the side letter which confirmed thatthey only had to pay for what they sold .

Another former Peregrine employee, who was in sales, recalls the Prokom transaction as

follows :

I remember that it was announced at the end of the quarter that wehad closed a $10 million dollar deal internationally right at the endof the quarter with an international company called `Prokom' . Iknew this to be a fact because it was announced at the President'sClub venue in July or August 2001 in the Cayman Islands . It wasduring a subsequent lunch with several ex-employees severalmonths after I had been laid off, that I learned that this was a`fishy' deal in that it was just a commitment to sell our productwith no cash exchanging hands - but that the company had bookedthe commitment nonetheless as revenue .

Defendants Gardner and Gless were aware of the existence of a side letter relating to thi s

transaction . On November 15, 2001, VP of Finance and Chief Accountant B.J . Rassam sent an

e-mail to defendant Gless stating :

Someone came by my office and told me that Geoffroy [Boonen]was extremely upset because he found a side letter . Apparently ona call w/ Prokom, Prokom told Geoffory [sic] that we gave Prokoma side letter saying they never had to pay us the $12M (or whateverthe balance is) unless they sold the product thru . . . .

That's all I know based on what I heard yesterday, so I thought Iwould contact you to see what's really going on .

Peregrine's Area Vice President for Southern Europe, Michel Isnard, also sent an e-mail ,

#105632

dated December 21, 2001, to Gardner and Gless informing them that Prokom claimed it wa s

never obligated to pay for the September 2000 transaction and they "were not open to do it ever ."

-3-

65APPENDIX E

• •

A former Director of the Alliance Group recalled the use of the side-letter in the Proko m

#105632

transaction in order to document that Prokom had no payment obligation until it sold Peregrine's

product to an end-user . Nevertheless, Peregrine booked revenue from this transaction in June

2001 . When Peregrine employees subsequently contacted Prokom concerning payment on the

receivable, they were told that Prokom had no obligation to pay because of the side agreement s

as alleged above .

Peregrine 's accounting for this transaction was not in accordance with GAAP. The side

le tter made it clear that Prokom was not obligated to pay until it sold -through to end users and

that the payment terms were subject to further negotiation . Thus , the fee was not fixed or

determinable and Peregrine ' s immediate recognition of revenue violated GAAP .

-4-

66

APPENDIX E

• •

B . Bull S .A.

In the first quarter of fiscal year 2001, Peregrine entered into a transaction with Bull S .A .

("Bull") . Defendant Gardner had worked for Bull prior to joining Peregrine . Bull licensed

ServiceCenter, AssetCenter and Get . Resources for $5,000,000 . Of this amount, $1,000,000 was

payable in 90 days and the balance was due upon the earlier of sell-through or 12 months .

Defendant Gardner participated in the negotiations by telephone . The arrangement wa s

memorialized in a software license agreement and a Schedule A .

Pereg rine recorded $4,300,000 in license revenue immediately . Defendants Gardner and

Powanda knew that this revenue was being booked even though the deal had not yet bee n

completed . In an e-mail dated July 5, 2000 - five days after the end of the fiscal quarter -

Jeremy Crook (Peregrine's Vice President of EMEA) sent defendants Gardner and Powanda an e-

mail stating "Bull should happen today." Thus, Gardner and Powanda knew this revenue w as

recorded in the quarter pursut to an agreement made after the end of the quarter .

On July 5, 2000, Crook wrote two side letters to Bull . The first side letter defines th e

payment obligation as $1 million down with the remainder payable upon sell-through or in 1 2

months, whichever came first . The first side le tter also commits Peregrine to deliver $5 millio n

of business to Bull . This letter alone provides evidence that revenue recognition was improper ,

as the fee was not fixed or determinable .

The second side letter defines the payment terms differently :

Bull S.A. will pay Peregrine Systems, Inc . in full to the value of$5m over the l2 month period . In the unlikely event that the levelof Licenses used does not meet or exceed this figure, Bull isentitled to raise a Services invoice to Peregrine of amount notexceeding $2 .5m and corresponding to the balance of the $5m Bul l

#105632 -5-

67APPENDIX E

• Scommitment and actual Bull achievement . This amountcorresponds to the Service costs incurred by Bull to implementPeregrine Platforms . Peregrine will pay the invoice on itspresentation .

Jeremy Crook's July 5, 2000 e-mail to Gardner and Powanda further documents thi s

agreement . Crook noted that Peregrine would "pay back" the difference between Bull' s

commitment and actual achievement with up to $2.5 million in professional services. This

provision guaranteed that if Bull failed to meet its sales commitment, Peregrine would purchas e

services from Bull to ensure that Bull could turn around and pay Peregrine . The payment

provision set forth in the second side letter also violates the fixed or determinable revenu e

recognition principle in that there is no enforceable payment obligation . Defendants Gardner an d

Powanda clearly knew of this bogus accounting treatment .

Thus, Peregrine recorded revenue prior to the execution of the agreement, which is a

#105632

violation of GAAP . Peregrine only collected $1,000,000 of the $4,300,000 contract amount. It

improperly wrote-off the $3,300,000 balance by reducing an accrual established in the accountin g

for the Harbinger acquisition .

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68APPENDIX E

0 0

C. International Computers Limited/Fujits u

Fujitsu is a Japanese conglomerate that is one of the largest companies in the world .

Peregrine entered into deals with both Fujitsu and Inte rnational Computers Limited ("ICL"), a

subsidiary of Fujitsu.

In December 1999, Pereg ri ne entered into an agreement worth £ 12,000,000 with ICL .

Under the agreement , ICL granted Peregrine : (1) the right to an ICL product called "Framework "

for £8,500,000; and (2) the option to use the word "Framework" for fifteen (15) months fo r

£3,500,000. In turn, ICL licenced software from Peregrine for a total of £l 2,000,000 through

contracts entered into in December 1999, January 2000, and June 2000 . The licenses included

the Get.It suite of products, ServiceCenter, AssetCenter, and FacilityCenter .

According to a former Peregrine employee, who was a product specialist in the InfraTool s

#105632

business unit, these transactions were nothing more than a "swap" arrangement between the

companies . To avoid the appearance that the transactions were a software swap, ICL an d

Peregrine prepared separate contracts for the purchases . The "swap" nature of the deals is

evidenced by: (1) the proximity of the dates the contracts were executed ; (2) the lack of cash

exchanged; and (3) the lack of resale by either company for'software acquired through prio r

transactions before ente ring into subsequent deals . Since the software exchanged was held fo r

resale by both comp anies in similar lines of business , GAAP requires that revenue be recorded a t

Peregrine's historical cost basis, which is zero . Peregrine did not sell or otherwise use th e

Framework product and there was no resale of Peregrine ' s product by ICL . By structuring these

software purchases as two separate and independent transactions, the true nature of th e

transactions was disguised and improperly booked based upon ICL's order of Peregrine product .

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69APPENDIX E

• •

The recognition of revenue from this swap transaction was improper and resulted in the

overstatement of Peregrine 's revenue in violation of GAAP .

In addition, one of the June 2000 transactions was for the internal use of Peregrine' s

software and access to Harbinger .net . There does not appear to be a reasonable basis on which to

determine the fair value of this software and access to Harbinger .net . Thus, this transaction als o

should have been recorded at Peregrine's historical cost basis of zero .

Defendants Gless and Cappel were well aware of the "swap" nature of the transaction . In

a March 28, 2001 e-mail sent to several Peregrine employees, Cappel wrote :

As you may be aware, Fujitsu/ICL owes us $1 .8 MM. $900,000was due at December 31, and an additional $900,000 is due onFriday. As it happens, we also owe them $566 K . . .

Unless there are any objections, Matt [Gless] has agreed to allowthe amounts owing to FujitsullCL to be offset against amountsowed to us by them (which would help us out from a DSOstandpoint at match 31) . . . . On the [accounts receivable] side, theinvoice for the first $900,000 should be reissued for the netamount. . . .

In December 2001, Peregrine entered into another software swap with Fujitsu . The

transaction provided that Fujitsu would take $10 million of Peregrine product . Peregrine was in

turn obligated to provide "solution" software to Fujitsu . Neither company actually paid for the

software or services .

The details of the Fujitsu swap, as recalled by a former Peregrine employee who was a

Senior Manager, Strategic Corporate Accounts, are as follows :

One example of a swap . . . was a swap transaction between

Peregrine and Fujitsu for approximately $3-5 million in equivalent

value . It was proposed that Fujitsu develop solutions with

Peregrine and jointly market the resulting product naming i t

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70APPENDIX E

• •

"Peregrine Retail" - Peregrine obligated Fujitsu to $5 million inlicense fees for product ; and after 9-12 months another $5 million .

Fujitsu was getting services and invoices from Peregrine but wasnot paying Peregrine . Peregrine was getting invoices from Fujitsubut was not paying Fujitsu .

I realized in March 2002 that Fujitsu was not paying its invoices toPeregrine and I was not certain that we should continue to providesupport services . I went to a financial analyst in the Financ edepartment who was responsible for invoices to inquire about thissituation. I was shown two invoices with notes written in pen andsigned by Matt Gless on each invoice stating that Peregrine waswaiving the fees owed by Fujitsu in lieu of services . The notestated that it was "ok" that Fujitsu did not have to pay and theservice was not rendered . The two invoices were put into theaccounting system as revenue, however . The company's financeperson traced the 2 Fujitsu invoices amounting to $500,000 to $1million each in the system that had not been paid and showed methat they has been posted as revenue - yet I knew that Fujitsu wasnot paying Peregrine .

The note in the accounting system stated that neither Fujitsu norPeregrine werg providing services - there was also an override inthe system that instructed that the situation was ongoing .

Dave Roudenbush, Director, Alliances told me when I brought thisissue specifically up with him the first time that "we will take careof it ;" and then after 2-3 weeks when I head nothing but kep tinquiring, I was told by Roudenbush that the matter was taken careof. I was told specifically by Rodenbush, "we can take care of ityou have more important things to do!" Right then and there Iknew that something was wrong !

Finally, I was able to verify that Fujitsu paid only $1 to $1 .5million in fees to Peregrine -- this showed up on the invoice report- only later did I realize that $8 .5 million was missing in paymentto Peregrine .

In December 2001, Peregrine improperly booked revenue on all or a significant portion o f

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the $10 million transaction .

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71APPENDIX E

D . eXchangeBridge

eXchangeBridge, Inc . ("EXB") is a Delaware corporation with its principal place of

business in Atlanta, Georgia . EXB provides electronic and paper transaction processing service s

to the food brokerage industry.

By February 2001, Peregrine had become the majority shareholder in EXB, with roughl y

78% of the preferred stock (with voting rights) . Peregrine acquired 1,750,000 shares through a

capital contribution of $1,750 ,000 and purchased another 1 ,750,000 shares from Crossmark in

February 2001 at $1 .74 per share in Peregrine stock. Defendant Nelson and Eric Deller o f

Peregrine were two of the three members of EXB's board of directors .

Crossmark, EXB's only significant customer, had signed an exclusive service agreemen t

with EXB for all of its transaction processing at a price of $3 .50 for each electronic transactio n

and $7.00 for each paper transaction. Within a matter of months, Nelson was pushing t o

renegotiate the deal in an attempt to artificially increase reported revenues for the June 200 1

quarter at Peregrine .

At the close of the quarter on June 30, 2001, Nelson signed an agreement with Crossmark

to reduce the price to $1 .25 for each electronic transaction up to 593,000 transactions per annu m

and to $6 . 50 for each paper transaction up to 331, 000 transactions per annum . Crossmark was

running roughly at those volume levels and this deal would save them approximately $1 . 5

million per year. On behalf of Peregrine, Nelson also agreed to purchase an EXB note an d

another debt owed to Crossmark for $1 .5 million in Peregrine stock .

In exchange, Crossmark agreed to "purchase" approximately $1 .6 million of software

#105632

from Peregrine through EXB . Nelson planned to book the software as $1 .6 million in revenue

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72APPENDIX E

• •

for the June 2001 quarter for EXB and for Peregrine . This additional amount of repo rted revenue

would allow Peregrine to continue its sequential repo rted revenue growth .

In violation of GAAP, Nelson insisted that EXB - and thus Peregrine - recognize the full

$ 1 .6 million software license fee immediately in the June 2001 quarter despite the fact that th e

transaction was nothing more than a contingent swap transaction . After the CFO at EXB

objected to Nelson's accounting treatment for the transaction, she was terminated . With the

addition of the full $1 .6 million in revenue in the June 2001 quarter, Peregrine was able t o

improperly report sequential revenue growth of $1 million - growing from $171 million in

reported revenue to $172 million in reported revenue .

#105632 -11-

73APPENDIX E

0 0

E. British Teleco m

In the third quarter of fiscal year 2001, Peregrine entered into an arrangement with Britis h

Telecom ("BT") under which BT licensed several of Peregrine's software products . The deal

was for £ 10,000,000 payable in installments over 2001 and 2002 . The arrangement was

evidenced by a Schedule A and Software License Agreement - Hosted Services ("SLA"). The

SLA contained a 30 day money back guarantee if BT was not satisfied with the products .

Peregrine recorded $12,546,000 of license revenue in the quarter in connection with thi s

transaction .

The arrangement was later modified through an amendment to the SLA dated August 23 ,

2001 (the "August Amendment") . Among other changes, the August Amendment require d

Peregrine, at its discretion, to either procure products or services from BT in an amount equal t o

120% of any outstanding payment under the Schedule A, or provide business opportunities to BT

in the equivalent value of an) outstanding payments due under the Schedule A, in the event BT i s

unable to fulfill its payment obligations .

Correspondence between Peregrine and BT indicates that final negotiations occurred i n

January 2001 - the quarter after revenue was recorded . The correspondence also evidences th e

underlying reason for the 30 day money back guarantee clause and discloses Peregrine's effort s

to address BT's cancellation of the contract over a period of three quarters .

In a le tter dated January 8 , 2001, David Hill (Senior Buyer at BT) wrote to Emma

Wilson , (Peregrine 's Legal Director for EMEA) :

Please find enclosed two signed copies of the Software LicenseAgreement also two signed copies of Schedule A . Can you pleasearrange to have them signed by the appropriate person in Peregrine

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APPENDIX E

0 0

and return one copy of each to me at the address below . Withregards to contract should BT Consulting not contract withQuardant within 30 days from 29 December 2000 then the contractbetween BT plc and Peregrine Systems will be cancelled .

From this side letter , it is clear that two of the four basic revenue recognition criteria were

not met when Peregrine recorded revenue : (1) the January 8, 2001 date of the letter indicates that

Peregrine recorded revenue in the quarter prior to obtaining evidence of an arrangement ( a

written contract signed by both parties) ; and (2) the letter demonstrates that the 30 day money

back clause is in substance a cancellation provision . Fees from licenses cancelable by th e

customer are neither fixed nor determinable until the cancellation provision lapses .

In a letter dated April 4, 2001, BT's cancellation provision is extended until April 6 ,

2001 . This extension is further evidence that the 30 day money back guarantee was substantively

a cancellation provision and is an example of Peregrine's practice of granting concessions t o

customers . In fact, in a letter dated April 5, 2001, BT did cancel the arrangement, stating : "I refe r

to your correspondence of 4th April 2001 in respect of the above agreement . BT is exercising its

right to cancel the agreement as outlined in the aforementioned letter, which shall mean that B T

has no commitment to you under the agreement . "

in an e-mail dated August 7, 2001, from Christopher Manton-Jones (Peregrine's Directo r

of Global Accounts - EMEA) to defendan t Gless, Jones states in reference to the draft Augus t

Amendment :

Please see attached what we hope to be the last version of the BTaddendum for your approval . BT Group Legal came back withwhat we were told was one last point today. Emma has reviewedand incorporated this and we proposed to accept it on the basis thatthere are no other changes .

4105632 -13-

75APPENDIX E

• •

Although I'm covering old ground, for the sake of clarity I'd like tohighlight two points .

1) Para 4 covers the essence of the agreement. It is a combinationof the two routes that we discussed previously, i.e ., we have anoption to execute "pass through" or "barter" . The timetablefor this is not a "cliff' at completion of the payment term but iseffectively reconciled within each accounting period that apayment is due .

2) Para 6 covers the resale elements . I have an action to documentthe guidelines under which BT receive[s] the margin levelspecified . Had we incorporated those into the process now itwould have drawn it out even further. Whilst we would have likedto include stronger wording here relating to "best commercialendeavors" it would not have been acceptable to BT, thereforeregrettably the agreement technically does not place obligationon BT to actually resell our software .

Whilst none of this is what we would wish it to be, I believe we

have worked within the boundaries you defined to ensure theliability was accepted and offset. (Emphasis added .)

Defendant Gless apprpved the signing of the August Amendment in an e-mail message

sent on August 14, 2001 .

The fact that the transaction lacked substance is further evidenced by an e-mail sent b y

defendant Gless to several people including defendant Cappel on October 24, 2001 . Gless wrote :

We have the right per the agreement to offset rec[ievable]against services purchased from BT. I suggest we explore

offsetting the current rec[ievable] for service or product we will

purchase from BT for the current o/s amount . We can swap

checks if necessary. I believe this will be the best course of action

and allows for immediate resolution . (Emphasis added . )

In a memorandum dated June 13, 2002, defendant Cappel acknowledged that he r

#105632

department knew of BT's lack of any real payment obligation at or near the time the Augus t

Amendment was signed :

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76

APPENDIX E

0 0

By mid Q2 [2002], a copy of an amendment to the BT agreementcame to Treasury's attention . This amendment effectively providedthat if BT were unable to sell through to an end user or deployinternally, then Peregrine would purchase product or services,which would then enable BT to pay Peregrine . In December, thecompanies exchanged funds in the amount of I MM GBP, and BTdeployed product to an affiliate in the amount of 300K GBP, soaltogether they were past due by about 200K GBP . During Q4,various executives continued efforts to coordinate payment or sellthrough, but these efforts were unsuccessful . . . .

As noted above, the language in the final August Amendment does not obligate BT to pay

Peregrine unless the software is sold through . Thus, Peregrine should not have recognize d

revenue from this transaction until such sell-through occurred .

In fact, Peregrine had significant problems collecting payment from BT for this deal . On

November 7, 2001, defendant Gless sent an e-mail message to defendant Gardner stating : "It i s

imperative Lenz or other BT reps gets cash out of BT this qtr . Otherwise, we will be subject to

provisions and reversals . This we can 't afford !" Then, on November 27, Dorothy Tril l

(Peregrine's European Finance Controller) sent an e-mail to Gless stating, "I am not so convince d

that we are going to receive this cash . Getting cash out of BT has been a complete nightmare . . . "

Despite having payment problems with BT, Peregrine entered into yet another deal wit h

#105632

BT. According to a former Peregrine employee, who was a product specialist in the InfraTool s

business unit, in late 2001, BT entered in a contract for the purchase of Peregrine software .

Andrew Highland , Peregrine 's European Sales Executive, obtained the order from BT. The BT

transaction was described as a $30 million deal within the company . Under the arrangement ,

Peregrine agreed to deliver Xanadu and, to a lesser extent, Peregrine's Service Center product .

Xanadu was a combination of technology derived from Loran and Peregrine 's Kinnetics Network

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77APPENDIX E

0 0

Management Product, a Linux-based appliance integrated with Service Center and othe r

Peregrine applications . At that time, defendants Gardner and Luddy were directly informed tha t

Xanadu was not close to being deliverable as a working product and would require many months

of intense development effort to make it work according to specifications and to be delivered as a

revenue producing product . Peregrine was not in a position to deliver a commercially viabl e

product to BT by the end of 2001 . Defendant Luddy nevertheless recommended the commercia l

release to BT at this time . In order to recognize revenue in the quarter, Peregrine delivered th e

product prematurely . BT, however, refused to accept the product . Peregrine improperl y

recognized revenue on the sale in late 2001 even though it knew BT had not accepted the produc t

which made collection of the receivable doubtful .

According to a former Peregrine employee, who was a Vice President, Supply Chai n

#105632

Group, in January 2002, Alan Kerr of Peregrine investigated the BT transaction and determined

that Highland "had got into JT and [the transaction] was not real and it was a wonder that Andy

[Highland] could sell anything ." The product was not commercially viable at that time . As a

result, Peregrine refused to pay Highland any commission on the transaction . Highland

threatened to expose Peregrine's improper revenue recognition practices unless he was paid .

Subsequently, Highland brought suit against Peregrine in the United Kingdom for unpai d

commissions .

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78APPENDIX E

• •

F. Critical Path

A software swap between Peregrine and Critical Path, Inc . gave rise to improper revenu e

recognition by Peregrine . David Thatcher, the former president of Critical Path , pled guilty t o

federal charges of criminal conspiracy to commit securities fraud . In his plea agreement,

Thatcher described the transaction as follows :

Critical Path agreed to a software exchange with Peregrine . FromCritical Path's perspective, this transaction was driven by the needto report revenue during the third quarter . At the end o fSeptember, 2000, Critical Path bought software from Peregrine,and Peregrine bought software from Critical Path . To avoid theappearance that the transaction was a software swap, Critical Pathand Peregrine prepared separate contracts for each purchase, eachpaid the full amounts owed, and made payment to each other ondifferent days .

I participated in the negotiations with Peregrine for this softwareswap. I spoke with the CEO of Peregrine [i.e., defendant Gardner]about the software swap. I also helped to set the value of thetransaction. BV structuring the software swap as two independenttransactions, I ealized that I and others working on the deal wereconsciously avoiding disclosure of the true nature of thetransaction.

The software that Peregrine agreed to "buy" from Critical Path was priced a t

approximately $3 .09 million . The software that Peregrine agreed to "sell" to Critical Path wa s

also priced at approximately $3 million .

E-mail correspondence also shows that defendants Gardner, Cappel, Gless, and Nelso n

knew that the transaction was merely a software swap for which revenue could not b e

recognized. For instance, in an e-mail dated September 14, 2000, Gardner wrote to Dian a

Hyland, Peregrine's Technology Alliance Manager, that:

I talked to David Gardner last quarter about increasing the size o f

#105632 -17-

79APPENDIX E

• •

the Reserve software rights and them [sic] becoming a Peregrinecustomer . Dave called me this week to ask if we could still do this .That is as far as it goes - discussion of a basic barter deal . . . .(Emphasis added . )

Defendant Gless also participated in a series of e-mails on September 19-20, 2000 whic h

demonstrate his knowledge of the nature of the deal . On September 19, 2000, Gless was e-

mailed the license agreement and other documents related to the transaction. Gless then sent an

e-mail to Taylor Barada (whose title was "Director , Special Projects , Office of the CEO) askin g

"why are we buying from these guys? I presume this is a barter transaction ." (Emphasi s

added.) Barada responded, "You are correct . This is a barter deal . . ." (Emphasis added . )

Defendant Nelson was provided with "the latest" version of the Critical Path document s

on September 27, 2000, when they were e-mailed to him by Taylor Barada. Later that day ,

Barada sent another e-mail to Nelson attaching the "Final, Final" version of the documents .

Defendants Gless and Cappel engaged in a series of e-mails on September 28, 2000 i n

which they discussed the accounting for the Critical Path deal . Cappel asked Gless, "Can w e

swap checks on the 29th?" Gless responded, "yes, work with Taylor [Barada] ." Cappel then sen t

another e-mail to Gless asking, "On second thought, which is better : Cash or DSO [days sales

outstanding]?" Gless replied, "dso ." Cappel then wrote an e-mail message to Taylor Barada

stating , "Matt [Gless] asked me to contact you on this directly . In your dealings on the Critica l

Path transactions, do you think you could arrange for us to swap checks with tomorrow's date ?

[¶] This is very important to us in terms of managing our quarter-end DSO . "

The recognition of revenue from these transactions was improper and resulted in th e

#105632

overstatement of Peregrine 's revenue in violation of GAAP. GAAP required that barter

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80

APPENDIX E

transactions be recorded at historical cost whenever the asset received will be resold in a similar

line of business or the fair value of the exchange cannot be reasonably determined . That cost was

zero .

This transaction was discussed by the full Board of Directors at a Board meeting on Jul y

18, 2001 and at a special Audit Committee meeting attended by defendant Moores and Audit

Commi ttee members on February 12, 2002 .

#105632 -19-8 1

APPENDIX E

• •

G. RT G

In March 2001, Peregrine improperly recognized revenue on a transaction with Rainie r

Technology Group Inc . ("RTG"), based in Seattle, Washington . Peregrine pressured RTG to sign

purchase orders totaling at least $2 million for copies of Xanadu, one of Peregrine's softwar e

packages . There was never any intention on the part of either Peregrine or RTG that RTG woul d

actually pay the monies unless the product sold-through to the end-user. RTG was a "shell"

company with very few assets and no revenue .

A former senior officer of a Peregrine reseller recalls his dealings with Peregrine on thi s

transaction as follows :

I had a flurry of contacts starting in December 2001 through March2002, e-mails and telephone conversations with Gary Lenz, aPeregrine officer and President of Infrastructure ; Joe Reichner,EVP of Worldwide Channel Sales, Steve Gardner, Peregrine'sCEO and VP, Partner Relations, David Roudenbush . I dealtdirectly with Roudenbush . . . I kept telling them that Xanadu wasnot engineered and did not work and that it was at least one yearaway from being able to be sold off the shelf so that they were fullyaware of these issues .

I also told these individuals speci fically that RTG had no revenues,no D&B , was a shell company and would be bankrupt before theinvoice arrived. I told them in various conversations, e-mails andin writing.

I also told them that I had heard that they had booked thistransaction as revenue in Q4, 2001 and that I was really surprisedas such . It was a little later that they re-approached us offering usluxury box seats to the Buick Open to ostensibly keep the lid onthis matter .

There was never any intent by RTG to pay Peregrine . This wasagreed upon between Peregrine's Roudebush and RTG's Kirb y

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82APPENDIX E

. •

orally and was confirmed later in a side e-mail from Roudebush .

Gardner was aware of all of these facts . Nevertheless, Peregrine improperly booked th e

#105632

deal as revenue in March 2001 in order to meet publicly announced revenue goals .

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83APPENDIX E

•

H. Barnhill

•

In 1999, Barnhill Management Corporation ("Barnhill") was a small reseller of Peregrin e

software . According to a former Peregrine employee who was a Director of the ICW Group ,

Peregrine obtained a $3 million commitment from Barnhill only by slipping Bamhill's president ,

Michael Witt, a significant amount of cash . The former employee remembers seeing that at a

sales kick-off meeting in the Spring or Summer of 1999, defendant Powanda handed Witt an

envelope with $25,000 to $50,000 in cash inside . The former employee heard Powanda say t o

Witt that if he "made the commitment," Peregrine "would take care of him ." Witt also told th e

former employee that he (Witt) was "walking around with the biggest amount of money that h e

ever had on his person in his life . "

The cash pay-off was to get Barnhi ll to increase its commitment to $3 million, which wa s

unrealistic for Barnhill . The Director of the ICW Group recalls being told by Witt that he was

very uncomfortable with the amount of the deal . Powanda also knew that Barnhill did not have

the financial resources to pay for the Peregrine software . Thus, the arrangement betwee n

Powanda and Barnhill provided that Barnhill would not be obligated to pay Peregrine until sell-

through to an end-user.

According to a former sales executive involved in sales to the Alliance Group, the tota l

amount of "bad deals" placed at Barnhill was approximately $15 million . Peregrine knew that

these "receivables" from Barnhill would never be paid . In order to avoid the receivables fro m

having to be written off, Peregrine acquired Barnhill as of March 24, 2000 . According to a

former Vice President, Product Marketing, Peregrine had no plan to integrate Barnhill into it s

operations . The acquisition of Barnhill allowed Peregrine to avoid the write-off of Barnhill' s

#105632 -22-84

APPENDIX E

large receivables at year-end March 3 1 , 2000 . Instead, Peregrine improperly buried the write-off

in the line item "Acquisition Costs and Other." Because this failed reseller transaction with

Barnhill had no relationship to a true "acquisition," it was clearly improper to write the value o f

the deal off under that line item .

#105632 -23-

85

APPENDIX E

• •

1 . O/E System s

Peregrine engaged in a fraudulent revenue recognition transaction with a reseller calle d

O-E Systems, Inc . In September 1999, O/E Systems entered into a transaction with Peregrine i n

which it agreed to resell $500,000 of Peregrine software . Defendant Powanda's name is typed on

the Schedule A memorializing the deal .

The Schedule A, which is dated September 30, 1999, provides O/E Systems with license s

for resale for Peregrine 's ServiceCenter, AssetCenter, InfraCenter for WorkGroups, and

InfraTools software . On two separate places on the Schedule A, there is a handwritten note

stating that O/E's payment to Peregrine was "subject to Peregrine's fulfillment of all obligations

outlined in the letter dated September 27, 1999 from Steven Spitzer to Tom Sieja [of 0/E

Systems] ." Spitzer's September 27, 1999 letter provided that O/E Systems would have a semi-

exclusive sales territory and that Peregrine would provide substantial assistance to O/E Systemsi

so it could make sales to end users .

A former Pereg rine employee , who was a sales representative in the ICW Group, recalled

the situation as follows :

A sales commitment was entered into in September 1999 byreseller O/E Systems for between $500,000 to $750,000 by Spitzer.Peregrine's Blaine Bragg was the sales representative responsiblefor this account . Bragg was paid 100% of his commission up frontat the time of commitment .

O/E Systems was given semi-exclusivity and in order to meet theircommitment [and] were also allowed to sell Peregrine's Asset andService Center products .

O/E Systems had not paid anything toward their commitment byAugust 2000 and I was now involved in dealing with them directlyto negotiate payment . O/E had simply refused to pay, claiming

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86APPENDIX E

• •

that Peregrine had not provided the agreed upon support and thatthe IC W product was not selling - and that Peregrine hadmisrepresented the product and market potential when thecommitment was entered into .

[ was dealing with Scott Goemmel at O/E . In subsequentconversations with Goemmel after I left Peregrine, he indicatedthat O/E Systems had still not paid a dime to Peregrine .

O/E Systems did not pay Peregrine because the conditions precedent to payment that wer e

set forth in Spitzer's September 27, 1999 letter were not satisfied . In a letter dated July 24, 2000 ,

OIE Systems outlined how Peregrine had failed to satisfy almost all of its obligation s

memorialized in the Spitzer letter . It further states :

We have also learned that other preferred providers of Peregrinesoftware have refused to pay any amount towards the purchase of asoftware reseller license until actual sales were made .

While O/E believes in the Peregrine software and believes it canbecome a necessary tool for many customers, O/E also believesthat it has not received the benefits it was promised in the ScheduleA that were a prerequisite to the $500,000 payment. Therefore O/Eis suspending the payment of the $500,000 . Peregrine willreceive its license fee from O/E when sales of the varioussoftware modules are made to O/E customers . (Emphasisadded . )

Defendant Spitzer was copied on O/E Systems ' July 24 , 2000 letter .

Notwithstanding the contingent nature of the transaction and Peregrine's obligation t o

provide subsequent support for the sale to the end-user, Peregrine improperly recorded th e

transaction as revenue in September 1999 . Only approximately $39,000 of the $500,000 wa s

ever collected by Peregrine, and this money was paid after software had been sold-through to a n

end user.

In addition, the software was shipped to O/E Systems after revenue was recognized .

#105632 -25-

87APPENDIX E

According to the shipping documentation, the software was shipped on September 30, 1999 for

"Second Day" delivery. Shipping terms are FOB Destination according to the Value Added

Reseller Agreement between Peregrine and 0/B Systems .

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APPENDIX E

0 0

J. Systematics AG

Systematics AG ("Systematics") was a German software reseller. In March 2001 ,

Peregrine entered into an arrangement with Systematics involving $12 million of Peregrin e

software . A payment of $5 million was due in twelve (12) months and the $7 million balanc e

was due twenty-four (24) months later . Defendant Powanda negotiated this deal .

There was a side letter involved in this transaction which made any payment obligation of

Systematics dependent on Systematics' ability to sell the product through to the end-user . I t

stated :

Systematics AG shall pay Peregrine Systems GnThH the fullamount of $5,000,000 for the first twelve months, and $7,000,000for the ensuing twelve months . In the unlikely event that thenumber of acquired software licenses does not reach or exceed theagreed annual target, Peregrine Systems will submit licensingearnings from Peregrine direct business in the amount of thedifference for the respectively de fined period to SystematicsAG for direct settlement with the final customer . (Emphasisadded . )

In light of the size and importance of this transaction , this side letter was signed on the

instruction and with the knowledge of defendants Gardner, Gless, and Powanda.

In connection with the side-letter issued to Systematics, a former Director of the Allianc e

Group recalled a discussion he had with defendant Gless and Andrew Cahill of Peregrine :

In February or March 2002, 1 was in Matt Gless' office with AndyCahill . The side-letter [involving Systematics AG] was signed bySven Ereletich of PRGN who was the acting general manager ofPRGN's office in Germany . I remember Gless and Cahil linstructing me to take the side letter to my office because theystated specifically that neither of them wanted a copy in theiroffice .

Peregrine initially contemplated including a clause in either the contract or the side lette r

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APPENDIX E

S •providing that if Systematics was unable to bum through its inventory, it could issue an invoic e

for services to Pereg rine . Cahill told investigators that he believed the Finance department kne w

of this agreement and approved it, based upon discussions between Powanda and Gless . While

the final contract documents do not contain such a provision, there is what appears to be a draft

addendum (which was found by investigators on defendant Powanda's computer hard drive )

which contains this language . When interviewed in connection with the investigation by

Peregrine, after May 2002, Powanda suggested that someone else changed this draft addendu m

without his knowledge to delete the professional services language and add the out clause . "

However, Sven Erhatic, EMEA Business Relationship Manager, stated that Powanda an d

Tumulty approved the language in the final version of the side letter .

By the end of the second quarter of fiscal year 2002, Peregrine became concerned abou t

the outstanding Systematics receivable even though it was not yet past due, because Peregrine

wanted to sell the Systematic receivable and to do so required a "hell or high water letter" from

Systematics . In September 2001, defendant Gardner visited David Thorpe of EDS, which had

acquired Systematics . Gardner had worked with Thorpe at Data General . On September 28 ,

2001, defendant Gardner sent Thorpe an e-mail regarding Peregrine's attempted sale of the

Systematics receivable, with an attached "hell or high water letter" (Amendment #1 to the

Schedule A) for Thorpe to sign . Thorpe ultimately signed the document and Peregrine sold th e

receivable to Fleet Bank.

In November 2001, Cahill met with Systematics to determine how Peregrine could hel p

#105632

Systematics sell-through Peregrine's product . At this meeting, Systematics stated that there wa s

a side letter and that if Systematics did not sell-through, it was under no obligation to pay .

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• •

Systematics did not believe the receivable was enforceable because defendant Gardner kne w

about the side letter when he requested that Systematics sign the "hell or high water letter ."

By December 2001, others within Peregrine had become aware of the side letters .

Attached to an e-mail message dated December 6, 2001, Geoffroy Boonen sent translated copies

of the side letters to defendant Gless .

In April 2002, the Systematics receivable became past due . John Benjamin, who worked

in Peregrine 's Treasury Department , learned that there was a side letter . Without seeking

permission from Gless, Benjamin immediately notified Fleet, which demanded that Peregrine re-

purchase the receivable .

A former Peregrine employee in the Alliance Group also recalled attempts to collect fro m

Systematics as follows :

One year after the contract is signed and payment comes due, I wasaware that Systematics had no intention to pay - I had seen theside-letter whilh Spitzer and Cahill were also aware of - I had toldthem that we should not have booked this transaction becauseSystematics had a side letter from us and they had no intention ofpaying the contract amount due after the first 12 months of thecon tract . In March of 2002, 1 was on a conference call with Spitzerand Cahill trying to resolve this deal - Systematics on the call toldus they had no intention of paying and referred to their side le tterand Peregrine ' s commitment to either reduce the payment or drivebusiness through Systematics . Peregrine did not have the businessto d rive through Systematics .

In March 2001, Peregrine improperly booked $9,300,000 from this transaction and "sold"

the resulting receivable to Fleet Bank . Recognizing any revenue on this transaction was a n

intentional violation of GAAP because of the terms of the side letter which negated Systematics '

obligation to pay Pereg rine until and unless sell-through of the product had occurred .

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K. Corporate Software & Technolo

In the fourth quarter of fiscal year 2000, Peregrine entered into an arrangement wit h

Corporate Software & Technology, Inc . ("Corporate Software"), a company based i n

Massachusetts that had annual revenue of more than $1 billion . Corporate Software provide s

software licensing services, technology procurement tools and methodologies and product-

selection consultation . Under the arrangement, Corporate Software licensed any currentl y

available Peregrine software in exchange for $5,000,000 payable in 60 days . The arrangement

was evidenced by a Schedule A and a Solution Connections Systems Integrator Alliance

Agreement ("Systems Integrator Agreement") . The Schedule A was signed by defendant Gardne r

and the Systems Integrator Agreement was signed by Eric Deller (Peregrine 's Vice President and

General Counsel) . Peregrine recorded $3,875,000 of license revenue immediately upo n

execution of the agreement . A former Peregrine employee who was a Director of the ICW Group

recalled :

Chad White told me that in Q4, March 2000, his account CorporateSoftware, after Gardner and Spitzer talked with them, had enteredinto an additional $3 .5 million commitment.

White told me that Spitzer told him in the airport prior to meetingwith this customer that Gardner had already negotiated theadditional commitment and that the purpose of the meeting waswindow dressing -- and since the deal was already done byGardner, nothing should be said or done to mess it up .

On May 23, 2000, Gardner sent an e-mail to Deller and Nolan Schiffer (a contracts

manager), with a copy to defendant Gless . Gardner stated : "I am not sure why we have no

contract closure on an item that we booked last quarter and which we are now looking fo r

payment on. This is going to place this payable in jeopardy, since CS&T has already indicate d

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• •

that they are well aware of the lack of closure . Please make this a priority and explain why it ha s

taken so long to get done ?" Gardner's message was in response to an e-mail dated May 19, 200 0

from Schiffer to defendant Spitzer indicating that Corporate Software was still reviewing th e

contract. On June 6, 2000, Spitzer sent an e-mail to Gardner in which he referred to th e

Corporate Software contract as not yet finalized . Recording revenue prior to obtaining

completed and signed contracts from the customer is a violation of GAAP .

As of September 2000, Corporate Software still had not sold any product from the Marc h

contract . In a September 4, 2000 e-mail from Johanna Cheung of Peregrine to defendant Spitzer ,

Cheung states: "CS&T is worried about their $5M commitment, and they have not sold anythin g

either in the US or EMEA . A couple of weeks ago, I hear the CEO was going to call Stev e

Gardner to discuss cancelling the agreement and the commitment . "

On September 29, 2000, Robert Flintoff of Peregrine sent David Cumming of Corporate

Software a letter referring to I software license agreement between AXA Shared Services an d

Peregrine . The letter states :

Please accept this letter as confirmation that you may invoice us forthe sum of $1,309,901 as set out in the attached Schedule A whichis due and payable from AXA Shared Services Limited under theAgreement and that the sum of $1,244,406 shall be allocatedfrom this amount against the prepayment of $5,000 ,000 in theIntegrator Alliance Agreement between Peregrine Systems ,Inc. and Corporate Software Technology, Inc. dated 24 March2000 . (Emphasis added . )

#105632

In other words, Peregrine agreed to refund a portion of the $5,000,000 fee collected fro m

Corporate Software. Under GAAP, any fee that is subject to refund or forfeiture is not fixed o r

determinable and precludes the recognition of revenue .

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In the second quarter of fiscal year 2001, Peregrine entered into another arrangement wit h

Corporate Software under which Corporate Software licensed any currently available software

modules in exchange for $8,000,000 payable in 90 days . The arrangement was evidenced by a

Schedule A and an "amendment" to the Systems Integrator Agreement . This "amendment" is i n

reality a side letter. The September 2000 Schedule A states "this reseller order form replace[s ]

and cancel[s] the previously sent order form number 00LS29/09/001 A." The previously sen t

reseller form totaled $6,000,000 and was dated October 2, 2000 . Peregrine recorded $6,429,00 0

of license revenue in the second quarter of 2001 .

The Schedule A was modified to eliminate language that would have precluded th e

recognition of revenue . The following provisions were deleted : (1) "This purchase is subject t o

the parties' UK business model throughout Europe as discussed by Mr. Mark Chatel and Jerry

Crook and successful resolution of the current business issues in the United States;" and (2) "I n

the event the obligations in this reseller order form are not fulfilled, then CS&T will have n o

obligation to purchase the licenses and this reseller form will be terminated." The modified

Schedule A was then executed, with an increase in the total value from $6,000,000 to

$8,000,000, and revenue was recorded . However, the problematic language in the origina l

Schedule A was included in the amendment .

A letter dated September 29, 2000 from Corporate Software's Senior Vice President o f

Operations to Jeremy Crook of Peregrine references the provisions of the arrangement between

CS&T and Peregrine . The letter states that additional purchases are subject to the parties

implementing the UK Business Model throughout Europe and the successful resolution of th e

current business issues in the United States . Additionally, the letter states :

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• •

The parties will use their best efforts to agree upon and execute anamendment to the Peregrine Agreement within the next few weeks .The amendment will formally add the above terms to the PeregrineAgreement . In the event the obligations in this letter are no tfulfilled, then [Corporate Software] will have no obligation topurchase the licenses .

The September 2000 transaction was, in fact, amended after the quarter in which revenue

was recorded . This is evidenced by a fax cover sheet from Emma Wilson (Peregrine' s Lega l

Counsel - EMEA) to Corporate Software's Senior Vice President of Operations, dated October 5 ,

2000 - five days after the end of the quarter . Wilson wrote: "Please sign the attached - date 29

September 2000 - and fax back to me asap ." (Emphasis original .) The attachment was th e

amendment to the Systems Integrator Agreement. This amendment included the language

requested in Corporate Software's September 29, 2000 letter and in an October 5, 2000 fax fro m

Corporate Software confirming that the transaction would be cancelled if various objectives wer e

not met and requesting that s1ch language be included in the amendment . Recording revenu e

prior to obtaining a customer ' s signature is inconsistent with GAAP .

The provisions in the amendment to the Systems Integrator Agreement included the

language referenced in Corporate Software's September 29, 2000 letter and October 5, 2000 fax

providing for the cancellation of the $5,000,000 obligation in the event the parties were unable o r

failed to meet the defined commercial objectives . Such objectives included implementation o f

the UK business model in Europe and resolution of current business issues in the U .S .

Furthermore, Peregrine agreed to use its best efforts to help Corporate Software sell the inventor y

to end users. This language negates the conclusion that Peregrine's fee was fixed or

determinable when it recorded revenue . Peregrine and Corporate Software were never able t o

#105632 -33-95

APPENDIX E

0

implement the UK business model or resolve the existing business issues in the U .S . Peregrine

never received any payment under the September 2000 transaction and Peregrine wrote off th e

entire receivable balance in Q2 02 .

In addition, in the second quarter of fiscal year 2002, Peregrine wrote off $6,367,000 o f

the outstanding accounts receivable balance from CS&T as a component of the "acquisition cos t

and other" line item in the income statement. Defendants Gless and Nelson knew of an d

approved this improper write-off. By writing off the receivable in this manner, Peregrin e

inappropriately avoided restating revenue and hid the nature of the write-offs from users of th e

Company's financial statements .

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APPENDIX E

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L . FM Internationa l

FM international ("FM") was a small organ ization in 2001 . It consisted of approximately

fifteen (15) people including two (2) outside sales persons . In March 2001, Peregrine entered

into a transaction with FM. The arrangement was for the license of FacilityCenter products fo r

$2,875,000 . Defendant Spitzer was the sales representative for this transaction . Peregrin e

immediately recorded $2,500,000 of license revenue from the deal . However, the transaction

was not completed in the fourth quarter of fiscal year 2001 . On April 3, 2001, three days after

the close of that quarter, defendant Spitzer sent an e-mail to FM's president . Attached to the e-

mail is the Schedule A for the deal, which was apparently being sent to FM for the first time .

Spitzer's April 3, 2001 e-mail also provides that ,

Should issues develop around the deployment of this software atLA County, Peregrine will provide FM International the rights tolicense this software to another end-user client . This wouldinclude clients in which FMI is providing services and Peregrine islicensing the software direct to the end-user . Peregrine will alsoprovide FMI flexibility on payment terms, should that benecessary . (Emphasis added . )

FM's president responded to the e-mail stating :

To clarify payment terms. My understanding is that FMI will payPeregrine after we receive collection from the mutual end userclients . We will not be obligated to make any softwarepayments to Peregrine prior to the collection from out Mutualend users . Can you please verify this . (Emphasis added . )

Defendant Spitzer responded, "Your understanding is correct . "

As noted above, Peregrine immediately recorded $2,500,000 of license revenue from th e

deal . However, Spitzer's e-mail side letter negates the conclusion that the fee is fixed o r

determinable . Thus, revenue should not have been recorded until the software was in fact sold

through to end users and Peregrine improperly booked the FM commitment as revenue i n

violation of GAAP .97

APPENDIX E#105632 -35-

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M. Action Computer Supplies

In the third quarter of fiscal year 2001, Peregrine entered into a transaction with Action

Computer Supplies Holdings PLC ("Action Computer") in which Action Computer license d

several Peregrine products for £10,000,000 . Documents memorializing the deal indicate tha t

£4,500,000 of the software was for Action Computer's own use and £5,500,000 was to be resol d

by Action Computer . Peregrine recorded $12,580,000 in license revenue in the reference d

quarter .

That same quarter, Peregrine placed an order for the rights to Action Computer's XML-

based component catalog for use in Peregrine's e-procurement software products for £3,000,000 .

In the following quarter, Peregrine licensed additional software products from Action Compute r

for £2,750,000. The latter transaction was negotiated by defendant Powanda and known by hi m

to involve a barter, rendering revenue recognition improper .

Peregrine improperly recognized revenue in connection with these transactions . An

exhibit to Action Computer's Master Distribution Agreement states that Peregrine will provide

"relief' or the difference between the amount of software Action Computer sells and £5,500,000

(the total amount of product Action Computer purchased for resale) . Peregrine , through

defendant Powanda, agreed that, if Action Computer had not sold Peregrine software in th e

amount owed, Peregrine would either bring end-users to Action Computer to cover the shortfal l

or purchase services in that amount from Action Computer .

In addition, the concurrent nature of the transactions between Peregrine and Actio n

Computer also indicates that Peregrine's accounting and Powanda's involvement was improper.

A fundamental premise in evaluating concurrent transactions is whether there exists a vali d

#105632 -36-

98APPENDIX E

• •

business purpose such that the products received in the exchange are expected, at the time of the

exchange, to be deployed and utilized, and the value ascribed to the transaction reasonably

reflects such expected use . The Action Computer Catalog was similar to pre -existing Peregrine

product . GAAP also requires software exchanged for software that will be sold in the ordinar y

course of business to be recorded at the software's historical cost . If the transaction was a

concurrent exchange of software to be resold by each party, Peregrine's revenue should have

been recorded at its historical software cost, which is zero .

Peregrine recorded a total of $3,128,000. in revenue in connection with Action Compute r

transactions in the fourth quarter of fiscal year 2001 . Some or all of this revenue came from a

transaction with Action Computer that was purportedly completed in that quarter . Peregrine

licensed AssetCenter, IND, and IDD to Action Computer for £2,7500,000 . Computer Sciences

Corporation ("CSC") was identified as the end user . The Schedule A was purportedly execute d

in March 2001 . However, defendant Powanda asked Kevin Tumulty of Peregrine to prepare a

Schedule A for the transaction on April 2, 2001, after the quarter in which revenue was recorded.

Therefore, Powanda knew that Peregrine failed to meet the requirement that it have persuasiv e

evidence of an arrangement (i.e., a contract signed by both parties) prior to recording revenue .

In addition, a side letter provides that Action Computer would not be liable for payment

on the CSC deal until a transaction with CSC or some other end-user materialized . The terms of

the side letter are referenced in a May 10, 2001 e-mail from Kevin Tumulty to defendant Spitzer,

in which Tumulty states : "A big concern is that Doug [Powanda] got Action Computers to take a

$3m contract in Q4 to cover and it would be backed out when CSC sign with us . "

On May 23, 2001, Mark Timmins (Pereg rine 's Credit Control for EMEA) sent defendan t

#105632 -37-99

APPENDIX E

0 0

Gless an e-mail stating : "Action are waiting on a full credit for this amount [£2,750,000], n o

reason was given other than numerous discussions possibly with Jerry [Crook of Peregrine] ." In

a letter from Crook dated August 14, 2001, Peregrine did in fact provide a credit to Actio n

Computer for the entire £2,750,000, citing "the joint efforts of Action and Peregrine in closing

sales at the following accounts : Dr . Materna GmbH, Mebit ." The letter further provided tha t

"All fees in respect to the above invoice , in the amount of 2,750,000 Pounds Sterling, have bee n

credited, leaving no liability for this amount for Action ."

#105632 -38-100

APPENDIX E

•

N. MGX Enterprise Solutions

In early 1999, Peregrine's EMEA Division established an Emerging Market Group whic h

had as one of its primary objectives the development of business in South Africa . In November

1998, Peregrine entered into a distributorship agreement with Software Futures, a South Africa n

distributor, and sold software licenses on which Peregrine recognized revenues of approximately

$340,000 in June 1999 and $724,000 in September 1999 . Software Futures was subsequentl y

acquired by CCH at the end of 1999 . Shortly thereafter , MGX, a publicly traded South African

company, acquired CCH. To support the acquisition , Peregrine, at MGX' s request, acquired

approximately $2 million worth of MGX stock on the open market (constituting a n

approximately 3% stake in MGX) . Peregrine's acquisition of Harbinger in June 2000, prompte d

further discussions between Peregrine and MGX, which ultimately resulted in a transaction in

June 2000 in which Peregrine sold approximately $7 million of e-business software to MGX an d

Peregrine purchased approximately $2 million of product from MGX . Peregrine recognized

approximately $4.2 million of license revenue on this transaction .

By June 2001, MGX had paid the amounts owing under the June 2000 transaction ,

although it had resold little of the licenses acquired the previous year. Nonetheless, sometime i n

or about June 2001, Peregrine's Richard Day, with the approval and authority of defendants

Gardner and Gless, and MGX's Aletha Ling signed an undated "Heads of Agreement - Strategi c

Partnership of MGX As Master Distributor," which proposed a new Master Distributio n

Agreement between the parties . The Heads of Agreement document was later determined by

Peregrine's General Counsel to be a non-binding letter of intent . Nonetheless, it committed

MGX to purchase $12 million of software licenses "with flexible payment terms over 2 years "

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101APPENDIX E

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and provided that if "MGX falls behind in revenue sold vs . payment to [Peregrine ], Peregrin e

will provide relief to MGX . . . until sales are back on target ." The parties thereafter entered int o

a Schedule A and a Solutions Connections Master Distribution Agreement dated June 29, 200 1

in which MGX licensed all currently available Peregrine software products and agreed to th e

following payment schedule : $2,000,000 on January 1, 2002 ; $3,000,000 on July 1, 2002;

$3,000,000 on January 1, 2003 ; and $4,000,000 on January 1, 2004 . Peregrine recognized

$8,543,000 in license revenue in June 2001 .

In August 2001, Peregrine acquired Remedy and thereby succeeded to Remedy' s

distribution arrangement in South Africa with AST, another publicly held company and a

competitor of MGX. At the same time, the new Peregrine executive responsible for Sout h

Africa, Michel Isnard , expressed concern to defendant Gardner about MGX's intention and

ability to make the payments that would soon be due under the June 29, 2001 Schedule A .

Defendant Gardner and Isnar~ therefore scheduled meetings with MGX in late November 200 1

in Johannesburg .

At these meetings in South Africa, MGX showed defendant Gardner and Isnard th e

"Heads of Agreement" and stated their position that the document conditioned MGX's obligatio n

to pay on sell-through of the Peregrine software. At about the same time, defendant Gardner e-

mailed to the Investment Committee of Peregrine's Board a request for authorization to proceed

to expand Peregrine 's investment in MGX by $15 to $20 million in order to support a proposed

joint venture between MGX and AST to distribute both Peregrine and Remedy product . In

support of the request, defendant Gardner noted that Peregrine would "insist upon accelerated

payment of the long-term receivables due" it under the June 29, 2001 Schedule A as a partial us e

#105632 -40-

102APPENDIX E

of the proceeds of the investment.

Ultimately, before the end of December 2001, MGX and Peregrine reached the following

agreements : (a) the June 29, 2001 Agreements were amended to increase MGX's paymen t

obligations by $500,000 and include the license of Remedy products as evidenced by a Firs t

Amendment to Master Distribution Agreement dated December 24, 2001 (the "First

Amendment"), unsigned by Peregrine ; (b) MGX provided promissory notes to Peregrine in th e

amounts of $2,000,000 and $3,000,000, representing the January and July 2002 payments due

under the June 29, 2001 Schedule A ; (c) Peregrine purchased MGX's convertible promissory

note in the approximate amount of $12 million in exchange for 1 .5 million shares of Peregrine

stock agreed to establish a joint venture with AST to market Peregrine and Remedy products .

The payments under the promissory notes were delayed because of problems with South Africa n

currency restrictions . Peregrine subsequently entered into a settlement with MGX in which all

relationships between Peregrine and MGX were cancelled in exchange for a cash payment b y

MGX of approximately $8.3 million .

The Heads of Agreement side letter authorized and approved by defendant Gardne r

contained several provisions which show that Peregrine's fee was not fixed or determinable at

the time it recorded revenue , i.e ., the offset of any reseller partner agreements against the

$12,000,000 commitment, flexible payment terms, and Peregrine's agreement to provide relief to

MGX by providing a margin variance on future sales .

#105632 -41-

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APPENDIX E

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0. IBM/Tivol i

Defendant Powanda oversaw a major relationship with IBM and had knowledge that the

transactions with IBM gave rise to improper revenue recognition . IBM Global Services ("IBM")

regularly received side letters which provided that it was not obligated to pay Peregrine fo r

product until the product had sold-through to the end-user . On a regular and re-occurring basi s

during the Class Period, IBM would place orders ranging from $2-$4 million at the request o f

Peregrine at the end of a reporting period and Peregrine would improperly record this as revenue .

IBM would hold the product for Peregrine until Peregrine or IBM sold the product through to th e

end-user. A former member of the Alliance Group summarized these transactions as follows :

IBM "would buy inventory at our request and hold it until Peregrine could sell it through - IB M

was acting like a bank . "

These transactions would generally come at the end of a reporting period. As a former

member of the Alliance Group noted :

Doug Powanda was very close to [BM and EDS and would go toIBM regularly at the end of a quarter to close a deal with IBMbecause we needed X millions to make the quarter. It wascommon knowledge around the company in 1999 and 2000 whenPowanda was North America sales manager, that he would go toIBM and EDS to make this happen - he was a great talker, he wasknown as someone who could make things happen, he was knownas the "miracle worker."

A former sales executive involved in sales to the Alliance Group similarly confirmed tha t

IBM was used regularly at the end of quarters to "carry the paper" while Peregrine continue d

after the close of the quarter to attempt to sell product to end-users .

A former Director of InfraCenter for Workgroup also confirmed that deals that were no t

#105632 -42-

144APPENDIX E

• •

yet finalized were placed temporarily with IBM :

I was involved directly in a conversation in early 1999 with DougPowanda . . . Powanda stated to me that Farley had told him that"we can begin to recognize pre-commitment sales in Q4 ,January-March 1999." Powanda told me that "we can really startto use it" referring to booking pre-commitments . He told mefurther that "the IBM deal was used as such to meet earnings forthe October-December 1998 quarter ." When I commented him thatwe can't do this since I believed it to be wrong based on my priorexperience with these matters [elsewhere], Powanda just naivelyshrugged his shoulders . I also remember that both Farley andGardiner popped their heads into Powanda's office during thismeeting and acknowledged that we go ahead with the IBMcommitment. It was from this point in early 1999 that Peregrinehad made the wholesale decision to book pre-committed re-sellersales as revenue . After they signed-off on the IBM deal that day i nPowanda's office, things really sta rted to go downhill forPeregrine .

In fiscal year 2001, Peregrine recognized $61,790,000 in license revenue from two deal s

with IBM and Tivoli Systems, Inc . ("Tivoli"), a wholly-owned subsidiary of IBM. Thi s

represented 17% of Peregrine's reported total license revenue for the entire fiscal year .

Peregrine's strategic objective was to "sunset" the Tivoli Service Desk ("TSD") products tha t

competed with Peregrine's ServiceCenter products . Peregrine purchased the TSD assets from

Tivoli in the third quarter of fiscal year 2001 for $45,000,000 in cash plus $60,000,000 i n

common stock . IBM did not want its customers to be harmed when TSD was phased out an d

sought to accommodate customers who wanted the Peregrine product . Therefore, in December

2000, at the same time Peregrine was purchasing TSD, IBM licensed certain Peregrine product s

related .to the migration of TSD customers for up to an aggregate of $33,900,000 .

Concurrent with the closing of the TSD purchase, Peregrine and Tivoli signed a

#105632

Participation Agreement . Defendant Nelson signed the agreement on behalf of Peregrine . The

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Participation Agreement entitled Tivoli to license currently available Peregrine products at a

discount for inte rnal use or resale to third parties . Under the Part icipation Agreement, Tivol i

committed to pay Peregrine $33,900,000 as a net license commitment (excluding maintenance

and support fees) on or before the first anniversary date of the Participation Agreement, i .e., by

December 29, 2001 . Any net license payments made to Peregrine for products used internally o r

resold to customers before December 29, 2001 were to be credited ("burned") against th e

$33,900,000 net license commitment .

The Participation Agreement also entitled Tivoli to a 10% referral fee for providing sale s

leads to Peregrine. Referral fees were credited, or "burned," against Tivoli's $33,900,00 0

obligation to Peregrine . The arrangement between Peregrine, IBM, and Tivoli was evidenced b y

the Participation Agreement, the Customer Solutions Agreement ("CSA") and the Statement of

Work ("SOW') to the CSA, each of which were signed by defendant Nelson .

In the fourth quarter of fiscal year 2001, the Participation Agreement was amended to (1 )

entitle Tivoli to purchase any Peregrine products commercially available at the time of th e

amendment ; (2) allow the $33,900,000 commitment to be "burned " by maintenance as well a s

licensee fees ; (3) increase Tivoli's discounts from 40% of the list price to 70% off the list pric e

on an aggregate of $27,120,000 in licensed products ; and (4) provide a discount of 13.5% of th e

license net price for an aggregate of $6,780, 000 for maintenance services on such products .

Additionally, the amendment provided that "on or before March 31, 2001, Tivoli shall make a

$10 million payment via wire transfer to [Peregrine], which shall be fully credited towards th e

$33 .9 million commitment ."

In the third quarter of fiscal year 2002, Peregrine, Tivoli, and IBM entered into Lette r

#105632 -44-

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Agreement No . I whereby Peregrine agreed to assume ce rtain obligations of IBM to provide

products and maintenance to the Federal Aviation Administration . In exchange, IBM agreed to

pay Peregrine $2,500,000 by December 31, 2001 and $2,500,000 by March 31, 2002 . Thi s

represented a concession of at least $5 million because the value of the software committed to the

FAA was greater than $10 million . These payments were credited ("burned") against IBM' s

minimum license commitments . Per Letter Agreement No . 1, IBM also agreed to provide a

$1,800,000 credit to Peregrine towards the purchase of future IBM products or services expirin g

in December 2002 . Letter Agreement No . 2 clarifies that the second payment was credite d

against a $44,000,000 commitment and implies that the first payment was credited against a

$33,900,000 commitment .

Before the end of the fourth quarter of fiscal year 2001, it became clear that TSD users

were successfully migrating to Peregrine ServiceCenter in large numbers, and IBM wanted to

further promote and market PLegrine products to it customers . Additionally, Peregrine and IB M

realized that $33,900,000 would not cover the migration . Accordingly, the par-tics entered into a

second arrangement whereby IBM's minimum commitment would be increased in exchange fo r

IBM receiving additional discounts on the ServiceCenter product line .

In Q4 01, Peregrine and IBM entered into a SOW (the "March 2001 SOW") whereb y

IBM committed to purchase an additional $44,000,000 worth of Peregrine products an d

maintenance services over a 24 month pe riod . The products available for license were any of

Peregrine's currently commercially available products (including future versions and releases) ,

products with similar functionality and maintenance services , including products and

maintenance services obtained through Peregrine's current and future subsidiaries . The

#105632 -45-

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$44,000,000 was payable in two installments : $13,200 ,000 on or before March 31, 2002 and

$30,800,000 on or before March 31, 2003 . Peregrine and IBM each were to track product

deployment , i.e., burn . The March 2001 SOW increased IBM's total commitment b y

$44,000,000, but also provided IBM with similar discounts on Peregrine's ServiceCenter produc t

line that were provided to Tivoli in the amendment to the Participation Agreement : a discount of

70% off on an aggregate of $15,000,000 in licensed products and a discount of 13 .5% of the

license net price for an aggregate of $10,000,000 for maintenance services . IBM also was given

the right to purchase: (1) an unlimited amount of additional ServiceCenter products and

maintenance through June 16, 2001 ; and (2) up to an additional $20,000,000 of ServiceCente r

products and maintenance from June 17, 2001 to December 15, 2001, at the same discount

levels . The March 2001 SOW was signed by Ryall on behalf of defendant Gardner.

In the fou rth quarter of fiscal year 2002, Peregrine , Tivoli and IBM entered into Lette r

Agreement No . 2 in which : ( 1) Peregrine acknowledged that Tivoli had satisfied its obligations to

pay Peregrine $33,900,000 under the Participation Agreement; (2) IBM agreed to pay Peregrine

$23,100,000 on the effective date of Letter Agreement No . 2 for a credit of $25,000,000 against

IBM's $44,000,000 commitment per the March 2001 SOW (the second $2,500,000 paymen t

referenced in Letter Agreement No . 1 counted against the $23,100,000 payment) ; and (3 )

Peregrine agreed to assume all existing obligations for TSD and/or any and all requirements fo r

Peregrine ServiceCenter for approximately 63 specified customers and to provide licenses t o

other specified customers .

Peregrine recorded $26,950,000 of license revenue on December 31, 2000 (Q3/01) an d

$34,840,000 of license revenue on March 31, 2001 (Q4701) . Peregrine recorded an

#105632 -46-

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APPENDIX E

additional $7, 100,000 in license revenue in Q3/02 and $4, 800,000 in license revenue in Q4 02 ,

which was a portion of the same license revenue that had been previously recorded under th e

March 2001 transaction. In total, Peregrine recognized $11,900,000 in license revenue to IB M

during Q3 02 and Q4 02 . Since IBM had not yet fulfilled its entire obligation related to the

previous transaction this revenue was, in effect, a portion of the same license revenue that had

been previously recorded under the March 2001 transaction. In other words, Peregrine recorde d

revenue at the time the arrangement was executed .

IBM's $33,900,000 commitment and approximately half of the $44,000,000 commitmen t

were satisfied ( i.e., burned) through resale to end users by January 2002 , more than one yea r

ahead of schedule . However, the underlying end-user sales required Peregrine to have significan t

involvement with the selling process, and to deliver the software to the end users . Peregrine

negotiated with the end-users directly to determine the type and extent of software licenses to b e

used. Peregrine then delivered the software product to the end user and sometimes provide d

services to the end user to assure that the software was functioning properly . Peregrine has

asserted that a "golden master" of all of their currently available products was delivered to IB M

at the time Peregrine recorded license revenue . However, the practice of subsequently deliverin g

software directly to the end user is inconsistent with the assertion that delivery occurred at th e

time revenue was initially recorded . Peregrine's involvement with end user sales, service, an d

delivery supports recognizing revenue on a sell-through basis versus a sell-in basis, assuming al l

other revenue recognition criteria have been met .

The CSA and the SOW to the CSA were dated by IBM on January 25, 2001, the quarter

after revenue was recorded . Since the CSA and SOW to the CSA are components of the overal l

#105632 -47-

109APPENDIX E

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arrangement , it was inappropriate to record revenue prior to obtainin g

IBM's signature and therefore inappropriate to sell the IBM receivable to a bank in the thir d

quarter of fiscal year 2001 . Peregrine's Cappel, who supervised accounts receivable sales, noted :

in December when we sold the IBM receivable to Fleet, we agreedto provide the associated Customer Solutions Agreement (which atthe time had not been signed) within 15 days . As you may know,this agreement is still not signed, and we are technically required torepurchase this receivable .

Peregrine maintained schedules to track the IBM burn . Peregrine recorded $11,900,000

of additional license revenue in Q3/02 and Q4/02, evidenced by Schedule Ps, before the IB M

commitment was satisfied . Peregrine recorded revenue at the time the arrangement was execute d

and when the software was subsequently burned . Separately, Peregrine also recorded

transactions as revenue that would otherwise have been considered usage against IBM' s

commitment . This was done to manage earnings and/or to meet sales quotas . In a September 10 ,

2001 e-mail, Ryall states :

but biggest challenge is managing the `burn' vs `new' issue . Lastquarter [the one ending June 30, 20011 we tool [sic] some dealsdirect in EMEA and NA to make sure we were solid for the quarter(I was party to it as well in spite of my role), but we will have ahard time developing a real alliance with these guys if we keepdoing it .

Peregrine's practice of discretionally recording certain transactions as direct was

inappropriate . With respect to crediting payments against the initial $33,900,000 purchas e

commitment, the Participation Agreement provides that "any and all net license payments mad e

to [Peregrine] for Program Products resold to Customers or used internally by Tivoli and it s

Affiliates and all amounts associated with referrals pursuant to section 4 shall be credited agains t

#105632 -48-

11 0APPENDIX E

• •

the $33 .9 million commitment ." Additionally, under the March 2001 SOW, Peregrine and IB M

were to jointly track product deployment, and Peregrine was to generate an invoice immediatel y

upon deployment of a Peregrine product or maintenance service . If, on the respective paymen t

dates, IBM did not have invoices from Peregrine to meet its payment obligations, it was require d

to pay the difference and Peregrine would give IBM a product credit to be applied towar d

Peregrine's currently commercially available product, including future versions and releases and

products with similar functionality.

Additionally, Peregrine recorded a $10,000,000 wire transfer from IBM in Marc h

2001 even though the wire date on the Bank of American Bamtrac Report was April 2 ,

2001 . Per an e-mail dated April 6, 2001 from Michael Parker (Business Development Finance a t

Tivoli) to defendant Cappel, the wire was initiated on March 30, 2001 . An e-mail dated April 8 ,

2001 from Cappel to Bush (a Cash Analyst) includes Parker' s e-mail and states :

Hi Jeff:

The below is documentation on the wire received from IBM .Would you please put this along with the wire audit info I'mputting on your chair into your binder as support for the postinginto March .

The IBM contracts described above were not accounted for properly . The contract s

include several provisions that impact the recognition of revenue including, for example, end-

user services or discounts off future purchases . Thus, Peregrine's revenue recognition wa s

inappropriate . Nonetheless, defendant Powanda alone reaped $290,357 in commissions from th e

deal .

#105632 -49-

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P. CI Software Solution s

Peregrine entered into several transactions with Cl Software Solutions (Europe) Limite d

("Cl Software"), an English company. The transactions included : (1) a total of $8,000,000 in

licenses and mainten ance ; (2) an equity investment by Peregrine in CI Software ; (3) the sale of

Peregrine's Templar software to Cl Software for $3,500,000 ; and (4) the commitment by

Peregrine to sell $6,500,000 of Cl Software's Kryptomax software .

In the fourth quarter of fiscal year 2000, Peregrine made a deal with CI Software for the

license of AssetCenter for £1,000,000 . The end-user was identified as a company called CSC .

Paperwork for the transaction called for payments to be made on June 30, 2000 ,

September 30, 2000, December 31, 2000, and March 31, 2000 . However, as of March 31, 200 1

no cash had been collected by Peregrine. In a letter dated April 18, 2001, defendant Nelson

wrote to Sean Scully of Cl Software (with copies to defendants Gardner and Spitzer) to discuss

this problem . Nelson acknowlledged in the letter that he and others knew from the beginning tha t

a deal with CSC had not been completed when Peregrine and Cl Software entered into the

transaction . Nelson wrote: "The original Reseller Agreement between the companies was put i n

place largely because we were led to believe that CI would be successful in winning CSC as a

Peregrine Systems customer for asset management, which has yet to happen . "

At the time of the March 2000 transaction , CI Software had been operating for less than

one year. Thus, Nelson had clear evidence that CI Software lacked the ability to pay Peregrine

absent resale to CSC . Collection of payment must be probable at the time of revenue recognitio n

and cannot be contingent upon payment from the end-user . Nonetheless, Peregrine recorde d

$1,300,000 in license revenue in the fourth quarter of fiscal year 2000, which Nelson knew was

#105632 -50-

112APPENDIX E

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improper .

In the first quarter of fiscal year 2001, Peregrine entered into a deal with Cl Software for

the license of the Get .It! suite of products for £2,000,000 payable within 30 days. However, th e

written agreement for the deal requires that Cl Software pay only the difference between

£2,000,000 and the amount received from the sell-through of licensed products at the end of one

year.

The following quarter, Peregrine entered into a deal with Cl Software for the license o f

Get .Resources! and Get .Services! for $3,500,000 payable in 30 days . Also in the second quarte r

of fiscal year 2001, Peregrine and Cl Software entered into an asset purchase agreement through

which Cl Software bought Peregrine's Templar Software in exchange for a $3,500,000 secure d

note. In addition, Peregrine entered into a distribution agreement with CI Software for th e

license of Cis Kryptomax software to distribute $6,500,000 of the product .

The fact that Peregrine improperly recognized revenue from this transaction is furthe r

supported by e-mail messages exchanged between defendants Powanda and Gless in Septembe r

2000 . An employee in Europe asked Powanda about the invoicing of Cl Software . Powanda

responded in an e-mail dated September 15, 2000, with a copy sent to defendant Gless, in whic h

he stated :

Matt Gless will provide the direction here . We should be writingoff $$ due against our purchase of security software from CI . Matt,to you . . . .

Gless responded on September 17, 2000 by writing :

"Write-off' is not the proper term. To the extent Powanda issuccessful in current deal negotiations, the company will re-class

the current receivable into the other assets category as we wil l

#105632 -51-

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receive an asset (inventory) in lieu of the receivable (treated as abarter transaction) . Will discuss further upon completion of thedeal .

Peregrine recognized $1,450,000 in license revenue in the first quarter of fiscal year 200 0

and $3,000,000 in license revenue in the second quarter of fiscal year 2000 . However, much or

all of this revenue was improperly recorded. The first quarter and second quarter of fiscal yea r

2000 deals and the license of CI's Kryptomax software were reciprocal transactions, as evidenced

by: (1) the proximity of the execution of the agreements ; (2) the lack of any cash exchanged o r

collected ; (3) the lack of use of the Kryptomax software by Peregrine as confirmed during the

course of the investigation; and (4) Cl Software' s perspective that the contractual commitment s

were reciprocal transactions . Since software exchanged and held for resale by both parties to th e

transaction is software exchanged in a similar line of business , GAAP requires that revenue b e

recorded at Peregrine ' s historical cost, which is zero .

The reciprocal nature bf the deal is fu rther evidenced by an e-mail from Mark Webb of C I

Software to defendant Nelson dated April 11, 2001 . Attached to the e-mail was a documen t

titled "Cl Solutions Contractual Commitments and reciprocal obligations," which stated :

As part of an M&A contract between CI Solutions and Peregrinesystems. [sic] Certain commitments and obligations wereentered into by both parties for the reciprocal sales ofproducts . These are defined within the contracts entered into byboth parties and form the basis of this document .

CI obligations to Peregrine systems [sic] :

$6 Million of Peregrine Software product s

To pay annually $1 .3 Million, for the purchase of the Templarproduct, for 3 years, a total owing of $3 .9 Million, first payment

falling due in September 2001 .

#105632 -52-11 4

APPENDIX E

•

Peregrine Systems obligations to CI .

Kryptomax purchases of $6 .5 Million over 3 years .

Current Take [sic] up of Commitments :

Peregrine to Cl: Nil

•

Current negotiations between Sean Scully and Peregrine are inprogress . . . . (Emphasis added . )

Further, since CI Software only started operations in June 1999, it was highly unlikely

that the company had the financial ability to pay Peregrine absent reselling the software . Nelson

knew this when the June 2000 and September 2000 deals were made . Cl Software's lack of

financial wherewithal is demonstrated in a February 20, 2002 e-mail from a representative of a

UK law firm to Eric Deller of Peregrine . It indicated that Cl Software was in the process of

being liquidated .

In the fourth quarter If fiscal year 2001, Gless and Nelson caused Peregrine to improperly

write off $3,997,000 of its outstanding Cl accounts receivable balance as a component of the

"acquisition costs and other" line item on its income statement .

#105632 -53-

115APPENDIX E

Q. Hyperio n

In September 2000 , Peregrine granted Hyperion a license to resell ServiceCenter,

AssetCenter , Infratools , and Get-It suites for $3,220,000. According to the Schedule A, payment

was due in 90 days . This transaction is an example of where Peregrine "parked" software with a

reseller until the real deal (i.e ., Peregrine ' s deal directly with the end-user) could be completed .

Peregrine recognized $2,800,000 in revenue from this transaction in September 2000 .

However, Peregrine never enforced payment by Hyperion . To the contrary, Peregrine never

intended to collect any money from Hyperion . A handwritten note on an invoice for the deal

states, "Per Doug Powanda - this is being credited later . Hyperion is a reseller. We will rebill

end-user ." Indeed, on March 13, 2001, Peregrine issued a credit invoice for the entire amount of

the September 2000 deal .

Defendants Gardner and Gless were also aware that revenue was being prematurely

recognized for this transaction . A November 20, 2000 e-mail message from defendant Gless t o

defendant Gardner notes that "we all recognize current period effects associated with prior

quarter activities ." The Hyperion deal was one of those listed by Gless as falling into thi s

category .

#105632 -54-

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CERTIFICATE OF SERVIC E

I, KimLane E . Gantan, hereby declare under penalty of perjury as follows :

I am employed by Gold Bennett Cera & Sidener LLP, 595 Market Street, Suite 2300, San

Francisco , California, 94105-2835 . I am over the age of eighteen years and am not a party to thi s

action .

On April 5, 2004, I served a copy of the aforementioned "FIRST AMENDED

CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES

LAWS" on all parties listed on the attached Exhibit I, by causing true and correct copies of same

to be enclosed in sealed envelopes and deposited in the U .S. Mail, postage prepaid, and by same

day facsimile .

Executed on April 5, 2004, at San Francisco, California .

KimLane E . Gantan

102201 CERTIFICATE OF SERVICE - Case No. 02-CV-0870 J(RBB)

EXHIBIT I

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Counsel for Plaintiff Heywood Waaa Counsel for Plaintiff Heywood Wag a

Jeffrey B. Abraham, Esq . Jules Brody, Esq .Lawrence D . Levit, Esq . Howard T. Longman, Esq .Abraham & Associates Patrick Slyne, Esq .One Penn Plaza, Suite 1910 Stull Stull & BrodyNew York, NY 10119-0165 6 East 45th StreetTel : (212) 714-2444 New York, NY 1001 7Fax : (212) 279-3655 Tel : (212) 687-723 0

Fax : (212) 490-2022

Counsel for Plaintiff Heywood Wag

Michael D. Braun, Esq .Marc L. Godino, Esq .Stull Stull & Brody10940 Wilshire Blvd ., Suite 2300Los Angeles, CA 90024Tel : (310) 209-2468Fax : (310) 209-208 7

Counsel for Defendants Arthur Andersen Counsel for Defendants Arthur Andersen LL PLLP Marshall B. Grossman, Esq .

C. Stephen Howard, Esq .Douglas M. Butz, Esq . T. Scott Vick, Esq .Kevin V. DeSantis, Esq . Daniel Fiore, Esq .Butz Dunn DeSantis & Bingham Alschuler Grossman Stein & Kahan, LL P101 West Broadway, Suite 1700 The Water GardenSan Diego, CA 92101 1620 26`h Street, Fourth FloorTel : (619) 233-4777 North TowerFax: (619) 231-0341 Santa Monica, CA 90404-4060

Tel : (310) 907-1000Fax: (310) 907-2000

Counsel for Defendant Christopher A. Cole Counsel for Defendant Douglas S . Powanda

Leighton M. Anderson, Esq .David A. Brady, Esq .Bewley Lassleben & Mille, LLP13215 East Penn Street, Suite 510Whittier, CA 90602-1797Tel: (562) 698-9771Fax: (562) 696-6357

Robert H. Logan, Esq .Jeff Feasby, Esq .Keesal Young & Logan400 OceangateP.O. Box 173 0Long Beach, CA 90801-1730Tel : (562) 436-200 0Fax: (562) 436-741 6

102201 CERTIFICATE OF SERVICE - Case No . 02- CV-0870 J(RBB)

0

I Counsel for Defendant Steve Gardner

2 Daniel J . Bergeson, Esq .3 Caroline McIntyre, Esq .

Bergeson, LL P4 303 Almaden Blvd., Suite 500

San Jose, CA 95110-271 25 Tel: (408) 291-6200

Fax: (408) 297-600 0

6 Counsel for Defendant use Cappel

7 Michael L. Lipman, Esq .Barbara Howe Murray, Esq .

8 Coughlan Semmer & Lipman, LLP501 West Broadway, Suite 400

9 San Diego, CA 92101Tel : (619) 232-0800

10 Fax: (619) 232-0107

1 1

12Counsel for Defendant John J . Moores

13Walter B . Stuart, Esq .

14 Jeffrey S. Johnston, Esq .Vinson & Elkins, LLP

15 2300 First City Tower1001 Fannin

16 Houston, TX 77002-6760Tel : (713) 758-219 8

17 Fax: (713) 615-592 0

18 Counsel for Defendant William Savoy

19 George J . Berger, Esq .Yvonne M. Dutton, Esq .

20 Allen Matkins Leck Gamble & Mallory, LLP501 West Broadway, 9'' Floor

21 San Diego, CA 92101Tel : (619) 233-1155

22 Fax: (619) 233-1158

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•Counsel for Defendant Daniel F . Stulac

Michael A. Attanasio, Esq .Cooley Godward LLP4401 Eastgate Mal lSan Diego, CA 92121Tel : (858) 550-600 0

Counsel for Defendant John J . Moores

VIA FEDExJohn B . Quinn, Esq .Harry A . Olivar, Jr ., Esq .Quinn Emanuel Urquhart Oliver

& Hedges, LL P865 South Figueroa Street , 10th FloorLos Angeles, CA 9001 7Tel : (213) 624-7707Fax: (213) 624-064 3

Counsel for Defendant William D. Savo

Cyrus R . Vance, Jr ., Esq .Robert P . Stewart, Esq.McNaul Ebel Nawrot Helgren & Vance, LLC600 University Street, Suite 270 0Seattle, WA 98101-3143Tel : (206) 467-1816Fax: (206) 624-512 8

Counsel for Defendant Charles E . Noell .Norris van den Ber n

Brian E. Pastuszenski, Esq .Kenneth 1 . Weissman, Esq .Testa Hurwitz & Thibeault, LLP125 High StreetHigh Street TowerBoston , MA 02110Tel : (617) 248-7253Fax: (617) 790-021 7

102201 CERTIFICATE OF SERVICE - Case No . 02-CV-0870 J(RBB)

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Counsel for Defendant Charles E . Noell,IIIand Norris van den Berg

Jane Hahn, Esq .Alison P . Adema, Esq .Hahn & Adema501 W. Broadway, Suite 1730San Diego, CA 9210 1Tel: (619) 235-2100Fax: (619) 235-2101

•Counsel for Defendant Richard T . Nelson

Robert S . Brewer, Jr., Esq .Jim McNeill, Esq .McKenna Long & Aldridge, LLPSymphony Towers750 B Street, Suite 3300San Diego, CA 92101Tel : (619) 595-5400Fax: (619) 595-545 0

Counsel for Defendant Richard A. Hosley I Counsel for Defendant Richard A . Hoslev l I

Gerard G. Pecht, Esq .Fulbright & Jaworski, LLP1301 McKinney, Suite 5100Houston, TX 77010-3095Tel : (713) 651-515 1Fax: 713) 651-5246

Michael A . Swartzendruber, Esq .Fulbright & Jaworski, LLP2200 Ross Avenue, Suite 2800Dallas, TX 7520 1Tel : (214) 855-8000Fax: (214) 855-8200

Counsel for Defendant Richard A . Hosley I I

Peter H. Mason, Esq .Fulbright & Jaworski, LL P865 South Figueroa Street, Suite 2900Los Angeles, CA 9001 7Tel: (213) 892-9200Fax : (213) 680-451 8

Counsel for Defendant Steve S . Spitzer

James P. Maniscalco, Esq .Dan Marmalefsky, Esq .Morrison & Foreste r555 West Fifth Street, Suite 3500Los Angeles, CA 90013-1024Tel : (213) 892-521 7Fax: (213) 892-5454

Counsel for Defendant Thomas Watrou s

Wayne T. Lamprey, Esq .Anne H. Hartman, Esq .Goodin MacBride Squeri Ritchie

& Day, LLP505 Sansome S treet, Suite 900San Francisco , CA 9411 1Tel : (415) 392-7900Fax: (415) 398-4321

Counsel for Defendant Fredrick B . Luddy

Christopher H. McGrath, Esq .Paul Hastings Janofsky & Walker, LLP3579 Valley Centre Driv eSan Diego, CA 92130Tel : (858) 720-2500Fax: (858) 720-255 5

Counsel for Defendant Matthew C . Gless

Thomas L . Vance, Esq .Vance Blair & Grad y1201 Camino Del Mar, Suite 205Del Mar, CA 9201 4Tel: (858) 793-0049Fax: (858) 793-165 5

Counsel for Defendant AWSC SocieteCooperative, En Liquidatio n

Robert S . Gerber, Esq .Sheppard Mullin Richter & Hampton, LLP12544 High Bluff Drive, Suite 30 0San Diego, CA 92130-3051Tel : (858) 720-890 0Fax: (858) 509-369 1

102201 CERTIFICATE OF SERVICE - Case No . 02-CV-0870 J(RBB)

I Counsel for Defendant AWSC Societe2 Cooperative, En Liquidatio n

3 Martha H. Sottosanti, Esq .Sheppard Mullin Richter & Hampton, LLP

4 501 West Broadway, 19`h Floo rSan Diego, CA 92101-3598

5 Tel : (619) 338-650 0Fax: (619) 234-3815

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102201 CERTIFICATE OF SERVICE - Case No. 02-CV-0870 J(RBB)