U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 20942 / March 11, 2009
Accounting and Auditing Enforcement Release No. 2947 / March 11, 2009
Securities and Exchange Commission v. Stephen P. Gardner, et al., Civil Action No. 04 CV 2002 JAH (RBB) (S.D. Cal.) (October 5, 2004)
SEC SETTLES WITH TWO DEFENDANTS IN PEREGRINE SYSTEMS ACCOUNTING FRAUD CASE
The Securities and Exchange Commission ("SEC" or "Commission") today announced settlements with two defendants in connection with the accounting fraud at Peregrine Systems, Inc. ("Peregrine"). On March 4, 2009, United States District Judge John A. Houston entered an Amended Final Judgment by consent against Michael D. Whitt, the former president of Barnhill Associates, Inc. ("Barnhill"), a reseller of Peregrine's software. The Court's Judgment enjoined Whitt from violating Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder, and ordered Whitt to pay a civil penalty of $60,000. On January 5, 2009, Judge Houston entered a Final Judgment by consent against former Peregrine Director of Strategic Alliances Peter J. O'Brien, enjoining him from violating the anti-fraud and other provisions of the federal securities laws, and ordering him to disgorge $124,792 in ill-gotten gains from unlawful sales of Peregrine stock and from a bonus he received from Peregrine during the fraud. Whitt and O'Brien settled the Commission's claims without admitting or denying the allegations in the Commission's complaint.
According to the Commission's complaint, beginning in 1999, Whitt caused Barnhill to enter into a series of sham transactions with Peregrine, which Peregrine used to artificially inflate its revenue. For several fiscal quarters, Whitt signed contracts-some of which were backdated to the prior quarter-that appeared to bind Barnhill to purchase Peregrine software licenses when, in fact, Barnhill had no obligation to pay Peregrine. Peregrine improperly recorded revenue on the sham contracts in contravention of U.S. Generally Accepted Accounting Principles ("GAAP").
With respect to O'Brien, the Commission's complaint alleged that in December 2000, O'Brien and another Peregrine executive persuaded an executive at a re-seller to sign two contingent sales agreements with Peregrine. The agreements related to software licenses that Peregrine was trying unsuccessfully to sell to two customers. O'Brien understood that Peregrine would only seek payment from the re-seller if the two Peregrine customers bought the licenses from the re-seller. Despite the contingent nature of the sale to the re-seller, Peregrine nevertheless recorded revenue on the two agreements in contravention of GAAP. Additionally, the complaint alleged that O'Brien was involved in a September 2001 contingent sale to a re-seller, for which Peregrine improperly recorded revenue. While participating in the fraud, O'Brien sold Peregrine stock.
In September 2006, Whitt entered a guilty plea in a related criminal case brought by the U.S. Attorney's Office for the Southern District of California. He pleaded guilty to obstructing justice by making false statements to Commission attorneys investigating the Peregrine fraud. Whitt was sentenced to six months of incarceration followed by six months of residency in a community confinement center, and he was ordered to pay $1 million in restitution.
In October 2004, O'Brien entered a guilty plea in the related criminal case. He pleaded guilty to obstructing justice by withholding relevant information and providing inaccurate information about his and others' knowledge and conduct to government investigators. O'Brien was sentenced to one year of probation.
In addition to the disgorgement order in the SEC action, O'Brien agreed to be enjoined from violating Section 17(a) of the Securities Act of 1933, Sections 10(b) and 13(b)(5) of the Exchange Act and Exchange Act Rules 10b-5, and 13b2-1; and from aiding and abetting violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act, and Exchange Act Rules 12b-20, 13a-1 and 13a-13.
The Commission also announced that, on January 7, 2009, Judge Houston issued an order granting the parties' Joint Motion of Dismissal for Defendant Joseph G. Reichner. The Commission had filed its action against Reichner in October 2004.
The Commission acknowledges the assistance of the U.S. Attorney's Office for the Southern District of California and the FBI.
Additional materials: Litigation Release Nos. 18919, 20449, and 20788.