UNITED STATES DISTRICT COURT
SECURITIES AND EXCHANGE COMMISSION,
STEVEN S. SPITZER
Case No. 03 CV 1178 IEG (NLS)COMPLAINT
Plaintiff Securities and Exchange Commission alleges:
1. This case involves a massive financial fraud at Peregrine Systems, Inc., a publicly traded San Diego-based software company. The purpose of the fraud was to inflate Peregrine's revenue and stock price. Defendant Steven S. Spitzer is a former sales vice president at Peregrine who schemed with senior officers of the company and others to achieve those unlawful objectives. During the fraud, Peregrine filed materially incorrect financial statements with the Commission for 11 consecutive quarters between April 1, 1999, and December 31, 2001. The fraud was uncovered in April 2002, and in February 2003, Peregrine restated its financial results for its fiscal years 2000 and 2001, and for the first three quarters of fiscal 2002. Peregrine reduced previously reported revenue of $1.34 billion by $509 million, of which at least $259 million was reversed because the underlying transactions lacked substance.
2. Peregrine senior management, other officers and employees and certain other individuals engaged in deceptive practices to artificially inflate the company's revenue. The heart of the fraud was the recording of millions of dollars of revenue on the basis of non-binding "parking" arrangements with customers, in violation of Generally Accepted Accounting Principles ("GAAP"). Spitzer negotiated some of the largest of Peregrine's fraudulent transactions at the urging of more senior executives. These executives, realizing that Peregrine lacked the revenue to meet the company's targets, urged Spitzer to "park" software with resellers (or purported resellers) in order to generate bogus revenue. The parking transactions were non-binding "sales" of software licenses to resellers with the understanding that they owed nothing to Peregrine unless the software was sold to an end-user. At the time, Spitzer knew that booking revenue from these parking transactions with resellers was improper.
3. While Spitzer was aware of the ongoing fraud, he sold 185,000 Peregrine shares for proceeds of approximately $5.2 million.
4. By engaging in the acts alleged in this complaint, Spitzer violated, or aided and abetted Peregrine's violations of, the antifraud, books and records, internal accounting controls, and reporting provisions of the federal securities laws, and unless enjoined by this Court, will continue to do so.
5. Spitzer, age 44, was hired to be Peregrine's Vice President, Alliances, in August 1997. He became Vice President, Managed Service Providers, in April 2000. He returned to his former position in March 2001 and held that position until he left the company in June 2002. Spitzer resides in Newport Beach, California.
6. Peregrine, a Delaware corporation with principal offices in San Diego, California, sells infrastructure management software. Its fiscal year ends March 31. From its initial public offering in April 1997 to the present, Peregrine's common stock has been registered with the Commission pursuant to Section 12(g) of the Securities Exchange Act of 1934 (Exchange Act) [15 U.S.C. § 78l(g)]. It traded on the Nasdaq National Market System from its initial public offering until August 30, 2002, when it was delisted. On September 22, 2002, Peregrine filed a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code.
7. This Court has jurisdiction over this action pursuant to Sections 21(d), 21(e), 21A, and 27 of the Exchange Act [15 U.S.C. §§ 78u(d) and (e), 78u-1, and 78aa].
8. Venue properly lies in this Court pursuant to Section 27 of the Exchange Act [15 U.S.C. § 78aa] because Spitzer transacted business in this judicial district, because offers and sales of the securities at issue in this case were made in this judicial district, and because certain of the acts and transactions constituting the violations in this case occurred within this judicial district.
9. Spitzer made use of the means and instrumentalities of interstate commerce in connection with the acts alleged in this complaint.
10. The Commission requests that the Court permanently enjoin Spitzer from engaging in further violations; order an accounting; impose civil penalties upon him for participating in the accounting fraud; order him to pay disgorgement, plus prejudgment interest, and civil penalties for insider trading; order him to disgorge any other ill-gotten gains, plus prejudgment interest; and bar him from acting as an officer or director of any reporting company.
11. Following its initial public offering in April 1997, Peregrine reported 17 consecutive quarters of revenue growth through the quarter ended June 30, 2001. During this period, Peregrine's publicly reported financial results met or exceeded analysts' expectations, and the company's stock price increased from $2.25 per share (split-adjusted) to a high of $79.50 per share on March 27, 2000.
12. Peregrine's apparent success in achieving revenue goals was largely illusory. During the 11-quarter fraud, Peregrine's senior management regularly held meetings near the ends of fiscal quarters to identify revenue shortfalls and discuss ways to close the gap between current and forecasted revenue. Peregrine's revenue goals were frequently achieved by a fraudulent practice known as "parking software." Such unlawful "parking" consisted of phony sales transactions arranged at or near the ends of fiscal quarters with resellers (or purported resellers). Peregrine then recognized phantom revenues from the parking transactions in order to "make the quarter." At the urging of Peregrine's most senior officers, Spitzer repeatedly negotiated parking arrangements with the knowledge that the revenue recognition scheme was unlawful.
13. Peregrine could not properly recognize revenue from a software sale unless the transaction met the GAAP criteria (in particular, American Institute of Certified Public Accountants' (AICPA) Statement of Position (SOP) 97-2): (a) persuasive evidence of an arrangement must exist, (b) delivery must have occurred, (c) the vendor's fee must be fixed or determinable, and (d) collectibility must be probable. None of Spitzer's parking transactions, alleged herein, complied with SOP 97-2 because (1) the fees supposedly due Peregrine were neither fixed nor determinable-since the end-user sales had not been finalized at the time Peregrine recorded revenue, and (2) because collection was not probable-since Peregrine's payment depended upon completing a successful sale to an end-user. Spitzer knew, or was reckless in not knowing, that the practice was improper and would illicitly inflate Peregrine's revenue. By June 1999, Spitzer was aware that Peregrine's senior sales personnel were parking software with purported resellers. By December 1999, he became directly involved in the scheme.
14. The counter-party to Spitzer's biggest parking deals was the consulting arm of a major accounting firm (hereinafter "the consulting firm"). The consulting firm signed approximately nine software license agreements for Peregrine software, purportedly worth $34.8 million. Peregrine reported revenue of approximately $34.8 million from its nine licensing agreements with the consulting firm. However, the consulting firm only paid Peregrine approximately $4.3 million for the licenses it ostensibly purchased. Unable to collect under the contracts, Peregrine eventually and, in large part improperly, wrote off approximately $30.8 million in purported receivables from the consulting firm.
15. Spitzer's unlawful dealings with the consulting firm began near the end of the December 1999 quarter, when a senior Peregrine officer informed Spitzer that Peregrine expected to close a software sale to a certain end-user in the next quarter and further, that without the anticipated revenue, Peregrine could not meet its revenue goal for the December 1999 quarter. To close the revenue gap, the senior officer urged Spitzer to park the potential software deal with the consulting firm.
16. Spitzer told his counterpart at the consulting firm (hereinafter "the consulting firm partner") that Peregrine needed revenue to achieve its quarterly goal, and asked him to sign a licensing agreement for the Peregrine software. Spitzer orally promised the consulting firm partner that Peregrine would not require the consulting firm to pay unless end-users were found for the software, and that Peregrine would also steer the services work associated with the end-user sale to the consulting firm. The consulting firm partner signed a contract that on its face required the consulting firm to pay Peregrine $4 million for software.
17. In the December 1999 quarter, Peregrine improperly recorded more than $4 million in revenue for Spitzer's parking transaction with the consulting firm but never collected from the consulting firm under their December 1999 contract.
18. Thereafter the consulting firm became Peregrine's "go to" reseller when it needed revenue to make quarterly forecasts. In late June 2000, Peregrine sales personnel were working on a $7.1 million software sale to an end-user, but Peregrine senior officers refused to wait until the sale closed before recognizing revenue. At their urging, Spitzer arranged to park the $7.1 million software deal with the consulting firm pursuant to a similarly bogus contract and an oral side agreement.
19. In the June 2000 quarter, Peregrine improperly recorded approximately $6.1 million in revenue for Spitzer's parking transaction with the consulting firm.
20. Within days of this parking transaction, Spitzer parked an additional $2.3 million in software with the consulting firm-purportedly for resale to another end-user. Again, Peregrine recorded revenue in the June 2000 quarter. No sale to the end-user ever occurred, and Peregrine never collected from the consulting firm.
21. Spitzer's next parking arrangement with the consulting firm was his largest. Near the close of the September 2000 quarter, a senior Peregrine officer told Spitzer that an end-user would likely buy $11.5 million of software, but that the sale would not close for several weeks. The senior officer urged Spitzer to park the anticipated sale with the consulting firm so that Peregrine could record the revenue in the September quarter. The consulting firm partner signed a contract for the consulting firm to buy $11.5 million worth of Peregrine software for resale to the end-user. Again, Spitzer and the consulting firm partner orally agreed that the consulting firm had no obligation to pay the contract amount.
22. In the September 2000 quarter, Peregrine improperly recorded approximately $11.5 million in revenue for Spitzer's parking transaction with the consulting firm. No sale to the end-user ever occurred, and Peregrine never collected from the consulting firm under the September 2000 contract.
23. In 2001, Spitzer continued to park software to improperly inflate Peregrine's revenue. Near the end of March 2001, a Peregrine senior officer urged Spitzer to park software with two different entities, so that Peregrine could use the phantom revenue to meet its March 2001 quarterly revenue goal.
24. First, Spitzer convinced one of Peregrine's paid consultants (hereinafter "the Peregrine consultant") to sign a contract obligating the Peregrine consultant to pay approximately $1 million for Peregrine software for purported resale to an end-user. Spitzer orally promised the Peregrine consultant that he was not obligated to pay Peregrine. In the March 2001 quarter, Peregrine recorded $993,000 in revenue for Spitzer's parking transaction with the Peregrine consultant. No sale to the end-user ever occurred, and Peregrine never collected from the Peregrine consultant under the March 2001 contract.
25. Second, Spitzer parked approximately $2.5 million in software with another entity for purported resale to an end-user. The reseller signed a contract that on its face obligated it to pay Peregrine for the software. However, Spitzer entered into a written side agreement with the reseller that relieved it of any payment obligation until an end-user paid for the software. In the March 2001 quarter, Peregrine recorded the $2.5 million in revenue for Spitzer's parking transaction with the reseller. More than a year later, when the fraud was exposed, $2.36 million of the $2.5 million contract remained unpaid.
26. 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 $15.75 and $52.42 per share. On May 6, 2002, after Peregrine announced that certain transactions involving revenue recognition irregularities, totaling as much as $100 million, had been called into question, the stock closed at $0.89. Peregrine declared bankruptcy on September 22, 2002, and its stock now trades in the Pink Sheets for less than $1 per share.
27. From 1999 through 2002, Peregrine paid Spitzer a base annual salary. The company also paid Spitzer commissions and bonuses totaling approximately $817,019, and awarded him incentive stock options.
28. Paragraphs 1 through 27 are realleged and incorporated herein by reference.
29. Spitzer knowingly or recklessly participated in a scheme by which Peregrine materially misrepresented its publicly-reported financial results, including its revenue.
30. By reason of the foregoing, Spitzer violated Exchange Act Section 10(b) [15 U.S.C. § 78j(b)] and Exchange Act Rule 10b-5 [17 C.F.R. § 240.10b-51].
31. Paragraphs 1 through 27 are realleged and incorporated herein by reference.
32. Spitzer sold Peregrine stock on the basis of material nonpublic information concerning Peregrine's true financial condition, in breach of his fiduciary duty to Peregrine and its shareholders.
33. By reason of the foregoing, Spitzer violated Securities Act Section 17(a) [15 U.S.C. § 77q(a)], Exchange Act Section 10(b) [15 U.S.C. § 78j(b)] and Exchange Act Rule 10b-5 [17 C.F.R. § 240.10b-5].
34. Paragraphs 1 through 27 are realleged and incorporated herein by reference.
35. Spitzer deliberately circumvented existing internal accounting controls in order to falsify Peregrine's books and records.
36. Spitzer, directly or indirectly, falsified or caused to be falsified, books, records, or accounts described in Exchange Act Section 13(b)(2) [15 U.S.C. § 78m(b)(2)].
37. Spitzer knowingly and substantially participated in a scheme to cause extensive false and misleading entries in Peregrine's books and records. By doing so, Spitzer aided and abetted Peregrine's failure to make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflected the company's transactions and dispositions of its assets.
38. Spitzer knowingly and substantially contributed to Peregrine's failure to maintain its internal accounting controls. By doing so, Spitzer aided and abetted the company's failure to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that transactions were recorded as necessary to permit preparation of financial statements in conformity with GAAP.
39. By reason of the foregoing, Spitzer violated Section 13(b)(5) [15 U.S.C. § 78m(b)(5)] and Exchange Act Rule 13b2-1 [17 C.F.R. § 240.13b2-12] and aided and abetted violations of Exchange Act Sections 13(b)(2)(A) and 13(b)(2)(B) [15 U.S.C. §§ 78m(b)(2)(A) and 78m(b)(2)(B)].
40. Paragraphs 1 through 27 are realleged and incorporated herein by reference.
41. Spitzer knowingly and substantially participated in Peregrine's inclusion of financial statements that were not presented in conformity with GAAP in its annual, quarterly, and other reports filed with the Commission from the first quarter of fiscal year 2000 (the period ended June 30, 1999) through the third quarter of fiscal year 2002 (the period ended December 31, 2001).
42. By reason of the foregoing, Spitzer aided and abetted violations of Exchange Act
WHEREFORE, Plaintiff Securities and Exchange Commission respectfully requests that this Court:
Issue an order of permanent injunction restraining and enjoining Spitzer, and his agents, servants, employees, attorneys, and assigns, and those persons in active concert or participation with him, and each of them, from violating Securities Act Section 17(a) [15 U.S.C. § 77q(a)], Exchange Act Sections 10(b) and 13(b)(5) [15 U.S.C. §§ 78j(b) and 78m(b)(5)], and Exchange Act Rules 10b-5 and 13b2-1 [17 C.F.R. §§ 240.10b-5 and 240.13b2-1], and from aiding and abetting violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) [15 U.S.C. §§ 78m(a), 78m(b)(2)(A), and 78m(b)(2)(B)] and Exchange Act Rules 12b-20 [17 C.F.R. § 240.12b-20], 13a-1 [17 C.F.R. § 240.13a-1], and 13a-13 [17 C.F.R. § 240.13a-13].
Order an accounting by Spitzer of all money, property, and other assets directly or indirectly derived from the transactions alleged herein.
Issue an order directing Spitzer to disgorge, with prejudgment interest, all ill-gotten gains resulting from his conduct described in this complaint.
Issue an order directing Spitzer to pay civil monetary penalties under Exchange Act Sections 21(d)(3) and 21A of the Exchange Act [15 U.S.C. §§ 78u(d)(3) and 78u-1].
Enter an order under Section 21(d)(2) of the Exchange Act [15 U.S.C. § 78u(d)(2)] prohibiting Spitzer from acting as an officer or a director of any issuer that has a class of securities registered pursuant to Section 12 of the Exchange Act [15 U.S.C. § 78l] or that is required to file reports pursuant to Section 15(d) of the Exchange Act [15 U.S.C. § 78o(d)].
Grant such other and further relief as this Court may deem just and proper.
Dated: June ___, 2003
Debra M. Patalkis (Lead Counsel)
Lawrence A. West
Daniel H. Rubenstein
Neil J. Welch, Jr.
Nancy E. McGinley
Cory C. Kirchert
John J. Field III
Attorneys for Plaintiff
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549-0911
Telephone: (202) 942-7133 (Patalkis)
Facsimile: (202) 942-9581
Securities and Exchange Commission
5670 Wilshire Boulevard, 11th Floor
Los Angeles, CA 90036-3648
Telephone: (323) 965-3877
Facsimile: (323) 965-3908
1 2002 ed., p. 60, promulgated 12/22/48, as amended 8/11/51.
2 2002 ed., p. 133, promulgated 2/23/79.
3 2002 ed., p. 112, promulgated 2/13/65.
4 2002 ed., p. 128, promulgated 7/24/97.
5 2002 ed., p. 132, promulgated 5/12/77, as amended 5/3/83, 7/9/85, 3/13/89, 3/27/92, and 6/14/96.
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