GOLD BENNETT CERA & SIDENER LLP PAUL F . BENNETT (State Bar No. 63318) 2 SOLOMON B .

CERA (State Bar No . 99467) GWENDOLYN R . GIBLIN (State Bar No . 181973 ) 3 THOMAS C . BRIGHT (State Bar No . 169713) 595 Market Street, Suite 230 0 4 San Francisco, California 94105-2835 Telephone : (415) 777-2230 5 Facsimile: (415) 777-518 9 1 6 Attorneys for Section 10(b) Lead Plaintiff The Loran Grou p 7 STULL, STULL & BRODY 8 JULES BROD Y HOWARD T . LONGMAN 9 PATRICK SLYNE 6 East 45`h Street, 4`h Floor 10 New York, New York 10017 Telephone : (212) 687-7230 11 Facsimile: (212) 490-2022 ABRAHAM & ASSOCIATES JEFFREY ABRAHAM 13 LAWRENCE D . LEVIT One Penn Plaza, Suite 1910 14 New York, NY 10119-0165 Telephone : (212) 714-2444 15 Facsimile : (212) 279-365 5 12 16 Attorneys for Section 1 I Lead Plaintiff Heywood Waga 17 18 19 20 Case No. 02-CV -0 870 J(RBB ) 21 22 23 JURY TRIAL DEMANDE D 24 25 26 27 28 )I,,#105317
FIRST AMENDED CONSOLIDATED COMP&AINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02-CV-0870 J(RBB)

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF CALIFORNI A

IN RE PEREGRINE SYSTEMS, INC . SECURITIES LITIGATION

FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAW S

This Document Relates to : ALL ACTIONS .

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

TABLE OF CONTENTS Pag e

SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
JURISDICTION AND VENUE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 4 THE PARTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 5

A.
B. C. D.

Lead Plaintiffs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 5 Other Plaintiffs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 6 Peregrine Systems, Inc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 6 Defendants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 7

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

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

OVERVIEW OF THE FRAUD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 A. B. C The Defendants Intentionally Destroyed Records . . . . . . . . . . . . . . . . . . . . . . . . 30 Peregrine's Internal Accounting Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 How The Fraud Was Committed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 1 . Improper Revenue Recognition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 1 2 . Quarters Were Improperly Kept Open To Meet Revenue And
Earnings Targets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

3 . Improper Balance Sheet Accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 19 4. Concealment Of Write Off Of Receivables . . . . . . . . . . . . . . . . . . . . . . . 49 20 5 . Understatement Of Stock Option Compensation . . . . . . . . . . . . . . . . . . . 49 21 22 23 24 25 26 27 28 D. 6. Failure To Implement And Maintain Adequate Internal Accountin g Controls . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 0 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
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02-CV-0870 J(RBB) i

#105317

TABLE OF CONTENTS
1 (Continued )

2 3
4 5

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

7. October 2000 Report To The Board Of Directors . . . . . . . . . . . . . . . . . . 66 8. January 2001 Repo rt To The Board Of Directors . . . . . . . . . . . . . . . . . . 67

6
7

9. April 2001 Report to Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . . 68

10 . July 2001 Repo rt To The Board Of Directors . . . . . . . . . . . . . . . . . . . . . 68 11 . October 2001 Repo rt To The Board Of Directors . . . . . . . . . . . . . . . . . . 70 12 . December 2001 Report To The Board Of Directors 71

8
9 10 11 12 13 14 15 16 17
18

13 . January 2002 Repo rt To The Board Of Directors . . . . . . . . . . . . . . . . . . 72 14. February 2002 Repo rt To The Board Of Directors . . . . . . . . . . . . . . . . . 73 15. March 2002 Repo rt To The Board Of Directors . . . . . . . . . . . . . . . . . . . 74 16. April 2002 Report To The Board Of Directors E. Audit Committee Members Knew Of Or Were Deliberately Reckless Wit h Regard To Peregrine's Accounting Fraud . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 1 . July 6, 1999 Audit Committee Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . 78 2. April 25, 2000 Audit Committee Meeting . . . . . . . . . . . . . . . . . . . . . . . . 79
3 . January 24, 2001 Audit Committee Meeting . . . . . . . . . . . . . . . . . . . . . . 79

19 20 21 22 23 24 25 26

4. April 25, 2001 Audit Committee Meeting . . . . . . . . . . . . . . . . . . . . . . . . 79 5 . June 29, 2001 Audit Committee Meeting . . . . . . . . . . . . . . . . . . . . . . . . 80 6. July 23, 2001 Audit Committee Meeting . . . . . . . . . . . . . . . . . . . . . . . . . 81 7. October 24, 2001 Audit Committee Meeting . . . . . . . . . . . . . . . . . . . . . 82 8 . February 12, 2002 Special Audit Committee Meeting . . . . . . . . . . . . . . 83 9. April 2, 2002 Audit Committee Meeting . . . . . . . . . . . . . . . . . . . . . . . . . 84 10. April 29, 2002 Audit Committee Meeting . . . . . . . . . . . . . . . . . . . . . . . . 85 THE INDIVIDUAL DEFENDANTS' KNOWLEDGE OF AND/OR DELIBERATE

RECKLESSNESS AS TO THE FRAUD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87 A. Stephen P . Gardner . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92

27 28

#105317

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

1 2 3 4 5 6 7 8 9 10 11 12 13

is TABLE OF CONTENTS (Continued) Page 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 OF . . . . . . . 132 . . . . . . . 142 . . . . . . . 149 . . . . . . . 151 . . . . . . . 15 7 . . . . . . . 165 . . . . . . . 176 . . . . . . . 18 2 . . . . . . .182 . . . . . . . 184 . . . . . . . 187 . . . . . . .189 . . . . . . . 192 . . . . . . . 194

14 DEFENDANT JOHN J . MOORES CONTROLLED PEREGRINE AND CERTAIN ITS OFFICERS AND DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 ARTHUR ANDERSEN'S PARTICIPATION IN THE FRAUD . . . . . . . . . . . . . . . . 16 1 . Fiscal Year 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 2. Fiscal Year 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 3. Fiscal Year 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 AWSC'S PARTICIPATION IN THE FRAUD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 KPMG'S PARTICIPATION IN THE FRAUD . . . . . . . . . . . . . . . . . . .. 21 THE FALSE STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 1Q 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 2Q 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 3Q 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 4Q 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 IQ 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 2Q 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

#105317

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

0 TABLE OF CONTENT S

1 2 3 4 5 6 7 8 9

(Continued) Page 3Q 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 196 4Q 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 9 FISCAL YEAR 2001 ANNUAL REPORT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 1 REMEDY PROXY STATEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 2

IQ 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 202 2Q 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 205 3Q 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 8

1 0 THE TRUTH BEGINS TO EMERGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 1 11 12 BASIS OF FACTUAL ALLEGATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 4 DEFENDANTS' CONCEALMENT OF WRONGDOING . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 4

13 THERE IS NO STATUTORY SAFE HARBOR APPLICABLE TO TH E ALLEGATIONS OF THIS COMPLAINT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 5 14 (Violations Of Section 10(b) Of The Exchange Act And Rule I Ob- 5 COUNT I Promulgated Thereunder And Of Section 20(a) Of The Exchange Act) . . . . . . 21 5 15 1 16 COUNT II 17 18 COUNT III 19 20 COUNT IV 21 22 I COUNT V 23 24 COUNT VI 25 26 COUNT VII (Violations Of Section 14(a) Of The Exchange Act And Rule 14a- 9 Promulgated Thereunder And Of Section 20(a) Of The Exchange Act Harbinger Acquisition) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 220 (Violations Of Section 14(a) Of The Exchange Act And Rule 14a- 9 Promulgated Thereunder And Of Section 20(a) Of The Exchange Act Harbinger Acquisition - Arthur Andersen, AWSC And Stulac) . . . . . . . . . . . . 224 (Violations Of Section 14(a) Of The Exchange Act And Rule I4a- 9 Promulgated Thereunder And Of Section 20(a) Of The Exchange Act Remedy Acquisition) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 227 (Violations Of Section 14(a) Of The Exchange Act And Rule 14a- 9

Promulgated Thereunder And Of Section 20(a) Of The Exchange Act Remedy Acquisition - Arthur Andersen, AWSC And Stulac) . . . . . . . . . . . . . . 23 0 (Violations Of Section 11 Of The Securities Act - The Harbinger Acquisition) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 234 (Violations Of Section 15 Of The Securities Act - The Harbinge r Acquisition) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 8

27 COUNT VIII (Violations Of Section 11 Of The Securities Act - The Remed y Acquisition) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 240

28 1
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02-CV-0870 J( RBB) iv

#105317

1 2 3 4 5

TABLE OF CONTENTS . (Continued)

PU N
COUNT IX (Violations Of Section 15 Of The Securities Act - The Remed y Acquisition) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 244 PRAYER FOR RELIEF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 245 JURY DEMAND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24 6

67 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02-CV-0870 J(RBB) v

#105317

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

2 f and all others similarly situated, for their First Amended Complaint, allege as follows : 3 4 5 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 .

6 ("Peregrine" or the "Company") between July 22, 1999 and May 3, 2002, inclusive (the "Class 7 Period") . This action is also brought on behalf of all persons and entities who held Harbinger

8 1 Corporation common stock or Remedy Corporation common stock and received Peregrine 9 1 common stock in connection with mergers between each of those companies and Peregrine .
10 11 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

12 transaction . The defendants are certain of Peregrine's former officers and directors, its former 13 independent auditor, an individual partner thereof and a related entity, and certain major

14 1 customers of Peregrine . 15 2. Peregrine represents one of the most egregious financial frauds ever committed .

16 As alleged herein in detail , the senior management , as well as all directors of Peregrine, wer e 17 complicit in the Company's accounting fraud . This case also involves unprecedented insider 18 stock sales by individuals who knew of, or were deliberately reckless with regard to the fraud, 19 while they were enriching themselves . This lawsuit is an attempt to recover the massive losses 20 incurred by public investors and to help restore the integrity of this country's capital markets . 21 Contrary to its published story of ever increasing success, Peregrine was a house of cards,

22 propped up by books and records that had been "cooked" by senior officers of the Company with 23 the knowledge and/or deliberate recklessness of members of Peregrine's Board of Directors .

24 Peregrine stands with Enron, Tyco, WorldCom, and Adelphia in the rogue's gallery of corporat e 25 26 accounting frauds .
3 . At all relevant times, Peregrine developed and marketed software products that

27 enabled business customers to be more competitive by reducing infrastructure costs an d 28 increasing efficiency . The Company also developed and marketed business-to - business an d
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No. 02-CV-0870 J(RBB) I

#105317 I

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 th e
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 in 18 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 %

FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS 4105317 Master File No . 02-CV-0870 J(RBB) 2

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

2 revenue as follows : 3 4 5 6 7 8 Announcement Reporting Period Reported Revenue Reported Growth in Date 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

9 the first three (3) reporting quarters of fiscal year 2002 . By these restatements the Company has 10 admitted that it improperly recognized over $500 million in revenue during the restated periods . 11 These restatements are also an admission that each document publishing the originally

12 announced financial results for the restated periods contained untrue statements of material fact . 13 Thus, Peregrine has admitted that each of the press releases and the annual and quarterly reports

14 filed on SEC Forms IO-K and 10-Q and all other SEC filings incorporating or including such 15 financial information, for the periods ending June 30, 1999 through and includin g 16 December 31, 2001, contained untrue statements of material fact . The devastating impact of the 17 accounting restatement is reflected by a comparison of the originally reported results with actual 18 results, as set forth below. 19 Fiscal Year Ended March 31, 2000 ($ 000 omitted) 20
Income Statement As Reported Restatement Adjustment Restated Amount

21 22 23 24 25 26 27 11 28 ll

Revenue Net Loss Cash Flow Statement Cash Flow Provided By

$253,300 ($25,070) As Repo rt ed $57,611 -----

($121,668) ($192,348) Restatement Adjustment ($92,373) ($90,885)

$131,63 2 ($217,418 ) Restated Amoun t ($34,762) ($90,885 )

Operation s
Advances From Factored
Receivables

#105317

FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02-CV-0870 J(RBB) 3

1 I Fiscal Year Ended March 31, 20011($000 omitted ) 2 3 4 5 6 7 8 9 7. Through Board of Directors meetings, their contacts with other directors and
Income Statement As Reported Restatement Adjustment Restatement Amoun t

Revenue Net Loss

Cash Flow Statement

$564,683 ($852,241)
As Reported

($254,105) ($922,276)
Restatement Adjustment

$213,35 3 ($1,844,517)
Restatement Amoun t

Cash Flow Provided By

Operation s Advances From Factored Receivable s

($10,171)
-----

($113,618)
($180,372)

($97,316 ) ($180,372 )

10 senior management, and other means, the individually named defendants and defendants Arthur 11 12 13 14 15 16 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

17 approval to the full Board by Chief Financial Officer David Farley (now deceased), because of 18
the serious ramifications of adopting this unusual and extremely aggressive method of accounting

1 9 for software license revenue . As a result of this accounting change, Peregrine began to record 20 revenues as if it had fully completed the software sales process when it "sold" software to 21 22 23 24 25 26 27 28
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,
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS --Master File No . 02-CV- 0870 J(RBB) 4

#105317 it

0.

Peregrine instead affirmatively misrepresented its revenue recognition policy. Notwithstanding a

2 negative financial report to the Board on April 14, 1999, and adoption of a new, highly 3 aggressive accounting policy as a result, shortly thereafter, in what was to continue as a pattern

4 throughout virtually all of the Class Period, on April 26, 1999, Peregrine issued a very positive 5 press release describing 1999 as "an incredible year of growth" with an increase in fourth quarter 6 7 revenues of 129% over the prior year's fourth quarter results . 10 . By the next quarter, notwithstanding the aggressive accounting method the Boar d

8 had approved in April 1999, Peregrine's financial prospects had worsened . According to 9 defendant Stephen P . Gardner, Peregrine's Chief Executive Officer, the second quarter of fiscal

l 0 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, 12 defendant Gardner alerted the individually named defendants then on the Board as to a specific 13 14 15 16 17 18 problem arising from use of the sell-in accounting treatment, as follows : We have now reached a level of channel activity that is concerning as we look to the future . We have a large amount of inventory in the channel that must be sold through, and this must be done as we simultaneously continue to grow our direct business . Sales rep productivity in the direct sales area was at a very low level (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

19 booked upon sell-in to the channel partners, there was no concurrent sell-through to end users . 20 Peregrine and its channel partners were unable to reduce hugely bloated inventory levels . End 21 22 23 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

24 disclosed to the investing public . 25

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

26 release repo rt ing enormous gains over the prior year : "We are delighted with our continued rapi d 27

growth . . . ." 13 . On January 18, 2000, defendant Gardner alerted the individually name d
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02-CV-0870 J(RBB) 5

28 1

#105317

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

2 1 (the quarter ended December 31, 1999) "was a very tough quarter ." 3 4 5 Our channel business is now a cause for concern . . . We have been much more successful generating sales to channels and getting partners to buy into our message and vision . We have not been as successful, and in some cases unsuccessful, in getting the sell-through that would remove the inventory of software from the channels . . . . The net of this is that we are now at a level of channel inventory that makes our auditors uncomfo rt able. 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

6
7 8

9 I channel was stuffed with software that could not be sold; (ii) Arthur Andersen was 10 I uncomfortable with the amount of inventory in the channel ; and (iii) it would take 2 to 3 quarter s 11 12 13 14 15 16 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 . O n July 17, 2000, defendant Gardner's "Review and Outlook" for the first quarter of fiscal year 2001

17 1 (the quarter ended June 30, 2000), informed the Board that "[i]t was a very tough quarter ." 18 19 20 21 22 23 16 . Notwithstanding the continuing negative financial developments within th e
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

24 rate and lower operating margins than those purportedly achieved by Peregrine, a sure indication 25 26 27
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

28 1 of the Harbinger acquisition . In four (4) days of insider selling between February 15 and 18 ,
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02-CV-0870 J(RBB) 6

#105317

1 2 3

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

4 egregious was this insider selling that in an e-mail exchange between defendant Richard T . 5 Nelson and Farley, the selling defendants' conduct was denigrated and referred to as "the hogs 6 are at the trough." 7 17 . This insider selling occurred when the selling defendants knew of, and traded on,

8 two material facts that were not known to the investing public ; specifically, that Peregrine's 9 channel sales were out of control, there was minimal sell-through, and its auditors were 1 0 I "uncomfortable" with the level of inventory in the channel, and (ii) that the Company was abou t 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 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

26 quarter of fiscal year 2001 (the quarter ended September 30, 2000), he informed Board member s 27 that : 28 Another quarter is behind us . As you know, it was a real nail-biter ,
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS M aster File No . 02-CV- 0870 J(RBB) 7

#105317

I 2 3

but in the end we pulled it off. We had some significant wins and some great orders, but we also had to borrow from the future to make the present happen ." (Emphasis added) . 19. On January 15, 2001, defendant Gardner's "Review and Outlook" (for the quarte r

4 I ending December 31, 2000) alerted these same Board members that "Our direct business i n 5 North America was a disaster ." He continued by stating that "our continued heavy reliance o n 6 I alliance and channel partners leaves me cautious . " 7 20 . At a July 18, 2001 Board meeting, defendant Gardner informed Board members o f

8 a barter transaction that had occurred with Critical Path, Inc . ("Critical Path"). At this Board 9 meeting, defendant Nelson discussed the fact that defendant Gardner and two other Peregrine 10 employees had already been deposed by the SEC in connection with this transaction . Former 11 General Counsel Deller has affirmed in an interview with investigators that Gardner's testimony

12 to the SEC and Peregrine's production of documents were "common knowledge to Board 13 members" at this time. Nelson's handwritten notes as to what transpired at this Board meeting

14 reflect a discussion of how Peregrine could "spin" this "public relations" concern . In a May 2001 15 e-mail from Deller to defendant Gardner, he expressed concern about where the SEC

16 investigation would lead and stated "[m]ore ominously, [the SEC] told me they were sending 17 another subpoena and what the contents would be . .. Here is the disturbing one : They also said 18 19 20 21 22 23 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

24 went on to state that, "[w]ere the attached documents, any of the `other' contracts mentioned 25 above, or this correspondence to fall into the hands of the `Wall Street Journal' or a curious 26 analyst, Peregrine Systems will be under serious and immediate scrutiny ." Defendant Gardner 27 immediately forwarded this e-mail to defendant Moores, who was assured that this individual
28 I was being "taken care of." In an e-mail exchange dated October 5, 2001 between defendant s
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02-CV- 0870 J(RBB) 8

#105317

Gless, Gardner, and General Counsel Deller, it was stated "[w]e need to fire this guy . That is a 2 given." Defendant Gardner arranged to have the e-mail sender terminated as part of a supposed 3 lay off, to hide the fact that he was being fired for blowing the whistle on Peregrine's revenue

4 recognition fraud . When he learned of his termination due to his branch office's allege d 5 6 7 8 9 10 11 12 13 22 . Throughout the Fall of 2001, senior management of Peregrine, including "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 time ago - Steve Gardner, Eric Deller, Matt Gless, Andy Cahill, John Moores, Fred Luddy all received copies . I sent it because I believe what you're doing with Partner contracts here is unethical, immoral and unconscionable . There is also no justification to book revenue when no product has been ordered , there is a `sales guarantee ' and there is li tt le likelihood of payment if things don't go as we predicted during discussions . .. . Here is the document, it's self explanatory . My closing comment that anyone who objected to the "channel stuffing" partner approach would be laid off is ironically relevant . (Emphasis added) .

14 defendants Gardner, Gless, and Nelson, as well as Arthur Andersen, were repeatedly informed of 15 the use of side letters excusing or deferring payment on software license sales, and the existence

16 of large uncollectible accounts receivable from channel transactions . This same month, October 17 2001, the members of the Audit Committee of the Board (defendants Noel], Thomas G. Watrous 18 19 20 21 22 23 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 const an t an d intense attention of Peregrine's Board members . Upon seeing that Peregrine's participation in

24 questionable Critical Path barter transactions was reported in a newspaper article, defendant 25 Moores arranged to hire his own lawyer to conduct a secret internal investigation in a self-serving

26 attempt to separate and exonerate himself from the obvious, but as yet publicly undisclosed, 27 massive accounting fraud ongoing within Peregrine . By April 25, 2002, defendant Moores was 28 informed that a successor accounting firm, KPMG LLP, had affirmatively concluded that ther e
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02-CV-0870 J(RBB) 9

4105317


1 2

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

3 control the flow of information, position himself as "above the fray," and to squelch any 4 suggestion of his personal involvement in the wrongful conduct . In a further attempt to insulate 5 himself and cover up his involvement, Moores had his personal counsel conduct a purported 6 "independent" investigation of the facts . In truth, Moores had arranged to have an investigation 7 conducted that would cast senior management and the auditors of Peregrine as the only 8 9 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

10 knowledge of the fraud and trading on inside information gradually were exposed, coupled with 11 the announcement of a massive restatement on February 28, 2003, Moores was finally forced to

12 relinquish all positions within Peregrine . As of the date of submission of this Amende d 1 3 Complaint , an d notwithstanding guilty pleas by three former senior officers of Peregrine, an SEC 14 investigation is continuing , as is a criminal investigation by the U. S. Department of Justice . 15 24 . The foregoing summary of critical events at Peregrine during the Class Perio d

16 demonstrates that Board members and Arthur Andersen knew, or were deliberately reckless i n 17 I not knowing, that a financial fraud was afoot at Peregrine . This fraud involved the followin g 18 19 financial and accounting manipulations : Peregrine's reported revenues were generated primarily from two sources : (1 )

20 I product licensing revenues from resellers, distributors and end users, and (2) service and support 21 revenues . Peregrine could not properly recognize revenue from the sale of software licenses t o

22 resellers, distributors or end users unless : (i) an unconditional contract had been signed ; (ii) the 23 product had been delivered; (iii) the fee was "fixed and determinable;" (iv) the risk of concession

24 was deemed remote ; (v) no significant vendor obligations remained ; and (vi) collection of the 25 receivable was probable . Hundreds of millions dollars of reported revenue was improperl y

26 recognized by Peregrine during the Class Period on transactions in which these required criteri a 27 under Generally Accepted Accounting Principles ("GAAP"), which were acknowledged in it s 28 own SEC filings, had not been met .
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02-CV-0870 J( RBB) 10

#105317

1 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 a s 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,

FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS -#105317 Master File No . 02-CV-0870 J(RBB) 1 1

11

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

2 repeatedly needed to access the capital markets to raise cash during the Class Period . Because of 3 this desperate need for repeated cash infusions, no disclosure could be made by the defendants of
4 the material adverse information regarding the Company's adverse financial fortunes as alleged

5 herein because any such disclosure would render it impossible to raise the needed cash and 6 would have led to the revelation of Peregrine's accounting fraud and/or possible bankruptcy ; 7
8 9 10 11 12 13 14 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 accuratel y 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

15 ~ mainten an ce revenue ; 16 17 18 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

19 1 identities) during particular accounting periods ; and

20 1 21 22 23 24 25 26 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

27 deliberate recklessness as to their truth or falsity . During the Class Period, while Peregrine was 28 falsely reporting record financial results, certain of the individually named defendant s
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02-CV-0870 J(RBB) 12

#105317

1 2 3

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

4 a time when the individually named selling defendants -- but not the investing public -- knew of 5 6 7 8 9 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 an d condoned by

10 defendant Arthur Andersen LLP which abrogated its duties and responsibilities as Peregrine's 11 12 13
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

14 of lower level Peregrine financial personnel . As alleged in greater detail herein, prior to the 15 public revelation of the accounting fraud, Arthur Andersen knew about the accounting 16 17
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

1 8 resign its position as it should have given its knowledge of Peregrine's accounting defalcations . 19 The lack of independence between Arthur Andersen and Peregrine was a major contributing 20 21
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

22 reviewed and approved throughout the Class Period, the Company's quarterly financial reports, 23
even though it knew (i) that the Company's internal accounting and financial controls were

24 grossly deficient, (ii) that the Company was recognizing material amounts of revenue in violation 25 of GAAP, (iii) that the Company was classifying loans as sales in violation of applicable 26
accounting standards and principles, and (iv) that Peregrine otherwise was manipulating the

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

28 1
#105317

27. The public dissemination of materially false and misleading financial statement s
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02-CV -0870 J ( RBB) 13

1 I and other positive statements about the Company's business and operations caused Peregrine' s 2 3 4 5 6 7 8 9 share price to trade at artificially inflated prices throughout the Class Period . As the fals e financial results were reported throughout the Class Period, Peregrine's stock price increase d 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 da y 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

1 0 20(a) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. 78j(b), 78n(a) and 78t ( a), respectively , an d the rules and regulations promulgated thereunder , including SE C 12 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

13 jurisdiction over the subject matter of this action pursuant to Section 27 of the Exchange Act, 14 15 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

16 jurisdiction over this action under 22(a) of the Securities Act, 15 U .S.C. 77v(a) . This Court 17 18 19 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 Exchan ge 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) .

20 The wrongs alleged herein occurred, in substantial part, in this District . At all relevant times , 21 Peregrine conducted, and still conducts, significant business in this District and maintains its

22 principal place of business in this District . At all relevant times, the defendants named herein 23 conducted subst an tial business and/or resided in this Dist rict , or committed violations of United

24 States law by acts committed in this District . 25 30 . In connection with the facts and conduct alleged in this Complaint, defendants,

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

27 not limited to, the United States mails, interstate telephone communications, and the facilities o f 28 the national securities markets .
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02-CV-0870 J(RBB) 14

#105317

i0

I 2 A. Lead Plaintiffs

THE PARTIES

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 6 securities during the Class Period and was damaged thereby . 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 10 securities during the Class Period and was damaged thereby . 11 (e) Lead Plaintiff Conrad Willemse purchased or otherwise acquired Peregrine 12 securities during the Class Period and was damaged thereby . 13 (f) Lead Plaintiff Bill Holman purchased or otherwise acquired Peregrine 14 securities during the Class Period and was damaged thereby . 15 (g) Lead Plaintiff Bob Benesko purchased or otherwise acquired Peregrine 16 securities during the Class Period and was damaged thereby . 17 (h) Lead Plaintiff Michael Slavitch purchased or otherwise acquired Peregrine 18 securities during the Class Period and was damaged thereby . 19 (i) Lead Plaintiff Richard Maheu purchased or otherwise acquired Peregrine 20 securities during the Class Period and was damaged thereby . 21 (j) Lead Plaintiff Mark Rollins purchased or otherwise acquired Peregrine 22 securities during the Class Period and was damaged thereby . 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 .
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS #105317 Master File No . 02-CV-0870 J(RBB) 15

0
B . Other Plaintiffs 2 3 4 5 6

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

7 held Remedy Corporation shares and acquired Peregrine registered common stock in connection 8 with Peregrine's acquisition of Remedy Corporation which was consummated on or abou t 9 August 27, 2001 and was damaged thereby . 10 II 12 13 14 15 16 (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

17 1 headquartered in San Diego, California. Peregrine is an unnamed defendant herein . But for 18 19 20 21 22 1 23 24 25 26 27 28 1 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 defendant 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 . To achieve its unlawful purpose, Peregrine filed materially incorrect financial statements with the Commission for 1 I consecutive quarters betwee n April 1, 1999 and December 31, 2001 . . . In February 2003, Peregrine restated its financial results for its fiscal years 2000 and 2001, and for the first three quarter of fiscal 2002 . Peregrine reduced 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
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02-CV-0870 J(RBB) 16

#105317


1 action against it . Among other things, the Final Judgment (i) permanently enjoined Peregrine 2 and related persons from violating the antifraud provisions of the federal securities laws; (ii) 3 required the Company to retain an Internal Auditor acceptable to the SEC who is required to 4 report directly to the Audit Committee of Peregrine's Board of Directors, and to assess and 5 enforce Peregrine's accounting control structure and to ensure that Peregrine's financial

6 condition and results are accurately reported in Peregrine's public financial statements; (iii) 7 8 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

9~ Peregrine's compliance with recognized standards of "best practices" with respect to corporate 10 governance and to ensure that Peregrine's Board of Directors (and its committees) have 11 appropriate powers, structure, composition and resources ; and (iv) required Peregrine to

12 commence a training and education program for its officers and employees, to prevent violations 13 14 15 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

16 herein. These Class Proofs of Claim were based on the violations of law alleged herein. On 1 7 October 14, 2003, Lead Plaintiffs settled their claims against Peregrine pursuant to an Amended 18 Settlement Agreement which was approved by the United States Bankruptcy Court for the

19 District of Delaware . 20 21 22 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

23 promoted to Executive Vice President and assumed principal responsibility for the day-to-day 24 operations of Peregrine . He was one of three members of the "Office of the Chairman," 25 established as of that date, the other members being defendant Moores and David A . Farley . At a

26 Board of Directors meeting on April 16, 1998, defendant Moores sought the appointment of 27 Gardner as President, Chief Executive Officer, and director, positions Gardner assumed on tha t 28 date . Gardner also became Chairman of the Board of Directors on July 19, 2000 . He was
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS--Master File No . 02-CV-0870 J(RBB) 17

#105317

1 terminated from all positions at Peregrine on May 3, 2002 . During the Class Period, while in
2 possession of material , undisclosed adverse information about Peregrine, Gardner sold 452,51 2

3 shares of Peregrine common stock and received gross proceeds of approximately $14,030,526 .
4 (b) Defendant Matthew C . Gless was hired as Peregrine 's corporate controller o n

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

6
8

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

7 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

9 ! owned and controlled by defendant Moores . Gless became Vice President, Finance and
10 Peregrine's Chief Accounting Officer on November 30, 1999 . He served as Chief Financial 11 Officer and a member of the Board of Directors from November 1, 2000 until May 5, 2002 .

12 During the Class Period, while in possession of material, undisclosed adverse information about 13 Peregrine, Gless sold 169,250 shares of Peregrine common stock and received gross proceeds of

14 approximately $3,993,188 .75. On April 16, 2003, the SEC filed a Complaint against Gless 15 which alleged that he violated, inter alia, Section 10(b) of the Exchange Act by knowingly or

16 recklessly making misrepresentations and omissions of fact with the intent of materially 17 misstating Peregrine's publicly reported financial results . That same day Gless pled guilty to a 18 criminal information charging him with a conspiracy, beginning no later than June 1999, to

19 commit, among other offenses, securities fraud . Gless's guilty plea is attached hereto as 20 Appendix A and is incorporated herein by this reference . By his guilty plea, Gless has effectively 21 22 23 24 25 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

26 undisclosed adverse information about Peregrine, Spitzer sold 185,000 shares of Peregrine
27 28

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
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02-CV-0870 J( RBB) 18

#105317

s
1 2 3

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

41 Spitzer charging securities fraud, to which he pled guilty . Spitzer's guilty plea is attached hereto 5 as Appendix B and is incorporated herein by this reference . By his guilty plea, Spitzer has

6 effectively admitted liability to the Class identified herein . 7 8 9 l0 11 12 13

(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

1 4 November 22, 2002, the SEC filed a Complaint against Cappel alleging that she committed bank 15 16 17 18 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

19 1 Appendix C and is incorporated herein by this reference . By her guilty plea, Cappel has 20 effectively admitted liability to the Class identified herein.
21 (e) Defendant Richard T. Nelson served as Peregrine ' s Vice President and

22 General Counsel from November 8, 1995 to March 2000 . He formerly worked for BMC 23 24 25 26
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

27 1 Executive Officer . During the Class Period, while in possession of material undisclosed adverse 28 I information about Peregrine, Nelson sold 375,000 shares of Peregrine common stock and

#105317

FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02-CV-0870 J(RBB) 19


1 I received gross proceeds of approximately $8,827,120 . 2 3 4 5 6 7 8

(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 .

9 Pursuant to an employment agreement dated April 1, 2000, which was prepared in September 10 2000 and backdated, Powanda was entitled to a specified amount of stock options provided he 11 12 13 14 15 16 17 18 19 20 21 22 23 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 an d 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

24 received gross proceeds of approximately $11,823,660 . 25

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

26 Directors from October 1989 through the Class Period, and as Chairman of its Board of Directors 27 from March 1990 until July 2000. During the Class Period, Moores also chaired th e 28 1 Compensation Committee of Peregrine's Board of Directors . Moores left the Peregrine Board i n
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02-CV-0870 J( RBB) 20

#105317

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

2 Executive Officer from 1980 until 1986 and as Chairman of its Board of Directors from 1980 3- until 1992. Since September 1991, Moores has served as Chairman of the Board of JMI 4 Services, a private investment company which Moores controls . JMI Services and its affiliate, 5 6 7 8 9 10 I 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

12 common stock and received gross proceeds of approximately $401,640,096 . 13 14 15 (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

16 January 1992, Noell has served as President and Chief Executive Officer of JMI Services, and as 17 18 19 20 21 22 23 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

24 & Sons, which was an underwriter of BMC Software's [PO . During the Class Period, while in 25 possession of material undisclosed adverse information about Peregrine, Noell sold 174,375 26 shares of Peregrine common stock and received gross proceeds of approximately $6,395,812 .

27 1

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

28 1 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-0870 J(RBB) 21

#105317

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 . an d

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 sol d 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 28 sitting on Peregrine's Board of Directors and its Audit Committee : Telescan, TicketMaste r
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02-CV-0870 J(RBB) 22

#105317

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

2 Go2Net, Value America and High Speed Access Corporation . 3 4 5 (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

6 partner with the management consulting firm of Andersen Consulting (now known as 7 Accenture), which was previously an affiliate of defendant Arthur Andersen LLP . During the 8 Class Period, while in possession of material undisclosed adverse information about Peregrine,

9 Watrous sold 15,000 shares of Peregrine common stock and received gross proceeds o f 10 I approximately $811,200 . 11 (o) Defendant Rodney T . Dammeyer served as a member of the Board of

12 Directors of Peregrine from June 29, 2001 through the end of the Class Period . He became 13 Chairman of the Audit Committee as of the Committee' s meeting on October 24, 2001 .

14 Dammeyer worked for defendant Arthur Andersen beginning in 1962, and was an audit partner 15 of the firm until 1979 . He thereafter served as Chief Financial Officer of various publi c

16 companies including Northwest Industries and Household International, He spent 15 years with 17 Itel, and its successor Anixter International, Inc ., including serving as its Chief Executive Officer 18 19 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

20 management and investment firm . Dammeyer has been a director of numerous public 21 22 23 24 25 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

26 accounting and auditing se rv ices, as well as tax and consulting services , and to give Peregrin e 27 accounting advice and consultation regarding its annual and quarterly reports filed with the SEC . 2 8 Arthur Andersen falsely represented, in its audit opinions on Peregrine's fiscal years 2000 an d
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02-CV-0870 J(RBB) 23

#105317

1 2 3 4 5 6 7 8

2001 fin an cial statements incorporated in SEC Forms 10-K filed for those years , that the Company ' s financial statements fairly presented the Comp any' s finan cial condition an d 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 an d approved of the mate ri ally false and misleading quarterly financial statements published by Peregri ne for each of the quarters of fiscal years 2000 and 2001 and the first, second and third quart ers of fiscal year 2002 . On Ap ril 5 , 2002 , Arthur Andersen was replaced by KPMG LLP as Peregri ne's independent auditor. A rt hur Andersen was paid approximately $4 million in fees for

9 its auditing, accounting , and consulting work for Pereg ri ne since being retained in July 1996 . 10 11 (q) Defendant Daniel F. Stulac was an employee and partner of defendant Arthu r Andersen at all relevant times . Stulac provided accounting and auditing services to Peregrine in

12 connection with its annual and quarterly repo rts filed with the SEC during the Class Period . 13 Stulac was the audit engagement partner for the annual audit relating to Peregrine ' s fiscal year

1 4 2001 fin ancial statements incorporated in the SEC Form 10-K filed for that year, which falsely 15 represented that the financial statements fairly presented the Company 's financial condition and

16 results of operations in conformity with GAAP an d had been audited in accordance with GAAS . 17 18 (r) Defendant AWSC Societe Cooperative , en liquidation ("AWSC "), is a societe cooperative organized under the Swiss Federal Code of Obligations . During the Class Period,

19 AWSC was comprised of the AWSC member firms and their respective partners, including 20 Arthur Andersen and Arthur Andersen Germany . AWSC served as the coordinating entity for 21 22 23 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

24 international segments of Peregrine's business which were incorporated in Peregrine's published 25 financial results. 26

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

27 of Peregrine's principal customers during the Class Period . During the Class Period, KPMG 28 entered into agreements with Peregrine for delivery of software which it knew were nothing mor e
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02-CV-0870 J(RBB) 24

#105317

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 thes e 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 .
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS #105317 Master File No . 02-CV-0870 J(RBB) 25

1 2 3 4

38 . Because of their positions an d 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

5 representations which were being made by Peregrine and certain of its executive officers were 6 materially false and misleading . Each such individually named defendant was in a position to 7 control or influence the contents of, or otherwise cause corrective disclosures to be made in the 8 public dissemination of the false and misleading information and failed to do so in order to

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

10 1 defendants to sell substantial amounts - more than $450,000,000 .00 - of Peregrine common
11 12 13 14 15 16 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

17 acquired Peregrine securities from July 22, 1999 through May 3, 2002 . The foregoing identifie d 1 8 period during which the securities law violations alleged herein were committed, was not 19 arbitrarily selected by Lead Plaintiff the Loran Group . Rather, by its restatements announced on 20 February 28, 2003, Peregrine has admitted that the financial results it published applicable to the 21 22 23 24 25 26 27 28 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 Pereg ri ne 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
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02-CV-0870 J(RBB) 26

#105317

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 Remed y 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, an d
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 .
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS #105317 Master File No. 02-CV-0870 J(RBB) 27

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
1

'S

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 :

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 an d 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 .
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS #105317 Master File No . 02-CV-0870 J(RBB) 29

9 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 9 A. OVERVIEW OF THE FRAUD 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 Board15 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 in advance of the meetings in preparation for a board meeting, each 25 board member shall retain such materials for no longer than a period of one month from the time of the board meeting. Prior to 26 or at the end of the one-month period, all physical documents shall be destroyed by the shredding of those documents . Any 27 board materials which may have been received by e-mail should be deleted and erased from e-mail. 28
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS 4105317 Master File No . G2-CV-0870 J(RBB) 30

1 2 3 4 5 6 51 . The minutes of the Peregrine Board of Directors meetings were doctored t o eliminate any potentially incriminating or controversial material . Defendant Nelson was With respect to e-mailed materials, I would advise that you print those materials upon receipt and immediately destroy the e-mailed copy. This practice will ensure your compliance with our policy with respect to soft copies of board materials . (Emphasis added) .

7 primarily responsible for keeping the minutes and for "cleansing" them of potentially damaging 8 9 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

10 1 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 12 1 accurately and truthfully reflect what transpired at the Board meetings . None of these defendants 13 14 15 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

16 Company at that time purchased an e-mail shredding software from Authentica Inc . for at least 17 $100,000 . This software constituted an online shredding system that scrambled e-mail messages 18 19 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,

20 copying or printing e-mail. To make e-mail messages "disappear," access to the key is 21 withdrawn after a given period of time . Senior Peregrine executives and Board members

22 (defendants Gardner, Glass, Spitzer, Powanda, Nelson, Moores, Noell, and van den Berg) used 23 the Authentica shredding software to send e-mails to one another knowing that their 24 communications would be difficult if not impossible to reconstruct . Although certain internal e25 mails survived this effort at destruction and are discussed herein, it was the intention of the

26 defendants to destroy as much of the paper trail of their conduct as possible . 27 28 53 . Defendants Moores and Noell also often communicated regarding Peregrin e business through use of handheld Blackberrys, which allow for remote, wireles s
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02-CV-0870 J(RBB) 31

#105317

1 I communications . It was widely known at the time that Blackberry communications were 2 essentially impossible to trace or reproduce . These defendants used their Blackberrys to

3i communicate regarding Peregrine because they knew of, and wanted to take advantage of, the 4 5 6 7 8 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

9 address infrastructure resource management, employee relationship management (or self10 service), and e-commerce technologies and services . Specifically, Peregrine's products and 11 services were intended to make its customers more competitive in their markets by reducing

12 1 costs associated with three primary business processes : (a) management of infrastructure assets , 13 14 15 16 17 18 19 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 reduce d 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

20 desk software system that assists businesses in managing their internal computer networks and 21 related assets . During fiscal year 1998, Peregrine decided to expand its product base to include

22 not only technology management software, but also physical asset management software an d 23 24 services .
56. Primarily through acquisitions, the Company expanded its product menu for asset

25 management, fleet management, facilities management, rail management and telecommunication 26 management. The most significant of its acquisitions included : (i) the June 2000 acquisition o f 27 Harbinger Corporation, which provided software enabling e-transaction management and other e28 business products and services ; (ii) the December 2000 acquisition of IBM's Tivoli Service Des k
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02-CV -0870 J ( RBB) 32

#105317

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, wer e

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
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS -

#105317

Master File No . 02-CV-0870 J(RBB) 33

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

1 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
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS #105317 Master File No . 02-CV-0870 J(RBB) 35

1 2 3 4 5 6 7 8 9 10 11 12 13 14

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

15 resided with Peregrine or with a channel partner . The "Alliance" sales force developed 16 17 18 19 20 21 relationships with channel partners and concentrated on selling into the channel . 77 . The Alliance sales group historically had been structured ar ound target indust ri es 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

22 I Operations prep ared the North Ameri ca forecast . The forecast was updated and refined through 23 conference calls, held bi-weekly , weekly and ultimately daily as the end of a qua rt er approached.

24 During these calls, the Area Vice Presidents reported deals that had been fi nalized and forecast 25 projected sales . They assigned rough probabilities to sale closure (e.g. "commitment," 26 "expectation," "upside " or "pipeline"). 27 1
79. On the working day following each Regional forec asting call, Peregri ne held a

28 1 worldwide conference call during which input was received from the Regional Vice President s
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS 36 Master File No . 02 -CV-0870 J( RBB)

#105317

on their sales forecasts. Sales Operations prepared a consolidated worldwide sales forecas t

2 which included a section called "On-Top." "On-Top" identified sales that typically were 3 4 5 6 7 8 9 10 11 12 13 negotiated by senior management ( including defendants Gardner and Gless ) and frequently materi alized into the forec ast near the end of the quarter . 80 . Defend ants 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 Powan da accompanied the quart er- 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),

14 together with defendants Nelson and Powanda, had adopted a business model for Peregrine 15 which emphasized growth through acquisitions and strategic alliances . In addition, these

16 defendants focused sales and marketing efforts on Fortune 500 companies and large transaction s 17 with those companies in order to generate 'substantial increases in reported revenue . Increases in 18 reported revenues were expected to and did fuel the increase in the share price of Peregrin e

19 common stock. 20 21
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

22 currency for these purchases or alliances . Du ring the Class Period , Peregrine completed more 23 than ten (10 ) acquisitions and three ( 3) additional strategic alliances for a stated value exceeding 24 $3 .4 billion. Appendix D hereto, which is incorporated herein by reference , identi fi es the 25 acquisitions and alliances entered into by Peregrine during the Class Period . Each of these 26 tran sactions was approved by Pereg rine's Board of Directors . 27 28

84 . GAAP prohibits recognition of any revenue from sales to channel partners unless
speci fi c criteria are met. Therefore, Peregri ne represented in its filings with the SEC both before
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02-CV-0870 J( RBB) 37

#105317

and during the Class Period that the Company recognized revenues from product license sales t o 2 I service providers or partners, system integrators or resellers only if the transaction met thes e 3 I criteria.
4 5 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

6 I recognition policy with respect to sales of license agreements : 7 8 9 Revenues from license agreements are recognized currently, provided that all of the following conditions are met : a noncancellable license agreement has been signed, the product has been delivered, there are no material uncertainties regarding customer acceptance, collection of the resulting receivable is deemed probable and risk of concession is deemed remote, and no other 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

10
11 12

13 Period . For example, the Form 10-K for fiscal year 2000 filed with the SEC on or about 14 May 10, 2000 included the following statement as to Peregrine's revenue recognition policy from 15 16 17 18 19 20 21 22 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 license agreements : Revenues from direct and indirect license agreements are recognized currently, provided that all of the following conditions are met : a noncancellable license agreement has been signed, the product has been delivered, there are no material uncertainties regarding customer acceptance, collection of the resulting receivable is deemed probable, risk of concession is deemed remote, and we have no other significant obligations associated with the transaction.

23 transactions which were not completed . The vast majority of Peregrine's reseller deals, on which 24 25 26 27 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

28 1 difficulty in closing these tran sactions increased . Purchase commitments from end users require d
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02-CV-0870 J(RBB) 38

#105317

1 2 3 4 5 6 7 8 9

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 .

1 0 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 12 1 agreements were necessary to induce resellers to enter into large software license agreements so 13 1 that Peregrine could report revenue consistent with prior public guidance given to securities 14 analysts and investors by Peregrine's senior management, including defendants Gardner and 15 16 Gless. 89. In these transactions, Peregrine knowingly recognized revenue from softwar e

17 licensing deals with resellers despite the fact that one or more conditions for proper recognition 18 of revenue under GAAP were never met, including the following : ( i) the fee owed to Pereg ri ne

19 was not fixed and determinable ; ( ii) collectability of the fee was not probable ; or (iii) the 20 1 resellers' obligation to pay for the product was contingent upon subsequent sale of the product to 21 22 23 24 an end user. In addition , Peregrine provided ce rt ain 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

25 practices by stating as follows: 26 During fiscal years 2002, 2001 and 2000, Peregrine recognized revenue when it "sold in" to a third party reseller, regardless of whether the reseller had a firm commitment from an end-user to purchase the software . In many cases, revenue was recognized despite the fact that the purchase commitments with resellers wer e
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02-CV-0870 J(RBB) 39

27 1
28 I

#105317

not fixed, but were subject to conditions and contingencies . As a result, revenue has been restated to reflect revenue only upon completion of the ultimate sale to an end-user customer. 91 . One confidential witness , a former senior officer of a Peregri ne reseller, described 4 5 6 7 8 9 10 11 12 13 14 15 Tier I resellers included : 16 17 18 19 20 21 22 23 24 25 92 . In addition, Peregrine improperly recognized revenue on "swap" transactions .
These were tr ansactions without any economic subst ance . They involved the contemporaneous

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 to work off the "burn" - namely, I learned that there were many other transactions similar to RTG [Rainier Technology Group, Inc .] wherein the prepayment commitments had to be "worked-off' over time by selling the software and that Peregrine had improperly recognized these transactions as revenue when they should have waited for the software to be sold through . Personally, as one of the stronger resellers pushing Peregrine software, I became a trusted insider, or "in the club" as it was referred to - that meant that they trusted me and told me things that they would not say to others. Other trusted insider/ resellers in Tier Il included : 1 . Intuition (out of Atlanta) 2. Predictive Systems (out of New York City) 3 . Column Business Systems 4. Evergreen 5 . TIG-Technical Integration Group (out of San Diego) 6. Denali

I . KPMG 2 . Accenture (which was an Arthur Andersen successor) 3 . IBM Global 4 . Siemens 5 . Perot System s All of the above Tier I and Tier II resellers were involved in "wink and nod" transactions - involving prepayments and "burn" - I was made privy to this information at a dinner [in February 2002] with myself, Joe Reichner and Gary Lenz Iformer Peregrine executives] . Peregrine would offer kickbacks to the'resellers sometimes things such as tickets and box seats to sporting events and more complex transactions that involved cash.

26 purchase and sale of product with customers which were designed solely to increase reporte d 27 revenue of Peregrine . 28 93 . A former Peregrine employee, who was a Director of the Alliance Group, state d
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02-CV-0870 J(RBB) 40

#105317

her understanding of swaps at Peregrine as follows : . . . Peregrine would say to the customer, if you commit to x dollar amount of purchases - we will commit a comparable amount in consulting services to you . I knew that these type of swap s happened regarding PricewaterhouseCoopers, KPMG and Seibel, the latter was a software swap . . . Predictive was another company that was involved in a product for guaranteed software services swap with Peregrine . 94 . On June 3, 2002, Peregrine filed with the SEC a Form 8-K in which it admitte d such revenue recognition irregularities : Revenue recognition irregularities, principally arising in the Company's indirect Li e,, reseller] channel sales and, to a lesser extent, arising in connection with commercial transactions involving contemporaneous product purchase activities and investments or acquisitions [i .e., swaps.] KPMG has advised that correcting these irregularities would have the effect generally of delaying to later periods, or nullifying revenue recognized from product sales. 95 . As detailed below, the individually named defendants caused and/or allowe d

4 5 6 7 8 9 10 11 12 13

14 k Peregrine to recognize revenue bas ed on such improper revenue transactions and Arthu r 15 Andersen and AWSC allowed such transactions to be recognized notwithstan ding knowledg e

16 that they violated GAAP and the Company 's own publicly stated revenue recognition policy. 17 18 19 20 21 22 Improper Revenue Recognitio n 96 . In early 1999, a meeting took place in the office of defendant Powanda, the the n 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

23 pre-commitments made by IBM in order to meet Peregrine's revenue goals . 24 25 26 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 :

27 28

I was involved directly in a conversation in early 1999 with Doug Powanda, who I reported to specific to I believe IBM Global Services which is one of the very first deals where channel stuffing was involved -- Powanda stated to me that Farley had told him that "we can begin to recognize pre-commitment sales in Q4, JanuaryFIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02-CV-0870 J(RBR) 41

4105317

. 0

2 3 4 5 6 7 8 9 10 11 12 13 14 15

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 on my prior experience with these matters, . . . Powanda just naively shrugged his shoulders . I also remember that both Farley and Gardner popped their heads into Powanda's office during this meeting and acknowledged that we [should] go ahead with the IBM commitment . It was from this point in early 1999 that Peregrine had made the wholesale decision to book pre-committed re-seller sales as revenue -- after they signed-off on the IBM deal that day in Powanda's office -- things really started to go downhill for Peregrine . Powanda was actually ready to fire Spitzer when he said that Spitzer will get the commitments and we will book them -- this was in the MarchApril 1999 time frame . 98 . Another former Director of the Alliance Group similarly recalled a meeting in lat e 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 revenu e 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 an d binding

1 6 commitment to pay reflected implementation by Comp any employees of the April 1999 Board17 approved revenue recognition policy. Pereg ri ne's Board explicitly sanctioned Pereg ri ne's 18 19 20 21 22 23 24 25 26 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

27 I negotiating many of the larger pre-commitments from resellers which were improperly booked a s 28 revenue . After the revenue had been booked, defendants Gardner and Gless became actively
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No. 02-CV-0870 J( RBB) 42

#105317

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 about the intent of the company to prematurely book pre-commitments as 6 revenue . Spitzer stated that "I am just following orders from Gardner and I am getting paid commissions on the pre7 commitments as they are booked -- and I won't take the fall -every quarter I vest my 28,000 option shares ." 8 I remember asking Spitzer where the deals were coming from that 9 made our quarters when we are getting a-mails constantly to the effect 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 these deals 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 . 12 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 to Europe - he was head of European sales and later worldwide sales, 18 then Europe again - Dominic O'Reilly and Jerry Crook wer e involved - Europe was heavily involved with the booking 19 prematurely of pre-commitments in 1999 and 2000. O'Reilly was Gardner's buddy from a previous life -- or company . 20 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 some
deal 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 .

26 I knew that there was something wrong with many of these last 27 minute deals because in my role I was getting partners ready to sell our products . . . and I was surprised because I knew specifically 28 that these partners were not ready to sell our product yet ; they
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS #105317 Master File No. 02-CV-0870 J(RBB) 43

weren' t ramping up to sell our product ; and in fact they were asking us for our help to sell our products for them . 105 . Another former employee, who was a Vice President, Supply Chain Group , 4 recalled the "magic" involved in Peregrine "making its numbers" as follows : . . . The Prokom situation was in June of 2001 and the end of the quarter . The company as a reseller agreed to purchase $5 million in software from Peregrine - and by way of Day's side letter did not have to pay for any software until they sold it - yet Peregrine booked the entire $5 million as revenue at the end of the quarter. I participated in weekly forecast meetings where accounts and the potential closing of sales were discussed for each quarter - there was never any discussion of Prokom as an account that had the potential to be closed as a sale - if any sale was closed or had a good possibility of closing prior to the quarter's end you would have known about it from our weekly meetings - Prokom was never even on the radar screen at our meetings . When we heard after the quarter's end about the Prokom sale, we were simply in awe and I asked Day "how did you do that -- how could you hit your forecast number when Prokom wasn't ever discussed in the forecast meetings? " In July or August 2001, Jerry Crook in a conversation told me about how Peregrine made the numbers for the prior quarter, -"Magic Quadrant Partners," he said -- "when you really need to count on them at the end of the quarter -- you can go to them and they come through ." 106 . Another former Peregrine employee, who was a Director of the ICW Group, als o

9 10 11 12 13 14 15 16 17 18

19 I recalled the " magic " involved : 20 21 22 23 24 25 26 27 28 107 . Attempts at collecting on these phony accounts receivable proved fruitless unles s
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS-Master File No . 02-CV-0870 J( RBB) 44

I was in a June 1999 staff meeting headed by Powanda with Spitzer and Crook discussing specifics as to how and in what accounts we were going to meet our sales numbers . . . Crook was goin g through every account regarding EMEA (Europe, Middle East and Africa) and saying we would make this here and when -- and then he referred to the Magic Quadrant Partners being able to make the next 40% of his sales target and that it was subject to working with Powanda - Crook was referring to the use of pre-commitments booked as revenue to help make earnings estimates . I remember e-mails each quart er close to the end of the quarter declaring that the quarter was in trouble -- and then lo and behold there were e-mails describing that we had met our quarter an d congratulating EMEA on its efforts in this regar d.

#105317

1 2

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

3 O-E Systems, Barnhill and Corporate Software . The total value of these unpaid pre4 commitments at that time was more than $10 million . When these resellers were contacted, they 5 expressed anger, telling Peregrine collectors that they were being billed net 30 days for the 6 balance of their unpaid "commitments" despite the fact that defendant Gardner and other 7 executives from Peregrine had told them, at the time that the pre-commitments were made, that 8 they did not have to pay for software until it was sold-through to the end user . 9 108 . A former Peregrine employee who was a Director of the ICW Group an d involve d

1 0 in the collection effort recalled that: 11 12 13 14 15 16 17 18 19 2. Quarters Were Improperly Kept Open To Meet Revenue And Earnings Targets 109 . Peregrine engaged in other improper accounting practices in order to maintain th e It was Spitzer who told me directly that the pre-commitments had been taken into revenue by the company. O-E Systems was one account ; Barnhill for $1 .25 million was another -- Peregrine put this company in a box by extracting an unattainable commitment from them and then acquired them when they failed to pay ; and Corporate Software was another -- there was a list of thes e accounts. When I started to call these partners they became very angry telling me that they were getting billed net 30 days for the balance of their unpaid commitments when they were told by Spitzer, Steve Gardner and others from Peregrine at the time of the commitments that they did not have to pay for software that they were unable to sell-though .

20 I appearance of revenue growth . This included holding the books open for the Company' s 21 I reporting qua rters past the end of the fiscal period , sometimes for as long as seven (7) days . This 22 23 24 25 26 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 transactions as revenue in a given period, although the sales order was not completed until after the end of the fiscal period . Revenue has been restated to record these transactions in the proper periods .

27 28
111 . A former member of the Alliance Group recalls the quarters being kept open a s
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS 45 Master File No . 02-CV-0870 J(RBB)

#105317

follows :
Starting in 1999, Spitzer would tell me each quarter that if I had any outstanding deals pending, that I had a few extra days after the month's end in the quarter to process them - other Alliance managers were told the same thing . Also, in 1999, it was routine at the end of a quarter to see John Moores, who had an office next door to our offices roam the halls of our building with Farley and Powanda . Moores and the others wanted to know how the quarter ended . 112 . A former Director of the Alliance Group stated that there were repeate d occurrences where, 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 I remember specifically at the end of the fiscal year 2001, March 2001 that Andy Cahill, a senior sales manager, wandered into Inside Sales - he knew and understood that we were still working on 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
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS 46 Master File No . 02-CV-0870 J(RBB)

"We were not at the number for the quarter by the end of the month and then mysteriously we would hear that we had made the quarter . Quarters were held open as a practice each and every quarter over my six and one-half year tenure with the company ranging from 25 days after the calender end of the quarter. It was an ongoing joke in the company and was referred to as being the 34th or 35 ' of the month . It got worse quarter by quarter after 2000 when th e prevailing attitude in the company was that we had to make our quarters 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 directives coming from Bill Moore, Doug Powanda and Maree Chung, that we were going to keep the quarter open for 3 days, 4 days and sometimes 7 days specifically referring to each quarter ending in March 2000, June 2000, September 2000 and December 2000 . The relayed intent was to bring in more sales so that the company could 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 was almost on a "wink-wink" basis . It was standard operating procedure . My earliest recollection was in 2001 . The quarter would stay open if we had not made our number or if we were close to making our number - I remember that quarters were left open from 2001 until when I left the company . . .

27
28

#105317

periods an d thereby artificially inflated the Company' s repo rted revenue in order to meet publicly

2 announced revenue goals set by Peregrine m anagement . This practice of keeping the quarters 3 open was widely known at Peregrine . Instructions to hold quarters open so as to allow the

4 Company to make revenue goals were given to employees in the sales department through verba l 5 6 7 8 9 10 11

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

12 of days which a company takes to collect on its accounts receivable . Defendants engaged in a 13 scheme to conceal the increasing difficulties in the collection of Peregrine's accounts receivable

14 by manipulating DSO . 15 117 . In order to reduce the Company's DSO figures and its reported accounts

1 6 receivable, defendant Gless, after consultation with defendant Gardner, instructed defendant 17 Cappel, Peregrine's Senior Treasury Manager, to remove receivables from the Company's 18 19 20 21 22 23 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

24
25

26 available accounts receivable but still had not reached its targeted DSO . Defendants Cappel and 27 28 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 o f
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02-CV-0870 J(RBB) 47

#105317 11

the contracts ultimately did not close, Peregrine was left with a shortfall of several millio n

2 1 dollars .
3 119 . In June 2001, Cappel told Gless that Peregrine would miss the targeted DS O

4 I number for the quarter . With Gless's approval, Cappel created a false invoice in the amount o f 5 $19 .58 million and sold it to a bank . Pereg rine 's cash flow was thereby overstated and it s

6 accounts receivable were understated on its books and records . 7 120 . Peregrine also distorted and falsified its DSO and balance sheet by improperly

8 I accounting for cash collected from its customers . Peregrine had an agreement with its lende r 9 banks that the Company would collect on receivables that it "sold" to the banks, and remi t 10 payment to the banks within a certain time period . Peregrine had a practice of reducing its 11 accounts receivable when it "sold" the accounts to a bank while still retaining the monies fro m

12 the collections on these accounts until such time as it had to pay them to its banks . When the 13 money was collected by Peregrine from the customers whose receivables had been "sold" to

14 banks, Cappel would again reduce the Company's accounts receivable, thus resulting in what 15 16 Cappel called a "double dip." 121 . Peregrine also failed to include its liability to the bank for these "sales" on its

17 accounts payable and it would record the cash received for the benefit of the banks as its ow n 18 instead of holding it in trust as required . Peregrine would then remit the payments to the banks in

19 the next quarter and reverse the "double dip" entries . These "double dips" occurred almost every 20 quarter during the Class Period beginning in September 1999 . The double dips resulted in 21 artificially reduced accounts receivable as well as an artificial increase in Peregrine's reporte d

22 cash. 23 I 24 25 122 . 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

26 payments on receivables in trust and to remit them within two weeks . Instead, Peregrine di d 27 neither. As a result, its accounts receivable for the quarter were understated by $13 .8 million as

28 1 was its liability to the bank .

FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02-CV-0870 J(RBB) 48

#105317

123 . Peregrine's transactions with its banks as alleged above did not constitute a "sale "

2 I of the receivables . Rather, these transactions were nothing more than borrowings from th e 3 . banks. Throughout the Class Period, Peregrine routinely borrowed money from financia l 4 I institutions and treated the funds received as proceeds from the sale of assets as opposed t o

5 borrowings as required by GAAP . The amount of the undisclosed liabilities reached up to $180 6 million during the Class Period and exceeded $ 100 million by the end of the Class Period . The 7 1 effect of this accounting irregularity was to significantly understate Peregrine ' s liabilities .
8 124 . In its restatement, Peregrine admitted that "these factoring arrangements shoul d

9 have been recorded as loans instead of sales of receivables ." Accordingly, Peregrine restated its 10 balance sheet to reflect the accounts receivable and related bank loans . As of March 31, 200 0 11 12 13 14 15 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 . Peregri ne also violated GAAP by including the write off of receivables in the expense catego ry of "Acquisition costs and other," an d in other accounts . For example,

16 Peregrine did so with respect to a $3 million receivable of Barnhill as of March 31, 2000 . In a 17 June 6, 2002 letter to the SEC, KPMG stated that they had advised Pereg rine "and its audi t 1 8 committee that the classification of the write offs of accounts receivable or revenue reversal s 19 1 recorded as an "`Acquisition costs and other ' expense in [Peregrine ' s] statement of operations 20 was not in accord ance with generally accepted accounting principles ." 21 126 . As admi tt ed by Peregrine in its restatement , "[m]any accounts receivable bal an ces

22 arising from improperly recorded revenue transactions . . . were inappropriately charged to ba d 23 debt expense, cost of acquisitions or accrued liabilities . The restated results reflect thos e

24 transactions as reductions in previously reported revenue ." 25 26 27 28 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
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02-CV-0870 J(RBB) 49

#105317

0
1 I option accounting . In its restatement, Peregrine states : 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17

Based on Peregrine's past practice, many employee stock options contained exercise prices that were below the common stock market values on the dates the options were granted . Under APB Opinion No . 25, the Company should have recorded compensation cost equal to the aggregate difference between the fair value of the stock and the exercise price of the options granted . The Company also accelerated the vesting periods for certain options which had previously been granted to employees . Under FASB Interpretation No . 44, "Accounting for Certain Transactions Involving Stock Compensation, an Interpretation of APB Opinion No . 25" ("FIN 44"), 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 the appropriate accounting for stock options . 6. Failure To Implement And Maintain Adequate Internal Accounting Controls 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 an d that the fin ancial 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

18 on the principle that accurate record-keeping is an essential ingredient in promoting management 1 9 responsibility and is an affirmative requirement for publicly held American corporations to 20 strengthen the accuracy of corporate books and records . The representations made by a company 21 in its financial statements and in other financial disclosures to the public are the representations

22 of that company's management . 23 130 . Pursuant to the FCPA, every issuer having a class of securities registered pursu ant

24 to 12 of the Exchan ge Act, 15 U.S.C. 781, shall : 25 (a) Make and keep books, records, and accounts which, in reasonable detail ,

26 accurately and fairly reflect the tran sactions and dispositions of the assets of the issuer; an d 27

(b) Devise and maintain a system of internal accounting controls sufficient t o

28 1 provide reasonable assurances that :

FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02-CV-0870 J(RBB) 50

#105317

(1) transactions are executed in accordance with management's general o r

2 specific authorization ;
3 (2) tran sactions are recorded as necessa ry ( i) to permit preparation of

4 financial statements in conformity with GAAP or any other criteria applicable to such statements, 5 I and (ii) to maintain accountability for assets ; 6 7 8 (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

9 assets at reasonable intervals and appropriate action is taken with respect to any differences .

10
11

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

12 disposition of assets, (ii) protect the integrity of the independent audit of issuer financial 13 statements that are required under the Exchange Act, and (iii) promote the reliability and

14 completeness of financial information that issuers are required to file with the Commission or 15 16 17 18 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

19 controls . Contrary to the requirements of the FCPA, GAAP and SEC rules, the individually 20 21 named defendants (other than defendant Rodda) failed to implement and maintain adequate internal accounting and financial controls and defendants Arthur Andersen and AWSC had

22 knowledge of such deficiencies . The indicia of the lack of internal accounting controls at 23 24 25 26 27 28 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
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02-CV-0870 J(RBB) 51

Peregrine included the following : (a) the use of oral and written "side agreements" allowing for nonpayment b y

#105317


1 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
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS 4105317 Master File No . 02-CV-0870 J(RBB) 52

1 2 3 4 5

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

6 Peregrine Board, specifically defendants Moores, Noell, Cole, van den Berg, Hosley, Savoy, and 7 Dammeyer, who had extensive experience in the industry . There were numerous high profile 8 examples of accounting fraud in the software industry throughout the 1990s involving improper 9 revenue recognition which were known to the Peregrine Board members, including Informix , 10 I Network Associates, and McKesson HBOC . 11 12 136 . 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

13 to December 1998), the Company recorded only $4 .8 million in total channel sales, representing

1 4 less than 10% of license revenues for the period . A change in the Company policy regarding
15 channel sales approved by the Board ushered in the era of fraud at Peregrine . 16 17 1. October 1998 Report To Board Of Director s

137 . Channel sales took on new significance with defendant Gardner's elevation to the

18 positions of President and Chief Executive Officer . In preparation for the Board's quarterly 1 9 meeting in October 1998, Gardner prepared a report to all Company directors concerning the 20 state of the Company . Entitled "Review and Outlook," these reports were distributed each 21 22 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,

23 Nelson, Noell, Cole, Hosley, and van den Berg received and reviewed Gardner's October 1998 24 "Review and Outlook" report at the time it was disseminated prior to the October 1998 Boar d 25 26 meeting . 138 . In his quarterly report dated October 1998, Gardner advised the Board members

27 that with respect to channel sales there had been "lots of smoke, little fire," and revenue fro m 28
channel sales was "absent ." Gardner advised Board members that "We are going to move
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02-CV-0870 J(RBB) 53

#105317

1 'I Channels under Worldwide Sales and Marketing, focus on 3 relationships and make it happen . 2 I This change will be made in the next few weeks . . ." 3 4 2. April 1999 Report To Board Of Directors

139 . By the fourth quarter of fiscal year 1999, ending March 31, 1999, the Company

5 was in the midst of the new channel strategy . Channel sales rose to $6 .7 million, representin g 6 22% of all license revenues that quarter, more than double prior quarters . 7 140 . 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 an d Spa in La Costa , California for its annual Sales Kick-Off. At the meeting , channel sales were a featured topic . In a presentation

8
9

10 at this event, defendant Powanda spoke concerning "Integrating our Channel Partners ." In a 9011 minute presentation that same day, defendant Spitzer, Vice President, Alliances, spoke on the

12 topic, "Using the Channel in FY 00 - Key to Closing Business ." 13 141 . In conjunction with the Sales Kick-Off meeting, the Board of Directors met at L a

1 4 Costa on the afternoon of April 22, 1999. The meeting was conducted to review both quarterly

15 1 results and results for the recently-completed fiscal year, including an "outlook and budget" for
16 1 fiscal year 2000 and executive compensation issues . In addition, given the proximity of the Sales
17 Kick-Off meeting, defendant Gardner encouraged the directors to take advantage of the 18 opportunity it afforded and "to attend as much of the kick-off as you like ." Attendees at this

19 Board meeting included defendants Gardner, Moores, Nelson, Noel], Cole, Hosley, van den Berg , 20 and Watrous . 21 22 23 142 . 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

24 this report at the time it was disseminated to the Board members in April 1999 . The report 25 26 contained a section headed "Continued Strong US performance , particularly in Channels ." It stated that, This was the first quarter that channels contributed meaningfully to revenue . Steve Spitzer's team came through in a big way .

27 28

#105317

FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02-CV-0870 J(RBB) 54

2 Given the favorable valuation of the company, it is time to proceed with a follow-on offering to raise additional cash for acquisition 3 purposes . We would propose a follow-on offering which would net $70 to $100 million in cash for the company in the May 1999 4 time period . The total offering size would depend upon the appetite 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 sellFIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS#105317 Master File No . 02-CV-0870 J(RBB) 55

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 5 ended three weeks earlier . He warned that, without adopting the new approach, the Company

6 would fail to meet stock market expectations . Farley had insisted that the Board be made aware 7 of this proposed change in accounting treatment of channel sales and signify its consent, which 8 the Board did at this meeting . Defendants Gardner, Moores, Nelson, Noell, Cole, Hosley, van

9 den Berg, and Watrous specifically approved of the use of this new more aggressive accounting
10 : method at the April 1999 Board meeting . 11 12 13 145 . 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

14 year 1999, 22% of license revenue derived from channel sales and it was clear from Gardner's 15 report to the Board that channel sales would represent an increasing percentage of licens e

16 revenue . 17 146 . Farley stated at the April 1999 Board meeting that adopting the sell-in metho d

18 I would not be a panacea for problems the Company was experiencing . For example, by applying 19 the more aggressive sell-in method for the prior qua rter , the Comp any would meet revenue 20 expectations only by cu tting into revenue for the coming first qua rt er of fiscal year 2000 ending 21 June 30 , 1999 . It was in essence borrowing revenue from the future . This confirmed to Board

22 members that there was an underlying an d continuing weakness in Pereg ri ne ' s overall sales 23 24 25

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

26 announcement, and applying the undisclosed sell-in accounting treatment, the Company posted 27 28 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
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02-CV-0870 J( RBB) 56

#105317

1 2 3 4 5

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

7 Rodda) were aware of the deepening problems with Peregrine's channel activities, as reflected in
8 defendant Gardner's report for the Board's October 19, 1999 meeting . Defendants Moores, 9 Nelson, Noell, Cole, Hosley, van den Berg, and Watrous received and reviewed Gardner's 10 11 12 13 14 ' 15 16 1 17 18 19 20 21 22 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 of 1997 . A decent performance from the West, a strong quarter (but still small) from Asia/Pacific Latin America and a very strong channel performance allowed us to compensate for these major deficiencies . We have now reached a level of channel activity that is concerning as we look to the future . We have a large amount of inventory in the channel that must be sold through, and this must be done as we simultaneously continue to grow our 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)

23 in the September quarter." This reflected a 29% drop in productivity . Gardner advised the
24 25 26 27 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

28 this fact in connection with the October 1999 Board meeting .

#105317
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No. 02-CV-0870 J(RBB) 57

1 2 3

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

4 for the creation of an e-business website, InfraPlace .com, as a separate company to be run by 5 defendants Gardner and Powanda, together with Farley . In answering the question he posed in

6 this report, "So, are all the rats moving on?," he acknowledged that current management was no t 7 the right "operating management team" to take the Company to $1 billion in revenue . Gardner 8 stated that Peregrine had "12 to 18 months to get the right team in place before we have a crisi s

9 I point . . ." Attendees at this meeting included defendants Gardner, Moores, Nelson, Cole, Noell , 10 I Hosley, van den Berg, and Watrous. 11 12 13 14 15 16 152 . On October 20, 1999, the Company announced results for the second quarter o f 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

17 1 months . 18 19 20 21 22 23 24 153 . 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 qua rter. With a quart erly 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 ,

25 Nelson, Noell, Cole, Hosley, Watrous, and van den Berg, which they each received and 26 27 28
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
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02-CV-0870 J(RBB) 58

#105317

2 3 4 5 6 7 8 9 10 11 12 13 14 15

lines from Dickens['] Tale of Two Cities summarizes it best : "It was the best of times, it was the worst of times . It was a time of wisdom. It was a time of foolishness." ** * Why was it the worst of times ? We have a $2 million professional services revenue shortfall compared to plan with little or no warning . Half of the reason for this was Y2K, the remainder was the shift toward selling through alliances, which had not been adequately factored into the plan . . . . Our bread and bu tter business went to hell. The deals between $ 75K and $ 500K just were missing in action . Some of this may also be Y2K effect, most of it was undoubtably due to the huge sales force re-engineering we have undertaken . In other words, we did this to ourselves .. . I suspect we have one more quarter, and perhaps two, of hand-holding and close upper management involvement in sales . Sales force productivity is at a ridiculously low level . The US is substantially under $1 million per person and EMEA is right around $1 million/person , while we need both to be closer to $1 .5 million per person . Big deals and excellent individual performances were required to cover the shortfall, when they should have been the icing on the cake. . . . The US was even worse . We had a bad forecast to begin with, a gradual improvement in the middle part of the quarter, and then a $4 million melt-down in the last week of the quarter. Only the KPMG deal with Sodexho/Marriott and Gold mine saved the US performance .

16 17 18 19

Why was it a time of foolishness ? 20 21 22 . . . I have come to the conclusion that we are at the awkward teenage stage of our existence . We are much bigger than we were but not big enough to be taken seriously . . .

23
24 25 26 27

28

Our channel business is now a cause for concern . We are victims of both our own success and a changing accounting and regulatory landscape . We have been much more successful generating sales to channels and getting partners to buy into our message and vision . We have not been as successful , and in some cases unsuccessful, in getting the sell -through that would remove the inventory of software from the channels . Rather than a 3 to 6 month latency, the inventory is moving in closer to 9 months as partners ramp up . Due to several highly publicized incidents at other companies (Informix ,
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02-CV-0870 J(RBB) 59

#105317

1 Network Associates , HBOC), the rules are tightenin g

and practices are being re-examined . The net of this is 2 that we are now at a level of channel inventory that makes 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
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS #105317 Master File No . 02-CV-0870 J(RBB) 60

discussions involving executives of both companies took place in January 2000 and Februar y

2 2000, with updates to key Board members, including defendants Moores and Noell . The 3 transaction was finalized and documented in March 2000 and publicly announced April 5, 2000 .

4 Costing more than $1 .5 billion, Harbinger was the largest acquisition in the Company's history . 5 Given its sheer size, and the strategic departure it represented, the acquisition was reviewed an d

6 I analyzed by the individually named defendants (other than defendants Savoy, Dammeyer an d 7 Rodda) well before its public announcement . 8

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

9
11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27

10 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) an d at least 23 calls to Goldm an 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

28 1 to a Form S-4 filed with the SEC for the merger, defendant Gardner met again with Deutsch e
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02-CV-0870 J ( RBB) 61

#105317

Bank Alex . Brown in January 2000, when he authorized contact with Harbinger . Thereafter, o n

2 I February 8, 2000, he talked by phone with the Harbinger Chief Executive Officer and its Genera l 3 I Counsel concerning "the benefits of a strategic relationship between the companies ." 4 5 164 . 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 wer e

6 I made to the Deutsche Bank banker, including by defendant Gardner . 7 8 165 . Between February 15 and 18, 2000, defendants Moores, Cole, Gless, Luddy, an d Powanda sold 4 .3 million shares of Company stock for over $194 million, with Moores

9 `accounting for over $177 million in just two days of trading . At the time, Peregrine stock trade d 1 0 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

12 1 revenues over the prior three quarters .

13 14 15 166 . 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

16 broker retained by defendant Moores was employed, and another three calls were placed from the 17 18 19 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 ,

20 the investment firm of defendants Moores and Noel] . 21 167 . Given the ramifications of the Harbinger acquisition , defendants Moores and

22 1 Noell kept ab reast of the discussions . On February 22, 2000, defendant Gardner and Farle y 23 traveled to Houston for what expense records refer to as a "JMI Meeting," where they wer e

24 joined by defendant Luddy, the Company's chief technology officer . 25 168 . Prior to departing for the JMI meeting early on February 22, Farley made two call s

26 each to Deutsche Bank Alex . Brown and to Goldman Sachs, all shortly before or just after the 27 commencement of stock market trading that day . Upon arriving in Houston later that morning , 28

he again made calls to Deutsche Bank Alex . Brown and Goldman Sachs . In addition, he
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS M as ter File No. 02-CV-0870 J(RBB) 62

#105317

accessed the browser function on his cell phone some sixteen times before the close of the

2 1 markets that day, on average once every fifteen minutes .

3 169. The day after the JMI meeting, February 23, 2000, Farley again placed calls to

4 Deutsche Bank Alex . Brown and Goldman Sachs at or near the time that the markets opened . He 5 also continued monitoring his browser, initiating some 28 sessions in only two hours, or onc e

6 every six minutes, before departing Houston . 7 8 170. 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

9 defendant Noell as well . By the end of the day, defendant Gardner and Farley booked airline 10 tickets to San Francisco, where on February 29, they traveled with defendant Nelson for a dinne r 11 12 13 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

14 monitoring of his browser while in Houston, his repeated phone calls to Deutsche Bank Alex . 15 Brown and Goldman Sachs, and the presence of the Company's chief technology officer in

16 Houston, these facts demonstrate that the "JMI meeting" was an update on both the Harbinger 17 acquisition and the ongoing insider stock sales . 18 172 . Upon agreement from defendants Moores and Noell, the discussions with

19 Harbinger moved forward, with defendants Gardner and Nelson, and Farley meeting the 20 Harbinger CEO, chief financial officer, and general counsel in San Francisco for a dinner on 21 February 29, 2000 . According to the Form S-4, after a discussion of their respective businesses,

22 the San Francisco meeting focused on strategic alternatives for the companies, including "a 23 24 25 26 27 28 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
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02-CV-0870 J(RBB) 63

#105317

1 I own position, he noted : "I forget (conveniently, in all likelihood) what I thought at the time . " 2 3 174 . 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 '

4 I stockholdings in Peregri ne had been reduced by over $177 million , before the material risk s 5 I accompanying the Harbinger acquisition became publicly known . 6 175 . When announced, the Harbinger acquisition caused the Company's stock to fal l

7 from $58 to $36 .75 in a single day of trading on then-record volume of 23 million shares . The 8 downward spiral in the stock price continued over the next several weeks, until it went under $1 8 9 per share in late May 2000 . 10 11 176 . 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

1 2 the Company's stock for each share of Harbinger stock . 13 177 . During the period February 15-19, 2000, defendants Moores, Cole, Gless, Luddy,

14 and Powanda, knowing material nonpublic adverse information concerning the Harbinger deal , 15 sold more than 6 million shares of Company common stock, obtaining proceeds exceeding $19 3

16 million. 17 18 6. Jul 2000 Report To The Board Of Directors 178 . In his quarterly report for the summer 2000 Board meeting, provided to and read

1 9 by defendants Moores, Nelson, Noell, Cole, van den Berg, Watrous, and Savoy in advance of the

20 I July 18, 2000 Board meeting, defendant Gardner gave the Board a very negative depiction o f
21 22 23 24 25 26 27
The second half of the quarter was consumed with closing business . This is what we always do for in the second half of a quarter, but this time, though, it was very hard . Our forecasts out of North America evaporated in the final 10 days . We knew we had a weak forecast in EMEA from the starting day of the quarter , and we have to scramble at the end to get some key deals done . The Harbinger operation (now our e-Business Connectivity Group) also saw a real fall-out of forecasted busines s

events at Peregrine : Well, we made it through the first quarter . That is probably the best summary I can give . It was a very tough quarter . . . . It was not easy and we did not accomplish everything we should have accomplished.

28 I

#105317

FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS 64 Mas ter File No. 02-CV-0870 J( RBB)

in the closing days of the quarter . The bottom line is that what on June 20 " looked like a quarter that would allow us to carry $10 to 12 million of backlog into Q2 while beating EP S expectations by a penny , turned into a quarter that closed with effectively no backlog and with EPS on target and the ability to scrape into a penny over with tightened expenses . 4 5 6 7 8 9 10 We will show approximately $94 million in top line revenue and $0.10 EPS against a $0 .09 expectation ; however, we go into the always - 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 year low. The "bread-and-butter" deals in the $100K to $500K range basically dropped off the radar screen .
Sales management weakness in France, Germany, Asia/Pacific/Latin America, and parts of the US became apparent .

12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

Regarding the "Outlook for Q2," Gardner informed the Board members of the following : Budget numbers call for $145 million in total revenue . . . . Given the recent shortfall in forecasts and our growing concerns about the productivity of our sales teams, this number may be very difficult 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 of these large deals and we do not have another fall-out of the "breadand-butter" business forecast, we will fill the gap and make the numbers. We even have the potential to carry a backlog into the December quarter, but it would be somewhat miraculous . . . .

In short, it is going to be a tough quarter again, and without a backlog cushion to absorb any shortfall or potential inability to pull in 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 uncert ainties:
We came out of the quarter with about $70 million in cash. However, we have some large payments due for acquisition-related charges, build-out of the San Diego campus, and other items that will drain cash this quarter . Our current projection is that we will end the quarter with $35 million . This is not enough .

We would like to raise a minimum of $50 million and up to $25 0

FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02-CV- 0870 J ( RBB) 65

4105317

1 2 3

to $300 million if market conditions permit . However, given the uncertainty surrounding the September quarter outlook, it is hard to proceed with any type of public offering . (Emphasis added) . 180 . On July 20, 2000, the Company announced its financial results for the first quarte r

4 of fiscal year 2001, ending June 30, 2000 . According to the announcement, Peregrine had 5 revenues of $94 .3 million for the quarter, an 83% increase over the previous year's comparable 6 7 8 9 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)

10 that it was running out of cash and could not complete a public offering because there was 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 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 [S]ales productivity its far from where we want it ... The average rep and the average deal is missing in action. 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, but in the end we pulled it off . .. [w]e also had to borrow from the future to make the present happen . In other words, we had to grant some extraordina ry terms on a few deals in the closing hours of the quarter to move business into the September time period . This will clearly impact December and March, but I think the damage will be manageable.

27 $150 to $250 million in the market as a Rule 144 offering . One reason for his suggestion was

28 1 that by doing this type of private offering "[w]e also avoid the overhead and delay of an SEC
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02-CV-0870 J( RBB) 66

#105317

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17

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 an t Noell , defendan t Gardner announced that the "line of credit is how we live between [the] first two weeks an d last two weeks" of each qua rt er , 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, Peregri ne had revenues of $142. 7 million for the qua rter, a 147% increase over the previous year' s comparable period . Neither the announcement nor related SEC filings disclosed mate ri al nonpublic adverse information , including : (i) that results for the Company's mid-size tr an saction market remained ex tremely unsatisfacto ry, ( ii) that it relied on "huge deals ," which were contingent, with alli an ce partners to meet its forecasts , ( iii) that the productivity of its sales force continued to dete riorate, ( iv) that it had to gr ant "extraordinary terms" to get key de al s done, (v)

18 1 that the Comp an y had to "borrow from the future to make the quarter," and (vi) that there w as a 19 1 desperate need for c as h. 20 21 8. January 2001 Report To-The Board Of Directors

185 . The foregoing materi al problems persisted in the ensuing quarter. In his report to

22 the Board for the third quarter of fiscal year 2001 ending December 31, 2000, which was 23 24 25
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

26 America was a disaster," with only slightly more than $13 million of business on a plan of over 27 28
$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 .
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02-CV-0870 J(RBB) 67

#105317

0
1 2 3

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

4 quarter of fiscal year 2001 ending December 31, 2000 . According to the announcement, it had 5 revenues of $156 .6 million for the quarter, a 132% increase over the previous year's comparable

6 period. Neither the announcement nor related SEC filings disclosed material nonpublic adverse 7 information, including : (i) that the Company's direct business in North America was a "disaster, "

8 (ii) that the continued "heavy reliance" on alliance and channel partner contingent deals made its 9 CEO "cautious" concerning the future, and (iii) that the productivity of the sale force wa s

10 I unsatisfactory and materially below plan . In addition, the Company completed a desperatel y I1 needed $270 million private convertible securities offering in the quarter . Public disclosure of

1 2 the material adverse facts reported to the Board members in the January 15, 2001 report woul d 13 14 15 ; 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

16 1 the fourth quarter of fiscal year 2001 ending March 31, 2001, and the outlook for fiscal yea r 17 1 2002 . This report was received and read by defendants Gless, Moores, Nelson, Noell, Cole , 18 Savoy, and Watrous prior to the quarterly Board meeting . In his report, defendant Gardner stated

19 that "the difficulty of the quarter leads us to be more cautious about the next couple of quarter s 20 than we have been previously ..." Gardner referred to the "massive expansion of our relationshi p 21 1 with IBM" as the highlight of the quarter. However, he observed that very large deals with Fleet 22 23 24 25 26 27 28 Boston, Morg an 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
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No. 02-CV-0870 J(RBB) 68

#105317

defendants Gless, Moores, Nelson, Noell, Cole, Savoy, Watrous, and Dammeyer prior to the Jul y 2 118, 2001 Board meeting . Among the items discussed by Gardner in this report were renewal o f concerns regarding available cash :

6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

Cash will decrease to approximately $240 million due to investments made during the quarter in Remedy stock (when we were contemplating a hostile bid) and other investments made in private equity placements in strategic partners . . . There was also a cash outflow in the quarter to fund severance and restructuring costs associated with the lay-off 290 people we undertook at the beginning of the quarter . We are becoming very tight with further cash expenditures as we get ready for the closure of the Remedy deal . We anticipate after closure and payment of the cash portion of that deal that we will have $ 150 to $170 million in cash for operations . If we see a favorable market window during the coming 180 days post -dosing of Remedy , we will probably want to go out with a common equity offering, fully marketed , 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 qua rter "difficult," an d advised that " Europe did weaken dramatically in the final weeks of the quarter .. ." Further, [The] "Infrastructure Management Group (IMG) team struggled in the quarter as the economic downturn really impacted both new name sales and reduced average deal sizes ." "We now know that Europe is weakening, which we had not assumed last quarter, and that this weakness is flying into a seasonally weak period in Europe anyway. We are seeing signs of a mild recovery or at least stability in the US, but that is very fragile. We also have less backlog to work with going into September than we did in June, but a very large pipeline. I believe the quarter is quite achievable, but as always, there is plenty of risk and uncertainty that we will need to manage through . Our close rate on end-user deals with direct sales will have to improve .. . My larger concern is December, in which we had guided to a fair amount of sequential growth assuming that we would see normal year-end buying patterns and 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 ,

25 attended by defendants Gless, Nelson, Noell, Cole, Savoy, Watrous, and Dammeyer, these 26 defendants were advised that the Company had received an inquiry from the SEC regarding 27 1 transactions with Critical Path, a software company based in San Francisco that principally 28 1 focused on Internet communications . They learned that a national business magazine, Business
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02 - CV-0870 J ( RBB) 69

9105317

Week, had contacted the Company in connection with an upcoming article concerning Critical

2 Path, raising the possibility that Peregrine would be linked publicly with the ongoing federal 3
investigation . In response, defendants directed preparation of a press release to be issued, if

4 necessary, denying any wrongdoing by the Company . Shortly after this meeting, defendant 5 6 7 8 9 10 11 12 13 14 15 16 17 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

18 had given to the investment community during a conference call on October 4, 2001 was already 19 in jeopardy of being inaccurate : "[a]s of right now, forecasts from our sales teams at the

20 "commit" level are skittish and a bit below the level we need for even the lowered guidance fo r 21 22 23 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

24 $30 million savings will permit us to make our EPS guidance against the lower revenu e 25 11 guidance ." 26 193 . Once again, Gardner directed Board members' attention to the problematic cash

27 situation : 28 We have about $140 million in cash and we have nearly completed
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02-CV -0870 J( RBB) 70

#105317

1 a $150 million LOC . We can run the company at these levels but it is a bit tight. We plan on filing a shelf registration shortly, not t o 2 sell stock at current levels, but to have the ability to do so should market 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 yet in and it will take a couple of weeks to get all the detaile d 19 information about expenses , balance sheet items, and breakdown 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 $180 million in revenue . For the first time as a public company w e

22 will post a loss in operating results per share . We estimate that loss 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. 24
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 $50 million strong in license sales, we found a lot that was not 27 qualified or forecastable .

28
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS##105317 Master File No . 02-CV-0870 J(RBB) 71

2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

It will take awhile to work through the issues, and while we made good progress in getting rid of some of the dead wood this past quarter, we still need to pay a lot of attention to EMEA over the quarters to come . . .. I do not really expect EMEA to be 100% healthy until the December quarter of 2002 .

We had a very weak US qua rt er in our sales to Managed Service Providers (EDS, IBM , Unisys , Fujitsu , Compaq) as their business slowed and they delayed orders , chosing (sic) instead to fully deploy 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 quality issues discovered in test , the product did not go into general availability status until December 19`h, so impact on the quarter 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 email 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 ]
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS -Master File No . 02-CV-0870 J(RBB) 72

#105317

1 2 3 4 5

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 :

6 "[w]e are looking at taking non-strategic assets and either (a) encapsulating them into stand-alone 7 operations with separate management and clear cash flow and profit targets, (b) selling them, or 8 (c) shutting them down. I think it is fair to say that most of the assets in this category come from 9 the Harbinger acquisition and the CRM side of the Remedy acquisition ." 10 199 . 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 12 fiscal year 2002 ended December 31, 2001 . While admitting being "disappointed in the results," 13 the press release attributed the problems solely to "global economic weakness, particularly in 14 Europe." The press release quoted Gardner as stating, "We are committed to returning to 15 operating profitability, and we are continuing to take appropriate steps to improve our revenue

16 performance and contain our expenses ." The press release omitted any mention of the crisis 1 7 internally at Peregrine, including violations of covenants on the Company's line of credit and 18 consideration of significant restructuring of the company's business and widespread violation of 19 GAAP arising from improper revenue recognition . 20 21 200. On February 19, 2002, Peregri ne announced that its Board had adopted a Stockholder Rights Plan under which Peregrine would issue a dividend of one right for each

22 share of its common stock held by stockholders of record as of the close of business o n 23 24 25 26 27 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

28 I received and reviewed Gardner's report to the Board dated February 23, 2002 at the time it wa s
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02-CV- 0870 J (RBB) 73

4105317

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 tran saction. 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 :
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS #105317 Master File No . 02-CV-0870 J(RBB) 74

1 I am now changing my recommendation to strongly support thi s

offer based upon four factors : (1) my much more pessimisti c 2 outlook for the timing of a positive upturn in our revenues leading me 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 With Regard 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 a ffi 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 .
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS #105317 Master File No. 02-CV-0870 ](RBB) 75

209 . Peregrine publicly represented that the purpose of its Audit Committee was "t o 2 3 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

4 I improvements in accounting procedures [and] to nominate independent accountants ." 5 210 . By April 2000, Peregrine's Board of Directors had adopted a written Charter t o

6 govern its Audit Committee . Under the heading "Responsibilities," the Audit Committee wa s 7 charged with the following : 8 9 10 2. Reviewing the independent auditors' proposed audit scope and approach ; Reviewing and providing guidance with respect to the external audit and the Company's relationship with its external auditors by (i) selecting, and evaluating the performance of the independent auditors ; (ii) reviewing the independent auditors' fee arrangements, proposed audit scope and approach ; (iii) obtaining a statement from the independent auditors regarding relationships and services with the Company which may impact independence and presenting this statement to the board, and to the extent there are relationships, monitoring and investigating them ; (iv) reviewing the independent auditors' peer review conducted every three years ; and (v) discussing with the Company's independent auditors the financial statements and audit findings, including any significant adjustments, management judgments and accounting estimates, significant new accounting policies and disagreements with management and any other matters described in SAS No . 61, as may be modified or supplemented ;
4. Conducting a post-audit review of the financial statements and audit findings, including any significant suggestions for improvements provided to management by the independent auditors ;

Reviewing on a continuing basis the adequacy of the Company' s system of internal controls ;

12
13 14 15 16 17 18 19 20 21 22 23 24

25
26 27 28

Reviewing before release, and recommending to the Board of Directors for inclusion in the Company's annual report on Form 10-K, the audited financial statements and management's Discussion and Analysis of Financial Condition and Results of Operations ;
6. Ensuring that the Company's independent auditors review the Company's interim financial statements included in quarterly reports on Form 10-Q, using professional standards and procedures for conducting such reviews ;

#105317

FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02-CV -0870 J ( RBB) 76

7. Reviewing before release the unaudited qua rt erly operating results in the Company's quarterly earnings release; 8. Overseeing compli an ce with the requirements of the Securities and Exchange Commission for disclosure of auditor' s services and audit commi tt ee members and activities; 5 6 7 8 9 10 11 9. Reviewing management's monitoring of compliance with the Company's standards of business conduct and with the Foreign Corrupt Practices Act ; 10. Reviewing, in conjunction with counsel, any legal matters that could have a significant impact on the Company's financial statements; 11 . Providing oversight and review of the Company's asset management policies, including an annual review of the Company's investment policies and performance for cash and short-term investments ;
12. Reviewing the Company's compliance with employee benefit plans ; 13 . Overseeing and reviewing the Company's policies regarding information technology and management information systems ;

12
13 14 15 16 17 18 19 20 21 22 23

14. If necessary, instituting special investigations and, if appropriate, hiring special counsel or experts to assist ; 15. Reviewing related party transactions for potential conflicts of interest ; 16. Reviewing its own structure, processes and membership requirements ; 17. Providing a report in the Company's proxy statement in accordance with the requirements of Item 306 of Regulation S-K and Item 7(e) (3) of Schedule 14A ; and
18. Performing other oversight functions as requested by the full Board of Directors .

211 . The Charter also provided that the Audit Committee was required to meet at leas t

24 three (3) times a year and maintain written minutes of its meetings . 25
212 . No minutes of any Audit Committee meetings exist . The reason is that the

26 Company, through defendants Gless and Nelson, one or both of whom regularly attended these 27 meetings, did not want a record of the matters discussed at Audit Committee meetings, and the 28
members of the Audit Committee were complicit in this failure to follow Company policy b y
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02-CV-0870 J(RBB) 77

#105317

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 Committe e
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 (sell26 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 FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS#105317 Master File No . 02-CV-0870 J(RBB) 78


1 revenue recognition policy and its overall accounting . However, the Audit Committee at this 2 meeting failed to give any attention to either the implementation of this policy or its ramifications 3 4 5 6 7 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

8 which defendant Arthur Andersen provided a handout entitled "Year-end Audit Committe e 9 Meeting Fiscal 2000 ." Noell received and reviewed this presentation at the time of the meeting . 10 11 218 . 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

12 recognition software, revenue recognition (service/other), financial reporting evaluation, 13 integration of acquisitions/purchase accounting, acquired in-process research and development,

14 accounting process and controls, and legal/environment . By this meeting, defendant Noell was 15 16 17 18 19 20 21 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 Meetin g

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

22 relatively small in amount, Noel] learned that Peregrine was engaging in and recognizing revenu e 23 24 25 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

26 April 25, 2001 . Also in attendance was defendant Nelson and representatives of defendant 2 7 Arthur Andersen including Stulac . At this meeting, Arthur Andersen made a presentation 2811 entitled "Year-End Audit Committee Meeting Fiscal 2001 ." It included a section entitle d
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02-CV-0870 J(RBB) 79

#105317

"Business Audit - Significant Business Risks" which highlighted "control issues in Europe" as a 2 3 4 5 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

6 the Audit Committee members, based on Arthur Andersen's audit procedures for the quarterly 7 reviews and year end audit, that Peregrine was improperly recognizing revenue immediately in 8 full, on sell-in transactions where there was no binding commitment on the part of resellers . 9 Defendant Watrous inquired at this meeting as to how "aggressive" Peregrine was with regard to 10 revenue recognition, and he was informed by Stulac that Peregrine was more aggressive than one 11 of its leading competitors, citing as an example SAP, which applied the sell-through method . At

12 this meeting, defendants Noell and Watrous were informed by Peregrine's auditor that the 13 Company's revenue recognition policy was different in material respects from those of its

1 4 competitors who were in the same business . They also knew at this time, or were deliberately 15 16 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

17 Company's revenue recognition policy . 18 19 5. June 29, 2001 Audit Committee Meetin g

221 . Defendants Noell, Watrous, and Savoy attended an Audit Committee meeting o n

20 June 29, 2001 . Also in attendance were defendant Nelson and Arthur Andersen audit 21 engagement partner Stulac . At this meeting, there was a discussion of the fact that the SEC was

22 reviewing transactions between Peregrine and Critical Path for possible improper revenue 23 recognition and that defendant Gardner's testimony had been taken by the SEC on June 19, 2001,

24 as had the testimony of Taylor Barada, Gardner's special assistant, on June 20, 2001 . Noell 25 informed defendant Moores of these developments following the Audit Committee meeting .

26 This SEC inquiry into Peregrine's transactions with Critical Path was an additional red flag to 27 Audit Committee members that Peregrine was engaged in highly aggressive accounting practices

28 that were drawing the scrutiny of the SEC and which called for heightened vigilance by Audi t
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02-CV-0870 J( RBB) 80

#105317

Committee members, which was not forthcoming . 2 6. July 23, 2001 Audit Committee Meetin g

222 . Defendants Noell, Watrous, and Savoy attended an Audit Committee meeting on
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

12 13 14

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

15 these facts . He asked Stulac, "on a scale of 1 to 10 with 10 being the most `clean"' how 16
Peregrine's revenue recognition procedures would rank?" Stulac responded they would rank in

17 the "5-7" range . Watrous queried why Peregrine was not a "10 ." He was told that the problems 18 were attributable to : (i) software customers delaying purchases until late in the quarter to get 19
discounts, (ii) as a result, the quarter ends were extremely busy, (iii) the European controller

20 position was vacant, (iv) there was a failure on the part of Peregrine to appropriately merge the 21
overseas processes, (v) the European sales force "used more aggressive revenue recognition,"

22 and (vi) the frequent acquisitions made by Peregrine required the merging of different accounting 23 24 25
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

26 spending time with management dealing with these revenue recognition issues . However, it was 27 the Audit Committee's duty to challenge management on the clear and continuous accounting 28 1 violations that were brought to the Committee members' attention . These discussions were a red
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02-CV-0870 J(RBB) 81

#105317

1 2

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

3 that the Company's revenue recognition policy was not being followed by its major competitors 4 in the same line of business, and was therefore presumptively improper. No actions were taken 5 by the Audit Committee in response to this discussion of material failures in Peregrine's internal 6 controls and accounting . 7 223 . At this meeting, there was also a fu rther discussion of Peregrine' s transactions

8 I with Critical Path and a decision was made to have Arthur Andersen review these transaction s 9 I even though they had already been recorded as revenue . 10 11 7. October 24, 2001 Audit Committee Meetin g

224 . Defendant Dammeyer chaired an October 24, 2001 Audit Committee meeting .

12 Defendants Noell and Watrous also attended this meeting . Also in attendance were defendants 13
Gless and Nelson, Peregrine's General Counsel, Deller, and its Vice President, Finance, B .J .

14 Rassarn, as well as several individuals from defendant Arthur Andersen, including a new audit 15
engagement partner, Ross Baldwin, as well as Robert S . Shanley, a Phoenix-based National

16 Practice Director for the Western Region . Mr . Shanley's presence at this meeting was a clear 17 indication that major problems in Peregrine's accounting, and material adverse information, was 18 to be discussed . 19 . 225 . A document entitled "Audit Committee Meeting Quarterly Review Q2 2002" was

20 handed out at this meeting . Although it bore a legend reading "This is Restricted to Audit 21 Committee Use Only," it was nonetheless provided to defendants Gless and Nelson, who were

22 not members of the Audit Committee . At this meeting , the Arthur Andersen personnel told the 23 Peregrine directors that there had been breakdowns in inte rnal control surrounding revenue

24 recognition during the quarter ended September 30, 2001, and identified 6-7 revenue transactions 25 which were challenged by Arthur Andersen, including deals with Fujitsu for $6 million, Total

26 Infosystems for $10 million and Unisys for $6 . 1 million. The auditors specifically discussed that 27 such transactions adversely impacted the "quality of earn ings ." With regard to the Unisys 28 tran saction , the auditors discussed how the arrangement included a speci fi ed undelivered version
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02-CV-0870 J(RBB) 82

#105317

1 2 3 4 5 6 7

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

8 to potential misstatements related to software revenue recognition and the application of this

9 GAAP principle . This document was handed out to show the Audit Committee members how 1 0 Peregrine was intentionally and repeatedly violating GAAP . In response to this discussion,
11 defendant Gless acknowledged at the meeting that "the Company needs to review its revenue

12 recognition process and tighten its controls ." The discussions at this meeting made clear that 13 Peregrine was engaged in accounting fraud . Defendants Noell, Watrous, and Dammeyer, from 1 4 their participation in this meeting knew, or were deliberately reckless in not knowing, that 15 Peregrine's revenue recognition was improper and violated GAAP as a result of, among other

16 items, the existence of side letters, and that there were no adequate internal controls . Defendant 17 Noell informed defendant Moores of what transpired at this Audit Committee meeting shortly 18 19 20 21 22 23 24 25 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

26 Critical Path . The defendants participating in the meeting were informed of the SEC activity . 27 28 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 '
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02-CV- 0870 J(RBB) 83

#105317

1 2 3

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

4 the press as stating, "We have fully cooperated with the SEC's investigation of Critical Path and 5 will continue to do so as necessary, but there is no formal investigation of Peregrine ." The 6 defendants who participated in the February 12, 2002 meeting had read, or had been informed of, 7 this article, and also knew that the SEC's sights were in fact trained on Peregrine as a result of its

8 transactions with Critical Path, yet failed to inform the investing public of this fact . 9
10 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

12 Counsel Deller, and B .J. Rassam, Vice President, Finance . Among the matters discussed at this 13 meeting were the ongoing SEC inquiry . Nonetheless, no member of the Committee insisted 14 upon public disclosure of the SEC activity . One of the open audit issues discussed at this 15 meeting was "desired improvement in sales cut-off," referring to a discussion about issues that 16 had arisen with regard to the timing of revenue recognized by the Company and the numerous 17 examples of transactions being dated after the end of a quarter but nevertheless being improperly 18 recorded in that quarter . Also discussed at this meeting was the replacement of Arthur Andersen 19 as the Company's independent auditor and the installation of KPMG in that position . Defendant 20 Noell reported to defendant Moores after the conclusion of the meeting as to the substance of 21 22 23 24 25 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

26 Dammeyer that numerous transactions reviewed by KPMG reflected improper revenu e 27 recognition, including findings of extended payment terms in violation of SOP 97-2, and other 2 8 examples of concessions on deals with extended terms . Specific identification was made of th e
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02-CV-0870 J(RBB) 84

#105317

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 $1 2 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
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS #105317 Master File No . 02-CV-0870 J(RBB) 85


1 4

further informed Dammeyer that Arthur Andersen had concluded that the Company's accounting

2 for the Critical Path transactions was wrong . Also disclosed was that defendant Gless had 3 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,

5 KPMG informed Committee members that it had learned of a December 6, 2001 e-mail from 6 Geoffrey Boonen to defendant Gless and B .J. Rassam whose subject line read "Cleaning 7 Confidential" and which discussed twenty-one side letters . KPMG explicitly raised the 8 possibility of a need for a restatement of Peregrine's previously published financial statements . 9 The discussions at this Audit Committee meeting were relayed to defendant Moores by either or 10 both defendants Noell and Dammeyer . Defendants made no disclosure of the damning 11 information provided by KPMG on April 29, 2002 . Instead, the Company caused a press release

12 to be issued on April 30, 2002 referring to a delay in the planned earnings release "pending 13 continued audit activities of KPMG ." Defendant Moores and the Audit Committee members

14 knew that a fraud had been uncovered, yet failed to make or insist upon any appropriate 15 disclosures . Seeking to distance himself as much as possible from the tarnish of his role as

16 1 Chairman of Peregrine's Audit Committee, Dammeyer submitted a short resignation letter to

17 defendant Moores on May 24, 2002 . 18 19 20 21 230, 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

22 February 12, 2002 Audit Committee meeting, learned of specific material problems in 23 24 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

25 transactions were being scrutinized by the SEC . Yet they made no disclosure of these material 26 facts and failed to correct Peregrine's materially misleading statements to the public regarding its

27 accounting practices and its financial results, and failed to insist on the Company making such 28 disclosures .
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02-CV-0870 J(RBB) 86

#105317

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' KNOWLEDG E OF AND/OR DELIBERATE RECKLESSNESS AS TO THE FRAUD 16 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 e20 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

FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS #105317 Master File No . 02-CV-0870 J(RBB) 87

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 License Revenues 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 FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS #105317 Master File No . 02-CV-0870 J(RBB) 88

peaked at over $57 million in December 1999, before falling to a level of $34 .9 million in March

2 2000, and then rising again to $49.6 million by September 2000 . Channel inventory levels rose 3 4 5 6 7 8 9 10 11 12 13 Channel partners were unable to sell the inventory even when assisted by 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 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% 42% 69% 84% 50% 37% 35 %

I Q/01
2Q/01

14 the Company's sales force . Internally, the Company tracked "burn," sales out of the inventory o f 15 its channel partners . Its ability to "burn" inventory was dwarfed by the sheer size of the channel

16 inventory that partners were accumulating ; 17 18 19 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

20 eliminate existing channel inventory, without any allowances for future channel inventory 21 22 23 24 25 26 27 28 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
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02-CV-0870 J (RBB) 89

#105317


1 2 3 4 5 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

6 I revenue recognition principles ; 7 8 9 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

10 1 such transactions was improper ;

As of October 1999, the Chief Executive Officer of the Company,

12 13 14 15 16 17 18 19 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 . * * *

20 1
21 22 23 24 25

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

26 transactions whereby revenue was knowingly, or with deliberate recklessness, improperly 27 28 recorded, and identifies specific defendants involved in such transactions .
234. In connection with the allegations made below regarding the individua l
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02-CV-0870 J(RBB) 90

#105317


1 2 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 3 the Company refrain from conducting transactions involving the purchase or sale of th e 4 Company's securities other than during the period commencing at the open of market on the third 5 trading day following the date of the public disclosure of the financial results for a particula r 6 fiscal quarter or year and continuing until the close of market on the last day of the second 7 calendar month of the next quarter ." In addition, there were other black-out periods which were 8 imposed and which related to Company specific events . For example, from September 1, 1999 9 through February 8, 2001, there was a black out on trading by Peregrine insiders based on a 10 series of Company events . As a result, during the Class Period, although there were 699 public 11 trading days, the black-out periods referenced above meant that officers and directors could trade

12 during only 225 of those days . As alleged herein, certain of these corporate blackout periods 13 14 were disregarded by the individual selling defendants . 235 . With regard to the prices at which the individual defendants sold Peregrine stock,

15 1 the peak price for Peregrine stock during the Class Period occurred during a quarterly black-out 16 1 period . Accordingly, it was illegal for Peregrine insiders to sell at peak prices during the Class 17 18 19 20 21 22 23 24 25 26 27 $50 .00-$59 .99 28
11 FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02-CV-0870 J(RBB) 91

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 e Trading Days Peregrin e Stock Traded In Pric e Range During The Clas s Period 79 43 76 27 0 0 Percentage Of Available Trading Days At Price Rang e

$0.00-$9 .99 $10.00-$19 .99 $20.00-$29 .99 $30.00-$39 .99 $40.00-$49 .99

35% 19% 34% 12% 0% 0%

#105317

1 2 3 4

$60.00-$69 .99

0% 0%

$70.00-$79 .99 A. Stephen P . Gardner

236 . Gardner, together with defendant Gless, was responsible for and created

5 Peregrine's communications to securities analysts and investors during the Class Period . 6 Gardner reviewed, authorized, and participated in the dissemination of Peregrine's financial 7 results throughout the Class Period and signed Peregrine's reports on Form 10-K for the fiscal 8 years ending March 31, 2000 and March 31, 2001 . Gardner signed all of the registration

9 statements (on Forms S-3, S-4 and S-8) filed by Peregrine during the Class Period . Gardner 10 approved of the filing with the SEC of Peregrine's reports on Form 10-Q throughout the Class 11 12 13 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

14 deliberate recklessness disregarding, their falsity . 15 16 17 18 237 . 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

19 reports and subsequently Joseph G . Reichner, Vice President, Alliances and his direct reports . 20 21 22 23 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,

24 Gardner closely monitored the progress of these anticipated deals, as well as Peregrine's progress 25 26 27 28 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
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02-CV-0870 J(RBB) 92

#105317


1 2 3 4 5 6 7 8 9 10 11 12 13

product from the reseller . Gardner also knew that , to induce resellers to issue purchase orders without contingencies for these products, Peregrine had to an d 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 an ding the foregoing , and pursu an t to the policy approved by Peregrine's Board, Gardner autho ri zed 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

14 purchases were inter-dependent and both companies were motivated by a desire to recognize 15 16 17 18 19 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

20 motivating factor and (iii) was not concerned with what Peregrine was purchasing . The nominal 21 22 23 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

24 transaction was improper . 25 26 27 28 241 . 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
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02-CV-0870 J (RBB) 93

#105317

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/Debis FrontRange 12 Hyperio n

KPMG/Avnet 13 KPMG/CitiGroup 14 excluding MS . total value of'other' deals is approx . $22 mil . This recent activity is on top of'other' prior activity . We must close 15 this business this quarter or otherwise risk potential exposure ." (Emphasis added) . 16 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 manipulated through 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 . 24 In 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 concern was expressed that the company was unlikely to meet its fisca l 27 2001 third quarter revenue projections . The adverse consequences of failing to meet the revenue projections on the company's stock 28 price were self-evident, and ... . asked Mr. Moore to travel to
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS #105317 Master File No . 02-CV-0870 J(RBB) 94

qb

Colorado to meet with one of Peregrine's strategic partners, Frontrange . Mr. Moore was told to solicit , in effect , a phantom order of between $5-10 million in consideration for a 2 %2 percent kickback . Mr . Moore met with the principals of Frontrange, as instructed, but because of his personal objections to this clearly unethical and illegal practice failed to consummate the transaction. We believe that the channel stuffing practices engaged in by Peregrine , for the purpose of manipulating revenue projections to suppo rt its stock price , is in violation of va ri ous state and federal laws, including, but not necessarily limited to , Secu ri ties Act of 1933, 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

8 9

10 subject of "burn" attached a report entitled "partner-ww-june .xls," similar to a spreadsheet 11 entitled "Worldwide Special Attention Invoices ." Gless provided the report in response to

12 Reichner's expression of frustration that "I can't seem to get a clear picture of outstanding 13 14 15 16 17 18 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 is the report we use for collection purposes . This report is extremely confidential . Please do not distribute . I have sent versions of this report to . . . Gardner. . . . We have discussed KPMG in great detail and understand actions to be taken . 245 . Reichner also reported on a meeting of Peregrine senior management in earl y

19 2001, where he raised the issue of sales transactions that were recorded as revenue, but did not 20 21 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

22 Peregrine should "take the hit," get rid of all the bad receivables, and start afresh . Reichner said 23 24 25 26 27 28 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
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02-CV-0870 J(RBB) 95

#105317

1 2 3

rejected the idea out of hand . 247 . On November 11, 2000, Gardner received an e-mail from Gless listing $2 2 million in "other" deals that posed the "risk" of "potential exposure" if they did not "close this

4 quarter," but that had already been booked and were still being carried as revenue . Gardner knew 5 during the Class Period that Peregrine had "revenue" on its books that was in fact non-existent 6 and knew that substantial, mate rial amounts of revenue on Peregrine's books should not have 7 been recorded . 8 9 10 11 248 . 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

1 2 neared each end of its accounting period . He was personally involved in closing large "on top" 13 transactions at the ends of quarters . 14 249 . Gardner routinely approved improper accounting involving Peregrine's merger

15 deals to hide unwanted charges and expenses . For example, in September 2001, Gardner wa s 16 told that former outside directors of Harbinger, which had been acquired by Peregrine in 2000 1 7 were unable to exercise some options on Peregrine shares . They complained to Gardner, who

18 1 was advised by General Counsel Deller that "fixing this problem . .. would result in a very 19 1 significant comp charges to Peregrine ." Gardner's response was to advise Deller and defendants

20 Gless and Nelson by e-mail dated September 5, 2001, "I think we need to fix this and find a way
21 22 to bury the compensation charge i n the Remedy deal if we can . ." (Emphasis added) . 250 . Gardner knew that the Company engaged in quarter end channel tran sactions

23 calculated to achieve revenue forecasts, and that an immense amount of Peregrine's previousl y 24 recorded revenues would never be realized . The Company's quarterly reports on Form l0-Q and 25 its annual reports on Form 10-K do not mention any problem of this nature or magnitude .

26 Gardner repeatedly painted a "big picture" of Peregrine as a thriving enterprise with steadil y 27 28 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
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02-CV-0 870 J(RBB) 96

#105317

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 .18 17 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 .80 Sold : 20 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 for 28 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 .
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS -#105317 Master File No . 02-CV-0870 J(RBB) 97

252,5122 shares were sold during what were Company imposed black-out periods . Gardner sold

21

most of the shares he held during the Class Period (250,262) when he knew of the impending ,

3 although as yet undisclosed, purchase of Harbinger and that the announcement would depress the 4 price of Peregrine stock . Further, Gardner was barred from selling during this time period but 5 nonetheless sold, in violation of Company policy . Before the Class Period, Gardner held 6 661,500 shares and sold 200,000, or 30% of his holdings? During the Class Period, Gardner 7 held 1,551,063 shares and sold 452,512, or 29% of his Class Period holdings . Almost 85% of 8 Gardner's proceeds from insider sales were derived from sales during the Class Period . 9 10 11 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

12 results throughout the Class Period and signed Peregrine's reports on Forms 10-K or 10-Q filed 13 with the SEC for all quarters during the Class Period and for the fiscal years ending March 31,

14 2000 and March 31, 2001 and for the first three quarters of fiscal year 2002 . Gless also signed 15 all the registration statements (on Forms S-3, S-4 and S-8) filed with the SEC by Peregrin e

16 during the Class Period . Gless did so although he knew that the financial statements containe d 17 therein were materially false . 18 255 . Gless was one of the principal orchestrators of the scheme alleged herein to inflat e

19 Peregrine's reported revenues throughout the Class Period . During the Class Period, Gless 20 authorized the booking of revenue on contingent transactions with resellers even though he kne w 21 22 23 24 25 ?' Throughout this Amended complaint, the number of shares sold during the Company imposed black-out periods are not adjusted to reflect stock splits effective February 12, 1999 and 26 February 21, 2000 . 27 31 Throughout this Amended Complaint, the number of shares sold and held used to compute the percentage of holdings have been adjusted to reflect stock splits effective February 12, 1999 28 and February 21, 2000. #105317
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02-CV-0870 J( RBB) 98

that revenue recognition on such transactions was improper under GAAP, violated the Company' s publicly stated revenue recognition policies, and that in m an y instances recorded revenue would never be obtained .

1*

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

S
1 2 3

J~

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

4 I careful of how we communicate . Not sure e-mail is appropriate me ans of communication ." In 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 261 . 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 an e-mail dated September 14, 2001, Rassam noted that, MG [defendant Matt Gless] tells me not to give KP [Kate Patterson, Peregrine's head of investor relations] any info of confidential nature due to MG telling a story different than reality to the Street about various fin'l matters such as LT Other Assets having 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 . Also during discussion threatens to use a knife to cut me up (and asserts he has a big knife) if I give away confidential PRGN info.

26 collections -- all in order to manipulate the Company's DSO and deceive market analysts and 27 28 investors . 263 . Gless was actively involved in managing the Company' s response to the flood o f
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No. 02-CV-0870 J(RBB) too

#105317

00"
1

side letters that came to light in October, November an d December 2001 . On December 6, 2001 ,

2 he received an e-mail from Geoffrey Boonen, Area Vice President of Commercial Operations for 3 EMEA, identifying more than 21 EMEA transactions involving side letters and other imprope r

4 revenue recognition techniques . 5 264 . Gless had also approved revenue recognition on transactions without signed

6 contracts . For instance, in the fourth quarter of fiscal year 2002, Peregrine received a letter of 7 intent on a potential deal with ABN AMRO . The deal did not close by the end of the quarter, but 8 Gless nonetheless directed Michael Fake, a staff accountant, to book revenue of $900,000 base d

9 I solely on the letter of intent . 10 11 265 . 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

12 ri ght to cancel a transaction because " they really needed the BT contract for that quarter." Gless 13 directed Dorothy T ri ll, European Fin an cial Con troller , to book the $12 , 545,910 revenue despite

14 the out clause . When Tri ll questioned this, Gless came up with a baseless rationale , i.e., that 151 because Harbinger had recorded revenue up front, and every Harbinger deal had an out clause, 16 and Peregrine had acquired Harbinger, Peregrine was also allowed to recognize revenue wher e 17 there were out clauses. 18 266 . Gless directed that there be revenue recognition on quarter-end sales to channe l

19 partners with a history of non-payment, such as KPMG . For instance, although Patrick Towle, 20 Manager of Revenue Accounting, was uncomfortable booking a deal with KPMG involving 21 22 23 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

24 have been recognized in the first place based on a rationale that the Company had sold the related 25 receivable to a bank. For instance, in March 2001, Gless instructed Cappel to sell the B T

26 receivable with an out clause to Wells Fargo Bank, and Peregrine had to repurchase the contract 27 when BT exercised the out clause . On several occasions, Peregrine booked revenue on contract s 28 I sold to banks on which revenue should not have been recognized, and repurchased them later ,
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02-CV- 0870 J ( RBB) 101

#105317


1 2 3 4 5 6 7 8 9 10 11 12

14 0

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 larg e 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

1 3 I offs through misclassifications. The Remedy acquisition in the second quarter of fiscal yea r 14 1 2002 provided a convenient opportunity . The Company padded the acquisition expense accrual 15 16 17 18 19 20 21 22 23 24 25 an d used it as a " cookie j ar" 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

26 I mislead market analysts as to the quality of the Company' s revenue and receivables and hide the 27 28 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
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02-CV-0870 J(RBB) 102

#105317

91

1 2 3

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,

4 to create "off line" invoices totaling at least $12 million . 5 6 273 . 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

7 directed her to create an invoice for KPMG Consulting, which was based loosely on several aged 8 9 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

10 quarter-end receivables balance and DSO, and improving its reported cash position . Peregrine 11 12 13 14 repurchased this "receivable" in November 2001 . 274. The Company retained responsibility for collecting on financed receivables . A t 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

15 already taken the receivables off its books upon sale to the bank), increased Peregrine's own cas h 16 account (instead of placing the money in a bank trust account), and failed to show any payable to 17 the bank . Gless directed this practice every quarter, which had the effect of artificiall y 18 19 20 21 22 23 24 25 07/26/99 26 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 imprope r 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 Shares 3,125 Sales Price $30 .01 Proceeds Receive d $ 93,781 .25

07/26/99 27 1
28 1

11,250 1,250
5,000

$30.01 $33 .00

$34 .50

$ 337,612 .50 $ 41,250 .00

$ 172,500 .00

08/17/99
08/26/99

#105317

FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02-CV-0870 J(RBB) 103

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 6 02/15/00 2,500 $45 .50 $ 113,750 .00 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 .00 13

14 15 02/25/00 1,500 $54 .19 $ 81,285 .00 02/25/00 1,000 $54 .38 $ 54,380.00

16 Total 93,625 $3,993, 188.75 Sold : 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

rt ually all

FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS -

#105317 Master File No . 02-CV-0870 J(RBB) 104

1' of Peregrine's software license sales were to end users . By the end of the third quarter of fisca l 2 year 1998 (December 31, 1997), however, approximately 15% of Peregrine's total licens e

3 I revenue was being generated through resellers like GE Capital and ATT Capital under Spitzer' s 4 5 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 departmen t

6 I "under Worldwide Sales and Marketing" -- defendant Powanda's responsibility -- and "focus in 7 I on 2 or 3 relationships and make it happen ." 8 9 279 . Spitzer' s cultivation of a relationship with KPMG ultimately bore fruit in Marc h 1999 when Peregrine and KPMG signed a letter agreement by which Peregrine loaned $500,000

1 0 to KPMG and KPMG committed to purchase $2 .5 million of Peregrine software and pay for it by 11 March 31, 2001 . Spitzer signed the agreement and, according to Spitzer, everyone in senior

12 management, including Gardner, was aware of and approved the agreement knowing that its 13 payment obligations were fictitious . From December 1999 through December 2000, Spitzer was

1 4 involved in a number of transactions with KPMG in which he arranged for KPMG to sign 15 Schedule A's committing KPMG to purchase more than $35 million of software licenses in

16 connection with particular entities who were potential end users but with whom Peregrine had 17 not finalized a transaction . 18 280 . Virtually all of these transactions were done in the last few days of a quarter an d

19 were motivated by an intention to recognize revenue on a sale of software licenses that otherwise 20 could not have been recognized in that quarter . Spitzer used his relationship with defendant 21
Larry Rodda and later Jim Murphy at KPMG to facilitate these transactions . More than $32

22 million of these transactions were eventually written off by Peregrine because the prospective 23
end users did not buy Peregrine software, and KPMG refused to pay . Spitzer understood when

24 these transactions were entered into that KPMG would not pay . Spitzer has admitted that the 25
structure of the KPMG/Avnet transaction raised red flags . The KPMG/Citigroup transaction was

26 done at the same time and under virtually identical terms . 27 281 . According to Reichner, KPMG Consulting's Murphy (who succeeded defendan t

28 1 Rodda as the Peregrine relationship manager) told Reichner that KPMG Consulting did not vie w
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02-CV-0870 J(RBB) 105

#105317

the outstanding accounts receivable as an actual obligation because of conversations between

2 Rodda and Spitzer. Murphy told Reichner that these transactions were done as an 3 4 5 "accommodation" and there was an understanding that KPMG Consulting would not have to pa y

on them.
282 . Spitzer knew that an understanding had been reached that Peregrine would not

6 enforce the contractual payment terms against KPMG if contemplated end user deals did not 7 close . He knew that the Company's financial reports were materially misstated as a result of the 8 9 KPMG and other transactions in which he participated . 283 . Spitzer was involved in other transactions where revenue was improperly

1 0 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

1 2 had made an investment . In an April 3, 2001 e-mail to FMI's Mark Douglas, Spitzer writes :
13 14 15 16 17 18 19 20 21 22 23 24 25 26 "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 an d is awaitin g

27 sentencing. 28 287 . Cappel has admitted that in June 2001, she prepared and sold a false $19 millio n
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02-CV-0870 J ( RBB) 106

#105317

i
1 2 3 4 5 6 7 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

8 maintained an informal, worldwide accounts receivable aging report which did not reconcile t o 9 the general ledger . Cappel knew that these receivables were uncollectible and that the Company 10 did not offset them with an adequate bad debt reserve . 11 12 13 289 . 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

14 sell -- in order to arrive at the internally generated target for DSO . She knew that Gless set the 15 16 17 18 19 20 21 22 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 b an ks . 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 ban k, Cappel did not book an entry reflecting any cash was payable to the bank . Instead, she

23 recorded the c ash payment and reduced receivables as though the accounts receivable still 24 belonged to Pereg ri ne . This artificially decreased Peregrine ' s DSO and increased cash at quart er 25 end . Cappel reversed these entries when she forwarded the collections to the bank in the 26 following quarter . 27 291 . Cappel deliberately sold receivables for maintenance revenue to banks when she

28 knew that these were not eligible for sale under Peregrine's agreements with the banks . The
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02-CV-0870 J(RBB) 107

#105317

1 2 3

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

4 the Class Period . Through these devices, Cappel also participated in the overstatement of 5 6 7 8 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

9 $14 .45 and $30 .25 per share . She sold 10,116 shares at $14 .45 per share on January 2, 2002, just 10 hours before Peregrine preliminarily announced disappointing results for the quarter ended 11 12 13 14 15 16 17 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,

18 Nelson became aware of numerous matters that revealed the Company was engaged in fraudulent 19 financial reporting . As Corporate Secretary, Nelson attended every Board of Directors meeting

20 and Audit Committee meeting during the Class Period . 21 295 . As alleged in paragraph 49-52 above, Nelson directed a document destruction

22 program while at Peregrine and instructed all Board members to destroy any material handed ou t 23 at or before a Board meeting within thirty (30) days . This was done for the purpose of masking

24 the defendants' wrongful conduct and making their activities as difficult as possible t o 25 26 27 28 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-0870 J(RBB) 108

#105317 I


1 2 3

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

4 though the subject was discussed at that meeting . He also failed to keep minutes of Audi t 5 6

Committee meetings .
297 . As Peregrine grew, Nelson's responsibilities burgeoned. Nelson had primar y

7 responsibility for corporate reporting and deal making, including the due diligence and 8 documentation for Peregrine's frequent acquisitions . This activity became so intense that in 9 March 2000, Nelson was promoted to Vice President, Corporate Development, reporting directly

10 to defendant Gardner, at which time he relinquished his position as General Counsel . 11 12 298 . 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

13 results. Based on his knowledge of the material adverse facts herein alleged, Nelson knew, or 1 4 with deliberate recklessness disregarded, that each such document was materially false an d 15 misleading . 16 299 . Nelson also serv ed as the Compli ance Officer for Peregrine ' s insider trading

17 policy until March 2000 . Nelson failed to ful fi ll his duties as the Compli ance Officer because he 18 permi tted substantial insider selling to occur du ri ng black- out periods . 19 300 . Nelson worked with the A rthur Andersen audit pa rtner D an iel Stulac to formulate

20 1 Peregri ne ' s stock option pricing policy . By this process , the Board approved the number of stock 21 1 options to be gr an ted on a quarterly basis. Nelson knew that pursuant to the policy , defendant 22 Gardner dated the option grants retroactively based on the lowest stock price of the quarter, and 23 that this policy was unheard of for a public comp any an d had the effect of understating the 24 Company' s option expense . Notwithst anding his knowledge during the Class Period of the 25 existence of this accounting manipulation , which had the effect of artificially boosting 26 Peregrine ' s reported ea rn ings , Nelson took no steps to correct or otherwise challenge its

27 1 implementation .
28 1
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

#105317

1 I a tran saction with Cl Software Solutions which identified it as a barter, no cash to exchange 2 hands, and referred to it as a "Powanda deal ." Nelson knew that revenue from this tran saction

3 I was improperly recorded by Peregrine . 4 5 302 . 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

6 was engaging in the sale of short term receivables to mask the impact that uncollectibl e 7 receivables were having on Peregrine's DSO number . Benjamin took Nelson through the 8 9 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

10 'financing of receivables . Based on this meeting, Benjamin expected Nelson to be "outraged" at 11 12 13 14 15 16 17 18 19 20 21 22 23 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 tr an saction with IDOM, a Sp anish reseller, rendering revenue from this transaction illusory. Nelson knew such revenue w as 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 emails 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

24 such receivables in the tens of millions of dollars . Nelson felt safe in not raising the issue of 25 uncollectible accounts receivable because he knew that Peregrine was making so many

26 acquisitions that its operating financial results, and in particular, material amounts of aged 27 accounts receivable, were being buried in the "acquisition and other" line item expense 28 associated with acquired companies . In fact, numerous uncollectible accounts receivable wer e
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02-CV-0870 J(RBB) 110

#105317

a
1 3

written off in the "Acquisition and Other Expense" line items of Peregrine's financial statements .

2 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

4 would not pay . To hide the existence of the receivable, Peregrine simply gave these entities th e

5 1 money they owed to Peregrine .

61

305 . Nelson had specific knowledge in November and December 2001 from reports he

7 1 received regarding EMEA sales activity, that EMEA salesmen did not believe they were going to
8 9 10 11 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 Africa n

12 company which acted as a reseller of Peregrine software . In June 2001, Peregrine and MGX 13 executed a master distribution agreement whereby MGX agreed to sell $13,800,000 of Peregrine 14 product, and had until June 2003 to pay Peregrine . In December 2001, Peregrine made an 15 16 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

17 proceeds of MGX's sale of the Peregrine stock it received ($5 million) was earmarked to pay 18 amounts due Peregrine in January and June 2002 under the June 2001 agreement . Defendant 19 Gardner informed Nelson of MGX's position that it had a side letter that allowed it not to pay , 20 and that it therefore needed an investment . By an e-mail dated November 24, 2001, Gardner 21 informed Board members, including Nelson that, "[w]e would also insist upon accelerated

22 payment of the long-term receivables due us as a partial use of proceeds, that this would actually 23 benefit our cash position as well, we should do it ." 24 307 . Nelson was involved in Peregrine's transactions with Critical Path in the secon d

25 quarter of fiscal year 2001 and learned of the details of these transactions, including that their 26 dollar volumes doubled shortly before the deals closed . He became aware of the SEC' s 27 investigation of the Critical Path transactions in the Summer of 2001 and the acknowledgment by

28 Gardner and others in the contemporaneous documentation that the deals were considered to be a
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02-CV-0870 J( RBB) 111

#105317

barter transaction.

308. In October 2001, Nelson learned c : an e-mail (later confirmed to be from Ron

3 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

5 revenue . Nelson participated in the plan tc terminate the e-mail sender ostensibly as part of a 6 lay-off, so that he would not contend he was terminated for blowing the whistle on Peregrine's
7 8 revenue recognition fraud . 309 . In October 2001, Nelson met with Andy Cahill, Executive Vice President of

9 Peregrine, to discuss side letters that had been uncovered which excused payment by resellers . 10 On October 30, 2001, Nelson received an e-mail from Gless attaching a list of International Past 11 Due invoices as of 9/30'')1 greater than $500,000 which totaled $29 .8 million and which showed

12 this amount to be $49 million at 12131101 . Nelson took no steps to ensure that these amounts 13 were properly recorded . Nelson learned in November or December 2001 from Boonen by e-mail

14 that a number of side letters had been discovered in Europe that impaired the collectibility of a 15 substantial amount of accounts receivable on Peregrine's books . In November - December 2001,

16 Nelson spent ten days reviewing Peregrine's operations in Europe . Between November 6-10, 17 2001, Nelson met with Boonen at Peregrine's Paris office to discuss the side letters raised in the 18 19 20 21 22 23 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

24 of payment obligations until Prokom had achieved a certain sell-through rate . In December 25 2001, Nelson also learned of a side letter with MGX which made contingent its obligation to pay

26 pursuant to a $12 million transaction . In April 2002, Nelson learned of a December 2000 27 agreement with BT Ignite which had a 30 day cancellation clause . When BT Ignite exercised its

28 cancellation clause, a second agreement was entered into purporting to cancel the cancellation ,
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02-CV-0870 J(RBB) 112

#105317

1 2 3 4 5

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

6 seven agreements which reflected material amounts of revenue that Boonen believed could no t 7 be properly recorded . 8 312 . Nelson learned in February 2002 of the SEC's charges against Critical Path

9 involving the Peregrine transactions, and later that the SEC was intending to charge Gardner with 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 314 . 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 08/16/99 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 : Date Number of Shares 12,500 Sales Price $33 .25 Proceeds Received $ 415,625 .00

08/16/99
08/23/99 08/26/99 08/31/99 02/15/01 Total Sold:

37,500
25,000 1,000 11,500 200,000 287,500

$33.00
$33 .50 $35 .25 $32.63 $29.63

$1,237,500 .00
$ 837,500 .00 $ 35,250 .00 $ 375,245 .00 $5,926,000 .00 $ 8,827 , 120 .00

26 or was deliberately reckless in not knowing , were materially false and misleading . 27 28 315 . 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% o f
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02-CV-0870 J(RBB) 113

#105317

'0

his Class Period holdings . Approximately 90% of Nelson's proceeds from insider sales wer e

21
31
4 5 6

derived from sales during the Class Period . F. Douglas S. Powand a

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,

7 whereby resellers were not obligated to pay Peregrine until they sold the product through to the 8 end user . Powanda knew through discussions with defendants Gardner, Gless, Nelson and 9 10 11 12 13 14 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

15 1 outlook for the current quarter and to review large license agreements anticipated to close during 16 17 18 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

1 9 Peregrine's progress towards meeting quarterly revenue targets . 20 21 318 . 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

22 April 2000 . At that point, Gardner and Powanda negotiated a compensation plan providing 23 Powanda with substantial cash, approximately $750,000 in commissions, which was paid

24 pursuant to this plan on March 15, 2001 and April 30, 2001 . During fiscal year 2001, Powanda 25 26 27 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

t 28 his return, he was employed in the Office of the Chairman and acted as a consultant until he lef
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02-CV-0870 J(RBB) 114

#105317

1 2

the Company in the Spring of 2002 . 319 . Powanda was involved in multiple transactions whereby revenue was improperl y

3 recognized including agreements with Corporate Software & Technology, Cl Solutions, British 4 Telecom, Action, Systematics, and Barnhill . See Appendix E hereto . These transactions were

5 negotiated near the end of a quarter, were large in dollar volume and were designed to permit
6 Peregrine to equal or exceed its revenue and pro forma earnings forecasts to the investment 7 community . Powanda was a confidant of defendant Gardner and often was called upon by 8 9 10 11 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

12 call in chits for Peregrine business . Powanda kept a drawer in his office, known as the "magic 13 drawer," which was filled with contracts that he could pull out at quarter's end to purportedl y

14 i book revenue. 15 320 . Powanda, along with defend ant Spitzer, was an architect of the KPMG

1 6 relationship . Although the main interface with KPMG was Spitzer , Powanda was directly 17 involved in the KPMG/Morgan Stanley transaction . Powanda negotiated with Morgan Stanley 18 for an "enterprise license" agreement, a very large sale . Powanda claimed to have a letter

19 agreement . He asked Spitzer to have KPMG finalize the deal, and KPMG would receive a large 20 services contract . Powanda knew that KPMG had done similar "favors" for Peregrine in the past, 21 22 23 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

24 receivables it was aware of, Powanda was among the most vocal opponents of this idea . 25 322 . Powanda knew , or w as deliberately reckless in not knowing , that revenues he

26 participating in creating for Peregrine were improperly recorded . On January 5, 2001, defendant s 27 Gardner, Gless and Powanda received an e-mail stating, "At the last second of the last hour of 28 the 37th of December" and proceeding to congratulate the sales team for obtaining a deal . The eFIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02-CV-0870 J(RBB) 115

#105317 1

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. Powand a

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 Ap ri 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 t o 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
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS #105317 Master File No . 02-CV-0870 J(RBB) 116

I 2 3

business, he knew the criteria to determine whether revenue could be recognized on a particula r transaction, and that the deals described herein did not satisfy the relevant criteria . Powanda 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 6 7 8 328 . Powanda made the following sales of Peregrine common stock during the Clas s Period, while knowing of material adverse nonpublic information : Date Number of Shares Sales Price Proceeds Received

9
10

08/16/99 08/16/99
02/17/00

10,000 6,250
30,000

$33 .00 $33 .00

$45 .98

$ $

330,000 .0 0 206,250 .00

$ 1,379,400 .00

11 12
13 14 15 16

02/17/00 02/17/00
02/17/00 02/17/00 02/17/00 02/23/00 02/23/00

20,000 10,000
20,000 20,000 10,000 2,500 5,000 22,500 10,000 10,000 2,500 10,000 7,500 5,000 10,000 5,000 400,000 10,000 8,750 30,000

$46 .19 $45 .94

$46 .13 $46 .22 $46 .44 $44.94 $45 .19 $45 .00 $45.13 $46.00 $45 .56 $46.38 $45 .50 $47 .75 $48 .13 $47 .00 $28 .08 $28 .20 $26 .50 $26 .50

$ $
$ $ $ $ $

923,800 .00 459,400 .00

922,600 .00 924,400.00 464,400 .00 112,350 .00 225,950 .00

17 18 19 20 21 22

02/24/00 02/24/00 02/24/00 02/24/00 02/24/00 02/24/00 02/25/00

$ 1,012,500 .00 $ $ $ $ $ $ $ $ 451,300.00 460,000 .00 113,900 .00 463,800.00 341,250.00 238,750 .0 0 481,300.00 235,000.00

23
24 25 26 27 28

02/25/00 02/25/00 02/08/01 05/10/01 05/16/01 05/16/01

$11,232,000 .00 $282,000 .00 $231,875 .00 $795,000,00

#105317

FIRST AMENDED CONSOLIDATED COMPLAINT FO R VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02-CV-0870 J(RBB) 117

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

05/16/01 05/21/01
05/21/01

1,250 20,946
14,000

$26.50 $28 .00

$28 .05

$33,125 .00 $586,488 .00

$392,700 .00

05/21/01 05/21/01
05/21/01

10,000 10,000
1,900

$28.10 $28.15
$28.25

$281,000.00 $281,500.00
$53,675 .00

05/21/01
05/21/01

600
2,500

$28.25
$28 .25

$16,950 .0 0
$70,625 .00

05/21/01
Total Sold:

10,000
736,196

$28 .30

$283,000 .00
$ 24,286 , 288 .00

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

26 Moores regarding Company business, and knew or recklessly disregarded that Peregrine's public 27 statements throughout the Class Period were materially false and misleading . O n

28 October 3, 2001, Luddy received a copy of an e-mail from Ron Hall, a salesperson in Peregrine' s
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS 118 Master File No. 02-CV-0870 J(RBB)

#105317


1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 02/09/01 18 19 20 21 22 23 24 25 26 Total Sold: 368,789 02/12/01 50,000 20,924 $28 .53 $27.94 08/11/99 08/25/99 02/15/00 02/16/00 02/16/00

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 rt h in paragraph 336 hereof. This e-mail put Luddy on notice that Pereg ri ne 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 tt ers discussed therein . 332 . Luddy made the following sales of Pereg ri ne common stock during the Class Period , while knowing of mate ri al adverse nonpublic information : Date Number of Shares 3,224 6,250 22,500 10,000 10,000 Sales Price $30.22 $33 .63 $43 .50 $44.19 $44.25 $ $ $ $ $ Proceed s Receive d 97,429.28 210,187 .5 0 978,750 .00 441,900 .00 442,500 .00

02/16/00
02/16/00

25,000
20,000

$44.40
$44 . 81

$ 1,110,000 .00
$ 896 ,200 .00

02/08/01

10,000

$28 .00

280,000.00

02/09/01

56,000

$28 .01

$ 1,568,560 .00
$ 1,426,500 .00 $ 584,616 .56

02/12/01
02/13/01 02/14/01

50,000
5,000 33,000

$28 .07
$28 .82 $27.94

$ 1,403,500 .00
$ $ 144,100.00 922,020.00

08/01/01
08/01/01

16,000
10,891

$28 .16
$28 .10

$
$

450,560 .00
306,037. 1

08/01/01

20,000

$28 .04

$ 560,800.00
$ 11,823 ,660.44

333 . This insider selling was unusual and suspicious, both in timing and amount . All

27 of the sales came on the heels of Peregrine's various press releases falsely announcing "record" 28 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 LAWS Master File No . 02-CV-0870 J(RBB) 119

#105317

knew, or was deliberately reckless in not knowing, were materially false and misleading .
2 3 4 5 6 7 334 . 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 ri od 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

1 0 approved the issuance of quarterly financial results for fiscal years 2000 and 2001 and the first
three quarters of fiscal year 2002 . 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28
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 and associated legality of the contract, the implied Peregrine responsibility and associated consequent acceptable non-payment should targets not be achieved due to failure to meet this contracted responsibility . It might pay to look at the maintenance terms, payment terms, territory, support implications and other Peregrin e
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02-CV-0870 J(RBB) 120

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 to yourself and all copied recipients . They pertain directly to business activities in Asia Pacific, more specifically Australia . In all likelihood also Europe, where Dominic O'Riley was previously engaged in executive management capacity . The attached `Schedule A' for Planwell Technology may well be familiar , 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 may not be so familiar . I understand that you don't see all these partner agreements.

#105317

responsibilities . My legal background suggests that the overall contract worthiness is questionable . At the least, certainly not what a shareholder (or an analyst) would pin faith on . 4 While in the process, it would be recommended you check the underpinning contracts for the following Australian Partner agreements, where large revenue amounts have already been recognised: IMS - booked for $10 million AUD in March , 2001 - $22 million dollars gross sales required to achieve target . Kinetica - booked for $1 million AUD in June, 2001 - $1 .4 million gross sales required to achieve target . 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28
2. The payment terms are extremely loose , extensively delayed and underpinned by the ` guaranteed sales' clause, which any good lawyer would use to avoid liability if things didn't work out as Peregrine have promised . Kinetica haven't yet paid for deals that were booked in June, before their partner `agreement' was signed . Yet revenue has been booked and valuable resources are being expended supporting their activities . What's the chances of them paying up if targets aren't met?
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02-CV-0870 J(RBB) 121

TELE IP - booked for $ 2 million in September , 2001 - $3 . 2 million gross sales required to achieve target . Planwell Technology - attached , booked for $5 million in September , 2001 - $10 million gross sales required to achieve target . That's $36 million gross sales required for these pa rtners to collectively achieve target . With implied and/or contracted sales guarantees . Of note, IMS ($22 million dollar AUD Target) haven't booked ONE SINGLE DEAL or burnt one dollar of revenue since they signed in March, 2001 . 1 repeat, NO business in 6 months on a $22 million AUD commit! Without the IMS `sale' of $10 million nett AUD in March, 2001, Australia would only have sold some $4 million dollars gross software for all of last year! They 're promising $36 million this year? The above mentioned ` contracts ' have a few similarities :
1. They represent ludicrous and irresponsible targets and commitments - little wonder that no ` Partner' has paid up front, particularly when you consider the current economic climate and last year ' s `real ' software sales . I am reliably informed that these partners were touted figures between $30 and $40 million sales in Australia for last year .

#105317

3 . In the main, Partner `Addendums' - the real contract - aren't signed off by Peregrine US and are exposed to non-compliance and potential litigation . `Unconscionable Contract' comes to mind . Yet Mr. Walsh and Mr . O'Riley are pressuring Sales Reps in Asia Pacific and Australia to find MORE Partners - so long as they commit bookable dollars up front . Their war cry is "anything less than $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 so called ` contracts' .

7 8 9 10 For the record, the $10 million dollar IMS deal that Mr . Walsh `won his stripes for' in March, has yielded absolutely NOTHING to date - not one cent worth of `real' business (apart from the initial revenue booking) . I also note he Mr . Walsh doesn ' t manage the account and has no involvement in it's progress . It's been offloaded to a ve ry inexperienced Sales person . Next March should be interesting when Peregrine try to get IMS to reload - or PAY for that matter. Still, Peregrine have booked the revenue . What will this do to Peregrine ' s partneri ng credability? Or Stock value ? Were the attached documents, any of the other `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. That is not my intention , but as a well meaning Peregrine investor with Peregrine's best interests at heart, I feel compelled to demand your attention to these contracts and the revenue booked from them . This is a blatant example of what can be termed `Channel stuffing', in their crudest form . The analysts have other names . Mr. Walsh and Mr . O'Riley have both been personally warned as to the lack of substance to these contracts, yet have chosen to ignore those warnings . I can only assume that as responsible executives and directors of Peregrine, you would have no knowledge of the underpinning contracts to the Schedule A's you receive on Partnering agreements . This type of contract should immediately cease and `real' revenue be recognised , ie., where PRODUCT is actually DELIVERED and payment is probable .
Terry Walsh' an d Dominic O'Riley' s contracts with Peregrine should immediately be reviewed due to breach of fiduciary duty .

12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

Reliable information suggests that a major Asia Pacific restructure will be announced on October 8`h, 2001 . This will include the termination 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

#105317


1 2 3 4 5 6 7 8 9 10 11 12 13 14 Sincerely Yours .

these staff will include anyone that has openly objected to the Channel stuffing . `Amway' approach outlined above . I look forward to your urgent attention to this correspondence in the hope that this is not the case . (Emphasis added) .

337 . By this e-mail, defendant Moores was placed on specific , direct notice o f 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

15 1 substance. The e-mail sender further notes that the investing public would understand these

16 1 contracts to reflect accounting fraud within Peregrine . The sender also urged that such contracts
17 18 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

19 of this e-mail, defendant Moores responded to Gardner as follows : "I can't figure out why (sic) 20 the hell is complaining about," and left it at that . Notwithstanding specific, credible information 21 22 23 24 25 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

26 otherwise the poor cash position of the Company and its ever increasing expenses . Moores knew 2 7 that the Company had insufficient cash to run its operations, and was dependent on the existence

28 of its bank line of credit and access to the capital markets to obtain needed funds . In November
#105317
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No. 02-CV- 0870 J ( RBB) 123

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 4 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

6 1 recognition policy which he authorized, Peregrine routinely entered into bogus software license

71

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 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 cash position, which we've talked about many times at board meetings . You might share, verbally, Matt's cash forecast (the point being that cash is precariously low) . Finally, remind him of the cash conservation measures we're taking . Charlie already knows, in the words of JJM [defendant John J . Moores] - we're the largest company in the world that lives hand to mouth . I think the point will be made with Charlie, without being stated . .. . . he has a fiduciary duty to the company and shareholders to not let a cash death 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 clear approach. Tell him your not sure you see what's got Charlie's dander, two things likely will happen . .. (1) John will shed some light, and (2) John will laugh (I guess there are three) and say something like . .. Charlie's nuts, this makes all the sense in the world. .. then he may carry the torch for you . EACH OF YOU SHOULD DELETE THIS AFTER READING ... AND FROM YOUR DELETE FOLDER . (I'd make 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

14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

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
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No. 02-CV-0870 J(RBB) 124

#105317

% 0

could lead to possible bankruptcy, as in fact happened upon disclosure of the fraud . However, by

2 that time, Moores had liquidated the vast majority of his Peregrine stock holdings, obtainin g 3 4 5 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

6 plea, including the nature of the transactions, i.e., a barter of goods without economic substance 7 for purposes of revenue recognition . Moores had prior dealings with Thatcher when Thatcher 8 served as Peregrine's Chief Financial Officer in 1995 . He had forced Thatcher's resignation

9 from Peregrine based on concerns about Thatcher's integrity. Moreover, Moores had experience 10 with so-called "reciprocal" transactions . In 1998, Moores had learned of a proposed transaction 11 between Peregrine and NEON Systems, a company in which Moores held a very substantial

12 1 (40%) equity stake . Defendant Gardner had worked on the proposal which Moores understood 13 1 was a contemporaneous purchase of software between the companies . Moores told investigators 14 that he believed this type of transaction "had the potential for self-dealing ." Thus, Moores was 15 familiar with the Critical Path-Peregrine type of barter transaction and knew it was improper and

16 was likely entered into for purposes of generating bogus revenue . Notwithstanding his 17 knowledge and experience with regard to both the type of transaction involved and the 18 individuals (Thatcher and Gardner), Moores failed to make any disclosure to Peregrine investors

19 as to his knowledge of this wrongful conduct. Instead, Moores arranged to retain his own 20 counsel to "investigate" the matter, and whose overriding goal was to protect Moores himself 21 from potential liability and embarrassment, including with regard to Moores's massive insider

22 selling . Disclosure of Moores's knowledge of this bogus Critical Path barter deal would have 23 24 25 26 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

27 I was also obtained from his attendance at a special Audit Committee meeting held o n 28 February 12, 2002 . At that time, Audit Committee members (defendants Noell, Watrous, an d
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02-CV-0870 J(RBB) 125

#105317

Dammeyer) and defendant Moores were told that the SEC had opened an inquiry into Peregrine's

2 role in the Critical Path transactions . Moores perceived at that time that defendants Gardner an d 3 Nelson were not treating the situation with the appropriate degree of seriousness given their 4 closeness to the improper transactions, and intervened to insist upon his own choice of a crimina l 5 defense attorney to continue handling the matter, so as best to protect himself while attempting to 6 divert blame to others . Moores at all times sought to protect himself and made no publi c 7 disclosures of the extent of his knowledge . 8 344 . In the weeks following the February 12, 2002 meeting, Moores met repeatedly

9 with defendant Nelson. Moores learned that Nelson was opposing Moores's counsel's efforts 10 and Nelson told Moores "that an extensive investigation might suggest bad answers to questions 11 that had never been asked ." Further, Moores learned in late April 2002 that KPMG had

12 contacted the Chairman of Peregrine's Audit Committee, defendant Dammeyer, and reported the 13 existence of fraud in some of Peregrine's transactions, including use of side letters and extended

1 4 payment terms . Moores's counsel told Moores in late April 2002 that he believed Gardner, 15 Gless, and Nelson were dishonest . 16 345 . At a special Audit Committee meeting on April 29, 2002, Moores was informed

17 by KPMG as to its belief that fraudulent accounting had occurred at Peregrine . Moores 18 continued to fail to make any disclosure to the investing public . Instead, by the end of the Class

19 Period, he arranged to have himself re-appointed as Chairman of the Peregrine Board so that he 20 could better control events and protect himself. 21 346 . Moores made the following sales of Peregrine common stock during the Class

22 Period, while knowing of material adverse nonpublic information : 23 24 25 26 07/26/99 07/26/99

Date

Number of
Shares 1,522,719 970,923

Sales
Price $28 .50 $28 .50

Proceeds
Received $ 43,397,491 .50 $ 27,671,305 .50

02/17/00 02/17/00
02/18/00

1,143,016 251,436
2,122,736

$46.06 $46.06
$43 .68

$ 52,647,31696 $ 11,581,142.1 6
$ 92,721,108.48

27 1
28 1

#105317

FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS -Master File No . 02-CV-0870 J(RBB) 126

1 2 3 4 5 6

02/18/00

466,960

$43 .68

$ 20,396,812.80

02/28/00
02/28/00

408,220
89,799

$51 .35
$51 .35

$ 20,962,097 .00
$ 4,611,178 .65

02/29/00
02/29/00 02/08/01 02/12/01

89,799
408,220 77,000 175,000 385,000 1,104,022 280,000

$52.65
$52 .65 $30 .19 $28.00 $28.54 $29.67 $29.76

$ 4,727,917 .3 5
$ 21,492,783 .00 $ $ 2,324,630 .00 4,900,000 .00

7 8 9 10

02/13/01 02/15/01 02/16/01

$ 10,987,900 .00 $ 32,756,332 .74 $ 8,332,800 .00

02/16/01
02/20/01

218,978
210,000 506,223

$28.91
$30.04 $30.52

$
$

6,330,653 .98
6,308,400 .0 0

12 13

02/23/01

$ 15,449,925 .96

02/26/01
02/27/01 14 15 16 17 18 19 20 21 22 23 02/28/01 Total Sold :

360,000
50,000 90,000 10, 930,051

$28.97
$26.70 $25 .29

$ 10,429,200.00
$ 1,335,000 .00

$ 2,276,100 .00 $ 401,640 ,096.08

347 . This insider selling w as 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%

24 of his Class Period holdings . 72% of Moores's total proceeds from insider sales of Peregrine 25 26 27 28 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
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02-CV-0870 J(RBB) 127

#105317 i

1*

1 2

the fraud at Peregrine during the Class Period . 350 . In October 2001, defendant Nelson orally advised Noell about the e-mail receive d

3 I from the Australian whistleblower . Noel[ did nothing in response . 4 5 6 351 . 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

7 existed excusing any payment obligation on license agreements for the sale of software. This 8 was a highly unusual term in a representation letter, had not been incorporated in the prior years' 9 representation letters, and was a "red flag" that Peregrine's auditor had become aware of th e 10 existence of side letters on transactions which rendered revenue recognition improper. Noell 11 1 ignored these facts and made no disclosure or investigation of this matter . 12 13 352 . On February 5, 2002, Noell e-mailed defendants Nelson, Gardner, Moores and Gless as king if management had ever received any employee communications relating to

14 accounting or financial concerns . In response, Nelson informed Noell of the e-mail from th e 15 employee in the Asia Pacific region alleged in paragraph 336 which drew att ention to Pereg ri ne's

16 improper revenue recognition practices . 17 353 . At a special Audit Committee meeting on February 12, 2002 which Noel l

18 attended, there was a discussion of "barter transactions" that Peregrine had entered into pursuant 19 to which revenue recognition was improper . NoelI was aware at this time that the SEC had 20 21 22 23 24 25 26 27 28 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 Committ ee 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
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No. 02-CV-0870 J(RBB) 128

#105317

1 2 3 4 5 6 7 8 9 10 11 12

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

Period, while knowing of material adverse nonpublic information :

Date 02/23/00 02/15/01 02/16/01 Number of Shares 90, 000 68, 978 15,397 Sales Pri ce $43.31 $29.76 $28.91 Proceed s Received $3,897, 900 .00 $2,052, 785 .28 $ 445 ,127.2 7

Total
Sold :

174 ,375

$6,395,812.55

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

13 Noell knew, or was deliberately reckless in not knowing, were materially false and misleading . 14 15 358 . 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

16 . Class Period, Noell held 187,543 shares and sold 174,375, or 93% of his Class Period holdings . 17 Approximately 74% of Noell's proceeds from insider sales were derived from sales during the

18 1 Class Period . 191 20 21 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

22 fraud at Peregrine during the Class Period . 23 24 25 26 360 . 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

27 1 sold 300,000 shares of Peregrine stock based on the material adverse information he obtained
28 1 between February 5 and 12, 2002 . On March 8, 2002, defendant Gardner receive an e-mail fro m
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02-CV-0870 J(RBB) 129

4105317

Ron Hall with the subject line reading "What in the hell is Cole doing?" The text of the message

2 read: "You've just about got everything back to normal and this idiot [defendant Cole] decides to 3 sell hundreds of thousands of shares . Nice one Cole ... you imbecile . The market's shaking . 4 Thanks to one fool . What are you doing about it Steve? Gardner forwarded the message the 5 same day to, among others, defendant Gless, with the message, "Good question ." Plainly, Cole

6 was trading on material nonpublic information with regard to the impropriety of Peregrine's 7 conduct vis-a-vis Critical Path, and his knowledge that defendant Moores had initiated a Special 8 Audit Committee meeting to investigate this and related accounting improprieties . 9 361 . Cole made the following sales of Peregrine common stock, during the Class

10 Period, while knowing of material adverse nonpublic information : . 11 12 13 14 15 16 17 18 19 1 07/27/99 07/28/99 08/02/99 08/12/99 08/13/99 08/16/99 08/26/99 02/15/00 02/16/00 Date Number of Shares 35,000 15,000 1,000 10,000 5,000 15,000 20,000 30,000 80,000 10,000 5,000 5,000 10,000 130,000 13,500 25,000
61,500

Sales Price $30.01 $30 .10 $31 .00 $31 .06 $32.00 $32.73 $34.72 $44.22 $44.95 $46.19 $46.75 $46.50 $46.13 $50.33 $30.03 $30.10
$30 .56

Proceed s Received $1,050,350.00 $451,500 .00 $31,000.00 $310,600 .00 $160,000 .00 $490,950 .00 $694,400 .0 0 $1,326,600.00 $3,596,000.00 $461,900 .0 0 $233,750 .00 $232,500 .00 $461,300 .00 $6,542,900.00 $405,405 .00 $752,500 .00
$1,879,440 .00

20 1
02/17/00 21 1 22 23 24 25 26 27 02/24/00 02/24/00 02/24/00 02/25/00 02/08/01 02/15/01
02/20/01

11/20/01

56,000

$18 .14

$1,015,840 .00

28 1
#105317
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02-CV- 0870 J ( RBB) 130


1 2 3 4 5 6

56,000 55,000 35,000 110,000

100,00 0 $18 .58 $1,040,480.00

11/27/02 02/05 /02 02/06 /02 02/07/02

02/13/02

$7.05 $6.53 $6.67

$7 .51

$387,750.00 $228,550 .00 $733,700.00

$751,000 .00

02/14/02 Total
7 8 Sold:

200,00 0 1,083,000

$7.62

$1,524,000 .00 $24,762,415.00

362 . This insider selling was unusual and suspicious, both in timing and amount . Cole

9 sold 270,000 shares during Company imposed black-out periods . Before the Class Period, Cole 10 held 2,523,284 shares and sold 330,000, or 13% of his holdings . During the Class Period, Cole 11 12 13 14 15 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 Ber g

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

16 the fraud at Peregrine during the Class Period . 17 364 . Van den Berg engaged in the following insider selling of Peregrine shares during

18 the Class Period while knowing of material adverse information. 19 Date 20 21 22 23 24 25 26 27 365 . 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 02/22/00 Number of Sales Shares Price 40,000 $43 .20 Proceed s Receive d $1,728,000 .00

Total 40, 000 Sold:

$1 , 728,000.00

28 1 sales during the Class Period .

FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02-CV-0870 J(RBB) 131

#105317

1 2 3 4 5

L. 366.

Thomas G. Watrou s 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

6 j Class Period while knowing material adverse nonpublic information about the Company . 7 8 Date Number of Sales Shares Price Proceeds Received

02/25/00
9 10 11

15,000

$54.08

811200 .00
$811 ,200.00

Total 15,000 Sold :

368 . All 15,000 shares were sold during a Company imposed black-out period . Before

12 the Class Period, Watrous held 20,000 shares and sold 10,000, or 50% of his holdings. During 13 the Class Period, Watrous held 25,000 shares and sold 15,000 or 60% of his Class Perio d

14 holdings . Almost 86% of Watrous's proceeds from insider sales were derived from sales durin g 15 the Class Period . 16 17 18 369 . At all relevant times, Peregrine and certain officers and directors of the Company, DEFENDANT JOHN J. MOORES CONTROLLED PEREGRINE AND CERTAIN OF ITS OFFICERS AND DIRECTOR S

19 'including defendants Gardner, Gless, Nelson, Noell, van den Berg, and Hosley, were controlled 20 21 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

22 Chairman of the Board and took on the responsibility of raising financing for the Company

23 during its developmental stage . By early 1997, Moores arranged for Peregrine to commence its 24 IPO . By that time, total annual revenues of the Company were less than $24 million . At the time 25 of the IPO, Moores and his business partners (i.e., defendants Noell, Hosley and van den Berg) 26 owned or had an interest in more than 11 million shares or in excess of 83% of the issued an d 27 outstanding shares of Peregrine common stock . 28 1
#105317

370. In addition, there were substantial related party transactions between Moores and
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02-CV- 0870 J(RBB) 132

Peregrine . The IPO prospectus disclosed these relationships and transactions as follows : 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26
Pursuant to an Agreement and Plan of Merger dated as of November 30, 1995, the Company acquired XVT Software , Inc ., a development tools software comp an y ("XVT") . In connection with the acquisition , the Company issued approximately 2,018,808 shares of its Common Stock in exch an ge for all of XVT's issued and outstanding preferred an d common stock . Mr . Moores and
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWSMaster File No . 02-CV-0870 J(RBB) 133

John J . Moores, the Chairman of the Company's Board of Directors and the majority stockholder of the Company, is party to a Continuing and Unconditional Guaranty dated November 13, 1995 (as subsequently amended) with NationsBank of Texas, N .A. ("NationsBank"), pursuant to which Mr . Moores guaranteed the Company's obligations under its bank line of credit agreement and term loan with NationsBank. As of December 31, 1996, the Company's outstanding obligations under such credit line and term loan were $4 .3 million and $1 .7 million, respectively . The Company intends to repay the outstanding balance of the revolving line 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 lo ans to the Company on an as-needed basis in amounts up to $250,000, typically bearing interest at the prime rate announced by major commercial banks . At December 31, 1996, the Company owed JMI approximately $250,000 in connection with such advances . Mr. Moores is a limited partner of JMI and Charles E . Noell III, a director of the Company, is General Partner of JMI . JMI holds, prior to this offering , more than 10% of the Company' s outstanding Common Stock . The Company and JMI are parties to a sublease pursuant to which the Company subleases approximately 13,310 square feet of office space at its San Diego headquarters to JMI Services, Inc ., an investment management company ("JMI Services") . The term of the sublease is from June 1, 1996 through October 21, 2003 . The sublease provides for initial monthly rental payments of $16,638 to increase by $666 per month on each anniversary of the sublease . Mr . Moores serves as Chairman of the Board of JMl Services, and Mr . Noell serves as President and Chief Executive Officer . . . Pursuant to an Acquisition Agreement dated November 29, 1995 among the Company, Skunkware, Inc . ("Skunkware") and Peregrine/Bridge Transfer Corporation, a database software subsidiary of the Company ("PBTC"), the Company sold all the outstanding shares of PBTC to Skunkware for an aggregate purchase price of approximately $559,000. In addition, under the Acquisition Agreement, the Company receives a royalty on certain license sales of PBTC . The royalty payments to the Company are limited to an aggregate of $677,000 . . . Mr . Moores is a controlling stockholder of Skunkware, and Mr . Noell was president of Skunkware . Pursuant to the Acquisition Agreement, the Company provides certain computer and administrative resources to PBTC for a monthly fee of $37,500 .

27 28

#105317

2 3 4 5 6 7 8 9 10

persons and entities affiliated with Mr . Moores owned subst antially all of XVT' s outstanding capital stock, and in connection with the acquisition, the Comp an y issued 1 , 579,436 shares of the Company's Common Stock to Mr. Moores an d affiliated persons and 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, directors and-their affiliates together will beneficially own approximately 75 .9% of the outstanding shares of Common Stock (73 .1 % if the Underwriters' over-allotment option is exercised in full) . In particular, John J . Moores, Chairman of the Company's Board of Directors, and entities affiliated with Mr . Moores collectively will own approximately 67 .0% of the outstanding shares of Common Stock (64 .0% if the Underwriters' over-allotment option is exercised in full) . As a result, these stockholders will be able to control most matters requiring stockholder approval, including the election of directors and the approval of mergers, consolidations and 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,

12 13 14 15

16 van den Berg, and Hosley regarding Peregrine's affairs . At a meeting of the Peregrine Board on 17 18 19 20 21 22 23 24 25 26 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-today 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

27 on the list, with his name listed above even those of Gardner and Farley . This document was 28 used to solicit business for the Company, as well as investment capital.
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS 134

#105317 1 Master File No . 02-CV-0870 J(RBB)

1 2 3 4 5 6

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

7 and Hosley, represented Moores' interests on Peregrine's Audit Committee . 8

374. A further indication of Moores ' s control of Peregrine is the fact that he chose t o

9 sublease space from Peregrine for his venture company, JMI Services . The purpose of locating 10 JMI Services and affiliated entities in space subleased from Peregrine was to keep a close 11 proximity to Peregrine and its executive officers so as to facilitate the monitoring of Peregrine's

12 operations by Moores and Noell, who was the President and Chief Executive Officer of JMI 13 14 15 16 17 18 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,

19 and Hosley, advised on key operating and financial issues at Peregrine . One former Vice 20 President, Product Marketing stated that "Moores's influence on Luddy was unbelievable and 21 22 23 24 25 26 27 28 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 Executiv e Officer p ri or to the Company's IPO in 1997 . Hunt resigned in early 1998 . Moores an d hi s
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02-CV- 0870 J(RBB) 135

#105317

business partners (defendants Noell, van den Berg and Hosley) on the Peregrine Board then

2~ caused defendant Gardner to be elevated to the position of Peregrine's Chief Executive Officer . 3 4 5 6 7 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

8 1 November 1995, Farley was Vice President, Finance, Chief Financial Officer and a director of 9 1 XVT Software, Inc . ("XVT"), a company controlled by Moores and which was acquired by
10 Peregrine in November 1995 in a related party transaction . Farley became Peregrine's Chief 11 Financial Officer in October 1995 a month prior to Peregrine's closing of the XVT acquisition .

12 Farley worked closely with defendants Gardner and Gless and kept Moores and Moores's 13 14 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

15 1 instrumental in installing Gless at Peregrine initially as its corporate controller . From 1990 to 16 April 1996, Gless held various accounting and financial positions at Houston based BMC 17 Software, a company founded by defendant Moores. Gless worked closely with defendant 18 Gardner and kept Moores and Moores's partner, defendant Noell, current on key operational and

19 financial issues at Peregrine . Defendant Gless's wife, Wendy Gless, also worked at BMC 20 Software and owed her job there to Moores. 21 379 . Moores also caused Peregrine to hire defendant Nelson as its General Counsel in

22 ! 1995 . Moores knew Nelson through a foundation he established for which Nelson worked . At

23 1 the time, Nelson was a Houston-based attorney . In June 2000, Nelson contacted Moore s
24 25 26 27 28 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
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02-CV-0870 J( RBB) 136

#105317

the accounting irregularities at Peregrine were first disclosed publicly in May 2002, Moores

2 I appointed Nelson as interim Chief Executive Officer of Peregrine .

3 4 5 6 380 . 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

7 Noell, a key confidant of Moores on the Board . Barada worked closely with defendants Gardner, 8 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

9 10 compensation was approximately $165,000 . Barada was involved in Peregrine's busines s 11

12 13 14 15 16 17 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 ri ne , Holsten was employed by XVT where he was Vice President, Professional Services . XVT was a company controlled by Moores, which

18 1 was acquired by Peregrine in November 1995 in a related party transaction . Holsten kept Moore s

19 1 and Noell current on key operating issues during the Class Period .
20 21 22 23 24 25 26 383 . 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 email 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

27 1 learned of the guilty plead by David Thatcher, CEO of Critical Path and reports of Peregrine's 28 1 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

#105317

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 . O n 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 FIR M

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
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS #105317 Master File No . 02-CV-0870 J(RBB) 138

presence, it created a new structure : the Andersen Worldwide Organization ("AWO"), comprised 2 of a Swiss cooperative entity, AWSC, which acts as an umbrella entity for the AWO member 3 firms, the partners of AWSC, and the individual partners of Arthur Andersen, including its

4 offices around the globe, which together, operated as a single global partnership or joint venture . 5 The model adopted by AWSC Partners was meant to preserve "The Heart of Partnership

6 Culture," including income sharing among the member firms of the two business units and 7 8 9 10 11 12 13 14 15 16 17 18 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 [Andersen Consulting] and AA [Arthur Andersen] were signatories to MFIFA's [Member Firm Interfirm Agreements] entered into with the AWSC [Andersen Worldwide Societe Cooperative] and were thereby subject to coordination and limited governance by the same body. Such an arrangement may have been , in some way, akin to the relationship of subsidiaries of the same parent enti ty , although neither partnership was owned by the AWSC. (Emphasis added) . 388 . AWO is the instrumentality through which the "one firm" concept became reality .

19 The guiding principle was that the member firms' practices shall be correlated and coordinate d 20 21 on an inte rn ational basis . It was achieved in four distinct ways . (a) Partner Overlap : AWO was a partnership made up of more than 4,80 0

22 partners from 390 offices in 84 different countries worldwide . Simultaneously, the partners of 23 24 25 26
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 .

27

(b) Sharing of Costs and Profits : AWO coordinated the sharing of costs and

28 allocation of revenues and profits among its partners and its offices around the world . As one o f
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWSMaster File No . 02-CV-0870 J(RBB) 139

#105317

1 2 3 4 5 6 7 8 9

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

10 those professional standards and principles . An office of AWO that breached the agreement was 11 12 13 14 1 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

15 1 behalf of its international offices, and maintained the financial records, payroll and employee and 16 1 health benefits of those international offices as well . All of AWO's offices also share global 17 computer operations , a worldwide tax structure and training facilities . By establishing a legal, 18 fi n an cial and administrative infrastructure , AWO enabled each of its offices around the world to

19 function as , and to appear to clients as , an extension of a single , global entity . 20 21 22 23 24 25 26 27 28

Andersen spokesman Dave Tabolt - " We conduct more than 30,000 audits around the world every year . . . ."
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02-CV-0870 J(RBB) 140

389 . AWO instituted its "one -firm" concept through partner overlays, global setting of standards, sharing of costs 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 member firms of the Andersen "global client service network."
"With world-class skills in assurance, tax, consulting and corporate finance, Arthur Andersen has more than 77,000 people in 84 countries who are united by a single worldwide operating structure that fosters inventiveness, knowledge sharing and a focus on client success ."

#105317 I

1 2 3 4 5 6

"AA is already much more integrated globally than the rest of the Big Five . As Mr . Berardino [the former CEO] points out, `there is one name over the door . We're not an alphabet soup .' The cohesiveness of AA's culture has been a source of humor to outsiders, who have labeled its bean counters `Androids .' While some rivals are stil l struggling with a complicated array of national pa rtnerships , and thus different systems for sharing pay, AA partners enjoy a single , and possibly unique, system of remuneration : they receive a list of what each of them has earned in the past year."

7 AWO Web site (Andersen . com) confirmed that it was one worldwide organization: 8 9 10 11 12 13 1 14 1 15 16 390 . AWO managed, directed and controlled its inte rn ational offices in two Arthur Andersen's 2001 recruiting brochure confirmed that it was one worldwide firm : "We will, in Arthur Andersen's own words, ` act as one firm and speak with one voice . It is a united family that operates across hierarchies , geographical boundaries, client groupings , service lines and competencies and feels like the kinship of understanding and shared responsibility ." "Our 390 offices may be scattered amid 84 different countries, but our voice is the same . No matter where you go, or who you talk to, we act with one vision . Without boundaries ."

17 I overlapping groups : by practice areas (also known as "lines of service") and by geographica l 18 19 20 21 22 23 24 25 26 27

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 rt hur

28 1 Andersen .
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02 -CV-0870 J( RBB) 141

#105317

394 . AWO and Arthur Andersen shared more than partners and officers . They shared the same address . In its promotional literature , AWO stated that its headqua rters were located at 33 West Monroe Street, Chicago, Illinois 60603 . That is the same address as the headquarters of Arthur Andersen . 5 6 7 8 9 10 11 12 395 . 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

13 ' sometimes used only the name "Andersen" and did not differentiate between Arthur Anderse n 1 4 and its offices around the globe . 15 396 . Financially, the firm operated as a "one firm" global enterprise . For fiscal 2000,

16 44% of its revenues derived from North America, 33% of its revenues from Europe, Middle East, 17 India and Africa, 13% from Asia/Pacific and 10% from Latin America . Of the $9 .3 billion in

18 revenues in 2001, North American operations contributed about half, or $4 .49 billion, and 19 Europe, Middle East, Africa, Asia/Pacific and Latin America operations contributed about half,

20 or $4 .85 billion . 21 22 23 24 25 26 27 28 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 that impact emerging companies and will provide proactive creative solutions. We pride ourselves on being similar to the clients w e
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02-CV- 0870 J(RBB) 142

#105317

serve - entrepreneurial, hands on, highly motivated and accessible . 2 399 . At that time, Arthur Andersen also touted its diligence in performing audi t

3 I services for their clients : 4 5 6 7 8 9 Although it is believed that every accounting firm can perform an audit, the value a client receives as part of that process varies widely . We believe the difference between firms lies in the approach, commitment, concern and competence of those individuals who perform the audit . We audit the business, not just the financial statements . Accordingly, we will devote significant time to planning, analyzing audit and business risks, supervising and reviewing the audit team's work . (Emphasis added). 400 . Arthur Andersen also noted that its commitment to learning the "busines s

10 operations and controls" of the company an d maintaining a continuous dialogue with 11 12 13 14 15 16 17 18 19 management throughout the year and not just during the audit . It stated : We add value beyond the frame of the primary services we are providing. We strive to understand the operational and financial issues that are important to your success and help you address those matters, as well as anticipate new issues . Our inquiries of your business operations and controls will extend beyond the accounting and finance functions and include sales and marketing , customer service, software development, administration and organization and information systems . Accordingly, we anticipate maintaining a continuous dialog with Peregrine throughout the year, not just at audit time . In short, we want to be a partner of Peregrine throughout the year so that the year-end audit is a non-event, with no last minute "surprises" or unanticipated accounting adjustments . (Emphasis added) . 401 . Based on the foregoing representations, Peregrine retained the services of Arthu r

20 Andersen in July 1996 . 21 402 . Arthur Andersen was engaged by Peregrine to provide independent auditing an d

22 accounting services throughout the Class Period . Arthur Andersen's San Diego office was 23
engaged to examine and issue opinions on Peregrine's fiscal 2000 and 2001 year-end financial

24 statements and to perform review services with respect to Peregrine's interim results in fiscal 25
years 2000, 2001 and the first three quarters of fiscal year 2002 . For fiscal year 2000, Dan

26 Bigelow was the audit engagement partner . For fiscal year 2001, defendant Stulac was the audit 27 engagement partner. Stulac had been the audit manager on the Peregrine account prior t o

28 becoming an Arthur Andersen partner in 2001 . Arthur Andersen extensively utilized the service s
#105317
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No. 02-CV-0870 J(RBB) 143

1 2 3 4 5

of defendan t AWSC in the course of performing its audit and review services for the Peregri ne engagements . In its audit opinions , Arthur Andersen falsely represented that Pereg ri ne's fin an cial statements for fiscal years 2000 an d 2001 were presented in accord ance 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 ri ne's

6 fiscal years 2000 and 2001 fi n an cial statements in Pereg rine ' s annual reports on Form 10-K for 7 8 9 10 11 12 13 14 15 16 17 18 those years and in Pereg rine ' s registration statements on Forms S - 3, S-4 an d S - 8, which were filed with the SEC during the Class Period. Arthur Andersen's issuan ce of materially false audit opinions on Pereg ri ne ' s fiscal 2000 and 2001 fin ancial 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, A rthur 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 ri od; (iv) that the Company' s repo rt ed accounts receivable were consistently understated by a material amount during the Class Period ; (v) that the Company' s repo rt ed cash position was mate rially

19 overstated during the Cl as s Period ; (vi) that the Company' s liabilities were materially understated 20 throughout the Class Period ; an d (vii) that the Comp an y failed to disclose adequately the nature 21 22 23 24 25 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

26 not function properly for several reasons . First, it failed to hold regular meetings in fiscal year

27 2000. Only one such meeting was conducted . Second, the Audit Committee and Arthur
28 I Andersen routinely allowed defendants Gless and Nelson to participate in, and control the agend a
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02-CV-0870 J (RBB) 144

#105317

for and substance of the meetings . This con tr avened the express purpose of the meetings, which

2 was to provide oversight of m anagement . Third, Arthur Andersen knew that no minutes were 3 4 5 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

6 recognition practices engaged in by Peregrine . The firm explicitly approved of improper revenue 7 recognition on channel sales of at least 25% of the contract amount even where there was no

8 1 commitment from the reseller or an end user to pay . Arthur Andersen also was routinely

9 1 consulted by defendant Gless regarding how to structure transactions with customers so as to

10 1 permit current and improper revenue recognition . Arthur Andersen also knew of and approved 11 12 13 14 15 16 17 18 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

19 because it desired to retain Peregrine as a client, to continue generating substantial fees from its 20 engagement and to secure additional business from Peregrine, including lucrative consulting 21 1 business. The partners responsible for the Peregrine engagement were motivated to participate in

22 1 the wrongdoing alleged herein because their incomes were directly tied to the fees generated
23 1 from Peregrine . 24 25 26 27 28 408 . 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-0870 J(RBB) 145

#105317

Andersen partner, a former Board member of defendant AWSC and a former Senior Vic e
2 I President of Peregrine, as set forth in a press release announcing Reichner's employment wit h 3 4 5 6 7 8 9 10 II 12 13 14 15 409 . Arthur Andersen also earned subst antial 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 UBmatrix . In pertinent part, the press release reads as follows : Mr . Reichner spent 31 years with Arthur Andersen starting his career in the Audit and Business Risk practice for the first eleven years and then was admitted to the Worldwide Partnership to develop a new consulting practice offering for a worldwide rollout . . . After retiring from Andersen in 2000, he was recruited by Peregrine Systems, Inc . to be Senior Vice President Alliances, Verticals and Business Development . In that role he developed programs that generated or influenced over 50% of worldwide revenue . Joe also created and was President of a new business, Peregrine Financial Management to expand the B to B enablement business offerings into the e-Finance marketplace and was serving as COO of the Integrated Solutions Group .

16 significant work assisting Peregrine in integrating Telco Research and Barnhill, and had begun to 17 support and would continue work on assisting with the Harbinger acquisition . This work 18 19 20 21 22 23 24 25 26 27 represented an additional $420,000 in fees, plus related out of pocket expenses . O n 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 ACCOUNTANTS To Peregrine Systems, Inc . :

28
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02-CV-0870 J(RBB) 146

#105317

We have audited the accompanying consolidated balance sheets of Peregrine Systems, Inc . (a Delaware corporation) and subsidiaries as of March 31, 2000 and 1999, and the related consolidate d statements of operations, stockholders' equity (deficit) and cash flows for each of the three years in the period ended March 31, 2000 . These consolidated financial statements and the schedule referred to below are the responsibility of the Company' s management. Our responsibility is to express an opinion on these consolidated financial statements and the schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States . Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of materia l misstatement . An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements . An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation . We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Peregrine Systems, Inc . and subsidiaries as of March 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 2000 in conformity with accounting principles generally accepted in the United States . Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole . The schedule listed in the index to the consolidated financial statements is presented for purposes of complying with the Securities and Exchang e Commission's rules and is not part of the basic consolidated financial statements . The schedule has been subjected to the auditing procedures applied in the audits of the basic consolidate d financial statements and, in our opinion, fairly states, in all material respects, the financial data required to be set forth therein in relation to the basic financial statements taken as a whole . 411 . With respect to Peregrine's audited financial statements for 2001, Arthu r

10

12 13 14 15

16
17

18
19 20 21

22 Andersen represented, in its audit opinion dated April 26, 2001, the following : 23 24 25 26 27 28 REPORT OF INDEPENDENT PUBLIC ACCOUNTANT S To the Stockholders of Peregrine Systems, Inc .:
We have audited the accompanying consolidated balance sheets of Peregrine Systems, Inc . (a Delaware corporation) and subsidiaries as of March 31, 2001 and 2000, and the related consolidated

statements of operations, stockholders' equity and cash flows for each of the three years in the period ended March 31, 2001 . These consolidated financial statements and the schedule referred to below are the responsibility of the Company's management . Our
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No. 02-CV-0870 J(RBB) 147

#105317

responsibility is to express an opinion on these consolidated financial statements and the schedule based on our audits .

2
We conducted our audits in accordance with auditing standards generally accepted in the United States . Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of materia l misstatement . An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation . We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Peregrine Systems, Inc . and subsidiaries as of March 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 2001 in conformity with accounting principles generally accepted in the United States . Our audits were made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole . The schedule listed in the index to the consolidated financial statements is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements . The schedule has been subjected to the auditing procedures applied in the audits of the basic consolidated financial statements and, in our opinion, fairly states, in all material respects, the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole . Is/ Arthur Andersen LL P 412 . The foregoing audit opinions were materially false and misleading due to Arthu r

10

12 13 14 15 16 17 18 19

20 Andersen's failure to comply with GAAS and the fact that Arthur Andersen knew, or was 21 22 23 24 25 26 27 28 1 SEC Accounting Series Release No . 296. Arthur Andersen did not meaningfully perform its
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02-CV-0870 J(RBB) 148

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 on the confidence of investors in financial repo rt ing . . . Accordingly, the audit function must be me an ingfully performed and th e accountants' independence not compromised .

4105317

I
Fiscal Year 2000

I audit function with regard to Peregrine . 2 3 1.

413 . On April 25, 2000, Arthur Andersen signed an unqualified audit opinion o n

4 Peregrine's financial statement for the fiscal year 2000 ending March 31, 2000 which it knew 5 would be relied on by the market . This audit opinion was materially false and misleading 6 because it failed to note in either the textual portion of the opinion letter, or in any accompanying 7 footnotes to the financial statements, that Peregrine's Board had approved of a material change in 8 accounting policy, i.e., the change to sell-in, which change materially impacted the fourth quarter 9 of fiscal year 1999 results incorporated in the year end results, and continued to affect the 10 Company's results throughout the Class Period . The change was designed to provide Peregrine 11 with an immediate revenue and earnings boost so that it could meet its published expectations for

12 the quarter. It was known to Arthur Andersen that the policy had been changed for application to 13 the fourth quarter of fiscal year 1999, that it had been changed to provide for revenue recognition

1 4 immediately upon execution of a software license agreement with resellers even though ther e 15 was no commitment to pay and no identified end user committed to pay, and to allow the

16 Company to meet fourth quarter and year end published earnings and revenue forecasts . Arthur 17 Andersen knew the new policy would continue to be applied going forward . Further, Arthur 18 Andersen knew that the Company's published descriptions of its revenue recognition policy were 19 materially inaccurate in light of the change made at the April 1999 Board meeting. 20 21 414 . 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

22 the Class Period, including in fiscal year 2000, the amount of channel inventory greatly exceeded 23 this level, as alleged in paragraph 232 herein . Arthur Andersen did not insist that its client reign

24 in this ballooning channel inventory and made no disclosure to the investing public that the 25 Company's newly adopted revenue recognition policy was improper and resulting in materially

26 overstated revenue . Arthur Andersen reviewed each of the quarterly financial statements and 27 press releases issued by Peregrine in fiscal year 2000 but failed to require disclosure of the

28 1 accounting policy change or to require disclosure or explanation of the artificial boost t o

FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02-CV-0870 J(RBB) 149

#105317

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 4 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 9 Peregrine Germany has been instructed to record the least amount of expenses possible ." This 10 message went on to state as follows : 11 12 13 14 15 16 17 18 19 20 21 22 415 . By this e-mail, both Arthur Andersen and AWSC were aware of material errors i n [A] significant amount of customers are resellers, whose ability to pay 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 not set up any bad debt provisions, as in the companies' opinion they will collect the full amounts . "Due Dates large than 12 months": the company sometimes grants due dates larger than 12 months which would cause "bad revenue" according to SOP 97-2 . "channel sales" : the company uses resellers to market their software (in addition to their own sales force) . According to our discussions with Mrs. Goetz some resellers only purchase when they also have a fixed customer order, others, though, order a larger quantity (to receive better prices) and then start marketing the software . The latter category of resellers represents "bad revenue " in our opinion... During our review we became aware of the following SOP 97-2 [revenue recognition] relevant issues :

23 the EMEA division' s revenue recognition. 24 25 416 . The failure to insist on appropriate disclosure was particularly egregious give n that in J anuary 2000, Stulac raised directly with the Company Arthur Andersen 's concern abou t

26 the level of inventory in the channel , notwithstanding its knowledge that revenues were recorded 27 28

as if such inventory had been sold .

417 . In the Summer of 2000, Arthur Andersen, working in conjunction with defendant
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02-CV-0870 J ( RBB) 150

#105317

Nelson, designed a stock option compensation plan for Peregrine employees that, when applied, 2 was an intentional violation of GAAP . This pl an allowed for exercise prices on stock options 3 that were below the common stock market values on the dates options were gr anted . Pereg ri ne

4 recorded the related compensation cost applying this formulation developed by Arthur Andersen . 5 6 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 an d the exercise

7 price of the options gr anted . The plan , devised and approved by A rt hur Andersen , was known to 8 both it and defendant Nelson to be contra ry to stock option compensation plans typically in place 9 10 11 at comparable comp anies. In addition , with the approval of Arthur Andersen , Peregrine accelerated the vesting period for ce rtain options which had been previously gr anted to employees . Under FASB Interpretation No. 44 , acceleration of vesting of options a fter

12 June 30 , 2000 caused an accounting charge for the affected options . Arthur Andersen's 13 intentional and/or deliberately reckless design of stock option plans and the accounting therefor

1 4 that violated GAAP contributed to $100 million of Peregrine's accounting restatement 15 16 17 announced in February 2003 . 2. Fiscal Year 200 1

418 . On April 26, 2001, Arthur Andersen signed an unqualified audit opinion o n

18 Peregrine's financial statement for fiscal year 2001 ending March 31, 2001 which it new would 1 9 be relied upon by the market. This audit opinion was materially false and misleading because it 20 continued to fail to disclose in either the textual portion of the opinion letter, or in an y 21 accompanying footnote disclosure to the financial statements, that Peregrine's revenues and

22 earnings were artificially boosted by application of the sell-in accounting method as approved by 23 24 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 an ce and

25 Controller began looking closely at the Company's accounting for consolidations and in the 26 EMEA division . He became concerned over what he was seeing, and could not understand how

27 the Company had accounted for its accounts receivable . Rassam raised these issues with

28 defendant Gless, who did not adequately respond . Rassam tried to obtain a detailed account s
#105317
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS -Master File No. 02-CV-0870 J(RBB) 151

receivable subledger that tied to the balance sheet, but was told one did not exist. He was told

2 that Arthur Andersen had not been concerned about the lack of an accounts receivable subledger 3 that did not tie to the balance sheet . Rassam was told that one could not be prepared because of

4 lack of information from EMEA. This was confirmed to Rassam by defendant Cappel . 5 420. Rassam was concerned because he understood the accounts receivable to be th e

6 most critical component for the auditors and the biggest area of audit risk . As a result, Rassam 7 contacted Arthur Andersen audit engagement partner Stulac and complained that he could not 8 understand the Company's accounting for accounts receivable . In January 2001, Stulac had met 9 Rassam and gave him certain Arthur Andersen memos on Peregrine's process flows and internal

10 controls. He also gave Rassam a listing of "audit differences" for fiscal year 2000 . Rassam was 11 stunned to learn that there were only $200,000 in audit differences and that Arthur Andersen's

12 corrections actually increased revenue . Stulac told Rassam at that time that Arthur Andersen had 13 14 15 16 17 18 19 20 21 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 ri ne an unqualifie d audit opinion on its financial statements, Rassam asked at a meeting with Stulac and Sacks how

22 they could issue the audit opinion without seeing an accounts receivable subledger . Stulac 23 showed Rassam a one page summary prepared by Treasury which identified the total amount of

24 accounts receivable adjustments to get to the balance sheet number, but which had no details and 25 26 27 28 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
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02-CV-0870 J(RBB) 152

#105317

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 4 Gless, but nothing was resolved . Sacks told Rassam that she and Leslie Sadoff, the Arthur 5 Andersen senior staff auditor, felt like they were on an island by themselves in trying to

6 understand Peregrine's accounting . 7 8 424 . 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 informe d

9 these defendants as follows : 10 Not meant to be preaching , but just to ensure everyone is on the same page . When the above events begin to appear at issue, they require disclosure . As a result you can expect the SEC to review the adequacy of disclosures in the current and earlier filings, to help ensure that such charges do not occur `out of the blue' and without detailed warning to the average investor . It is not unusual for the Division of Corp Fin and the Office of Chief Accountant to look at the disclosures made to a company's Board and Audit Committee re : these events . Information that has been requested by the SEC includes budgets, operating CF forecasts, strategic business plans, level of revenues from major customers, and analysts' reports in order to assess whether they are consistent with and support the financial reporting and disclosures to investors . As you know we wrote-off - $600 million during Q4'01 . Addition write-offs during FY `02 may occur . Without being overly pessimistic, please help ensure that our upcoming and other future filings are compliant w/the above and that communications w/the Board and Audit Committee are all consistent w/that provided the 3rd parties. Thanks, B .J. Rassam's plea to defendants Gless, Nelson, Stulac and, through Stulac, Arthur Andersen an d AWSC , for full an d 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

12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

had an internally generated spreadsheet showing accounts receivable of between $80-$ 10 0

million at December 31, 2000 . Peregrine ' s published fin an cial statements did not reflect thi s
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02-CV-0870 J(RBB) 153

#105317

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
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS #105317 Master File No . 02-CV-0870 J(RBB) 154

1 2 3

assigned to Peregrine, consisting of audit engagement pa rt ner Stulac and senior staff auditor Leslie Sado ff 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

4 defendant AWSC reported that "we have visited with Peregrine Systems GmbH today and 5 6 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

7 AG & Co. for 2,000,000 EUR and Systematics AG with contracts totaling $12,000,000 as 8 involving improper revenue recognition . The e-mail sated "In all cases fees are not fixed an d

9 determinable (payments - in part - are due in over 12 month), the customers are all resellers an d 10 delivery has not occurred . Therefore it is not appropriate to recognize any revenue from these 11 12 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

13 to state "[w]e are awaiting further license contracts for our review, so there could potentially 14 come up more revenue recognition issues once we receive further information next week ." This 15 e-mail also identified problems with aged receivables : "[w]e have preliminary information about

16 aged accounts receivables, mainly towards resellers that in our opinion should be reversed 17 18 19 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

20 Andersen personnel that, "[d]ue to serious problems concerning information flow and quality w e 21 22 23 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

24 communicated regarding "bad revenue" and failure to set up sufficient bad debt reserves . 25 26 431 . On May 30, 2001, the AWSC representatives in Germ any e-mailed the Arthu r
Andersen audit engagement team (Stulac, Sacks and Sadoff) with a summary of thei r

27 management recommendations . It stated that :

28 1
#105317

... [a]ccounting and financial reporting information quality is poor .

FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02-CV-08 70 !(RBB) 155

e
4

6
7

Namely, subledgers for Accounts Receivables and Accounts Payables do not tie into the General Ledger . During the audit it was not possible to get a detailed revenue listing from the system, nor was it possible to get detailed reports for other significant account balances such as deferred revenue, prepaid expenses and other, or similar. Therefore it is not possible to obtain the necessa ry information in order to assess the correctness of a number of significant account balances ....During our audit we became aware of a number of revenue recognition issues (e .g. channel sales, due dates larger than 12 months , missing dates and signatures on contracts )."... Summarizing the above, company's accounting and financial reporting need significant improvement and immediate a tt ention . (Emphasis added) . 432 . By e-mail dated August 1, 2001, Philippe Turowski and Mair of AWSC repeated

9 all of the serious issues and concerns in their prior e-mail of May 30, 2001, and specifically 1 0 reported that license revenue of 2,720,314 EUR on several transactions (with Matema
Information & Communications GbmH, Arxes Network Communication Consulting AG,

12 Detsche Bank AG, MSE Middleware Sorewae Engineering GmbH, and HAN DATAPORT 13
Software GmbH) was misstated . Among the reasons for this conclusion were that "Arxes, MSE

14 and HANB Dataport are all initial orders by resellers, where no end-user has been specified . 15
Therefore we believe that revenue should not have been recognized ." This was an

1 6 acknowledgment that Peregrine's entire Board-authorized revenue recognition policy since the 17 fourth quarter of fiscal year 1999 based on sell-in resulted in improperly recognized revenue . As 18 19
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

20 set up any bad debt provisions ." (Emphasis added) . The AWSC personnel concluded that a 21 22 23
24 25 26 27 28 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

#105317

FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02-CV-0870 J(RBB) 156

1 2 3 4 5 6 7 8

and was engaging in an accounting fraud . 433 . Through the assistance of AWSC in its audits and reviews of Pereg ri ne' s finan cial 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 .

9 They believed the Arthur Andersen audit team was "out to lunch" because there was never any 10 11 12 13 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

1 4 EMEA division, which letters excused and/or made contingent payment by resellers with whom 15 Peregrine had entered into license agreements and pursuant to which revenue had bee n

16 recognized . By this knowledge, Arthur Andersen was provided with yet further evidence that its 17 18 19 20 21 22 23 24 25 26 27 28 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 matt ers , 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
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02-CV-0870 J(RBB) 157

4105317

1 2 3 4 5

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

6 think this supports my assertion that we disclose off B/S risk . Please advise ." After a meeting 7 with Peregrine's Treasurer, Benjamin, about these receivables, Arthur Andersen personnel Sacks 8 and Sadoff came out of the meeting "white as ghosts" because it confirmed for them that their 9 client's personnel were liars, including defendant Gless . Rassam asked Stulac why bank 10 financing of accounts receivable had not been disclosed in Peregrine's public filings pursuant to 11
FAS 140 and Stulac told Rassam that it was because "Gless did not want it disclosed ." In

12 deferring to its client's fraud, Arthur Andersen itself committed fraud . Arthur Andersen 13 14 15 16 17 18 19 20 21 22 23 24 25
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

26 that Stulac inform the Audit Committee . Stulac resisted . 27

439 . Peregrine wrote off approximately $40 million in receivables in the quarter endin g

28 1 September 30, 2001 . Of this amount , $ 25 million was written off as "acquisition expense and
#105317
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS -Master File No. 02-CV-0870 J( RBB) 158

0
2 3 4 5 6 7 8

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

9 should were required under GAAP to have been recorded as reversals of revenue . 10 11 440 . 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

12 AWSC , referring to, 13 14 15 16 17 Even Peregrine's own employees mocked the work, or absence of work, of the Company' s 18 19 20 21 22 23 24 25 26 27 28 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
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02-CV-0870 J(RBB) 159

"[t]he absolute mess I inherited from the old regine (sic) (e .g. local currency ledgers out of balance; intercompany accounts which have not been reconciled ; an aging report which has not, and still does not tie-in to the G/L, ad nauseum) ...I'm a little frightened by this inasmuch as I can ill afford to loose (sic) my license to practice should forensic auditors ever decide to pay us a visit .

#105317 1

I making the client happy, rather than challenging management's accounting decisions . 2 3 442 . 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

4 management representation letters from Peregrine's sales department because of the information 5 that came to his attention in the Fall of 2001 that certain sales transactions contained unusual 6 terms, including side letter agreements eliminating or deferring the obligation to pay, which 7 rendered revenue recognition improper . Defendant Nelson nevertheless prevailed upon Baldwin 8 to back off this request . The refusal of management to allow the sales department to provide 9 representation letters was a red flag to Arthur Andersen that there were purported revenue

1 0 generating transactions which Peregrine relied on which in fact did not consist of revenue that
could properly be recognized under GAAP . 12 13 14 15 16 17 18 19 443 . 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

20 that the existence of these false management representation letters would purportedly give Arthur 21 22 23 24 25 26 27 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

28 1 generated legitimate revenue .

FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWSMaster File No . 02-CV-0870 J(RBB) 160

#105317

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 "non16 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 .
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS # 105317 Master File No . 02-CV-0870 J(RBB) 161

S
1 3

447 . Notwithstanding the clearly intentional and repeated violations of GAAP whic h

2 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

4 its client, agreeing to accept the "significant accounting judgments " made by the Company. 5 6 Arthur Andersen thereby acquiesced in Peregrine 's accounting fraud . 448 . Arthur Andersen conducted a review of the financial results for the third quarte r

7 of fiscal year 2002 ending December 31, 2001 . In connection with its review, Arthur Andersen 8 continued to note material deficiencies in Peregrine's accounting practices . At a

9 1 January 22, 2002 Audit Committee meeting these issues were raised . In addition to the members
10 1 I of the Audit Committee as of that date (defend ants Noell, Watrous, and Dammeyer), Peregrine 11 I management was represented by defendants Gless and Nelson, and General Counsel Deller als o 12 13 14 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

15 1 being recognized lacked any dates . A transaction with Smith Barney that was recognized as

16 1 revenue at December 31, 2001 was dated January 3, 2002, beyond the end of the third quarter .
17 18 19 20 21 22 23 24 25 26 27 28 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) tran sactions with accept an ce clauses without the proper acceptance documentation ; an d (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 qua rt erly 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
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02-CV-0870 J (RBB) 162

#105317

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 . Th e 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
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS #105317 Master File No . 02-CV-0870 J(RBB) 163

appropriately accounted for. Baldwin knew this to be untrue, as the analysis previously initiated

2 by Arthur Andersen was incomplete and had not been reviewed by a partner . As of this meeting, 3 and based on defendant Gless's false representation to the Audit Committee, Arthur Andersen

4 knew that its client was dishonest and, given the history of multiple material issues with its 5 accounting practices, was engaged in accounting fraud . Further, on March 11, 2002, Arthur

6 Andersen communicated to defendants Gardner and Gless that the Company's accounting for the 7 Critical Path transactions did not meet the requirements of SOP 97-2 . 8 454 . Baldwin authored a memorandum dated March 29, 2002 . In it he discusse d

9 consideration of possible restatement of the prior year's financial statements based on the fact 10 that Peregrine had used the "acquisition and other" line item in its balance sheet for the improper 11 12 13 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 .

14 Notwithstanding this knowledge, Arthur Andersen failed to require a restatement, failed to 15 16 17 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

18 revenue pursuant to agreements that were signed after the close of the quarter in which the 19 revenue was recorded . The March 2002 Baldwin memorandum indicated that the firm's cut-off 20 testing had generally occurred 9 to 15 days after period end . Based on the knowledge gained 21
through its review work, Arthur Andersen knew that it needed to test the cut-off much closer to

22 the end of the period because of recurring examples of agreements without dates, or dates that

23
24 25 26 27

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 .

28 1 11
#105317
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02 -CV-0870 J( RBB) 164

AWSC' S PARTICIPATION IN THE FRAU D

456. AWSC assisted in both the year-end fiscal 2000 and 2001 audits of Peregrine an d
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

8 audit, Arthur Andersen in San Diego would send a memo to the appropriate AWSC office 9 describing the scope of procedures to be conducted by the AWSC foreign office .
10 11 12 13 457 . As alleged in paragraphs 413-455 above , which are incorporated herein by reference , AWSC knew of Pereg rine ' 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,

1 4 (ii) that many of the contracts pursuant to which it reported revenue were undated and/or outside 15 16 17 18 19 20 21 22 23 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 ri ne' 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 an d review work . GAAS, as approved and adopted by the American Institute of Ce rt ified Public

24 Accountants ("AICPA"), relate to the conduct of auditors in performing an d report ing on audit 25 26 27 28 engagements . Statements on Auditing Stan dards are recognized by the AICPA as the interpretation of GAAS . Arthur Andersen 's representations concerning Peregrine ' s fiscal 2000 and 2001 fin ancial 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
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02-CV-0870 J ( RBB) 165

#105317

1 2 3 4 5

had Art hur Andersen or AWSC conducted their audits in accordance with GARS . Arthur Andersen knew that its repo rt s would be relied upon by potential investors in Pereg rine securities . Moreover, Art hur Andersen and AWSC' s failure to require Pereg ri ne to revise its false interim finan cial 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

6 interim results for each of the qua rterly periods in 2000 , 2001 and for the first three quarters of 7 8 9 10 11 12 13 14 15 fiscal 2002 . As to the published interim fin an cial 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 Comp any ' 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, inquiri es , and con fi rmations to afford a reasonable basis for an opinion regarding the fi nancial statements under audit. AU 326 . 01 . When an auditor believes that fi nancial statements contain material departures from GAAP, the auditor should express a qualified or adverse opinion . See

1 6 AU 508 .20, 508 . 35-.60. 17 18 19 20 461 . In violation of GAAS and contrary to the representations in its opinions o n Pereg ri ne ' 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

21 1 opinion . In fact, Arthur Andersen was aware of several factors which contradicted or gave rise t o
22 1 serious questions regarding Peregrine's internal accounting controls :

23 1
24 25 26 27 28

a. Peregrine had weak and/or non-existent internal accounting controls an d thus no ability to generate reliable fi nancial 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
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02-CV-0870 J( RBB) 166

#105317

0 1 I Peregrine's various business combinations ; 2 3 4

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

5 recognition pursuant thereto improper ; 6 g . Substantial delays in providing, or an inability to provide, information

7 such as trial balances, general ledgers and subledgers that would customarily be readily availabl e 8 9 from a comp any ' s accounting systems ; and h. Pereg ri ne did not have a functioning Audit Committee independent o f

10 Peregrine senior management . 11 12 13 14 462 . 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

15 1 to obtain reasonable assurance about whether the financial statements are free of materia l

16 1 misstatement, whether caused by error or fraud . AU 317 requires the auditor to give
17 1 consideration to the possibility of illegal acts by a client in an audit of financial statements . For 18 19 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

20 quarters of fiscal year 2002, Arthur Andersen and AWSC knew or recklessly disregarded facts 21 and circumstances which showed Peregrine and its senior management was committing a frau d

22 and/or committing illegal acts which rendered the financial statements unreliable and materiall y 2311 misstated . 24 25 463 . In November 1998, the AICPA circulated to public accounting firms Practice Alert 98-3 entitled "Revenue Recognition Issues." The Practice Alert identified various issues

26 which required "special consideration" by auditors. Among the issues identified were the 27 28 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 ;
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No. 02-CV-0870 J(RBB) 167

#105317

I and (iv) the existence of "side agreements ." Each of these conditions existed at Peregrine durin g

21
3 4 5

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 `always 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

6 company's sales occur at the end of the accounting period, extra caution in auditing revenue 7 transactions is appropriate ." Despite notice of specific types of problems which were occurring 8 9 10 11 12 13 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

1 4 engagement. Similarly, Arthur Andersen and AWSC knew or with deliberate recklessnes s 15 16 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

17 I accord an ce with GAAP . However, in order to keep Peregrine as a client an d continue to generat e 18 19 20 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

2 1 I conducted in conformity with GAAS . 22 466 . Peregrine and Arthur Andersen have since admitted that Peregrine's fiscal 200 0

23 I and 2001 audited financial statements as well as Peregrine's interim financial results for fiscal 24 25 26 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

27 I Peregrine's false interim financial reports for fiscal years 2000 and 2001 and the first thre e 28

quarters of fiscal year 2002 when they became aware that the results were misstated . Arthu r
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02-CV-0870 J(RBB) 168

#105317


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 b as is , which was in violation of GAAS . 468. Arthur Andersen and AWSC reviewed and approved of each of the financia l
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 . 10 469 . GAAS, as set fo rt h 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 or her to believe that interim financial information, filed or to be filed with a specified regulatory agency, is probably materially misstated as a result of a departure from generally accepted accounting principles . In such circumstances, the accountant should discuss the matters with the appropriate level of management as soon as practicable . .21 If, in the accountant's judgment, management does not respond appropriately to the accountant's communication within a reasonable period of time, the accountant should inform the audit committee, or others with equivalent authority and responsibility (hereafter referred to as the audit committee), of the matters as soon as practicable . This communication may be oral or written . If information is communicated orally, the accountant should document the communication in appropriate memoranda or notations in the working papers . .22 If, in the accountant's judgment, the audit committee does not respond appropriately to the accountant's communication within a reasonable period of time, the accountant should evaluate (a) whether to resign from the engagement related to interim financial information, and (b) whether to remain as the entity's auditor or stand for reelection to audit the entity's financial statements. The accountant may wish to consult with his or her attorney when making these evaluations. 470 . Due to Arthur Andersen and AWSC 's knowledge of Pereg ri ne's internal contro l

12 13 14 15 16 17 18 19 20 21 22 23 24 25

26 structure obtained from auditing procedures and reviews performed during Peregrine's audits ,
27 1 and from its other work performed for Peregrine, as well as the Arthur Andersen and AWSC' s

28 1 frequent contacts with Pereg ri ne personnel , Arthur Andersen and AWSC knew or with deliberat e
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02-CV-0870 J( RBB) 169

#105317