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U.S. Securities and Exchange Commission

Litigation Release:
Matthew C. Gless

Litigation Release No. 18093 / April 16, 2003

Accounting and Auditing Enforcement Release No. 1759 /April 16, 2003

Securities and Exchange Commission v. Matthew C. Gless, Civil Action No. 03 CV 0747 W (LAB) (S.D. Cal.) (April 16, 2003)

SEC Charges Former Peregrine CFO with Financial Fraud

The Securities and Exchange Commission today filed civil fraud charges against Matthew C. Gless, the former Chief Financial Officer at San Diego-based software company Peregrine Systems, Inc., for his participation in an eleven-quarter financial fraud at the company. The complaint alleges that Gless and other Peregrine senior officers engaged in deceptive practices to artificially inflate Peregrine's revenue and stock price, and that Gless then took fraudulent action to conceal the scheme.

According to the complaint, the heart of the fraud was the recording of millions of dollars of revenue despite non-binding arrangements with customers, in violation of Generally Accepted Accounting Principles (GAAP). At the ends of fiscal quarters, Gless schemed with other Peregrine senior officers about ways to arrange non-binding transactions with resellers (known as channel partners) and record them as revenue, so that Peregrine could meet or exceed quarterly revenue projections. Peregrine senior officers then purported to sell Peregrine's software to channel partners, even though the channel partners' obligations to Peregrine were frequently contingent or subject to other terms that made revenue recognition improper. Gless knew that senior officers were secretly adding material sale contingencies-by oral or written side agreement-to what appeared on their face to be binding contracts. Gless also knew that senior officers were using other gimmickry to inflate the company's revenue.

The complaint further alleges that, to conceal the revenue recognition scheme, Gless abused the receivable financing process. When Peregrine booked the non-binding contracts, and the customers predictably did not pay, the receivables ballooned on Peregrine's balance sheet. To make it appear that Peregrine was collecting its receivables more quickly than it was, Gless directed Peregrine's senior treasury manager to sell receivables to banks and then remove them from the company's balance sheet. There were several problems with this. First, Gless knew, or was reckless in not knowing, that because Peregrine had given the banks recourse and frequently paid or repurchased unpaid receivables from them, Peregrine should have accounted for the bank transactions as loans and left the receivables on its balance sheet. Second, Gless knew that some of the "sold" receivables were not valid because the customers were not obligated to pay. Third, Gless knew that several of the "sold" invoices were fake, including one that purported to reflect a $19.58 million sale.

According to the complaint, Gless also concealed the fraud by improperly writing off unpaid receivables that he knew, or was reckless in not knowing, should not have been recorded as revenue in the first place. To make it appear to investors that the write-offs related to a non-recurring event, Gless wrote off several million dollars in uncollectible receivables to acquisition-related accounts, even though he knew the write-offs had nothing to do with acquisitions.

The complaint further alleges that Gless signed false SEC filings and false management representation letters to Peregrine's outside auditors, and that he responded falsely to an SEC Division of Corporation Finance Comment Letter that inquired about Peregrine's revenue recognition practice.

According to the complaint, while Gless was aware of the ongoing fraud, he illegally sold 68,625 shares of Peregrine stock for approximately $4 million, based on material nonpublic information he possessed about Peregrine's true financial condition.

The Commission's complaint seeks to permanently enjoin Gless from violating certain antifraud provisions of the federal securities laws (Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Exchange Act Rule 10b-5), and from violating, or aiding and abetting violations of, certain reporting, books and records, internal controls, and representations to accountants provisions (Exchange Act Sections 13(a), 13(b)(5), 13(b)(2)(A) and 13(b)(2)(B), and Exchange Act Rules 12b-20, 13a-1, 13a-13, 13b2-1, and 13b2-2). The complaint also seeks an accounting, disgorgement of ill-gotten gains, prejudgment interest, civil money penalties, and an order prohibiting Gless from acting as an officer or a director of any reporting company.

In November 2002, the Commission filed a civil injunctive action against Ilse Cappel, the former senior treasury manager at Peregrine (Litigation Release No. 17859A).

The Commission's investigation of the financial fraud at Peregrine is continuing.

The Commission thanks the U.S. Attorney's Office for the Southern District of California and the Federal Bureau of Investigation for their cooperation in this matter.

SEC Complaint in this matter



Modified: 04/16/2003