Part 2

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I the comparable prior year period . In addition, defendant Gardner was quoted in the release as 2 saying: 3 We had a remarkable quarter of growth in our infrastructure management solutions and Get .It! employee self service solutions . 4 This quarter saw a large number of new products, technology, an d alliances come to fruition, further establishing the basis for 5 continued growth into the future .
6 560 .
The individually named defendants (other than defendants Rodda, Hosley, an d
7 Dammeyer) read and approved the issuance of Peregrine's October 3 and October 24, 2000 press 8 releases (except as to defendant van den Berg with regard to the October 24, 2000 press release) . 9 As part of its quarterly review work, Arthur Andersen and AWSC read and approved of th e 10 October 24, 2000 Peregrine press release . These defendants knew, or were deliberately reckless 11 in not knowing, that the financial information contained in the foregoing statements wa s 12 materially false and misleading for the reasons set forth above . 13 561 . On October 24, 2000, Peregrine management, led by defendant Gardner, held a 14 conference call with investors and securities analysts . The purpose of the conference call was to 15 give Peregrine management the opportunity to discuss with investors the Company's secon d 16 quarter fiscal year 2001 results . During the conference call, Peregrine management reported on 17 Peregrine's previously released financial results for the quarter . In addition, Peregrine 19 management stated that the Company expected to be cash flow positive during the second h al f of 19 the year and that accounts receivable rose to $165 million while DSO fell from 122 days to 106 20 days . 21 562. On October 25, 2000, CIBC issued a report based on the conference call with 22 Peregrine management . Relying on management's representations and Peregrine's publicly 23 released financial results, CIBC rated Peregrine's stock a "buy ." 24 563 . In response to the information disseminated by Peregrine management and the 25 contents of the analyst reports based on information provided by Peregrine management ,
26 Peregrine's stock closed at $23 .00 per share on October 26, 2000 .
27 564. The individually named defendants (other than defendants Rodda, Hosley, and 28 Dammeyer) either knew or were deliberately reckless in not knowing that the financia l
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information provided to investors and securities analysts in the foregoing conference call was
2 materially misleading for the reasons set forth above . These defendants knew that securities 3 analysts would rely on their materially false and misleading statements in writing their research
4 reports which would be disseminated to the investing public . 5 565 . On November 14, 2000, the Company filed its Form 10-Q for the second quarte r
6 I of fiscal year 2001 with the SEC . It incorporated the financial statements that were included i n 7 the October 24, 2000 press release . Defendant Gless signed the Form 10-Q in his capacity a s
8 1 Vice President of Finance and Chief Accounting Officer .

9 10 11 12 13 14 15 16 566 . The Form 10-Q also included the following statement on revenue recognition : Revenues from direct and indirect license agreements are recognized currently, provided that all of the following conditions are met : a noncancelable 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 no other significant vendor obligations exist . 567 . The foregoing statements were materially false and misleading because Peregrine's reported revenue was materially overstated, there was no disclosure of a material change in its accounting policy as applied to the second quarter of fiscal year 2001, its accounts
17 receivable were understated, its cash balances were overstated, its liabilities were understated and 18 its DSO were understated for the reasons set forth above . 19 20 21 22 23 568 . The individually named defendants (other than defendants Rodda, Hosley, van den Berg, and Dammeyer) and Arthur Andersen and AWSC, read and approved the filing of Peregrine's Form 10-Q with the SEC . Each of these defendants either knew, or were deliberately reckless in not knowing, that the financial information contained in the foregoing 10-Q was materially false and misleading for the reasons set forth above .
24 30 2001 25 26 569 . On January 24, 2001, Pereg ri ne issued a press release that announced "record"
quarterly financial results for the third quarter of fiscal year 2001 ended December 31, 2000, wit h
27
total revenues of $156 .6 million . The release stated that "[t]otal revenues . . . climbed by 132%"
28 ~ compared with revenues in the comparable prior period . Peregrine stated that these results wer e
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1 "driven by a 114% increase in software license revenues over the comparable prior year period . 2 . ." Defendant Gardner was quoted as saying that "[djespite uncertainty and turbulence in th e
3 economy, particularly in the United States, we exceeded our objectives for the December 4 quarter . " 5 570 . The individually named defendants (other than defendants Rodda, Hosley, van 6 den Berg, and Dammeyer) read and approved the contents of Peregrine's January 24, 2001 press 7 release . As part of their quarterly review work, Arthur Andersen and AWSC read and approved 8 of the foregoing Peregrine press release . These defendants knew, or were deliberately reckless in 9 not knowing, that the financial information contained in the foregoing statement was materially 10 false and misleading for the reasons set forth above . 11 571 . On January 24, 2001, Peregrine management, led by defendant Gardner, held a 12 conference call with investors and securities analysts . The purpose of the conference call was to 13 give Peregrine management the opportunity to discuss with investors the Company's thir d 14 quarter fiscal year 2001 results. During the conference call, Peregrine management reported on 15 Peregrine's previously released financial results for the quarter. In addition, Peregrine 16 management stated that the balance sheet improved as DSOs fell to 97 days from 106 days last 17 quarter and that the Company expected to make additional progress on this front by the end of 18 the fourth quarter and that international revenues had increased over 37% . 19 572 . On January 25, 2001, CIBC issued a report based on the conference call with 20 Peregrine management . In its report, CIBC repeated Peregrine's previously released financial 21 results and noted that Peregrine management had indicated that : 22 During the quarter the balance sheet strengthened . Accounts receivables were flat at $165 million while DSOs fell to 97 from 23 106 last quarter as the company stepped up its collection activities . Management expects to make additional progress on this front and 24 expects DSOs to fall to the low 90s by the end of the fourthquarter. Deferred revenue increased 22% sequentiall y 25 ($15 million) to $83 million . Management attributed the increase to some recent wins in its EMG operation . 26 27 Internationally, Peregrine knocked the cover off the ball . License 28 revenue increased over 37% sequentially to $40 .8 million. Driving
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2 3
this growth were several large deals in the quarter in the infrastructure and e-markets groups . Management believes that what the company witnessed in the quarter is quite sustainable and is shifting resources to Europe and Asia .
4 Relying on management's representations and Peregrine's publicly released financial results , 5 6 CIBC rated Peregrine's stock a "buy ." 573 . In response to the information disseminated by Peregrine management and th e
7 contents of the analyst reports based on information provided by Peregrine management, 8 Peregri ne' s stock rose to $29 . 81 per share at the closing of trading on Janua ry 29, 2001 . 9 574 . The individually named defendants ( other than defendants Rodda , Hosley, van
10 den Berg, and Dammeyer) either knew or were deliberately reckless in not knowing that the 11 financial information provided to investors and securities analysts in the foregoing conference
12 call was materially misleading for the reasons set forth above . These defendants knew that 13 securities analysts would rely on their materially false and misleading statements in writing their
14 research reports which would be disseminated to the investing public . 15 16 17 18 19 20 21 22 23 24 25 575 . The Form 10-Q also included the following statement on revenue recognition : Revenues from direct and indirect license agreements are recognized currently, provided that all of the following conditions are met : a noncancelable 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 no other significant vendor obligations exist . 576 . The foregoing statements were materially false and misleading becaus e Peregrine's reported revenue was materially overstated, there was no disclosure of a material change in its accounting policy as applied to the third quarter of fiscal year 2001, its accounts receivable were understated, its cash balances were overstated, its liabilities were understated and its DSO were understated for the reasons set forth above .
577. The individually named defendants (other than defend ants Rodda, Hosley, van
26 den Berg, and Dammeyer) and Arthur Andersen and AWSC read and approved the filing of th e 27 28 foregoing Form 10-Q with the SEC . Each of these defend ants either knew , or were deliberatel y reckless in not knowing , that the fi nancial information contained in the foregoing 10-Q was
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1 I materially false and misleading for the reasons set forth above . 2 1 40 2001 3 578 . On April 4, 2001, Pereg ri ne issued a press release stating that its revenues an d
4 earnings per share for the fourth quarter of fiscal year 2001 ended March 31, 2001, would be 5 consistent with guidance previously provided to investors by the Company . Specifically, it stated 6 that "fjor the fiscal fourth quarter ended March 31, 2001, the Company expects to report license 7 revenues of approximately $105 million, total revenues of approximately $170 million and 8 earnings per share of $0 .16 . . ." Defendant Gardner is quoted as saying that "[d]espite 9 challenging economic conditions worldwide, we were able to meet our objectives for the quarter 10 1 and deliver strong profitable results, the sixteenth consecutive quarter we have done so ." After this press release was issued, Peregrine's stock gained $5 .25 per share, closing at $19 .06 per 12 share on April 5, 2001 . 13 579 . The individually named defendants ( other than defendants Rodda, Hosley, van
14 den Berg, and Dammeyer) read and approved the issuance of Peregrine's April 4, 2001 press 15 release . These defendants knew, or were deliberately reckless in not knowing, that the financial 16 information contained in the foregoing statement was materially false and misleading for the 17 reasons set forth above . 18 580 . On April 26, 2001, Peregrine issued a press release confirming the preliminary
19 results it had announced on April 4 . It stated that revenue for the fourth quarter of fiscal year 20 2001 was "a record $171 .0 million, an increase of 124 percent from the same quarter a year ago ." 21 For fiscal year 2001, the press release states that revenue totaled $564 .7 million an increase of
22 123% from the prior year . In the April 26 release, defendant Gardner was also quoted as saying : 23 24
25 26 27 28 We were particularly pleased with the strength of our sales through managed services providers and our professional services partners . As we continue to meet major milestones in our corporate
development and build our solutions portfolio, these relationships become increasingly important to our ability to extend our reach to new customers and markets .
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Our results this quarter in the face of challenging economic conditions demonstrate the value of our solutions . . . As we enter fiscal 2002, we remain confident in our market position and the opportunity we address . . .
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S 1 581 . Peregrine's stock closed at $25 .60 per share on April 27, 2001 . 2 582 . The individually named defendants (other than defendants Rodda, Hosley, van 3 den Berg, and Dammeyer) read and approved the issuance of Peregrine's April 26, 2001 press 4 release. As part of its audit procedures, Arthur Andersen and AWSC read and approved of the 5 foregoing Peregrine press release . These defendants knew, or were deliberately reckless in not 6 knowing, that the financial information contained in the foregoing statements was materiall y 7 false and misleading for the reasons set forth above .
8 583 . On April 26, 2001, Peregrine management, led by defendant Gardner, held a
9 conference call with investors and securities analysts . The purpose of the conference call was to 10 give Peregrine management the opportunity to discuss with investors the Company's fourt h 11 quarter fiscal year 2001 results . During the conference call, Peregrine management reported on 12 Peregrine's previously released financial results for the quarter . In addition, Peregrine 13 management stated that the Company met its earnings per share guidance and that key balance 14 sheet metrics improved or remained steady (such as a cash increase of $38 million) with DSOs 15 remaining essentially flat at 95 days . 16 584 . On April 27, 2001, CIBC issued a report based on the conference call wit h 17 Peregrine management . In its report, CIBC noted that Peregrine management had indicated that : 18 Not only was the company able to meet its EPS expectation, bu t key balance sheet metrics also improved or held steady . Even 19 though accounts receivables showed a moderate $15 million increase in the quarter, DSOs were essentially flat at 95 . Deferred 20 revenue, which consists almost exclusively of service related activities (maintenance, network usage, etc .) climbed $12 million 21 $14% sequentially) to $95 million . Cash increased in the quarter by about $38 million to $287 million . Management attributed the 22 growth to financing activity in the quarter, option exercises, acquisitions (Extricity brought some cash) as well as a moderat e 23 amount of cash flow from operations . 24 Relying on management's representations and Peregrine's publicly released financial results, 25 CIBC rated Peregrine's stock a "strong buy ." 26 585. In response to the information disseminated by Peregrine and the contents of the 27 analyst reports based on information provided by Peregrine management, Peregrine's stoc k 28 closed at $25 .78 per share on April 30, 2001 .
0.
586 . The individually named defendants (other than defendants Rodda, Hosley, van
2 den Berg, and Dammeyer) either knew or were deliberately reckless in not knowing that the 3 financial information provided to investors and securities analysts in the foregoing conference 4 call was materially misleading for the reasons set forth above . These defendants knew that 5 securities analysts would rely on their materially false and misleading statements in writing their 6 research reports which would be disseminated to the investing public . 7 8 9 FISCAL YEAR 2001 ANNUAL REPORT 587 . On June 29, 2001, the Company filed its Form 10-K for fiscal year 2001 with th e SEC . It incorporated the financial statements that appeared in the April 26, 2001 press release .
10 Defendant Gless signed the Form 10-Kin his capacity as Vice President of Finance and Chief 11 Accounting Officer, defendant Gardner signed it in his capacity as Chief Executive Officer and
1 2 Chairman of the Board of Directors and defendants Moores, Noell, Watrous and Savoy signed it 13 1 as directors of the Company . 14 588 . Peregrine's financial statements contained in the Form 10-K were audited by th e
15 Arthur Andersen and AWSC and contained Arthur Andersen's unqualified audit report o n 16 Peregrine's fiscal 2001 financial statements . 17 18 19 1 20 21 22 23 589 . The Form 10-K also included the following statement on revenue recognition : Revenues from direct and indirect license agreements are recognized currently, provided that all of the following conditions are met : a noncancelable 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 no other significant vendor obligations exist. 590 . The foregoing statements were materially false and misleading because Peregrine's reported revenue was materially overstated, there was no disclosure of a material
24 change in its accounting policy as applied to the fourth quarter of fiscal year 2001, its accounts 25 receivable were understated, its cash balances were overstated, its liabilities were understated and
26 its DSO were understated for the reasons set forth above . 27 591 . The individually named defendants who signed the Form 10-K read and approve d
28 its contents and approved its filing with the SEC . Each of these defendants and Arthur Anderse n
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0
1 2
and AWSC either knew , or were deliberately reckless in not knowing , that the financial information contained in the Form 10-K was materially false and misleading for the reasons se t
3 forth above . 4 5 6 REMEDY PROXY STATEMEN T 592 . On July 23, 2001, Peregrine filed Amendment No . 1 to its Form S-4 Registratio n Statement with the SEC . The Amendment contained a Joint Proxy Statement and Prospectus, th e
7 purpose of which was to solicit proxies from Remedy Corporation shareholders to approve of th e 8 proposed merger of Peregrine and Remedy . The Joint Proxy contained a discussion of 9 Peregrine's business, and incorporated by reference Peregrine's financial statements (and audit
10 reports) for the three years ended March 31, 2001 . The Joint Proxy also stated that : 11 12 13 1 14 1 15 16 17 18 19 20 593 . The Amendment was signed by each of the individual defendants who wer e Peregrine directors at that time . Arthur Andersen and AWSC consented to the use of the false audit reports for the fiscal years ending March 31, 2000 and 2001 . Each of these defendants and Arthur Andersen and AWSC either knew, or were deliberately reckless in disregarding, that the financial information for the fiscal years ending 2000 and 2001 contained in or incorporated into the Joint Proxy was materially false and misleading for the reasons set forth above . Peregrine's selected consolidated financial data is presented below as of March 31, 2001, 2000, 1999, 1998 and 1997 and for each of the years in the five-year period ended March 31, 2001, and derives from the consolidated financial statements of Peregrine Systems, Inc. and its subsidiaries, which financial statements have been audited by Arthur Andersen LLP, independent public accountants .
2 1 .102002 22 594. On July 24, 2001, Peregrine issued a press release announcing its fin ancial results
23 I for the first quarter of fiscal year 2002 ended June 30, 2001 . Peregrine stated that revenues fo r 24 the quarter were a "record $172 .0 million, an increase of 82% from the same quarter a year ago ." 25 26 27 In the release, defendant Gardner was quoted as saying : "We were pleased to post significant topline [revenue] growth in this challenging economic environment[.] " 595 . The individually named defendants (other than defendants Rodda, Hosley, an d
28 I van den Berg) read and approved the issuance of Peregrine's July 24, 2001 press release . As part
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of its quarterly review work, Arthur Andersen and AWSC read and approved of the foregoing Peregrine press release . These defendants knew, or were deliberately reckless in not knowing, that the financial information contained in the foregoing statement was materially false and misleading for the reasons set forth above .
596. On July 24, 2001, Peregrine management, led by defendant Gardner, held a
conference call with investors and securities analysts . The purpose of the conference call was to give Peregrine management the opportunity to discuss with investors the Company's first quarter 8 fiscal year 2002 results of operations . During the conference call, Peregrine managemen t 9 reported on Peregrine's previously released financial results for the quarter . In addition, 10 Peregrine management stated that it was comfortable with analysts projections of 30%-40% 11 revenue growth and 25%-35% earnings per share growth based on the strength of its business
12 1 and that DSOs were 99 days and expected to decrease in the next quarter to 80-90 days . 13 597 . On July 24, 2001, Bear Stearns & Co ., Inc . ("Bear Stearns") issued a report base d
14 on the conference call with Peregrine management . In its report, Bear Steams repeated 15 16 Peregrine's previously released financial results and noted that Peregrine management had indicated that it saw "positive growth in Asia Pacific, Africa, and Eastern Europe ." The report
17 also stated that : 18 19 1 20 21 In sharp contrast to the norm, management reiterated revenue and EPS guidance of 30-40% top line growth and 25-35% EPS growth for the full FY02, citing strength in all areas of business (product mix, geographic mix, and a return to strength in key vertica l markets) . Relying on management's representations in the conference call and Peregrine's publicl y
22 released financial results, Bear Steams gave Peregrine a "buy" rating . 23 24 25 26 27 598 . On July 25, 2001, CIBC also issued a report based on the prior day's conference call with Peregrine management. In its report, CIBC repeated Peregrine's previously released financial statements and noted that Peregrine management had indicated that : "Peregrine's revenues of $172 million came in ahead of expectations, which the Street had pegged at $165 million ." The report also stated that "Management noted that the strong verticals during the
28 quarter were financial, telecom, high tech, and government and that the mix was a return to a
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1 I more typical mix, after the financial vertical was very weak in the March quarter . Excludin g 2 I acquisitions, the company indicated that year over year revenue growth was about 50% ." 3 4 5 6 7 8 9 10 Accordingly, CIBC rated Peregrine a "strong buy " in its repo rt dated July 25, 2001 .
599. On July 25, 2001, U .S. Bancorp Piper Jaffray (" Piper Jaffray") issued a report
based on the prior day's conference call with Peregrine management . In its report, Piper Jaffray noted that Peregrine management had exceeded the revenue expectations and that Peregrine management indicated that "[t]he Company expects to approach DSOs of 80-90 days in the coming quarter." Relying on management's representations and Peregrine's publicly released financial results, Piper Jaffray rated Peregrine's stock a "strong buy ." 600 . In response to the information disseminated by Peregrine and the contents of th e
11 I analyst reports based on information provided by Peregrine management, Peregrine stock rose to 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 $27 per share at the close of trading on July 26, 2001 . 601 . The individually named defendants (other than defendants Rodda, Hosley, an d van den Berg) either knew or were deliberately reckless in not knowing that the financial information provided to investors and securities analysts in the foregoing conference call was materially misleading for the reasons set forth above . These defendants knew that securities analysts would rely on their materially false and misleading statements in writing their research reports which would be disseminated to the investing public . 602 . On August 14, 2001, the Company filed its Form I0-Q for the first quarter o f fiscal year 2002 with the SEC . It incorporated the financial statements that were included with the July 24, 2001 press release . Defendant Gless signed the Form 10-Q in his capacity as Executive Vice President an d Chief Accounting Officer . 603 . The Form 10-Q also included the following statement on revenue recognition : Revenues from direct and indirect license agreements are recognized, provided that all of the following conditions are met : a noncancelable 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 no other significant vendor obligations exist .
604 . The foregoing statements were materially false and misleading becaus e
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s
1 2 3 4 5 6 7 8 its DSO were understated for the reasons set forth above .
Peregrine's reported revenue was materially overstated, there was no disclosure of a material change in its accounting policy as applied to the first quarter of fiscal year 2002, its accounts receivable were understated, its cash balances were overstated, its liabilities were understated and
605 . The individually named defendants (other than defendants Rodda, Hosley, an d van den Berg) and Arthur Andersen and AWSC read and approved the filing of Peregrine's I O-Q for the first quarter of fiscal year 2002 with the SEC . Each of these defendants either knew, or were deliberately reckless in not knowing, that the financial information contained in the
9 foregoing I0-Q was materially false and misleading for the reasons set forth above . 1 0 .202002 11 12 13 14 15 606 . On October 3, 2001, Peregri ne issued a press rele ase announcing the Company's preliminary financial results for the second quarter of fiscal year 2002 ended September 30, 2001 . It stated that "Peregrine expects to report quarterly revenue of approximately $175 million . Based on these revenues, the company expects to report net income of approximately $ .05 per share, excluding acquisition costs and restructuring charges ." The
16 press release quotes defendant Gardner as saying : 17 Like many companies in our industry, the tragic events of September 11 and the subsequent effect on the global economy impacted our September quarter results . However, even during these challenging times, we were able to generate approximately $175 million in total revenue, demonstrating the strength of our product portfolio and the value proposition we deliver to our customers . . . 607 . The individually named defend ants ( other th an defendan ts Rodda, Hosley, an d van den Berg) read and approved the issuance of Peregrine's October 3, 2001 press release . These defendants knew, or were deliberately reckless in not knowing, that the financial
18 19 20
21 22 23
24 information contained in the foregoing statement was materially false and misleading for the 25 26 27 28 reasons set forth above . 608 . On October 24, 2001, Peregrine issued a press release confirming the preliminary financial results it had previously announced for the second quarter of fiscal year 2002 . It stated that total revenues were a "record" $175 million, an increase of 23% from that reported in th e
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0 1 second quarter of fiscal 2001 .
2 609 . The individually named defendants (other than defendants Rodda, Hosley, and 3 van den Berg) read and approved the issuance of Peregrine's October 24, 2001 press release . As 4 part of its quarterly review work, Arthur Andersen and AWSC read and approved of th e 5 foregoing Peregrine press release . These defendants knew, or were deliberately reckless in no t 6 knowing, that the financial information contained in the foregoing statement was materially false 7 and misleading for the reasons set forth above . 8 610 . On October 24, 2001, Peregrine management, led by defendant Gardner, held a 9 conference call with investors and securities analysts . The purpose of the conference call was to 10 give Peregrine management the opportunity to discuss with investors the Company's secon d 1 l quarter fiscal year 2002 results of operations . During the conference call, Peregrine management 12 reported on Peregrine's previously released financial results for the quarter . In addition , 13 Peregrine management stated that guidance for the remainder of the current and following year 14 remain unchanged, that the Company expected to finish the fiscal year with $140-$150 million in 15 cash and that DSOs for Peregrine on a stand alone basis were 99 days and 113 days whe n 16 including recently acquired Remedy . 17 611 . On October 24, 2001, CIBC issued a report based on the conference call with 18 Peregrine management . In its report, CIBC repeated Peregrine's previously released financial 19 results and noted that Peregrine management had indicated that , 20 Guidance for the remainder of this year and next year remain unchanged. The Company expects revenue of $450 million in the 21 second half and a snap back in operating margins, which were 8% this quarter, vs . 17% last year . Management indicated tha t 22 operations appeared to be returning to a more normal pace after a virtual standstill in late September . Peregrine expects to finish the 23 fiscal year with $140 million to $150 million in cash . 24 612. On October 24, 2001, Bear Steams issued a report based on the conference call 25 with Peregrine management . In its report, Bear Steams repeated Peregrine's previously released 26 financial results and noted that Peregrine management had indicated that :"Management affirmed 27 guidance -- we are maintaining estimates ."
28 613 . On October 25, 2001, Thomas Weisel Partners ("Weisel") issued a report based
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1 2 3 4 5 6 "management commentary was encouraging ."
on the conference call with Peregrine management . In its report, Weisel repeated Peregrine' s previously released financial results and noted that Peregrine management had indicated tha t
614 . On October 25, 2001, Piper Jaffray issued a repo rt based on the conference call with Peregrine management . In its report, Piper Jaffray repeated Peregrine's previously released financial results and noted that Peregrine management had stated that the Company reported
7 1 revenues in line with expectations, finished the quarter with $142 million in cash and DSOs for
8 9 Peregrine, excluding Remedy, remained essentially flat at 99 days . 615 . Relying on management's representations and Peregrine's publicly released
10 financial results, CIBC, Bear Stearns, Weisel and Piper Jaffray each rated Peregrine a "buy ." 11 12 13 14 15 616 . In response to the information disseminated by Peregrine and the contents of th e analyst reports based on information provided by Peregrine management, Peregrine's stoc k closed at $16 .46 per share on October 26, 2001 . 617 . The individually named defendants (other than defendants Rodda, Hosley, an d van den Berg) either knew or were deliberately reckless in not knowing that the financial
1 6 information provided to investors and securities analysts in the foregoing conference call was 17 1 materially misleading for the reasons set forth above . These defendants knew that securities
18 1 analysts would rely on their materially false and misleading statements in writing their research
19 1 reports which would be disseminated to the investing public .

20 21 22 23 24 25 26 27 618 . On November 21, 2001, Peregrine filed its Form 10-Q for the second quarter o f fiscal year 2002 with the SEC . It incorporated the financial statements that appeared in th e October 24, 2001 press release . Defendant Gless signed the Form 10-Q in his capacity a s Executive Vice President and Chief Accounting Officer . 619 . The Form 10-Q also stated the following on revenue recognition : Revenues from direct and indirect license agreements are recognized, provided that all of the following conditions are met : a noncancelable 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 no other significant vendor obligations exist .
28 1
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620. The financial statements in the Form I 0-Q for the second quarter of fiscal year
2 2002 were materially false and misleading when made because Peregrine's reported revenue was 3 4 5 materially overstated, there was no disclosure of a material change in its accounting policy as applied to the second quarter of fiscal year 2002, its accounts receivable were understated, its cash balances were overstated, its liabilities were understated and its DSO were understated fo r
6 the reasons set forth above . 7 621 . The individually named defendants (other than defendants Rodda, Hosley, and
8 van den Berg) and Arthur Andersen and AWSC read and approved the issuance of Peregrine's 9 filing of the 10-Q with the SEC . Each of these defendants either knew, or were deliberately 10 reckless in not knowing, that the financial information contained in the foregoing statements 11 12 13 were materially false and misleading for the reasons set forth i above . 302002 622. On January 2, 2002, Peregrine issued a press release announcing the Company' s
14 preliminary results for the third quarter of fiscal year 2002 ended December 31, 2001 . It stated 15 16 that Peregrine anticipated total revenues of approximately $175 million . 623 . The individually named defendants (other than defendants Rodda, Hosley, and
17 van den Berg) read and approved the issuance of Peregrine's January 2, 2002 press release . 18 These defendants knew, or were deliberately reckless in not knowing, that the financia l
19 information contained in the foregoing statement was materially false and misleading for th e 20 reasons set forth above . 21 624 . On January 3, 2002, Peregrine management , led by defendant Gardner, held a
22 conference call with investors and securities analysts . The purpose of the conference call was t o 23 give Peregrine management the opportunity to discuss with investors the Company's third
24 quarter fiscal year 2002 preliminary results . During the conference call, Peregrine management 25 26 reported on Peregrine's previously released preliminary financial results for the quarter . 625 . On January 3, 2002, CIBC issued a report based on the conference call with
27 Peregrine management . In its report, CIBC repeated Peregrine's previously released preliminary 28 financial results . Relying on management's representations and Peregrine's publicly release d
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financial results , CIBC gave Peregrine's stock a "buy" rating .
626. On January 3, 2002, Piper Jaffray issued a report based on the conference cal l
3 with Peregrine management. In its report, Piper Jaffray repeated Peregrine's previously released 4 preliminary financial results and gave Peregrine's stock a rating of "outperform ." 5 627 . On January 3, 2002, Bear Steams issued a report based on the conference call with
6 Peregrine management . In its report, Bear Steams repeated Peregrine's previously released 7 financial results and rated Peregrine's stock as "attractive." 8 628 . In response to the information disseminated by Peregrine and the contents of the
9 analyst reports based on information provided by Peregrine management, Peregrine's stock 10 closed at $9 .40 per share on January 4, 2002 . 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 629 . The individually named defendants (other than defendants Rodda, Hosley, and van den Berg) either knew or were deliberately reckless in not knowing that the financial information provided to investors and securities analysts in the foregoing conference call was materially misleading for the reasons set forth above . These defendants knew that securitie s analysts would rely on their materially false and misleading statements in writing their research reports which would be disseminated to the investing public . 630 . On January 24, 2002, Peregrine issued a press release confirming that total revenues for the third quarter of fiscal year 2002 were $175 .2 million . 631 . The individually named defendants (other than defendants Rodda, Hosley, and van den Berg) read and approved the issuance of Peregrine's January 24, 2002 press release . As part of its quarterly review work, Arthur Andersen and AWSC read and approved of the foregoing press release. These defendants knew, or were deliberately reckless in not knowing, that the financial information contained in the foregoing statement was materially false an d misleading for the reasons set forth above .
632 . Such statements were materially false and misleading because Peregrine's reported revenue was materially overstated, its accounts receivable were understated, its cash balances were overstated, its liabilities were understated and its DSO were understated for th e
28 reasons set forth above.

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1 633 . On January 24, 2002, Peregrine management held a conference call with investors 2 and securities analysts . The purpose of the conference call was to give Peregrine managemen t
3 the opportunity to discuss with investors the Company's third quarter fiscal year 2002 results . 4 During the conference call, Peregrine management reported on Peregrine's previously release d 5 financial results for the quarter. In addition, Peregrine management stated that its DSO remained 6 essentially flat at 100 up one day from the prior quarter and that the Company finished th e 7 quarter with approximately $107 million in cash. 8 634 . On January 24, 2002, CIBC issued a report based on the conference call with 9 Peregrine management . In its report, CIBC repeated Peregrine's previously released financial 10 results and noted that the "Company appears to be on the right track ." Relying upon 11 management's representations and Peregrine's publicly released financial results, CIBC rated 12 Peregrine's stock a "buy ." 13 635 . On January 24, 2002, Piper Jaffray and Bear Stearns also issued reports based on 14 the conference call with Peregrine management . Piper Jaffray and Bear Stearns each repeated 15 Peregrine's previously released financial results and rated Peregrine's stock as "outperform" and 16 "attractive," respectively . 17 636 . In response to the information disseminated by Peregrine and the contents of the 18 analyst reports based on information provided by Peregrine management, Peregrine's stoc k 19 closed at $7 .95 per share on January 25, 2002 . 20 637 . The individually named defendants (other than defendants Rodda, Hosley, and 21 van den Berg) either knew or were deliberately reckless in not knowing that the financia l 22 information provided to investors and securities analysts in the foregoing conference call was 23 materially misleading for the reasons set forth above . These defendants knew that securitie s 24 analysts would rely on their materially false and misleading statements in writing their research 25 reports which would be disseminated to the investing public . 26 638 . On February 14, 2002, Peregrine filed its Form i 0-Q for the third quarter of fiscal 27 year 2002 with the SEC . It incorporated the financial statements that appeared in th e
28 January 24, 2002 press release . The Form 10-Q was signed by defendant Gless in his capacity as FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS #105317 Master File No. 02-CV-0870 J(RBB) 210
1 2
Executive Vice President and Chief Accounting Officer . 639 . The foregoing statements were materially false an d misleading because
3 Peregrine's reported revenue was materially overstated, there was no disclosure of a material 4 change in its accounting policy as applied to the third quarter of fiscal year 2002, its accounts 5 receivable were understated, its cash balances were overstated, its liabilities were understated an d
6 I its DSO were understated for the reasons set forth above .
71
640 . The individually named defendants (other than defendants Rodda, Hosley, and
8 1 van den Berg) and Arthur Andersen and AWSC read and approved the filing of Peregrine's Form 9 1 I0-Q with the SEC . Each of these defendants either knew, or were deliberately reckless in no t
1 0 knowing, that the financial information contained in the foregoing Form 10-Q was materially false and misleading for the reasons set forth above . 12 13 THE TRUTH BEGINS TO EMERGE 641 . On April 5, 2002, Peregrine issued a press release announcing that it was
14 replacing Arthur Andersen as its independent auditor with KPMG . It quoted defendant Gardner 15 as saying that "we have the highest regard for our audit team's work ethic," but "in light of th e 16 current uncertainties at Arthur Andersen [relating to Enron], we felt it was in the best interest of 17 18 our company and shareholders to retain KPMG as our independent auditors at this time ." 642 . After the close of trading on April 30, 2002, Peregrine issued a press release
19 announcing that it would delay the release of its financial results for the fourth quarter and year20 end 2002 . The results were supposed to have been announced on May 2, 2002, but now would 21 be delayed until the week of May 6, 2002 due to the "continued audit activities by KPMG, th e
22 company's independent auditors . " 23 643 . Before the market opened on May 6, 2002 (and approximately thirty (30) days
24 after the engagement of KPMG), Peregrine issued a press release announcing (i) the discovery of 25 accounting irregularities ; (ii) an internal accounting investigation ; and (iii) the resignation of 26 defendants Gardner and Gless . 27 28
644 . Peregrine's stock price fell approximately 67% in response to this disclosure . On May 3, 2002, Peregrine stock closed at $2 .57 per share . On the next trading day (May 6, 2002),
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Peregrine common stock closed at $0 .89 per share on extremely heavy volume . 2 645 . On May 28, 2002, Peregrine filed a Form 8-K with the SEC stating that its Board
3 I of Directors had terminated its engagement of KPMG as its auditor . Approximately $35 million 4 5 6 7 of the then estimated $100 million in improperly recognized revenue came from questionable transactions with KPMG' s consulting arm .
646. In a Form 8-K filed with the SEC on June 3, 2002 (which was date d
May 24, 2002), Peregrine stated that, in the course of its engagement, KPMG had informed th e Company's Audit Committee and other Board members that:
9 10 11 12 13 14 15 16 17 18
a. Information had come to the attention of KPMG that had led it to no longer be able to rely on representations by some members of management. This information consisted principally of customer documentation and accounting information provided by personnel within the company's sales and finance organizations which, when taken together, pointed out accounting inconsistencies, errors and irregularities, principally in the company's indirect channel sales ; and
b. KPMG had concluded the information provided to it during the course of its audit activities would impact the fairness and reliability of the company's audited financial statements for fiscal 2000 and 2001 and for each of the three subsequent unaudited quarterly periods reported by the company for fiscal 2002 . On May 23, 2002, the Company announced that it would be restating its financial statements for fiscal 2000 and 2001 and each of the first three quarters of fiscal 2002 .
647 . In the Form 8-K, Peregrine stated that the "questions and issues" raised about
19 Pereg ri ne' s financial statements by KPMG fell into four categories : 20 21 22 23 24 25 26 27 a. Revenue recognition irregularities, principally arising in the company's indirect channel sales and, to a lesser extent, arising in connection with commercial transactions involvin g contemporaneous product purchase activities and investments or acquisitions . KPMG has advised that correcting these irregularities would have the effect generally of delaying to later periods, or nullifying, revenue recognized from product sales ;
b . Accounting and transparency-of-presentation issues associated with the accounting treatment for impaired accounts receivable . KPMG has advised that some write-offs of impaired accounts receivable should have been accounted for as errors in the previous recognition of revenue . KPMG also advised that where write-offs of impaired accounts receivable were appropriately made, reclassification of those adjustments as bad debt or as a reversal of revenue would be appropriate ;
28
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1 2 3 4 5 6 7
c . The appropriateness, from an accounting perspective, of the manner in which the company recorded on its balance sheet the financing of some of its accounts receivable with three banks ; and d. KPMG has advised that the financing of some of these accounts receivable should be recorded for balance sheet purposes as loan transactions and not as sales of accounts receivable . 648 . On June 5, 2002, Peregrine filed a Form 8-K/A for the purpose of filing a lette r from KPMG to the SEC . In its letter, KPMG noted that the prior statements made by Peregrine in the June 3, 2002 Form 8-K were inaccurate or incomplete in that KPMG had determined that it
8 was necessary to significantly expand the scope of the fiscal 2002 audit, and recommended an 9 10 11 internal investigation by forensic auditing experts "into the various indicators of possible fraud ." 649 . On June 27, 2002, Peregrine issued a press rele as e announcing that the NASDAQ Stock Market had notified the Company of its intention to delist the Company at the opening of
12 trading on August 30, 2002 because it had not filed periodic reports with the SEC . On 13 August 16, 2002 Peregrine announced in a press release that it had been given further notification
1 4 of noncompliance by the NASDAQ based on the stock's failure to maintain a bid price over 15 16 $1 .00 per share . 650 . On August 29, 2002 Pereg ri ne issued a press release announcing that it was
17 "restructuring" its accounts receivable, and that management now estimated the overstatement of 18 revenue during the eleven quarter period (ending the third quarter of fiscal year 2002) to be $250
19 million. In this release, Peregrine also quantified the amount of debt not reflected on its financia l 20 statements ( up to $180 million) and the amount by which it had understated stock optio n 21 22 23 24 25 26 27 28 compensation ($100 million) . 651 . On August 29, 2002 Peregrine issued an other press release announcing that NASDAQ would delist the Company from the NASDAQ National Market at the opening o f trading on August 30, 2002 because the Company "had not filed periodic reports with th e Securities and Exchange Commission." 652 . On September 22, 2002 Peregrine, "[c]iting the financial and legal issues raised by the company's inability to file audited financial reports for the 2000, 2001 and 2002 fiscal years, among other reasons ," announced in a press release that it had filed a voluntary petition t o
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1 2 3 4 5 6
reorganize under Chapter 11 of the U .S. Bankruptcy Code . 653 . On February 28, 2003, Peregrine filed with the SEC its restatement of its financial statements for fiscal years 2000 and 2001 and the first three quarters of fiscal year 2002 . BASIS OF FACTUAL ALLEGATION S 654 . The basis for Lead Plaintiffs' factual allegations as alleged herein consists of th e following : (i) review of documents produced by Peregrine to the SEC and the U .S. Department
7 of Justice in connection with those authorities' investigation of Peregrine and certain former 8 officers and directors of Peregrine including investigatory interviews of witnesses ; (ii) a review
9 of Peregrine press releases ; (iii) a review of Peregrine SEC filings ; (iv) a review of BMC 10 11 12 13 Software's SEC filings ; (v) a review of Peregrine's website; (vi) a review of securities analysts' reports on Peregrine ; (vii) a review of reports, articles and discussions concerning Peregrine and/or its accounting irregularities contained in the print and electronic media ; (viii) interviews of witnesses; (ix) a review of the trading volume and pricing of Peregrine ; (x) consultations with
1 4 expert consultants ; (xi) a review of complaints filed in other pending actions ; (xii) a review of 15 pleadings filed in Peregrine's bankruptcy case ; and (xiii) a review of the guilty pleas of
16 defendants Gless, Spitzer and Cappel . 17 18 DEFENDANTS' CONCEALMENT OF WRONGDOIN G 655 . Defendants actively concealed their wrongdoing as alleged herein such that no
19 reasonable investor would have been put on inquiry or actual notice of Peregrine's wrongdoing 20 as alleged herein until, at the earliest, May 6, 2002 when Peregrine announced the resignations of 21 defendants Gardner and Gless and the commencement of an investigation into potential
22 accounting irregularities . These consolidated actions were filed within one year of May 6, 2002 . 23 As to defendants KPMG, KPMG Consulting, Rodda, and Dammeyer, Lead Plaintiffs were
24 unaware of the facts supporting the allegations against these defendants until they had access to 25 26 and were able to review Peregrine's document production to the SEC and U .S. Department o f Justice beginning in December 2003 .
27 /I 28 11
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1 THERE IS NO STATUTORY SAFE HARBO R
APPLICABLE TO THE ALLEGATIONS OF THIS COMPLAINT 2
3 656. The statutory safe harbor provision for forward-looking statements under certain 4 circumstances does not apply to any of the allegedly false statements plead herein . The vas t
5 majority of the statements plead herein as being false are not "forward-looking statements" but 6 are statements of financial results which are statements of historical fact and which are no t 7 protected by the statutory safe harbor. To the extent that there are any forward-looking fals e 8 statements alleged, there were no meaningful cautionary statements identifying important factors 9 that could cause actual results to differ materially from those in the purportedly forward-looking 10 statements . Alternatively, to the extent that the statutory safe harbor does apply to any forward11 looking statements plead herein, defendants are liable for those false forward-looking statements 12 because at the time each of those forward-looking statements was made the particular speake r 13 knew that the particular forward-looking statement was false . 14 COUNT I
15 (Violations Of Section 10(b) Of The Exchange Act And Rule 10b-5 Promulgated Thereunder And Of Section 20(a) Of The Exchange Act) 16 17 657 . 18 forth herein . 19 658. This Count with regard to the claim under Section 10(b) of the Exchange Act and 20 SEC Rule I Ob-5 promulgated thereunder is asserted by Lead Plaintiffs the Loran Group and the 21 Class against all defendants . 22 659 . These defendants carried out a plan, scheme, and course of conduct which was 23 intended to and did :
24 (a) deceive the investing public, including plaintiffs and other Class 25 Members ;
Plaintiffs incorporate by reference Paragraphs 1 through 656, as though fully set
26 (b) artificially inflate and maintain the market price of Peregrine securities ; 27 and
28 (c) cause Class members to acquire Pereg ri ne secu ri ties at art ificially inflated
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#105317
Master File No . 02-CV-0870 J(RBB) 215
1 2
I prices.
660 . In furtherance of this unlawful scheme, these defendants employed devices ,
3 f schemes and artifices to defraud plaintiffs and Class members . They made untrue statements o f 4 I material fact and/or omitted to state material facts necessary to make the statements made no t 5 6 7 misleading . In addition, these defendants engaged in acts, practices, and a course of business that operated as a fraud and deceit upon plaintiffs and Class members . These defendants did so to maintain a rtifi cially in fl ated market p ri ces for Peregri ne ' s securi ties in violation of Section 10(b)
8 of the Exchange Act and Rule I Ob- 5 promulgated thereunder.

9 10 11 12 13
661 . In addition to the duties of full disclosure imposed on defend an ts as a result o f

their making or approving of affirmative statements and reports, or their participation in the making of affirmative statements and reports to the investing public, the defendants had a duty to promptly disseminate truthful information that would be material to investors in compliance with the integrated disclosure provisions of the SEC as embodied in SEC Regulation S-X (17 C .F.R.
14 210.01 et seq.) and S-K (17 C .F .R. 229.10 et seq.) and other SEC regulations, including accurate 15 and truthful information with respect to the Company's operations and performance so that the
16 market price of the Company's securities would be based on truthful, complete and accurate 17 18 information . 662 . The liability of the individually named defendants (other than defendant Rodda)
19 arises from the following facts as more specifically alleged above : 20 21 22 23 24 25 26 27 (a) they were high-level executives at the Company and were members of th e Company' s senior management team or were members of the Company ' s Audit or Compensation
Committees ;
(b) by virtue of their responsibilities and activities as senior officers and directors of the Company, they were privy to and participated in the drafting, reviewing and/or approving the misleading statements, press releases, reports and other public representations about Peregrine, and/or were engaged in authorizing or entering into the fraudulent transactions alleged herein, and/or signed the Company's public filings with the SEC which contained the
28 1 materially misleading statements as alleged herein ;

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(c) they knew of or had access to the material, adverse, nonpublic informatio n about Peregrine's financial results and business, which were materially at odds with reporte d
financial results ; and

(d) they were aware of the Company's dissemination of information to th e investing public which they knew or were deliberately reckless in not knowing was materially
false and misleading .

663 . Arthur Andersen and AWSC were engaged by Peregrine to provide the auditing 8 and accounting services to Peregrine and to audit Peregrine' s annual financial results and t o
9 review Peregrine's quarterly financial results during fiscal year 2000 and 2001 and the first three 10 quarters of fiscal 2002 . Defendant Stulac was the engagement or concurring partner for Arthur 11 Andersen on the Peregrine engagements . Stulac and Arthur Andersen used the services of
12 AWSC in connection with the Peregrine engagements . As a result, Arthur Andersen and AWSC 13 14 15 16 17 owed a duty of full and complete disclosure to shareholders and prospective shareholders of Peregrine . Arthur Andersen and AWSC breached that duty by failing to fully and adequately disclose Peregrine's true financial condition through the issuance of unqualified audit reports on Peregrine's audited financial statements for fiscal years 2000 and 2001 and by failing to cause Peregrine to revise or withdraw materially false interim financial statements as alleged herein .
18 1 Arthur Andersen's and AWSC's actions or inactions, as alleged herein, violated GAAS as set 19 20 21 22 forth above . 664 . Defendants KPMG, BearingPoint , and Rodda directly part icipated in Peregrine' s fraud . They did so by engaging in transactions with Peregrine so Peregrine could book revenue before deals with anticipated end users were completed . In doing so, the KPMG Defendants
23 1 deliberately chose to conceal the truth and played a significant role in Peregrine's ability to 24 misrepresent its financial condition to investors . In exchange for its participation in the scheme ,
25 the KPMG Defendants were awarded lucrative services contracts . At the end of a quarter, the 26
KPMG Defendants frequently agreed to have Peregrine software "parked" with them . This
27 occurred when Peregrine knew it could not complete a direct sale in time to record revenue fo r 28 1 that quarter but needed the revenue to meet its publicly announced revenue projections . In suc h
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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23
instances, the KPMG Defendants would enter into a deal for the anticipated amount of the sale to the end user . The KPMG Defendants knew that Peregrine would immediately book revenue from such transactions even though a deal with the end user had not yet been completed . The KPMG Defendants further knew that Peregrine proposed the "parking" arrangements so it could falsely represent to investors that it had obtained revenue from such incomplete transactions . 665 . The defendants named herein had actual knowledge of the misrepresentations an d omissions of material facts set forth herein, or acted with deliberate recklessness in that they failed to ascertain and to disclose such facts, even though such facts were readily available to them . These defendants' material misrepresentations and/or omissions were done knowingly or with deliberate recklessness to conceal Peregrine's true financial condition from the investing public and to support the artificially inflated price of its securities . 666 . As a result of the dissemination of the materially false and misleading informatio n and failure to disclose mate ri al facts , the market price of Peregrine securities was artificiall y inflated throughout the Class Period . In ignorance of the fact that the market price of Peregrine securities was artificially inflated, and relying directly or indirectly on the false and misleading statements by these defendants, or upon the integrity of the market in which Peregrine securities trade, plaintiffs and Class members purchased Peregrine securities at artificially inflated price s and were damaged thereby . 667 . At the time of the alleged misrepresentations and omissions , plaintiffs and Cl as s members were ignor an t of their falsity, and believed them to be true . Had plaintiffs an d the other Class members known of the defendants' false statements as alleged herein they would not hav e purchased Peregrine securities . 668 . As a direct and proximate result of defendants' wrongful conduct, plaintiffs an d
24 Class members suffered damages in connection with their purchase or acquisition of Peregrin e 25 26 securities during the Class Period .
669 . This Count with regard to the claim under Section 20(a) of the Exchange Act is
27 asserted by Lead Plaintiffs the Loran Group and the Class against defendants Gardner, Gless ,
28 1 Moores, Nelson, Noel], Cole, van den Berg, Hosley, Watrous, Savoy, and Dammeyer based o n
#105317
1 their control of Peregrine . In addition, this control person claim is asserted against defendan t
2 Moores based on his control of defendants Gardner, Gless, Nelson, Luddy, Noell, van den Berg, 3 and Hosley, and against defendant AWSC based on its control of Arthur Andersen . 4 670 . Defendants Gardner, Gless, Moores, Nelson, Noel], Cole, van den Berg, Hosley, 5 Watrous, Savoy, and Dammeyer were controlling persons of Peregrine within the meaning o f 6 Section 20(a) of the Exchange Act . By virtue of their executive positions, Board membership, 7 and stock ownership (as more specifically alleged above), these defendants had the power t o 8 influence and control (and did influence and control, directly or indirectly) the decision-making 9 of the Company, including the content and dissemination of the various statements whic h 10 plaintiffs contend are materially false and misleading . These defendants were provided with or 11 had unlimited access to the Company's internal reports, press releases, public filings and other 12 statements alleged by plaintiffs to be misleading prior to and/or shortly after these statements 13 were issued and had the ability to prevent the issuance of the false statements or cause the false 14 statements to be corrected . 15 671 . Peregrine violated Section 10(b) and Rule I Ob-5 by the issuance of materially 16 false and misleading statements as alleged herein . By virtue of their positions as controlling 17 persons of Peregrine, defendants Gardner, Gless, Moores, Nelson, Noell, Cole, van den Berg , 18 Hosley, Watrous, Savoy, and Dammeyer are liable to plaintiffs and the Class pursuant to Section 19 20(a) of the Exchange Act . 20 672. Defendant Moores was a controlling person of defendants Gardner, Gless, Nelson, 21 Luddy, Noel], van den Berg, and Hosley, within the meaning of Section 20(a) of the Exchang e 22 Act . By virtue of his long standing business entanglements with these defendants and his 23 instrumental role in placing them in senior executive and director positions at Peregrine , 24 defendant Moores had the power and influence to control, and did influence and control, directly 25 and indirectly, the conduct of these defendants in connection with their Peregrine-relate d 26 activities . 27 673 . By vi rt ue AWSC's relationship to A rthur Andersen with respect to accounting an d
28 auditing work performed for Peregrine, as more fully alleged above, defendant AWSC was a
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control person of Arthur Andersen within the meaning of Section 20(a) of Exchange Act .
2 AWSC had the power and influence to control, and did influence and control, directly and 3 4 indirectly, the contents of Arthur Andersen's audit reports and quarterly review work both o f which are alleged to have caused damage to the Class . 674 . Arthur Andersen violated Section 10(b) and Rule I Ob-5 by the issuance of
6 materially false and misleading statements as alleged herein . By virtue of its position as a 7 controlling person of Arthur Andersen, AWSC is liable to plaintiffs and the Class pursuant to 8 Section 20(a) of the Exchange Act .
9 675 . As a direct and proximate cause of defendants' wrongful conduct, plaintiffs an d
10 Class Members suffered damages in connection with their purchase or acquisition of Peregrin e 11 121 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28
securities . COUNT Il
(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 Acquisitio n 676 . Plaintiffs Waga and Sutliff incorporate by reference, as though fully set forth herein, Paragraphs 4, 6, 8, 10-11, 13, 18-19, 24 (bullet points only), 28-30, 31(1) - (o), 32, 36(a) (b), (h) - (1), (n), 37, 40-48, 54-58, 60-70, 72-82, 84, 87, 90, 92-94, 100, 103, 137-146, 148-151, 153-156, 159, 167, 171-172, 178-179, 181, 185, 187-190, 232 (bullet points only), 369-385, 547, 592 and 642-654 above . 677 . This Count is asserted by Plaintiffs Waga and Sutliff on behalf of all those who held Harbinger common stock on May 22, 2000 and still held those shares on June 16, 2000 and exchanged those shares for shares issued by Peregrine in connection with Peregrine's acquisition of Harbinger Corporation (the "Harbinger Sub-Class") . 678 . This Count is asserted against defendants Gardner, Gless, Moores, Cole, Hosley, Noell, van den Berg and Watrous on behalf of the Harbinger Sub-Class, for violations o f
Section 14(a) of the Exchange Act, 15 U .S .C . 78n, and Rule 14a-9, 17 C .F .R. 240.14a-9 . This Count is based solely on those defendants' negligent conduct .
679 . Each defendant named in this Count solicited proxies by means of the Joint Prox y
#105317
1 Statement and Prospectus filed on or about May 22, 2000 as part of Amendment No . I to
2 Peregrine's Form S-4 Registration Statement (the "Harbinger Joint Proxy") . The Harbinger Joint 3 Proxy was distributed by defendants named herein to Harbinger shareholders . They each 4 permitted the use of their names in the Harbinger Joint Proxy . 5 -680 . The Harbinger Joint Proxy was a "proxy solicitation" within the meaning of 6 Section 14 of the Exchange Act, and Rule 14a-9 promulgated thereunder. 7 681 . Each of the defendants named in this Count signed Amendment No . 1 to th e 8 Peregrine Registration Statement which contained the Harbinger Joint Proxy, thus allowing it to 9 be filed with the SEC . These defendants were members of Peregrine's Board of Directors at all 10 relevant times. 11 682 . The Harbinger Joint Proxy contained or incorporated by reference Peregrine's 12 audited financial statements for the fiscal year ending March 31, 2000 . These financial 13 statements were materially false and misleading for the reasons set forth above . 14 683 . The Harbinger Joint Proxy was materially false and misleading, in that i t 15 contained the foregoing false and misleading statements of material fact and failed to disclose 16 material facts necessary to make the statements made not false and misleading . 17 684 . The defendants named in this Count sought to secure Harbinger shareholder 18 approval of the Peregrine/Harbinger merger by means of the materially false and misleadin g 19 Harbinger Joint Proxy and permitted the use of their names to solicit proxies from the Harbinger 20 Sub-Class . 21 685 . The facts herein referenced in paragraph 676 and the following facts give rise to a 22 strong inference that each of the defendants named in this Count acted with the requisite state of 23 mind for liability under Section 14(a) and Rule 14a-9, i.e., negligence, at the time they issued or 24 caused to be issued the Harbinger Joint Proxy and permitted the use of their names in th e 25 Harbinger Joint Proxy . As detailed more fully above, these defendants were negligent in not 26 knowing that the Harbinger Joint Proxy contained misstatements of material fact and that i t 27 omitted to state material facts necessary in order to make the statements made therein not false or 28 misleading .
1 686 . The defendants named in this Count (except Gless) were members of th e 2 Peregrine Board on April 14, 1999 when the Company implemented a radical change . It was at a 3 meeting on that date that the Board approved of the use of the sell-in method of accountin g 4 although they were told that the sell-in method was not the preferred method. The Board 5 members were informed that only by using that method would Peregrine meet its quarterl y 6 revenue goals . Thus, the Board should have been aware that a weakness existed in Peregrine's 7 sales efforts, which needed to be watched consistently . Moreover, the Board was informed that 8 the Company's auditors would be uncomfortable if the channel activity accounted for more than 9 25% of the Company's revenue . From that point forward, the members of the Board were o n 10 notice that they needed to scrutinize the Company's revenue closely, along with the Company's 11 revenue recognition policies, and to satisfy themselves that the sell-in method was not bein g 12 utilized improperly and that revenue was being recognized appropriately . 13 687 . The members of the Board were given a further reason to assure themselves that 14 the Company's revenue was proper by their receipt of the quarterly Review and Outlook reports 15 send by defendant Gardner . These reports, as detailed above, consistently painted a bleak picture 16 of Peregrine's anticipated revenue while the Company incredibly was able to meet analys t 17 expectations at the last moment of almost every quarter . Thus, while Gardner was reporting 18 severe trouble with the Company's "bread and butter" business, and informing the Board that 19 channel activity was a cause for concern and that the Company was borrowing from the future, 20 the Board did not take actions necessary to correct the problems . Even when Gardner reported 21 that channel inventory had reached a level that made the auditors uncomfortable, the Board took 22 no appropriate action . 23 688. Indeed, as detailed above, as channel sales increased quickly and dramatically , 24 inventory was also becoming overly bloated -- sure signs that the Company was having problems 25 selling to end users -- yet the Company was purportedly making its revenue number . The 26 defendants named in this Count were sophisticated businessmen, many of whom had years of 27 experience in the software industry and, their failure to miss these warning signs was negligent . 28 689. Defendants named in this Count acted as controlling persons of Peregrine withi n
1 the meaning of Section 20(a) of the Exchange Act as alleged herein . By virtue of their high-level 2 positions, and their ownership and contractual rights, participation in and/or awareness of th e 3 Company's operations and/or intimate knowledge of the false financial statements contained in 4 the Harbinger Joint Proxy, these defendants had the power to influence and control and di d - 5 influence and control, directly or indirectly, the decision-making of Peregrine, including the 6 content and dissemination of the various statements which plaintiffs contend are false an d
7 misleading . These defendants were provided with or had unlimited access to Peregrine' s
8 misleading financial statements contained in the Harbinger Joint Proxy alleged by plaintiffs to be 9 misleading prior to and/or shortly after these statements were issued and had the ability t o 10 prevent the issuance of the statements or cause the statements to be corrected . 11 690 . In particular, each of these defendants had direct and supervisory involvement in 12 the day-to-day operations of the Company and, therefore, is presumed to have had the power to 13 control or influence the particular transactions giving rise to the securities violations as alleged 14 herein, and exercise the same . 15 691 . As detailed above, the defendants named in this Count controlled Peregrine . 16 Certainly, for purposes of the distribution of the Harbinger Joint Proxy, the Board had control of 17 whether such distribution should be made and the contents thereof. 18 692 . Beyond the Harbinger transaction, Moores also had control of Peregrine through 19 his control and domination of the Board . As stated in detail above, almost every Board member 20 had ties to Moores, which allowed Moores to have a great deal of influence over those Boar d 21 members . Moreover, by his control of these Board members, Moores and these Board members 22 effectively controlled Peregrine . 23 693 . The Merger required and received the affirmative vote of the Harbinger 24 shareholders at the Special Meeting of Harbinger shareholders held on June 16, 2000 . 25 Accordingly, the materially false and misleading Harbinger Joint Proxy was an essential link in 26 the accomplishment of Peregrine's acquisition of Harbinger . 27 694 . Based on the foregoing, the defendants named in this Count have violate d
28 Section 14(a) of the Exchange Act and SEC Rule 14a-9 promulgated by the SEC thereunder and
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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
by virtue of their positions as controlling persons, these defendants have violated Section 20(a) of the Exchange Act . 695 . As a direct and proximate result of these defendants' wrongdoing, Plaintiffs Waga and Sutliff and the other members of the Harbinger Sub-Class have sustained injury and damages by reason of these defendants' misrepresentations contained in the Harbinger Joint Proxy i n connection with the Peregrine's acquisition of Harbinger . COUNT II I (Violations Of Section 14(a) Of The Exchange Act And Rule 14a-9 Promulgated Thereunder And Of Section 20(a) Of Th e Exchange Act - Harbinger Acquisition - Arthur Andersen , AWSC And Stulac) 696 . Plaintiffs Waga and Sutliff incorporate by reference, as though fully set forth herein, the paragraphs referenced in Paragraph 676 above and Paragraphs 36(p) - (r), 95, 132, 208-212, 217-219, 386-396, 398-403, 411-412, 429-433, 460-461, 470-472, 476, and 482 above . 697 . This Count is asserted by Plaintiffs Waga and Sutliff on behalf of the Harbinge r Sub-Class . 698 . This Count is asserted against Arthur Andersen, AWSC and Stulac on behalf of the Harbinger Sub-Class for violations of Section 14(a) of the Exchange Act, 15 U .S .C. 78n, and Rule 14a-9, 17 C .F.R. 240.14a-9. 699 . The Joint Proxy which was included in Peregrine's May 22, 2000 Amendment 1
19 to its S-4 Registration Statement filed with the SEC and distributed to Harbinger shareholders 20 21 22 23 (the "Harbinger Joint Proxy") was a "proxy solicitation" within the meaning of Section 14 of the Exchange Act, and Rule 14a-9 promulgated thereunder . This Count is based solely o n defendants ' negligent conduct . 700 . Arthur Andersen and AWSC consented to the use of Arthur Andersen' s name in
24 the Harbinger Joint Proxy to solicit proxies from Plaintiffs Waga and Sutliff and other members 25 26 27 28 of the Harbinger Sub-Class .
701 . Arthur Andersen and AWSC also consented to the inclusion and/or the incorporation by reference , in the Harbinger Joint Proxy , of Arthur Andersen' s unqualified audit repo rt on Peregrine ' s fi scal year 2000 financial statements, as set fo rt h in Pereg rine's Form 10- K
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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
for the year ending March 31, 2000, and consented to all references to Arthur Andersen in the registration statement , which included a reference to it under the caption "Experts," and under the caption " Pereg rine Selected Consolidated Financial Data," where it was noted that the consolidated financial data was based upon financial statements audited by Arthur Andersen . Stulac was the representative of Arthur Andersen and AWSC for the Peregrine account . 702 . Arthur Andersen's audit report on Peregrine's financial statements for the year ending March 31, 2000, which was included and/or incorporated by reference into the Harbinger Joint Proxy, was materially false and misleading for the reasons set forth above . 703 . The following facts and the facts referenced in paragraph 696 above give rise to a strong inference that Arthur Andersen, AWSC and Stulac acted with the requisite state of mind for liability under Section 14(a) and Rule 14a-9, i .e., negligence, in permitting Arthur Andersen' s name to be used in conjunction with the solicitation of proxies pursuant to a proxy statement that contained material misrepresentations and omissions. As detailed more fully above, Arthur Andersen, AWSC and Stulac should have known at the time that consent to the use of Arthur Andersen's name in the Harbinger Joint Proxy was given that Arthur Andersen's audit report on Peregrine's financial statements for the year ending March 31, 2000, which were included and/or incorporated by reference to in the Harbinger Joint Proxy, was materially false and misleading . 704 . Arthur Andersen, AWSC and Stulac were aware that when the Company adopte d
19 the sell-in method, it did so in order to meet its qua rterly revenue estimates . Moreover, these 20 21 22 23 24 25 26 defend ants knew that the sell-in method was an aggressive revenue recognition procedure, which was not the preferred method . 705 . Arthur Andersen had informed the Comp an y when it adopted the sell - in method that it would be uncomfortable if channel activity reached 25% of the Comp any ' s revenue, yet even when that number was far exceeded , Arthur Andersen , AWSC and Stulac consented to Arthur Andersen's unqualified audit report to be included in the Harbinger Joint Proxy . 706 . As detailed above, plenty of warning signs existed that should have alerted Arthu r
27 Andersen , AWSC and Stulac that severe problems existed with the Compan y ' s accounting . 28 Auditor guidelines for items that should receive special consideration identified almost the exac t
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1 2 3 4 5
type of situation as the one that existed at Peregrine, such as significant sales volume occurring near the end of the quarter, unusual volume of sales to resellers, barter transactions and sid e agreements . Messages about "bad revenue," inquiries from the SEC, and complaints about revenue recognition were either provided to Arthur Andersen, discovered by it or readily available to it had it sought to look . Instead , Arthur Andersen, AWSC and Stulac ignored the
6 I warning signs and allowed the Company to continually spiral downward into a deeper revenue 7 8 9 10 hole . 707 . In addition , Arthur Andersen, AWSC and Stulac should have been awar e that problems existed at the Company that required further investigation on their part because of the lack of Audit Committee minutes, the failure to hold regular meetings during fiscal year 2000 ,
11 j and the participation of members of management in the Audit Committee deliberations . The 12 13 14 15 16 17
failure to respond to the above repeated warning signs demonstrates Arthur Andersen 's, AWSC's
and Stulac's negligence . 708 . Arthur Andersen and Stulac were also involved in designing the Company's stock option compensation plan, which allowed for the exercise prices to be below the common stock market values when the options were granted . This plan was also a part of Peregrine's restatement, and a further sign that should have alerted Arthur Andersen, AWSC and Stulac tha t
18 a problem existed at Peregrine . 19 20 21 709 . The Merger required and received the affirmative vote of the H arbinger shareholders at the Special Meeting of Harbinger sh areholders held on June 16, 2000 . Accordingly, the mate ri ally false and misleading Harbinger Joint Proxy was an essential link i n
22 the accomplishment of the Peregrine ' s acquisition of Harbinger . 23 24 25 710 . B ased on the foregoing , A rt hur Andersen , AWSC and Stulac violated Section 14 (a) of the Exchange Act and SEC Rule 14a-9 promulgated by the SEC thereunder. 711 . As a direct and proximate result of A rthur Andersen , AWSC' s and Stulac' s
26 wrongful conduct, plaintiffs and other members of the Harbinger Sub-Class have sustained injury 27 and damages by reason of defendants ' misrepresentations contained in the Harbinger Joint Prox y 28 in connection with the Peregrine's acquisition of Harbinger .
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1 712 . Defendants AWSC and Stulac acted as controlling persons of Arthur Andersen 2 within the meaning of Section 20(a) of the Exchange Act as alleged herein . By virtue of their 3 control of and/or interlocking officers, partners and finances and/or awareness of the Arthu r 4 Andersen's operations and/or intimate knowledge of the false financial statements contained in 5 the Harbinger Joint Proxy, these defendants had the power to influence and control and di d 6 influence and control, directly or indirectly, the decision-making of Arthur Andersen, including 7 the content and dissemination of the various statements which plaintiffs contend are false an d 8 misleading . These defendants were provided with or had unlimited access to Peregrine' s 9 misleading financial statements contained in the Harbinger Joint Proxy alleged by plaintiffs to be 10 misleading and had the ability to prevent the issuance of the statements or cause the statements to 11 be corrected . 12 713 . In particular, each of these defendants had direct and supervisory involvement in 13 the day-to-day operations of the Arthur Andersen and, therefore, is presumed to have had the 14 power to control or influence the particular transactions giving rise to the securities violations as 15 alleged herein, and exercised the same . 16 714 . As set forth above, defendants AWSC and Stulac, by virtue of their positions as 17 controlling persons, these defendants are liable pursuant to Section 20(a) of the Exchange Act. 18 As a direct proximate result of these defendants' wrongful conduct, plaintiffs named in this Count 19 and other members of the Harbinger Sub-Class suffered damages in connection with thei r
20 acquisition of shares of Peregrine.

21 COUNT IV
22 (Violations Of Section 14(a) Of The Exchange Act And Rule 14a-9 Promulgated Thereunder And Of 23 Section 20(a) Of The Exchange Act - Remedy Acquisitio n 24 715 . Plaintiffs Balch and Hylton incorporate by reference, as though fully set fort h 25 herein, Paragraphs 36(m), 36(o), 686-688, and all paragraphs referenced in Paragraph 676 above 26 except Paragraphs 36(k) and 36(l) .
27 716 . This Count is asserted by Plaintiffs Balch and Hylton on behalf of all those who 28 held Remedy common stock on July 23, 2001 and still held those shares on August 27, 2001 and FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS # 105317 Master File No . 02-CV-0870 J(RBB) 227
1 2 3 4 5
exchanged those shares for shares issued by Peregrine in connection with Pereg ri ne ' s acquisition of Remedy Corporation ( the "Remedy Sub-Class") . 717 . This Count is asserted against defend ants Gardner, Gless , Moores , Savoy, Cole , Noell, Watrous, and Dammeyer on behalf of the Remedy Sub-Class, for violations o f Section 14(a) of the Exchange Act, 15 U .S.C. 78n, and Rule 14a-9,17 C .F.R. 240 .14a-9 . This Count is based solely on those defendants' negligent conduct . 718 . Each defendant named in this Count solicited proxies by means of the Joint Prox y Statement and Prospectus filed on or about July 23, 2001 as part of Amendment No . 1 to Peregrine's Form S-4 Registration Statement (the "Remedy Joint Proxy") . The Remedy Joint Proxy was distributed to Remedy shareholders by defendants named herein . They each permitted the use of their names in the Remedy Joint Proxy . 719 . The Remedy Joint Proxy was a "proxy solicitation" within the meaning of Section 14 of the Exchange Act, and Rule 14a-9 promulgated thereunder . 720 . Each of the defendants named in this Count signed Amendment No . 1 to the Peregrine Registration Statement which contained the Remedy Joint Proxy allowing it to be filed with the SEC . These defendants were members of Peregrine's Board of Directors at all relevan t times. 721 . The Remedy Joint Proxy contained or incorporated by reference Peregrine's audited financial statements for the fiscal years ending March 31, 2000 and March 31, 2001 . Each of these financial statements were materially false and misleading for the reasons set fort h above . 722 . The Remedy Joint Proxy was materially false and misleading in that it contained false and misleading statements of material fact and failed to disclose material facts necessary t o make the statements made not false and misleading . 723 . The defendants named in this Count sought to secure Remedy shareholder
6
7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
26 approval of the Peregrine/Remedy merger by means of the materially false and misleading
27 28
Remedy Joint Proxy and permitted the use of their names to solicit proxies from the Remedy Sub-Class .
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS M aster File No . 02-CV-0870 J(RBB) 228
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1 724. The following facts and the facts referenced in paragraph 715 above give rise to a 2 strong inference that each of the defendants named in this Count acted with the requisite state of 3 mind for liability under Section 14(a) and Rule 14a-9, i.e., negligence, at the time they issued or 4 caused to be issued the Remedy Joint Proxy and permitted the use of their names in the Remedy 5 Joint Proxy . As detailed more fully above, these defendants were negligent in not knowing that 6 the Remedy Joint Proxy contained misstatements of material fact and that it omitted to stat e
7 material facts necessary in order to make the statements made therein not false or misleading . 8 725 . Defendants named in this Count acted as controlling persons of Peregrine withi n 9 the meaning of Section 20(a) of the Exchange Act as alleged herein. By virtue of their high-level 10 positions, and their ownership and contractual rights, participation in and/or awareness of the 11 Company's operations and/or intimate knowledge of the false financial statements contained in 12 the Remedy Joint Proxy, these defendants had the power to influence and control and di d 13 influence and control, directly or indirectly, the decision-making of Peregrine, including the 14 content and dissemination of the various statements which plaintiffs contend are false an d 15 misleading . These defendants were provided with or had unlimited access to Peregrine' s 16 misleading financial statements contained in the Remedy Joint Proxy alleged by plaintiffs to be 17 misleading prior to and/or shortly after these statements were issued and had the ability t o 18 prevent the issuance of the statements or cause the statements to be corrected . 19 726. In particular, each of these defendants had direct and supervisory involvement in 20 the day-to-day operations of the Company and, therefore, is presumed to have had the power to 21 control or influence the particular transactions giving rise to the securities violations as alleged 22 herein, and exercise the same . 23 727 . As detailed above, defendants named in this Count controlled Peregrine . 24 Certainly, for purposes of the distribution of the Remedy Joint Proxy, the Board had control of 25 whether such distribution should be made and the contents thereof . 26 728 . Beyond the Remedy transaction, Moores also had control of Peregrine through his 27 control and domination of the Board . As stated in detail above, almost every Board member had 28 ties to Moores, which allowed Moores to have a great deal of influence over those Boar d
1 members . Moreover, by his control of these Board members, Moores and these Board members 2 effectively controlled Peregrine .
3 729 . The Merger required and received the affirmative vote of the Remedy 4 shareholders at the Special Meeting of Remedy shareholders held on August 27, 2001 . 5 Accordingly, the materially false and misleading Remedy Joint Proxy was an essential link in the 6 accomplishment of Peregrine's acquisition of Remedy .
7 730. Based on the foregoing, the defendants named in this Count have violate d
8 Section 14(a) of the Exchange Act and SEC Rule 14a-9 promulgated by the SEC thereunder an d 9 by virtue of their positions as controlling persons, these defendants have violated Section 20(a) of 10 the Exchange Act . 11 731 . As a direct and proximate result of these defendants' wrongdoing, plaintiffs and 12 the other members of the Remedy Sub-Class have sustained injury and damages by reason of 13 these defendants' misrepresentations contained in the Remedy Joint Proxy in connection with 14 Peregrine's acquisition of Remedy . 15 16 17 COUNT V (Violations Of Section 14(a) Of The Exchange Act And Rule 14a-9 Promulgated Thereunder And Of Section 20(a) Of Th e Exchange Act - Remedy Acquisition - Arthur Andersen AWSC And Stula c
18 732 . Plaintiffs Balch and Hylton incorporate by reference, as though fully set forth 19 herein, the paragraphs referenced in Paragraphs 696 and 715 above . 20 733 . This Count is asserted by Plaintiffs Balch and Hylton on behalf of the Remedy 21 Sub-Class . 22 734 . This Count is asserted against Arthur Andersen, AWSC and Stulac on behalf of 23 the Remedy Sub-Class, for violations of Section 14(a) of the Exchange Act, 15 U .S.C . 78n, and 24 Rule 14a-9, 17 C .F .R. 240 .14a-9. This Count is based solely on defendants' negligent conduct . 25 735 . The Joint Proxy which was included in Peregrine's July 23, 2001 Amendment 1 to 26 its S-4 Registration Statement filed with the SEC and distributed to Remedy shareholders (th e
27 "Remedy Joint Proxy") was a "proxy solicitation" within the meaning of Section 14 of the 28 Exchange Act, and Rule 14a-9 promulgated thereunder .

1 736 . Arthur Andersen and AWSC consented to the use of Arthur Andersen' s name i n 2 I the Remedy Joint Proxy to solicit proxies from Plaintiffs and other members of the Remedy Sub3 I Class. 4 5 6 7 8 737 . Arthur Andersen and AWSC also consented the inclusion and/or to the incorporation by reference, in the Remedy Joint Proxy, of Arthur Andersen's unqualified audit reports on Peregrine's consolidated financial statements as of March 31, 2000 and March 31, 2001, and consented to all references to Arthur Andersen in the registration statement, which included a reference to it under the caption "Experts," and under the caption "Peregrine Selected
9 Consolidated Financial Data," where it was noted that the consolidated financial data was audite d 10 11 12 13 14 15 16 by Arthur Andersen . Stulac was the representative of Arthur Andersen and AWSC for the Peregri ne account 738 . Arthur Andersen's audit reports on Peregrine's financial statements for the years ending March 31, 2000 and March 31, 2001, which were included and/or incorporated by reference in the Remedy Joint Proxy, were materially false and misleading for the reasons se t forth above . 739 . The following facts and the facts referenced in paragraph 732 above give rise to a
1 7 strong inference that Arthur Andersen, AWSC and Stulac acted with the requisite state of mind 18 for liability under Section 14(a) and Rule 14a-9, i .e., negligence, in permitting Arthur Andersen' s
19 name to be used in conjunction with the solicitation of proxies pursuant to a proxy statement that 20 contained material misrepresentations and omissions . As detailed more fully above, Arthur 21 'Andersen, AWSC and Stulac should have known at the time that consent to the use of Arthur 22 Andersen's name in the Remedy Joint Proxy was given that Arthur Andersen's audit reports on 23 Peregrine's financial statements for the years ending March 31, 2000 and March 31, 2001, which
24 were included and/or incorporated by reference in the Remedy Joint Proxy, were materially fals e 25 and misleading . 26 740 . Arthur Andersen, AWSC and Stulac were aware that when the Company adopted
27 the sell-in method, it did so in order to meet its quarterly revenue estimates . Moreover, these
28 1 defendants knew that the sell-in method was an aggressive revenue recognition procedure, whic h
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1 I was not the preferred method . 2 3 741 . Arthur Andersen had informed the Company when it adopted the sell-in metho d that it would be uncomfortable if channel activity reached 25% of the Company's revenue, yet
4 even when that number was far exceeded, Arthur Andersen, AWSC and Stulac allowed Arthu r 5 Andersen's unqualified audit report to be incorporated or included in the Remedy Joint Proxy . 6 742 . As detailed above, plenty of warning signs existed that should have alerted Arthur
7 Andersen, AWSC and Stulac that severe problems existed with the Company's accounting . 8 Auditor guidelines for items that should receive special consideration identified almost the exact 9 type of situation as the one that existed at Peregrine, such as significant sales volume occurrin g 10 near the end of the quarter, unusual volume of sales to resellers, barter transactions and side 11 agreements . Messages about "bad revenue," inquiries from the SEC, and complaints about
12 revenue recognition were either provided to Arthur Andersen, discovered by it or readily 13 available to it had it sought to look . Instead, Arthur Andersen, AWSC and Stulac ignored the
14 warning signs and allowed the Company to continually spiral downward into a deeper revenue 15 16 hole . 743 . In addition, Arthur Andersen, AWSC and Stulac should have been aware that
17 problems existed at the Company that required further investigation on their part because of the 18 lack of Audit Committee minutes, the failure to hold regular meetings during fiscal year 2000 ,
19 and the participation of members of management in the Audit Committee deliberations . The 20 failure to respond to the above repeated warning signs demonstrates Arthur Andersen's, AWSC's 21 22 23 and Stulac's negligence . 744 . Arthur Andersen and Stulac were also involved in designing the Company's stock option compensation plan, which allowed for the exercise prices to be below the common stoc k
24 market values when the options were granted . This plan was also a part of Peregrine's 25 restatement, and a further sign that should have alerted Arthur Andersen, AWSC and Stulac that
26 a problem existed at Peregrine . 27
745 . The Merger required and received the affirmative vote of the Remed y
28 I shareholders at the Special Meeting of Remedy shareholders held on August 27, 2001 .
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1 2 3 4 5 accomplishment of Peregrine's acquisition of Remedy .
Accordingly, the materially false and misleading Remedy Joint Proxy was an essential link in the
746 . Based on the foregoing, Arthur Andersen, AWSC and Stulac violate d Section 14(a) of the Exchange Act and SEC Rule 14a-9 promulgated by the SEC thereunder . 747 . As a direct and proximate result of Arthur Andersen, AWSC and Stulac' s
6 wrongdoing, plaintiffs and other members of the Remedy Sub-Class have sustained injury and 7 damages by reason of Arthur Andersen and AWSC's misrepresentations in connection with th e 8 9
Peregrine's acquisition of Remedy .

748 . Defendants AWSC and Stulac acted as controlling persons of Arthur Andersen
10 within the meaning of Section 20(a) of the Exchange Act as alleged herein . By virtue of their 11 12 13 14 control of and/or interlocking officers, partners and finances and/or awareness of the Arthur Andersen's operations and/or intimate knowledge of the false financial statements contained in the Remedy Joint Proxy, these defendants had the power to influence and control and did influence and control, directly or indirectly, the decision-making of Arthur Andersen, including
1 5 the content and dissemination of the various statements which plaintiffs contend are false and
16 17 18 19 20 21 misleading. These defendants were provided with or had unlimited access to Peregrine's misleading financial statements contained in the Remedy Joint Proxy alleged by plaintiffs to be misleading and had the ability to prevent the issuance of the statements or cause the statements to be corrected. 749 . In particular, each of these defendants had direct and supervisory involvement in the day-to-day operations of the Arthur Andersen and, therefore, is presumed to have had the
22 power to control or influence the particular transactions giving rise to the securities violations as 23 24 25 alleged herein, and exercise the same .
750 . As set forth above, defendants AWSC and Stulac, by virtue of their positions as controlling persons, are liable pursuant to Section 20(a) of the Exchange Act . As a direct
26 proximate result of these defendants' wrongful conduct, plaintiffs named in this Count and other 27 28
members of the Remedy Sub-Class suffered damages in connection with their acquisition o f
shares of Peregrine .
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1 2 3 4 5 6
COUNT VI
(Violations Of Section 11 Of The Securities Act - The Harbinger Acquisition) 751 . Plaintiffs Waga and Sutliff incorporate by reference, as though fully set fort h herein, Paragraphs 6, 28-30, 31(1) - (o), 32, 36(a), 36(b), 36(h) - (1), 36(n), 36(p), 36(r), and 40-4 8
above .
752. This Count is asserted against defendants Gardner, Gless, Moores, Cole, Hosley,
7 Noell, van den Berg, Watrous, Arthur Andersen and AWSC . This Count is based solely on 8 9 10 11 12 13 14 15 16 17 18 defendants' negligent conduct . 753 . This Count is asserted by Plaintiffs Waga and Sutliff on behalf of a Sub-Class consisting of all persons and entities who acquired Peregrine registered common stock in connection with Peregrine's acquisition of Harbinger Corporation which was consummated on or about June 16, 2000 (the "Harbinger Sub-Class") . 754. On or about May 22, 2000, the defendants named herein issued, caused the issuance, and/or signed Amendment No . I to its Form S-4/A Registration Statement that was filed with the SEC (the Harbinger Registration Statement) in connection with Peregrine's acquisition of Harbinger . The Harbinger Registration Statement included a Proxy/Prospectus, which provided, inter alia, for special meetings to be held on June 16, 2000 in which shareholders of both Peregrine and Harbinger were solicited to vote to approve the
19 consummation of the proposed merger between the two companies . Under the terms of the 20 proposed merger, each outstanding share of Harbinger common stock would be exchanged for 21 0.75 of a share of Peregrine common stock, and each option to purchase Harbinger common
22 stock would be exchanged for an option to purchase Peregrine common stock at the sam e 23 24 exchange ratio . 755 . Defendants Gardner, Gless, Moores, Cole, Hosley, Noell, Van Den Berg and
25 Watrous signed the Harbinger Registration Statement . The Harbinger Registration Statement 26 contained untrue statements of material fact and/or omitted to state material facts necessary to 27 make statements therein not misleading . 28 756 . In particular, the Proxy/Prospectus contained Peregrine financial statements fo r
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1 2 3 4 5 6 7 8 9 10 11 12
the Company's fiscal year ended March 31, 2000 along with an unqualified audit opinion on those financial statements issued by Peregrine's auditor, Arthur Andersen, dated April 25, 2000 . Defendant AWSC consented to Arthur Andersen being named as having certified its opinion as to Peregrine's financial statements . The Proxy/Prospectus included a "Consolidated Statements Of Operations" for Peregrine for its fiscal year ended March 31, 2000 which reported, among other things that Peregrine had achieved Total Revenues of $253,300,000 ($168,467,000 attributed to Licenses Revenues and $84,833,000 attributed to Services Revenues), and that Peregrine had a Net Loss of $25,070,000 for that fiscal year . 757 . The Proxy/Prospectus included a section entitled "Notes To Consolidate d
Financial Statements ." Under the caption "Company Operations And Summary Of Significant
Accounting Policies" the Proxy/Prospectus provided Peregrine's revenue recognition policy an d stated :
13 1
14 15 16 17
REVENUE RECOGNITIO N
We generate revenues from licensing the rights to use our software products primarily to end-users . We also generate revenues from post-contract support (maintenance), consulting and training services performed for customers who license our products. We do not provide professional services unrelated to our products. Revenues from direct and indirect license agreements ar e
18 19 20 21 22 23 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 . . . [Emphasis added.] 758 . The "Management ' s Discussion And Analysis Of Fin an cial Condition And
24 Results Of Operations" section of the Proxy/Prospectus stated with respect to revenue that : 25 26 27 28 Our revenues are derived from product licensing and services . Services are comprised of maintenance, professional services, and training. . . Revenues from license agreements are recognized currently, provided that all of the following conditions are met : a noncancelable license agreement has been signed, the product has
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No. 02-CV-0870 J(RBB) 23 5
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been delivered, there are no material uncertainties regarding customer acceptance, collection of the resulting receivable is deemed probable, the risk of concession is deemed remote, and n o other significant vendor obligations exist . . . REVENUES . Total revenues were $253 .3 million, $138 .1 million and $61 .9 million for the fiscal years ended 2000, 1999 and 1998, representing period-to-period increases of 83% and 123% for the fiscal 2000 and 1999 periods . . . LICENSES . License revenues were $168 .4 million, $87 .4 million and $38 .8 million in fiscal 2000, 1999 and 1998, representing 67% of total revenues in fiscal 2000 and 63% in both fiscal 1999 and 1998 . Total license revenues increased 93% and 125% period-to-period for fiscal 2000 and 1999 . Domestic license revenues increased 73% in fiscal 2000 and 135% in fiscal 1999, while international license revenues increased 125% and 111 % in fiscal 2000 and 1999 . The increases in license revenues are attributable to increased demand for new and additional licenses of our infrastructure resource management applications, from new and existing customers, larger transaction sizes, expansion of our domestic and international sales forces, and acquisitions . We expect larger transaction sizes from a limited number of customers to account for a large percentage of license revenues for the foreseeable future . Management believes these trends will fluctuate period to period in absolute dollars and as a percentage of total revenues . During the past three years, we have increased the number of channels that we use to distribute our products . The majority of our products are distributed through our direct sales organization . The balance is derived through indirect sales channels and alliance partners, including value added resellers and systems integrators . Revenues derived through indirect channels now comprise a
9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28
significant portion of our total license revenues . . .

SERVICES . Services revenues consist of support, consulting and training services . Service revenues were $84 .8 million, $50 .7 million and $23 .1 million for fiscal years 2000, 1999 and 1998, representing 33% of total revenues in fiscal 2000 and 37% in both fiscal 1999 and 1998 . Total services revenues increased 67% and 120% period-to-period for fiscal 2000 and 1999 . Domestic services increased 63% in fiscal 2000 and 111 % in fiscal 1999, while international services revenues increased 78% and 140% in fiscal 2000 and 1999, respectively . The dollar increases are attributable to maintenance agreements and related billings from our expanded installed base of customers and an increase in consulting and training revenues related to the implementation of our software from initial license agreements and related expansion . . .
[Emphasis added .]
759 . The above mate rial statements of fact contained in the Harbinger Registratio n
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1 2 3 4 5 6 Statement were untrue for among other reasons : (a) Peregrine's fiscal 2000 financial statements were false as its reported revenue was materially overstated and its reported net loss was materially understated ; (b) revenue was improperly recognized on software contracts that were subject to cancellation and therefore collection of that revenue was not probable ;
(c) the rate of revenue growth was materially overstated due to, among other
7 things, improper recognition of revenue ; 8 9 10 11 12 13 14 GAAS . 760 . On May. 24, 2002, Arthur Andersen withdrew its audit opinion on Peregrine's fiscal 2000 financial statements because that opinion could not be relied upon. 761 . On February 28, 2003, Peregrine issued restated financial statements for, among . GAAP ; and
(d) the fiscal 2000 financial statements were not presented in accordance wit h
(e) the fiscal 2000 financial statements were not audited in accordance wit h
15 other periods, its fiscal year ended March 31, 2000 . The restated figures relative to those 16 contained in the Harbinger Registration Statement are as follows (in thousands) : 17 18 19 20 Net Loss ($ 25,070) ($217,418 ) 21 22 23 24 25 26 27 28 762 . Defendants' false statements, misrepresentations, and omissions caused the market price of Peregrine securities to be artificially inflated at the time of the merger with Harbinger. On June 16, 2000, the date of the merger with Harbinger, the market price of Peregrine common stock closed at $25 .56 per share . 763 . The defendants named herein from Peregrine's board each had a duty to make a reasonable and diligent investigation of the truthfulness and accuracy of the statements contained in the Harbinger Registration Statement . They had a duty to ensure that such statements wer e
As Contained in Registration Statement As Restated (In $000) (In $000) License Revenue $168,467 $53,329 Services Revenue $ 84,833 $78,303 Total Revenue $253,300 $131,632
#105317
S
1
true and accurate and that there were no omissions of material facts that would make th e
2 I statements made misleading . These defendants failed to do so. 3 4
764. Arthur Andersen and AWSC each had a duty to make a re asonable and diligent
investigation of the truthfulness and accuracy of the Peregrine financial statements contained in
5 the Harbinger Registration Statement . They had a duty to ensure such statements were true and 6 there were no omissions of material facts that would make the statements made misleading .
7 8 9 10 11 12 13 14 15
Arthur Andersen and AWSC failed to do so . Instead, Arthur Andersen and AWSC consented t o
the inclusion of its materially false and misleading audit report on Pereg rine ' s fiscal year 2000 financial statements. Arthur Andersen and AWSC audit repo rt was contained in the Harbinger Registration Statement with the knowledge and consent of Arthur Andersen and AWSC . 765 . None of the defendants named herein made a reasonable investigation or possessed reasonable grounds for the belief that the statements contained in the Harbinger Registration Statement were true and without omissions of any material facts and were not misleading . The defendants named herein, in the exercise of reasonable care, should have know n of the misstatements and omissions contained in the Registration Statement and Prospectus as se t
16 forth above . 17 766 . Plaintiffs and the Sub-Class Members who acquired Peregrine common stock
18 pursuant to the Harbinger Registration Statement did so without knowledge of the materiall y 19 untrue statements or omissions in the Registration Statement . As a direct and proximate result of 20 the defendants' wrongdoing, the Harbinger Sub-Class Members have suffered substantia l 21 22
damages.
COUNT VI I (Violations Of Section 15 Of The Securities Act - The Harbinger Acquisition) 767 . Plaintiffs Waga and Sutliff incorporate by reference, as though fully set fo rth herein, the paragraphs referenced in Paragraphs 676, 696 and 751-772 above, only to the extent
23 1 24 1
25
26 that they allege negligence only . 27 28 768 . This Count is asserted against defendants Gardner, Gless, Moores, Cole, Hosley, Noell, van den Berg, Watrous, Arthur Andersen and AWSC . This Count is based solely o n
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02-CV-0870 J( RBB) 238
#105317

defendants' negligent conduct. 2 769 . Each of the individual defendants named in this Court was a controlling person of 3 Peregrine within the meaning of Section 15 of the Securities Act at the time of the Harbinger 4 Registration Statement and had the power and authority to cause the issuer to engage in the 5 wrongful conduct complained of herein, including the issuance of the false and misleading 6 statements and omissions in the Prospectus . In addition, defendants AWSC and Stulac were 7 controlling persons of Arthur Andersen within the meaning of Section 15 of the Securities Act at 8 the time of the Harbinger Registration Statement and had the power and authority to cause the 9 issuer to engage in the wrongful conduct complained of herein, including the issuance of the false 10 and misleading statements and omissions in the Harbinger Joint Proxy . 11 770 . Certainly, for purposes of the dist ribution of the Harbinger Joint Proxy, the Board
12 members named in this Count had control of whether such dis tributions should be made and the 13 contents thereof. Beyond the Harbinger transaction, Moores also had control of Peregrine
14 through his control and domination of the Board. As stated in detail above, almost every Board 15 member had ties to Moores, which allowed Moores to have a great deal of influence over thos e
16 Board members . Moreover, by his control of these Board members, Moores and these Board 17 members effectively controlled Peregrine . 18 771 . None of the individual defendants mentioned in this Count or defendants AWS C
19 or Stulac made a reasonable investigation or possessed reasonable grounds for the belief that the 20 statements contained in the Harbinger Joint Proxy were true and devoid of any omissions of 21 22 23 24 25 26 material facts . Therefore, by reason of their positions of control, as alleged herein, each of these defendants is jointly and severally liable to plaintiffs bringing this Court and other members of the Harbinger Sub-Class as a result of the wrongful conduct alleged herein . 772 . Plaintiffs and the Sub-Class Members who acquired Peregrine common stock pursuant to the Harbinger Registration Statement did so without knowledge of the materiall y
untrue statements or omissions in the Registration Statement . As a direct and proximate result of
27 the defendants' wrongdoing, the Harbinger Sub-Class Members have suffered substantial 28 damages .
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Master File No . 02-CV- 0870 J (RBB) 239
#105317
1 2 3
COUNT VIII (Violations Of Section 11 Of The Securities Act - The Remedy Acquisitio n 773 . Plaintiffs Balch and Hylton incorporate by reference, as though fully set forth
4 herein , Paragraphs 6, 28-30 , 31(1) - (o), 32, 36(a), 36(b), 36(h) - (j), 36 (m) - (n), 36(p), 36(r), and 5 1 40-48 above . 6 774 . This Count is asserted against defendants Gardner, Gless, Moores, Savoy, Cole,
7 Noell, Watrous, Arthur Andersen and AWSC . This Count is based solely on defendants ' 8 j negligent conduct. 9 775 . This Count is asserted by Plaintiffs Balch and Hylton on behalf of a Sub-Class
10 consisting of all persons and entities who acquired Peregrine registered common stock in 11 connection with Peregrine's acquisition of Remedy Corporation which was consummated on or
12 about August 27, 2001 (the "Remedy Sub-Class") . 13 776 . On or about July 23, 2001, the defendants issued, caused the issuance, and/or
14 signed Amendment No . 1 to a Form S-4 Registration Statement that was filed with the SEC (the 15 "Remedy Registration Statement") in connection with Peregrine's acquisition of Remedy . The 1 6 Remedy Registration Statement included a Proxy/Prospectus which provided, inter alia, for a 17 special meeting of Remedy stockholders to be held on August 27, 2001 in which shareholders of 18 Remedy were solicited to vote to approve the consummation of the proposed merger of Peregrine 19 and Remedy . Under the terms of the proposed merger, each outstanding share of Remedy 20 common stock would be exchanged for $9 .00 in cash and 0.9065 of a share of Peregrine commo n 21 stock, and each option to purchase Remedy common stock would be exchanged for an equivalent
22 amount of Peregrine common stock based on the value of stock and cash which each share o f 23 24 25 Remedy common stock was to receive in the merger . 777 . Defendants Gardner, Gless, Moores, Savoy, Cole, Noell and Watrous signed the Remedy Registration Statement . The Remedy Registration Statement contained untrue
26 statements of material fact and/or omitted to state material facts necessary to make statement s 27 28
therein not misleading.

778 . In particular, the Proxy/Prospectus, under the heading "Peregrine Selecte d
FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS 240
#105317
1 Master File No. 02-CV-0870 J(RBB)
Consolidated Financial Data," contained consolidated operating results for, inter alia, the
Company's fiscal years ended March 31, 2001 and March 31, 2000 . The financial dated included the following :
YEAR ENDED MARCH 31, STATEMENT OF OPERATIONS DATA : Revenues : Licenses 2001 (in 000s ) $ 354 , 610 200 0 ( in 000s) $168,467
Services 6 Total revenues

7 Total costs and expenses Income (loss) from operations 8 Net income ( loss) Net income ( loss) per share diluted 9 10 11
$ 210, 073 $ 564,683

$ 1,378,090 $ (813,407) $ (852 ,241) $ ( 6.16)
$ 84,83 3 $ 253,300
$ 261,956 $ ( 8,656) $ (25,070) $ (0 .24)
779 . The Remedy Registration Statement also incorporated by reference Peregri ne' s Annual Report on Form 10-K for the fiscal year ended March 31, 2001, which contained, inter
12 alia, Peregrine's consolidated financial statements as of March 31, 2000 and as o f 13 14 March 31, 2001, including an unqualified audit opinion of Arthur Andersen on those financial statements . Defendant AWSC consented to Arthur Andersen being named as having certified its
15 opinion as to Peregrine's financial statements . 16 780 . Peregrine's Form IO-K for the fiscal year ended March 31, 2001 stated as follow s
17 I in connection with the Company's revenue recognition : 18 Revenues from direct and indirect license anreements 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 uncertaintie s re ag rding customer acceptance collection of the resulting receivable is deemed probable, risk of concession is deemed remote. and we have no other significant obligations associate d with the transaction . Revenues from post-contract support services are recognized ratably over the term of the maintenance period, generally one year . Maintenance revenues which are bundled with license agreements, are unbundled using vendor specific objective evidence . Professional services revenues are primarily related to implementation services most often performed on a time and material basis under separate service agreements for the installation of our products . Revenues from professional services and customer training are recognized as the respective services are performed.
19
20 21 22 23 24 25 26
27 1 [Emphasis added.]
28 781 . The Remedy Registration Statement also included a Consent of Independen t
#105317
I Public Accountants signed by Arthur Andersen which stated : 2 As independent public accountants, we hereby consent to the incorporation by reference in this registration statement of our 3 report dated April 26, 2001 included in Peregrine Systems, Inc . Form 10-K for the year ended March 31, 2001 and to all references 4 to our Firm included in this registration statement . 5 782 . The above material statements of fact contained in the Remedy Registration 6 Statement were untrue for among other reasons :
7 (a) Peregrine's fiscal 2000 and 2001 financial statements were each false as its 8 reported revenue was materially overstated and its reported net loss was materially understated ;
9 (b) revenue was improperly recognized on software contracts that were 10 subject to cancellation and therefore collection of that revenue was not probable ; 11 (c) the rate of revenue growth reflected in the fiscal 2000 and 2001 data was 12 materially overstated due to, among other things, improper recognition of revenue ; 13 (d) the fiscal 2000 and 2001 financial statements were not presented in 14 accordance with GAAP ; and 15 (e) the fiscal 2000 and 2001 financial statements were not audited in
16 accordance with GAAS . 17 783 . On May 24, 2002, Arthur Andersen withdrew its audit opinion on Peregrine's 18 fiscal 2000 and 2001 financial statements as its opinions with respect to those financia l 19 statements could not be relied upon . 20 784 . On February 28, 2003, Peregrine issued restated financial statements for, among 21 other periods, its fiscal years ended March 31, 2000 and March 31, 2001 . The restated figures 22 relative to those contained in the Remedy Registration Statement are as follows (in thousands) : 23 24 Fiscal 2000 Fiscal 2001 Fiscal 2000 Fiscal 2001 25 License Revenue $168,467 $ 354,610 $53,329 $ 94,918 26 Services Revenue $ 84,833 $ 210,073 $78,303 $ 118,435 Total Revenue $253,300 $ 564,683 $131,632 $ 213,35 3
27 Net Loss $(25,070) $(852,241) $(217,418) $(1,844,517) 28 785 . As a result of the defendants' false statements, misrepresentations, and omissions, FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS #105317 Master File No . 02-CV-0870 J(RBB) 242
As Contained in Registration Statement As Restate d (in $000) (in $000)

1 the price of Peregrine securities was artificially inflated at the time of the merger with Remedy . 2 On August 27, 2001, the date of the merger with Remedy, the market price of Peregrine stock 3 4 closed at $23 .01 per share. 786 . The defendants who were members of Peregrine's board of directors name d
= 5 herein each had a duty to make a reasonable and diligent investigation of the truthfulness and 6 accuracy of the statements contained in the Remedy Registration Statement, They had a duty to
7 ensure that such statements were true and that there were no omissions of material facts tha t 8 would make the statements made misleading . These defendants failed to do so . These 9 defendants signed the Remedy Registration Statement . 10 11 787 . Arthur Andersen and AWSC each had a duty to make a reasonable and diligent investigation of the truthfulness and accuracy of the Peregrine financial statements contained i n
12 the Remedy Registration Statement . They had a duty to ensure such statements were true and 13 there were no omissions of material facts that would make the statements made misleading . 14 'Arthur Andersen and AWSC failed to do so . Instead, they consented to the inclusion of the 15 16 17 materially false and misleading audit reports on Peregrine's fiscal year 2000 and fiscal year 2001 financial statements . These audit reports were contained in the Remedy Registration Statement with the knowledge and consent or the acquiescence of defendants Arthur Andersen and AWSC . 788 . None of the defendants named herein made a reasonable investigation or
18 1
19 possessed reasonable grounds for the belief that the statements contained in the Remedy 20 Registration Statement were true and without omissions of any material facts and were not 21 22 23 24 25 26 misleading .
789. The defendants named herein, in the exercise of reasonable care, should have
known of the misstatements an d omissions contained in the Remedy Registration Statement as set forth above. 790 . Plaintiffs and the Remedy Sub-Class Members who acquired Peregrine common stock pursuant to the Remedy Registration Statement did so without knowledge of the materially untrue statements or omissions in the Registration Statement . As a direct and proximate result o f
the defendants' wrongdoing, the Remedy Sub-Class Members have suffered substantia l
27
28
#105317
1 2 3 4 5
damages. COUNT I X (Violations Of Section 15 Of The Securities Act - The Remedy Acquisition ) 791 . Plaintiffs Balch and Hylton incorporate by reference, as though fully set forth herein, the paragraphs referenced in Paragraphs 715, 732 and 773-790 above, only to the extent
6 that they allege negligence only. 7 792 . This Count is asserted against defendants Gardner, Gless, Moores, Savoy, Cole,
8 Noel[, Watrous, Arthur Andersen and AWSC . This Count is based solely on defendants ' 9 I negligent conduct . 10 11 793 . Each of the individual defendants named in this Court was a controlling person of Peregrine within the meaning of Section 15 of the Securities Act at the time of the Remedy
12 Registration Statement and had the power and authority to cause the issuer to engage in the 13 wrongful conduct complained of herein, including the issuance of the false and misleading
14 statements and omissions in the Prospectus . In addition, defendants AWSC and Stulac were 15 controlling persons of Arthur Andersen within the meaning of Section 15 of the Securities Act at
16 the time of the Remedy Registration Statement and had the power and authority to cause the 17 issuer to engage in the wrongful conduct complained of herein, including the issuance of the false 18 19 20 21 22 23 24 25 26 and misleading statements and omissions in the Remedy Joint Proxy . 794 . Certainly, for purposes of the distribution of the Remedy Joint Proxy, the Board members named in this Count had control of whether such distributions should be made and th e
contents thereof. Beyond the Remedy transaction, Moores also had control of Peregrine through his control and domination of the Board . As stated in detail above, almost every Board member had ties to Moores, which allowed Moores to have a great deal of influence over those Board members . Moreover, by his control of these Board members, Moores and these Board members effectively controlled Peregrine .
795 . None of the individual defendants mentioned in this Count or defendants AWSC
27 or Stulac made a reasonable investigation or possessed reasonable grounds for the belief that th e 28
statements contained in the Remedy Joint Proxy were true and devoid of any omissions o f
#105317
1 2 3 4
material facts . Therefore, by reason of their positions of control, as alleged herein, each of these defendants is jointly and severally liable to plaintiffs bringing this Court and other members of the Remedy Sub-Class as a result of the wrongful conduct alleged herein . 796 . Plaintiffs and the Sub-Class Members who acquired Peregrine common stock
5 pursuant to the Remedy Registration Statement did so without knowledge of the materially 6 untrue statements or omissions in the Registration Statement . As a direct and proximate result o f
7 the defendants' wrongdoing, the Remedy Sub-Class Members have suffered substantial damages . 8 9 PRAYER FOR RELIEF WHEREFORE Plaintiffs, on behalf of themselves and the Class, demand judgment
10 against defendants, and each of them, as follows : 11 12 13 A. Determining that this action is properly maintainable as a class action pursuant to Rule 23 of the Federal Rules of Civil Procedure an d certifying the Class and Sub-Classes; B. Declaring and determining that the defendants violated the federal securities law s
1 4 by reason of their conduct alleged herein ; 15 C. Awarding monetary damages against all of the defendants, jointly and severally,
16 in favor of plaintiffs and the Class and Sub-Classes for the damages suffered as a result of th e 17 18 19 wrongdoing complained of herein together with prejudgment interest from the date of the wrongdoing to the date of the entry of judgment ; D. Awarding plaintiffs their costs, expenses, and disbursements incurred in this
20 action, including reasonable attorneys' and experts' fees and costs ; 21 22 23 24 25 26 27 proper . E. Granting extraordinary equitable and/or injunctive relief as permitted by law, equity and federal and state statutory provisions sued on hereunder, including attaching, impounding, imposing a constructive trust upon or otherwise restricting the proceeds of Defendants' trading activities or their other assets so as to assure that plaintiffs and the Clas s
have an effective remedy ; an d
F. Awarding plaintiffs and the Class such other relief as the Court may deem just an d
2 8 11
#105317

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 26 27 28 By: JURY DEMAND Plaintiffs hereby dem and a trial by jury .
Dated : April 3, 2004 GOLD BENNETT CERA & SIDENER LL P
Solom B . Cera Att orn eys for Section 10(b) Lead Plaintiff The Loran Group And All Others Similarly Situated - and STULL, STULL & BROD Y
By :
&vmd
Howard T . Longman
ABRAHAM & ASSOCIATES By_ Ce,J t Lawrence D. Levi
for Section 11 Lead tAorneys Plaintiff Heywood Waga And All Others Similarly Situated
#105317
M
Document APPENDIX A
t
Pag e
TABLE OF CONTENTS FOR APPENDICES
Plea Agreement of Matthew C . Gless . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1-25 APPENDIX B Plea Agreement of Steven S . Spitzer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26-43 APPENDIX C Plea Agreement of Isle Cappel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44-59 APPENDIX D Peregrine Class Period Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 APPENDIX E Transaction Summaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61-11 6
#105770

I 2 3 4
CAROL C . LAY United States Attorney GEORGE D . HARDY Assistant U .S . Attorney California State Bar No . 086037
2083 APR 16 FM 12~ 5 5
BARBARA L. MOR
Assistant U.S . Attorney California State Bar No .131812 SANJAY BHANDARI
Special Assista nt U.S . Attorney California State Bar No,181920 Federal Office Building 880 Front Street, Room 6293 San Diego , California 92101-8893 Telephone : (519) 557-6197 f Attorneys for Plaintif
14
United States of America -
. 1a
J 11
UNTIED STATES DISTRICT COURT

12
SOUTHERN DISTRICT OF CALIFORNIA

13
UNITED STATES OF AMERICA, ) Criminal Case No . 03crl090W

14
Plaintiff,
is
v.
16
P ~ AGREEMENT MATTHEW C. GLESS, )

Defendant.
17
18 19 .
aa
IT IS HEREBY AGREED between the plaintiff, UNITED STATES OF A CA, through its counsel, CAROL C .' LAM, United States Attorney, GEORGE D . HARDY and BARBARA L. MAJOR, Assistant United States Attorneys, and SANJAYBHANDARI, Special
a].
22
23 24 2$
Assistant United States Attorney, and defendant, MATTBEW .C. GLESS, with the advice and consent of JAMES D . RIDDET, counsel for defendant, as follows :
THE PL A
26 37 ,
Defendant MATTHEW C, GLESS ("defendant") agrees to waive indictment and plead guilty to an infomiation charging defendant with one count of conspiracy, in violation of Title k
A I A 11 -1 6 \/ntpV
281
APPENDIX A
1 18, United States Code, Section 371, and one count of fraud in connection with thepurchase and 2 sale of securities in violation of Title 15, United States Code, Section ?8j(b) and 78f and Title 3 17, Code of Federal Regulations, Section 24O .10b-S . 4 In exchange for defendant's guilty plea to the above charge and subject to the conditions s set forth herein, the government agrees to bring no further criminal charges against defendant 6 relating to his conduct relating to Peregrine Systems, Inc . I ~`w NATURE o H O N A. ELEMENTS EXPLAINED
7 B 9
10 Defendant understands that the offense of conspiracy (Count 1) to which defendant is 11 pleading guilty has the following elements : la I . Beginning on a date unknown to the United States Attorney but no later than 13 June, 1999, two or more persons entered an unlawful agreement and conspiracy 1 4 to commit offenses against the United States, in this case to commit securities 15 fraud, mail fraud, wire fraud ; add bank fraud, to falsify books and records, and 16 to make false and misleading statements to auditors and the U .S . Securities and 17 Exchange Commission ("SEC"); 18 2 . Defendant knowingly and wiffullybecame amemberofthis conspiracy knowing 19 its objectives and intending to help accomplish it ; and 20 3 . At least one member ofthe conspiracy committed at least one overt act to further 23. some objective of the conspiracy. 22 Defendant understands that the offense of fraud in connection with the purchase and sale 23 of securities (Count 2) to which defendant is pleading guilty has the following elements : as 1. In connection with the purchase and sale of any security, the defendant did one 25 or more of the following : 26
a.
employed a device, scheme or a rtifice to defraud;
27
2
APPENDIX A
03~1A117C Vf~W}I IN,J{~~
W 7 '7
1NUd
b. made an untxve statement of a material fact or omitted to state a materia l
2
3
fact which made what was said under the circumstances misleadutg or c. engaged in an act , practice, or course of business which operated o r would operate as a fraud or deceit upon a purchaser or se ller;
2 . In connection with the purchase and sale of any sectffity , defendant knowingl y used or caused to be used any means or instrumentality of interstate commerc e or of the mails , or of any facility of and national sec urity exch ange; and
4
s s 7
a 9
ro
3, Defendant acted willfully, knowingly, and with the intend to de fraud. B. ELEMENTS UNDFRSTDOD AN,D AD)MLTTB . FACTUAL BASI4
Defendant has fully discussed the facts of this case with defense counsel . Defendant has
i1
z2
13
committed each of the elements of-the crime, and admits that there is a factual basis for No
guilty plea. The following facts are true and undisputed:
The'COm n y
14
1 . Pereg rine Systems , Inc. CTereg ne ") is a computer software compan y
z5
1-6 17 ze 19 20 21 22 23
24
headquartered in San Diego, California. Peregrine was incorporated in California in 1981 an d

reincorporated in Delaware in 1994 . From its initial public offering ("IPO") in April 1997 until -it was delisted cn August 30, 2002, Peregrine was a publicly held corporation whose shares wer e registered securities traded under the symbol "PRGW' on the National Association of Securitie s Dealers Automated Quotation system ("NASDAQ' ), g national securities exchangethatused th e means and instrumentali ti es of interstate commerce and the mails . 2. Peregrine developed and sold business so ftware an d related services .
Software license fees accounted forthe bulk ofPeregrine's publicly reportedrevenue. Peregrin e sold its software direc tly through its own sales organization and indirectlytbrough resellers suc h as value added resellers and systems integrators . These indirect sales (also known as "resellee'
25
or "chael" sales) became a critical component of Peregrine' s revenue.
: .
28
3
3 APPENDIX A
n71TA 2c VfI WA AI :c c - 1 uw
1 0
I
2 3
3. From its IPO in April 1997. through the quarter ended June 2001, Peregrine reported 17 consecutive quarters of revenue growth, always meeting or beating securities analysts' expectations . Peregrine stock price soared from its April 1997 IPO price of approximately $2 .25 per share (split adjusted) to almost $80 in March 2000 . Outing this time period, Peregrine issued over 192 million shares to the investing-public . 4. In May 2002, Peregrine disclosed that its prior public reports had been materially false and that it had employed a variety of devices, schemes and fraudulent accounting practices over an extended period of time in order to portray itself as far more healthy and successful that it actually was . After Peregrine restated its financial results and condition, its stock p ri ce dropped precipitously and it now trades at below $1 per share .
11
The Defendant 5. Defendant MATTHEW C . GLESS was hired by Peregrine in April 1996
13
as its controller and, in October 1998, he was promoted to Chief Accounting Officer and Vice President ofFinanee . InNovember 2000, defendant GLESS was named Cbief financial Officer
15 16 17
and made a Director on the Board. In May 2001, Peregrine gave defendant GL3SS the additional title of Executive Vice President . On May 5, 2002, defendant GLESS resigned from Peregrine . As Chief Accounting Officer and Chief Fin2mcial Officer, defendant GLESS was responsible for maintaining accurate books, records and accounts that fairlyreflected Peregrine's transactions and dispositions of assets and for ensuring that Peregrine's financial records and public reports and statements were accurate , tr uthful and compli ed with Generally Accepted Accounting P rinciples ("GAAfl. Peregne ' s Public eaortin a 6. As a public company, Peregrine was required to comply with the Securities Act of 1933, the Securities Exchange Act of 1934, and the regulations of the United States Secu ri ties and Exchange Commission (the "SEC'). These laws and regulations are
~~II 19 20 21 22 23 24 25 26 27
designed to protect the investing public by en suring that companies like Peregrine fairly,
4
4 APPENDIX A
ae
0 0
1
0 2
3 4 . 5
accurately, and timely teport their financial results and condition. To ensure fair, accurate and timely reports to the investing public, the securities laws and SEC regulations required Peregrine and its directors and officers to, among other things ; (a) make and keep books, records and accounts which in reasonable detail accurately and fairly reflected Peregrine's transactions and dispositions of assets; (b) devise and maintain alsystem of internal accounting controls sufficient to provide reasonable assurances that the company's . tr ansactions were executed in accordance with management's policies, and recorded as necessary to permit preparation of reliable financial statements in 'accordance with applicable accounting norms; (c) file regular public reports including quarterly reports (on Form 10-Q) and annual reports (on Form 14-K) with the SEC ; and (d) make fair and accurate representations to auditors preparing . public reports ofPeregrine, includ ing all mate ri al facts necessary . to make m anagement representations to auditors not misleading. From 1997 through December 2001, Pereg rine filed regular financial reports with the SEC, Dinin g this entire period, Arthur Andersen LLP, which was at the time a public accounting firm, served as the outside auditors of Peregrine ' s financial repo rts.
s
7
e
9
io
xl 12
13
1
1s
16 17
is 19 20 21
22, 23
The Conspiracy
7 . To make Peregrine's financial condition appear significantly better than it actually was, to ensure that Peregrine met or exceeded the securities analysts' expectations, to keep the Peregrine stock price artificially bigb, and to induce the public to purchase and hold Peregrine stock, defendant MATTHEW GLESS conspired with other Peregrine executives, Peregrine employees, and individuals to use a variety of schemes, devices, and artifices, to mak e 5 APPENDIX A
24
25
26 27
2e
i l I :c C(
~i
I
2
3
4 5
i
seller of Peregrine's stock, including the following: .
false and misleading statements and omit material facts intheir statements, andto engage in acts, practices and courses of business which would operate as a fraud or deceit upon a purchaser or
(a) recognizing and maintaining as revenue, and causing to - be

recognized and
maintained
as revenue,
software
license
s 7
8. 9 1 L7
tr ansactions that could not berecognized as revenue under GA .AP

and Peregrine's stated revenue recognition policy, including reporting revenue from transactions that were not yet complete
and those that may never be completed ;

(b) selling and causing to be sold uncollectible, falsified and invalid accounts receivable to banks to fraudulently manipulate
12
Peregrine's Days Sales Outstanding (DSO), which is a formula used by securities analysts to measure the quality'and quantity of a company's outstanding debts or "accounts receivable" and which reflects on a company's financial condition and stock value; (c) hiding and causing to be hidden in financial statements uncollectible accounts receivable and invalidrevenuerecognition as acquisition and other one-time costs to fraudulently enhance
13
sa ~.5 16i 17 1. 8
20
21
Peregrine's financial condition; (d) making aid causing to be made materially false statements to -Peregrine's auditors, the SEC, and the investing public, and omitting and causing to be omitted material facts from statements to Peregrine's auditors, the SEC, and the investing public, in order to deceive these groups regarding Peregrine's policies, transactions and condition ; and, 6 APPENDIX A
22
23 24
25
26 27 2e
. .- ,
.u
111 -
nb
.e
1.11
creating and causing to be created false records including false
2 contracts and invoices in order to continue , maintain , and conceal
3 their deceitful schemes . 4 8. The American Institute of Certified Public Accountants ' Statement of
s Position ("SOP") 97-2, Software Revenue Recognition , and subsequent clari fi cations are the r, Generally Accepted Accounting Principles ("GAAP") that apply to recording or "recognizing"
7 revenue in publicly fried financial statements from transactions involving' so ftware licenses ., e These accounting pri nciples require that revenue is notrecognizable unless a transaction sati sfies s four criteria : (a) persuasi ve evidence of a transacti on exists, (b) delivery has occurred, (c) the 'i o vendor ' s fee is fixed or determinable, and (d) collectibility is probable, in essence, these ii principles require that a company publicly recognize revenue only when and to the extent that 1 2 a transaction has resulted in actual economic gain . 13 9 . In the financial reports filed with the SEC from A ugust 14,1998 to March Defendant
14 4, 2002, Pereg rine claimed to recognize revenue in accordance with GAAP .
15 MATTHEW C . GLESS signed nine Quarterly Reports on Form l0-Q and two Annual Report s on Form 10-K between August 1999 and February 2002 fraudulently asserting that Peregrine 17 recognized revenue is accordance with GAAP . For example , defendant GLESS signed and 18 submitted the following financial reports , knowing that they contained materially false ig statements and omissions and intending to deceive and defraud the secu rities analysts, the SEC, 20 the investing public, and others who rely upon them: 21 (a)
On or about November 14, 2000, defendant GLESS, as
22 Peregrine's Vice President and Chief Financial Officer, signed 23 and submitted to the SEC a Form 1O-Q in which defendant
24 GLESS falsely represented that Peregrine 's "[r)evenues from

25
license agreements are recognized currently, provided that all of
26 the following conditions are met :

27
a noncancellable license
28
7 APPENDIX A
1 1 2
3 4 5 6 7
agreernem has been signed, the product has been delivered, there arc no material unce rt ainties regarding customer acceptance, collection of the resulting receivable is deemed probable and the risk of concession is deemed remote , and no other significant vendor obligations exist."
(b) On or about June 29, 2001, Peregrine's Chief Executive Officer and Chairman of the"a Board of Directors and defendant
MATTHEW C. GLESS, as Peregrine's Executive Vice President
9 10 11 12 13 IA 155 16 17 is 1 .9 20 21
and Chief Financial Officer, signed and submitted to the SEC a Form i4-K in which defendant GLESS falsely represented that
Peregrine 's "[r)evenues from direct and indireef license

agreements are recognized, provided that all of the following conditions are met ; a noneancellab ]e license agreement has been signed ; the product has been delivered ; there are no material uncertainties regarding customer acceptance ; co ll ection of the resulting receivable is deemed probable ; risk of concession is deemed remote ; and no other signi ficant vendor ob ligations
11
10. Defendant GLESS and his co-conspirators also signed more than nine manage rent representation letters that Peregrine presented to its independent auditors its, which defendant GLESS, on behalf ofPereg rine , assert ed that Peregrine ' s financial statements were in accordance with GAAP . For example , on January 22, 2002, Pereg rine ' s Chairman and Chief
23 24 2$
Executive Offi cer and defendant MATTHEW C, GLESS, as Executive Vice President , Finance and Chief Financial Officer, signed a letter to Peregrine ' s auditor, Arthur Andersen LU', in which the following false and misleading misrepresentations were made , among others :
as 27 28
S APPENDIX A
ntnl 4 tIA V/111fi
w .- i ,,
I
2
3
(a) "We are not aware of any side agreements, whether written or
oral, to its [Peregrine's] software revenue arrangements ."

(b) "The Company has recognizzed revenue in accordance with the
4
5
6 7 e 9 so
provisions of SOP 97-2 and other authoritative literature "

11 . Despite having filed and caused to be filed these public reports that
peregrine would recognize revenue in accordance with GAAP, defendant GLESS and his co conspirators structured and booked as revenue, azrcl` caused to be structured and booked , transactions that violated some or all of the provisions of GA .A,P and/or Peregrine's stated revenue recognition policy, including : (a) transactions that were still under negotiation or were otherwis e
11
.12 13
incomplete in the quarter in which they were booked as revenue; (b) transactiobsthat were subject toside letters orothercontingencie s
that allowed forpartial or complete cancellation ofthe customer' s obligation to pay Peregrine; and (c) barter and swap transactions in which Peregrine would provid e cash, stock, or a purchase order for the customer's products o r services in order to secure the customer's wmmitmerrt , 12 . To perpetuate this fraudulent conspiracy, defendant GLESS and his co conspirators, including other members of Peregr'ine's management team, would meet or talk at . or near the end of each quarter to determine bow much revenue Peregrine needed to book tha t quarter in order to meet or exceed the securities analysts' expectations . Defendant GLESS and his co-conspirators would then devise, structure or create fraudulent and misleading transactions , as described above, and the resulting "revenue" would be recognized in that quarter in order t o mislead the securities analysts and investing public into believing that Peregrine's financia l
14
is
16
17
ze 19
20
21 22
23
24
25
condition was significantly better than it really was and to maintain'Peregrine's inflated stoc k price.
9
,26
27
29
APPENDIX A
ca1IANI-q Xfj I : r c(1fl '7 %VW
13 . To further fraudulently enhance Peregrine's financial health, defendant GLES5 and his co-conspirators also would deceitfully manipulate Peregrine 's "DSO", whic h
3 4 5 6 7 e 9 10
stands for "Days Sales Outstanding." DSO is a formula used by securities analysts to measure
how many days it takes a company to collect outstanding debts or "accounts receivable" from its customers . The larger the number, the more likely it is that analysts would call into question
the quality of a company's receivables and therefore the related revenue that had been recognized. Securities analysts pay attention to a coh parry's DSO in judging the health of a company and the value of its stock , 14,- Peregrine's management was very concerned about keeping its DSO below a certain number in part because management had previously provided guidance t o I analysts about the expectedDSO number and impart because ahigh DS0 could alert the analyst s
12 1, 3
14 15 16 17 is 19 20 21 22 23 24 25 26
to the fact that peregrine had improperly recognized revenue . However, it was difficult for peregrine to keep the DS 0 low because, as set forth above, Peregrine had a practice of recording contingent sales (e .g. sales to resellers or channel .partners who were not required to pay Peregrine unless and until the product was sold-through to an end user) as revenue before . satisfaction of the .contingency an which payment to Peregrine depended. These revenues, once improperlyrecorded, would remain uncollected receivables for extended periods, raising concern
among securities analysts and possibly exposing Peregrine's improper revenue . practices . 1 I S, To avoid this and to give the impression that Peregrine's customers wer e
timely paying Peregrine, defendant GLESS directed- Peregrine employees to remove aging receivables from Peregrine's balance sheet by selling them to banks at quarter end . The bans, however, would purchase the accounts receivable onlyiftheywere told that the receivables were valid, enforceable and based on completed transactions . To further the fraudulent conspiracy , defendant GLESS repeatedly falsely represented to the banks that the receivables were valid an d collectible . 10 APPENDIX A
10
27 28
1 A 7 , 11 ,A
.,--
16. To further perpetuate the fraud, defeadant GLESS and his co-conspirator s 2 . gave the batiks recourse on the receivables if Peregrine, who was supposed to collect from th e
3 4
s
channel partner, did not timely pay the basks . Despite his intimate knowledge of the nature o f the bank transactions, defendant GLESS denied in Form 10-Q filings with the SEC tha t
Peregrine sold receivables with recourse by stating that Peregrine "may market certain clien t
6
7 e
receivable balances without recourse ."

17. When receivables were not available to sell to banks, defendant GLES S instructed certain Peregrine employees including ESE CAPPEL (charged elsewhere) to prepar e
s 10 11 12
13
14
false invoices corresponding to deals that had not yet closed, and to sell those false invoices to banks before the deals were even reported to be closed . In the quarter ending June 30, 1999, .
defendant GLESS caused Peregrine personnel to prepare false invoices for transactions that ha d
not closed, totaling several million, and to sell them to a bank before the deals had closed .
19, On or before June 29, 2001, defendant MATTHEW C . GLESS instructed ILSE CAYPEL to fabricate a Peregrine invoice to KPMG Consulting LLC, dated June 29,2001 P for s 19,580,596.00 that was sold to Wells Fargo }ISBC Trade Bank, . N.A ., as if it were a valid, enforceable account receivable, based on a completed transaction with KPMG Consulting, whe n in actual fact, it was not because Peregrine had no valid contract with KPMG Consulting at tha t time for that amount under those tern-;s . In addition, defendant GLESS, as Peregrine's vic e
1s
3.6
17 ie
19 . 20
21 22
President and ChiefFinancial Officer, executed aForm of Sale and Assig=ent, wbichhe caused
to be transmitted to Wells Fargo Bank, in which he fraudulently represented that the KPM G invoice represented a valid and enforceable account receivable . Defendant GLESS admits tha t he thereby defrauded a bank, the deposits of which were insured by the Federal Deposi t
Insurance Corporation .
23
24 2s
19. To further perpetuate the fraudulent conspiracy, on or about April 12 , 2001, defendantGLESS, as Peregrine's ChiefFinancial Officer, signed and submitted to the SE C
26
27
a letter containing Peregrine's response to the SEC's Comment Letter in which defendan t
~e
~~
11
11 APPENDIX A
z GLESS made the following representations, among others, that were false, and misleading and 2 omitted facts necessary to render them not false and misleading :
3 (a) "Peregrine has demonstrated that under the revenue recognition 4 runes of SOP 97-2, the price of their products is fixed and 5 determinable at the date of the sale. Peregrine has a policy of 6 deferring revenue where this requirement is called into question" 7 (b) The payment is never'contiugent upon resale and any and . al3. sales to indirect partners fall under the same payment structure." s 20. In a further attemptto reduce the DSO and disguise the amount and extent
xo of fraudulent, uncollectible and aging receivables, defendant GLESS conspired with others to 1l. improperly remove the receivables from Peregrine's balance sheets by writing them off as part 12 of unrelated acquisition and other0one-time costs . At the time that he authorized the write-offs, 13 defendant GLDSS knew that the receivables were uncdllectible and that the write-off would 14 further mislead the securities analysts and investingpublic as to the status ofPeregnne's financial xs condition. 16 21 . Defendant GLESS adrrmits that in committing the charged crimes, be used 17 and caused to be used instrumentalities of interstate commerce, the mails, and the facilities of is national security exchanges, . 1s 22. Defendant GLESS admits that he and others knowingly, wmfuully, and 2o with an intent to defraud, used the above-described schemes, devices and artifices to create the 21 false impression that Peregrine was financially sound, to artificially increase the value of 22 Peregrine's stock, to induce the public to purchase and bold Peregrine's stock, to defraud 23 securities analysts and the public, and to enhance their reputation and enrich themselves through 24 compensation, stock options, and other means ,
25
26
27
20
12
12 APPENDIX A
2
3
PENALTIE S
Defendant understands that the crime of conspiracy (Count 1) carries the followin g
4
s
6
penalties :
A . a maxim= term of five years in prison (18 U .S.C. 371); a maximum fine of the greatest of 5250,000, twice the gross pecuniary gai n
7
s
derived from the offense, or twice the gloss pecuniary loss to a person other tha n
the defendant as a result of the offense (18 U .S.C. 3571);
9 20
xi
22 13
C . a mandatory special'assessment of 8100 (18 U .S .C. 3013);

D . a term of supervised release of at least two years but not more than three year s (USSG 5DI .1-5D1 .2). Defendant understands that failure to comply with an y of the conditions of supervised release may result in revocation of supervise d release, requiring defendant to serve in prison all orpart of the term of supervise d release; and E . an order from the court pursuant to Title 18, United States Code, Section 3663 A that defendant make mandatory restitution to the victim(s) of the offense o f conviction, or the estate(s) of the victims(s) in an amount to be specified by the . Court in accordance with 18 U,S .C . 3663, 3663A and 3664 . This amount
14 a5 16 17
2s
20
21
shall be paid according to a plan established by the Court , Defendant understands that the crime of fraud in the purchase and sale of securitie s (Count 2) carries the following penalties : A. a maximum term of ton years in prison (15 U .S.C . -78ff(a)) ;. B. a maximum fine of the greatest of $250,000, twice-the gross pecuniary gai n derived from the offense, or twice the gross pecuniary loss to a person other tha n the defendant as a result of the offense (18 U .S.C. 3571);
22
23
24
25
26
27 20
C. a mandatory special assessment of $100 (18 U .S .C. 3013);

13
13 APPENDIX A
A-In1jul + VALIV
W,l71 :c cn n7 7 AV
I Z 3
4 s
D. a term of supervised release of at least two years but not more than three year s (USSG 5D1 .1-SD1 .2). Defendant uiaderstands that failure to comply with any of the conditions of supervised release may result in revocation of supervised
release, requiring defendant to serve in prison all or part ofthe term of supervise d release ; and
6
7
E, an order from the court pursuant to Title 18, United States Code, Section 3663 A
that defendant make mandatory restietion to the victim(s) of the offense o f
a
9
10 11
conviction, or the estate(s) of the victims(s)in an amount to be specified by th e

Court in accordance with 18 . U.S.C. 3663, 3663A and 3664, This amoun t shall be paid according to a plan established by the Court . Defendant understands that by pleading guilty to the above offense(es) defendant ma y
la
1.3
become ineligible for federal benefits .

IV
14
is 16 x 17 ae
19
DE1 DA rS w R of TEAL LUG$T ,

Defendant understands that this guilty plea waives the right to : A. continue to plead not guilty and require the government to prove the elements of the crime beyond a reasonable doubt ; B. a speedy and public trial by jury; C. the assistance of counsel at all stages of trial; D, confront and cross-examine adverse witnesses; E. present evidence and to have witnesses testify an behalf of defendant ; F. not testify or have any adverse inferences drawn from the failure to testify. V
20 21 22
23
24
25 26
DEFENDANT ACKNOWLEDGES NO PRETRIAL RIGHT TO B E pVID D C WEDS NSE RMA Q

The government represents that any information establishing the factual innocence o f
defendant ]mown to the undersigned prosecutor in this case has been turned over to defendant ,
27
28
14
14 APPENDIX A
VfM V
Ilid71'CA67'7 tuw
The government will continue to provide such information establishing the factual innocence of
2,1 3
4
defendant.
Defendant understands that if this case proceeded to trial, the government would be required to provide impeachment information relating to any informants or other witnesses . In addition, if defendant raised an affirmative defense, the government wouldbe required to provide
6 7
information in its possession that supports such a defense . Defendant acknowledges, however, that by pleading guilty defendant willnot be provide&this information, if any, and Defendant also waives the right to this information . Finally, defendant agrees not to attempt to withdraw the guilty plea or to file a collateral attack based on the existence of this information .
1D
VI DEFENDANT'S REPRESENTATION THAT GUILTY T.E IS !(NOW NG ANP VO U
12
Defendant represents that ;

13
A. Defendant has had a full opportunity to discuss all the facts and circumstances of
0 14
this case with defense counsel, and has a clear understanding of the charges and
1s
the consequences of this plea;

16
B, No one has made any promises or offered any rewards in return for this guilty
17
plea, other than those contained in this agreement;

1B
C . No one has threatened defendant or defendant's family to induce this guilty plea ;
19-
and
20
21
22
D . Defendant is pleading guilty because in truth and in fact defendant is guilty and for no other reason .
VII
23 24
AGREEMENT LIMITED TO U.S. ATTORNEY'S OFI+IC E SOUT ERN DJST ICI OF CALIFORNI A This plea agreement is limited to the United States Attorneys Office for the Souther n District ofCalifornia and cannot bind any other federal, state or local prosecuting, administrative ,
25 26 27 26
'5
15
APPENDIX A
6 1RTAube VfIJ
:c W717 iwim
or regulatory authonties . The government, however, will bring this plea agreement to the
2 3 4 5 6 7
attention of other authorities, if requested by defendant .
Yf
E C1NG GUIDEL S
Defendant understands-the sentence will be governed by the United States Sentencing Commission Guidelines ("Guidelines") . Defendant has discussed the Guidelines with defense counsel, and understands that the sentence cannot be '`etermined until a presentence report has been prepared by the U .S . Probation Office .and defense counsel and the government have had an opportunity to review and challenge the presentence report . Defendant understands that,
] .o
under some circumstances, the Court may "depart" from the guidelines and impose a sentence more severe or less severe than the guidelines, up to the maximum in the statute of conviction ,
12 13 14 z~ 16 17 is is 20 21 22 23 24 25 26
27 28
The United States Attorney's Office will fully advise the District Court and the U .S . Probation Office of all of defendant's relevant conduct for sentencing . Nothing in this plea agreement shall be construed as limiting the information that the government may provide to the Court or the Probation Office .
IX
SEh2ENCE IS WITHIN SOLE DISCRETION DF JUDG E This plea agreement is made pursuant to Federal Rule ofCriminal Procedure 11(e)(1)(A) . Defendant understands that the sentence is within the sole discretion of the sentencing judge . The government has not made and will not make any representation as to what sentence defendant will receive . Defendant understands that the sentencing judge may impose the maximwn sentence provided by statute, and is also aware that any estimate of the probable sentence by defense counsel is a prediction, not a promise, and is not binding on the court. Likewise, the recommendation made by the government is not binding on the court, and it i s uncertain at this time what defendant's sentence will be .
16 16 APPENDIX A
n,ArIuin vngv UIJ7I :C
CA A7 '7 '1um
1 2 3 4 s 6 7 e 9 10
Defendant also has been advised and understands that if the sentencing judge does not follow the parties' sentencing recommendations, defendant nevertheless has no right to withdraw the plea. X PARTIES' SENTENCING RECOMENIDAnQN S
A. G LINES MANUAL AND THE OF ALE C 0
The parties will jointly recommend that the Court apply the United States Sentencing Commission Guidelines Manual ["USSG' ] that was effective November 2002 , in its entirety to all counts . The parties will further jointly recommend that the Court find that Counts I and 2 group under USSG 3D1 .2(b), and that Counts 1 and 2 should run consecutively if necessary to produce a sentence equal to the total punishment required after all adjustments and departiues,
12 1s
lg is
per USSG 5G1 .2(d) . B. BASE _OMNSE LEVEL AND ADTUSTTMEN'S
The parties wi ll jointly make the following sentencing recommendations : 1, Base offense level [ 2B1 .1) Speci fi c Offense Characteristics a. Loss gr eater than $100 million 2B 1 .1(b)(1)(N)] +26 b. 50 or more victims [$ 2B1 .1(b)(2 )(B)] +4
16
17
is
19
c. Substantial part of scheme committed abroad / use of sophisticated means [ 2B I . 1(b)(8)(B )-(C')] +2 3. Accede of resgonsib tv H ME .1
Adjusted Offense Leve' 35
20
21
22
23
The parties will propose a loss measurement system based upon shareholder loss and specifically a gree that the loss exceeds $ 100 million . See, ems U 'ted States v. a1 bi 218 F .
24
Supp .2d 1232 (C.D . Cal . 2002) . The government estimates total loss at we ll in excess of $2
23
as
27
. bi on
17
APPENDIX A
20 {,
17
e31TAuac Yn~y wll.I :F Tool 'I 'A m
0
1
C.
ACCEPT,M CE OF RESPONSiILTTY
2
3 4 S
6
Notwithstanding paragraph B,3 . above, the government will Dat recommend any adjustment for & ceptance ofResponsibi l ity if defendant: 1 . Fails to admit a complete factual basis for the plea at the time it i s
entered, or
2 . Denies involvement in the offense, gives conflicting statements about that involvement, or is untruthful wi the court or probation officer, o r 3 . Fails to appear in cow't, o r
9 10
4. Engages in additional criminal conduct, or 5. Attempts to withdraw the plea, or 6. Refuses to abide by any lawful court order . D. PTO OTHER ADJUSTMENTS
11
12 13
As set forth above, the parties jointly will recommend that the base offense level be increased by 26 levels pursuant to USS G 2B 1 . l (b)(1)(N) for a loss greater than S 100 million . Although the United States estimates that the loss exceeds $2 billion, the United States agrees for purposes of this plea agreement that it will not seek an upward adjustment or departure for the]ossabove $100million (other than the 26 levels required by USSG 2B 1 .1 (b)(1)(N)). Both parties agree that they will oppose any loss adjustment recommendation other than the 26 level enhancement set forth above ,
14 is 16 17 18 is 20 211 22 23 24 25 26
The parties further agree that neither party will seek any adjustment other than those referenced above.
E. PTO AGREEMENT AS TO AFEAR R_E_5
The parties agree that defendant may argue for departure on any basis permitted by law except that defendant may not argue that the loss is less than $100 million . The parties further agree that'the United States may oppose all of defendant's departure requests . The United States agrees that it will not seek, and will oppose, any upward departure and that it may seek a 18 1g APPENDIX A
27
28
rntl7 7 -'AHW
I
F.
4 5 8 7 8 9 10 11 12 13 14 Isi s
downward departure under section SK1 .1, as set forth below. The government remains free to
defend on appeal any upward adjustments or departures imposed by the Co urt. NO AGRE .MENT AS TO CRIMINAL HISTORY CAThGO$V
There is no agreement as to defendant 's Ciiminal History Catego ry.
G.
"RELEVANT CONDUCT INFOR 4A1FION
Defendant agrees thaithe facts contained in the "factual basis " section are t ue, and may be considered as "relevant conduct" under USSG 1B .3. C MRNIETTT'S RE M DATON REARDTG CUSTODY
The government will recommend that defendant be sentenced to the low end of th e guideline range if the guideline range found by the Court is at or above the range suggested by the government . If the Court employs a guideline range below that suggested by the governm ent, the government may recommend a term anywhere withi n that range . I. SPECIAL A.SSE SMEN iFINL
g pecial Assess amer~t . The parties will jointly recommend that defendant pay a special assessment in the amount of $200 to be paid forthwith at the time of sentencing . The special assessment shall be paid through the ofce of the Clerk of the District Court bybank or cashier's check or m on ey order payable to the "Clerk, United States District Court ." mac. The parties have no agreement with respect to the app li cable fine that may be imposed. Both parties are free to assert any argument they feel is approp ri ate. 7. RESTtLU 9N
is
17
is
19 2D
a2 .
za
23 24
25 26
Defendant agrees that the amount of restitution ordered by the court may include defendant ' s total offense conduct , and is not limited to the count(s) of conviction . While the parties do not have any agreement with respect to the approp ri ate restitution order, defendant acknowledges that restitution is normally mandatory and that the United States retains the right to argue for complete restitution . Defendant shall pay any such court-ordered restitution (according to his financial abi lity as determined by the Court) through the Inmate Responsibility 19 APPENDIX A
0 "1
28 1
fr
19
h~~rAv]e vnuv ~ ~ a7! ;F Fflfl? 'I 'AVW
I.
program and during period of supervised release . paid Defendant's itution shall be aid nS by bank or cashier's check or money order payable to the "Clerk, United States District Court."
Defendant's restitution liability will be joint and several to the restitution liability any coconspirators subsequently convicted and sentenced . Financial Statement. Defendant agrees that, before sentencing, defendant shall provide to the United States, under penalty of perjury, a financial disclosure form listing all of defendant's assets and financial interests valued at nit a than $1,000 . Defendant understands that-these assets and financial interests include all assets and financial interests in whic h defendant has an interest (or had an interest prior to May 6, 2002), direct or indirect, whether held in defendant's own name or in the name of another, in any property, real or personal. Defendant shall also identify all assets valued at more than $5000 whicbhave been transferred to third parties since May 6, 2002, including the location of the assets and the identity ofthe third party(ies) . 'The parties will jointlyrecoinmend that as a condition ofprobation or supervised release, defendant will notify the Collections Unit, United States Attorney's Office, of any interest in properly obtained, directly or indirectly, including any interest obtained under any other name, or entity, including a trust, partnership or corporation after the execution of this agreement until any fine or restitution ordered is paid in full .
Ile parties will also jointly recommend that as a condition of probation or supervised release, defendant will notify the Collections Unit, United States Attorneys Office, before defendant transfers any interest in property owned directly or indirectly by defendant, including any interest held or owned under any other name or entity, . including trusts, pa rtnerships and/or
s
6
. .e s
10 .
11 12
23
14
is
16
27 18
19
20 21 22
23 corporations .
.24 25 26
0 27 28
11 11
20
20 APPENDIX A
rni.n *nu
S3)IA 3S XONX
wdZi :[ coat z 'AV
0 1
0
b
COLLATERAL A
NA NT's S APP AL
3 4 5 b 7
In exchange for the government's concessions in this plea agreement, defendant waives, to the full extent of the'law, any right to appeal or to collaterally attack the conviction and sentence, unless the court imposes a custodial sentence greater than the high and of t' a guideline range (or statutory mandatory minimum term, if applicable) recommended by the government pursuant to this plea agreement at the time of sentencing If the custodial sentence is greater then the high end of that range, defendant may appeal, but the government will be free to support on appeal the sentence actually imposed . Ifdefendantbelieves the government's recommendation is not in accord with this agreement, defendant will object at the time of sentencing ; otherwise, the objection will be deemed waived. X~
e
9 10 11 ].2 13 14 15 16 17 1a 19 20 21, 22 23 24 2s 26 27 26
coo ERA IO
A. Defendant has expressed a desire to provide substantial assistance to the government in the investigation and prosecution of others, after entering a guilty plea . The government has made no evaluation whether the cooperation, if any, will be "substantial," or whether it will merit a downward departure from the Sentencing Guidelines . B . Defendant agrees to be interviewed by federal and state law enforcement agents and attorneys and to tell everything defendant knows about every person involved presently or in the past in the incident which gave rise to these charges as well as . other violations of law. Defendant also agrees to produce all documents and other evidence in defendant's possession or control related to these violations. C. Defendant agrees not to do any undercover work or tape record any conversations
or gather evidence unless instructed by the agent assigned to defendant . Defendant can be prosecuted for any criminal activity undertaken without i nstructions .
21
21 APPENDIX A
11 , 11 7 A%,IA Vnkw
i r i r
A 7 1
. . . ., .,
p . Defendant agrees to provide statements under penalty of perjury and to testify
a
3
4
5 6 7
before any federal or state grand jury, and at any pretrial, trial or post-trial proceedings . Defendant will provide complete, truthful and accurate infomtation and testimony . Defendant agrees to submit to a polygraph examination to test the truthfulness of defendant's statements , upon request by the government. E. The government agrees that, if defendant fully complies with this agreement, it
will not make use of any statements made by defendant during the period of post-plea I coopera ti on in any further prosecution of defendant for any offense, or in defendant's sentencing
9 10 11 12 13 14 is Z6 17
as provided in Guideline section 1B1 .8. If defendant does not fully comply with this agreement, all statements made by defendant before, during and after this agreement, and any leads or evidence derived from such statements can be used against defendant . F. Statements made by defendant pursuant to this agreement are not statement s "made in the course of any proceedings under Rule 11 of the Federal Rules of Crimina l Procedure" and are not statements "made in the course of plea discussions ." G. If the United States Attorneys Oi ce decides that the defendant has provided substantial assistance, itmay, in its sole discretion, file a motion fora downward departure under 1 8 U.S .G . 3553, or SKI .] of the United States Sentencing Guidelines, The defendant acknowledges that evezaifthe government makes amotion, the court mayrejectthe government' s
19 20 21 22 23 24 35 26
recommendation and refuse to depart downward. H. If the United States Attorney's Office decides to make a substantial assistanc e motion, it will infomn the sentencing judge of (1) this plea agreement ; (2) the nature and extent, of defendant's activities in this case ; (3) the full nature and extent ofd6endant's cooperation wit h I the government and the date when such cooperation commenced ; and (4) all information in the possession of the government relevant to sentencing . L. If defendant provides mate ri ally false, incomplete , or misleading testim ony or information , or breaches this agr eement in any other way, the government may y the e prosecut 22 APPENDIX A
27 28
22
n1#%T ~ v :c YAWN
w A zl .x FOOZ 'Z 'Abw
3. 2 3
defendant in connection with all offenses in the present information as well as for any othe r federal criminal violation of which it is aware, including false statements, pcrjuryand obstructio n of justice, and defendant's sentencing guidelines may be adjusted for making false statement s (e.g., 3C1 .I and 3E1l) . Any prosecution and sentence may be based on informatio n provided by defendant . In addition, the government may move to set aside this plea agreement , and prosecute defendant on the underlying charges . However, if the government elects not t o set aside the plea agreement, defendant agrees thatthe government may recommend any sentenc e without restriction by this agreement
4 s
6
i e
9
1o ii 12
13
J. The parties will request that the court continue the sentencing in this case beyon d
the normal period to allow defendant to cooperate under this plea agreement. Defendant acknowledges that the court may deny this request and require that sentencing proceed accordin g to the court's schedule .
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3 .7
CRIMES AFTER ARREST OR BREACH OF THE AGREEMENT

WILL PERMIT THE GOVERNMENT TO RECOI%MND A HIGEER SENTENCE OR'SET ASIDE THE PLEA
This agreement is based on the understanding that defendant has not committed or bee n arrested for any offense not known to the government at the time of this agreem=t, Thi s agreement is further based on the understanding that defendant has committed no crimina l conduct since May 6, 2002, and that defendant will commit no additional criminal conduct before sentencing . If defendant has engaged in or engages in additional criminal conduct durin g this period, orbreaches any of the terms of this agreement, the government will not be bound b y the recommendations in this agreement, and may recommend any iawfW sentence, In addition , at its option, the government may move to set aside the plea .
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23 APPENDIX A
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CA
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Ap
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= AGREE~
3 This plea agreement embodies the entire agreement between the parties and supersedes 4 any other agreement, w ritten or oral .
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DEFENDANT AND COUNSEL FULLY UNIDERSTAND AGREEMEN T
7 By signing this agreement , defendant certifies ttat defendant has read it in its entirety and e discussed its terms with defense counsel and fully understands its neaning and effect. .
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XVI DEFENDANT SATJS 'I D WITH COUNSEL
11 Defendant has consulted with counsel and is satisfied with counsel's representati on 12
CAROL C. LAM
13 United States Attorney 14
/L o3
G]rOR D. Assistant U,S, Att
xs ?A, la
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BARBARA L. MAJ Assistant U.S. Attorney
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S .. RIDDET Defense Counsel for MATMEW C . GLESS
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, .fn, I% t nl , V
- iAIJCI C CAA7 -?~ AVW
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3
IN AUDITI ON TO THE FOREGOING 'ROI1SIONS TO'4 CII I AGREE, I SWEAR UNDER PENALTY OF FERJ(JRY TEAT THE FACTS IN THE "FACTUAL BASIS" . PARAGRAPH ARE TRUE AND CORECT.
D E MATTHEW C . GLESS s Defendant

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APPENDIX A
A1n1 a,1 ,n nk l%j
WJCI :1 CAA7 7
CAROL C . LAM United States Attorney a

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Assistant U.S . Attorney California State Bar No . 086037 BARBARA L. MAJOR Assistant U.S. Attorney California State Bar No . 131812 SANJAY BHANDAR I Special Assistant U. S. Attorney California State Bar No . 181920 Federal Office Buildin g San Diego, California 92101-8893 Telephone : (619) 557-6197 Attorneys for Plaintif f United States of Ame rica
GEORGE D. HARDY
20 03AN 16 PM 12:59
880 Front Street, Room 629 3
a
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UNITED STATES DISTRICT COURT

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SOUTHERN DISTRICT OF CALIFORNI A

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UNITIED -STATES OF AMERICA,

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Criminal Case No . 03cr] 665W
Plaintiff, ) )
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STEVEN S . SPITZER,
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) ~
PLE `'AGREEM-EN~'
Defendant,
IT IS HEREBY AGREED between the plaintiff, UNITED STATES OF AMERICA, through its counsel , CAROL C . LAM, United States Attorney, GEORGE 1) . HARDY and BARBARA L. MAJOR, Assistant United States Attorneys, and SANJAY BHANDARI, Special Assistant United States Attorney, and defendant , STEVEN S . SPITZER, with the advice and consent ofDAN MARMALEFSKY and JAN L . HANDZLIK, counsel for defendant, as follows : !1 11
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26 APPENDIX B
II
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Defendant STEVEN S . SPITZER ("defendant") agtecs to waive indictment and plead guilty to an information charging defendant with one count of conspiracy to commit securities
s fraud, in violation of Title 18, United States Code, Section 371 .

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In exchange for defendant's guilty plea to the above charge and subject to the conditions set forth herein, the government agrees to bring no further criminal charges against defendant relating to his conduct at Peregrine Systems, Inc .
. n
NATURE W THE OFFENSE A. S,.EMENTS EXPLAINED
Defendant understands that the offense of conspiracy to commit securities fraud, to which defendant is pleading guilty, has the following elements :
Beginning on a date unknown to the United States Attorney but no later than December 1999, two or more persons entered an unlawful agreement and conspiracy to commit offenses against the United States, in this case to commit securities fraud by falsifying books and records and making false and misleading statements to auditors ; 2. Defendant knowingly and willfullybecame a memb cr of this conspiracyknowing its objec tives and intending to help accomplish it ; and 3 . At ]east one member of the conspiracy committed at least one overt act to further some objective of the conspiracy . B. ELEMENTS UNDERSTO D LAND ADMITTED - FACTUAL BASIS
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Defendant has fully discussed the facts of this case with defense counsel, Defendant has committed each of the elements of the crime, and admits that there is a factual basis for this guilty plea . The following facts are true and undisputed :
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27 APPENDIX B
AIM 1 111% vn ~ iU uiu4,l 'CA7 Al '3,7 Bunn
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e ma n
1 . Peregrine Systems, lncr ("Peregrine"j is a computer software company headquartered in San Diego, Califomia Peregrine was incorporated in California in 1981 and reincorporated in Delaware in 1994, From its initial public offering ("IP0") in April 1997 until it was delisted on August 30, 2002, Peregrine was a publiclyheld corporation whose shares were registered securities traded under the symbol "PRGN" on the National Association of Securitie s Dealers Automated quotation system ("NASDAQ"}, a national securities exchange that used the means and instrumentalities of interstate commerce and the mails . 2. Peregrine developed and sold business software and related services . Software
io
license fees accounted for the bulk of Peregrine's publicly reported revenue. peregrine sold its software directly through its own sales organization and indirectly through resellers such as valu e
12
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added resellers and systems integrators .

3. From its IPO in April 1997 through the quarter ended June 2001, Peregrine reported 17 consecutive quarters of revenue growth, always meeting or beating securities analysts' expecta tion s. Peregrine's stock price soared from its April 1997 IPO price of
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161 approximately $2 .25 per share (split adjusted) to approximately $80 per than in March 2000, 37.
By March 2002, Peregrine bad issued over 192 million shares .
4 . In May 2002, Peregrine disclosed that its prior public reports had b een materially
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2s .
false and that it had employed a variety of devices, schemes and fraudulent accounting practices over an extended period of time in order to portray itself as far more healthy and successful than it actually was, After Peregrine disclosed its true financial results and conditi on, its stock price dropped precipitously and it now trades at below $1 per share, Th f
3. Defendant STEVEN S . SPITZRR was hired by Peregrine in August 1997 as a

Vice President in its Sales bepartment, in charge of developing Peregrine's relationships with its indirect sales partners . From August 1997 through approximately April 2000, defendan t
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28 APPENDIX B

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Sp1I'ZEA worked on building sales alliances with entities who could serve as promoters of Peregrine's products in North America . These entities were frequently identified as Peregrines "Channel Partners ." From approximately April 2000 through April 2001, defendant SPITZBR focused on North American Sales ofPe egrine's Get .It! product . Thereafter, defendant SPITZER focused on direct sales to managed service providers, until he left Peregrine in June 2002 . Peregrine's Pub l ' RMgr6ng
6 . As a public company, Peregrine was required to comply with the Securities Act of 1933, the Securities Exchange Act of 1934, and the regulations ofthe United States Securities and Exchange Commission (the "SEC") . These laws and regulations are designed to protect the investing public by ensuing that companies like Peregrine fairly, accurately, and timely report their financial results and condition . To ensure fair, accurate and timely reports to the investing public, the securities laws and SEC regulations required Peregrine and its directors and officers to, among other things: (a) make and keep books, records and accounts which in reasonable detai l
it
.ia
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accurately and fairly reflected Peregrine's transactions and dispositions of assets;

(b) devise and maintain a system of in temal accounting controls sufficient to provide reasonable assurances that the company's transactions were executed in accordance with management's policies, and recorded as necessary to permit preparation of reliable financial statements in accordance with applicable accounting norms ;
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(c) file regular public reports including quarterly reports (on Form 10-Q) and annual reports (on Form l0K) with the SEC; and
(d) make fair and accurate representations to auditors preparing public reports of Peregrine, including all material facts necessary to make management representations to auditors not misleading .
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4 29 APPENDIX B
. . .. .
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FAA
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I
From 1997 through December 2001, Peregrine filed regular financial reports with the SBC . 2 During this entire period, Arthur Andersen LLP, which was at the time a public accounting tit, 3 served as the outside auditors of Peregrine's financial reports . 4
Th QO-risDiracy
7. From at least December 1999 through April 2001, defendant STEVEN S. SPITZER knowingly and willfully became a member of a conspiracy to commit securities fraud through the falsification of Peregrine' s books and records and the making of false statements to its auditors.
8. The American Institute of Cer tified Public Accountants' Statement of Position ("SOP") 97-2, Software Revenue Recognition , and subsequent clarifications are the Generally Accepted Accounting P ri nciples ("GAAP') that apply to recording or''ecogniaing" revenue in publi cly filed financial statements from transactions involving software licenses . These accounting p rinciples require that revenue not be recognized on a transaction unless : (a) persuasive evidence of a transaction exists, (b) deliveryhas occurre d, (c) the vendor ' s fee is fixed or determinable , and (d ) collectibi li ty is probable , In essence , these pri nciples require that a company publicly recognize revenue only when and to the extent that a transaction has re sulted in actual economic gain. 9. Throughout the conspiracy, Peregrine claimed to recognize revenue in accordance with GA,AP . In truth, however, during this time, defendant SPITZER and his co-conspirators str uctured and booked as revenue, and caused to be structured and booked , transactions that violated some or all of the provisions of GAAP and Peregrine's stated revenue recognition policy, i ncluding :
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(a) transactions that were still under negotia ti on or were otherwise incomplete in the quarter in which they were booked as revenue ;
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30 APPENDIX B
(b) transacytions that were subject to side letters or other contingencies-that allowed for partial or complete cancellation ofthe customer's obligation to pay Peregrine ; and
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(c) barter and swap transactions in which Peregrine would provide cash, stock, or a purchase order for the customer's products or services in order to secure the customer's commitment .
10. As part of this conspiracy, conspirators amongst Peregrine's senior most management would meet or talk at or near the end of each quarter to determine how much additional revenue Peregrine needed to book that quarter in order to meet or exceed securities analysis' expectations. Defendant SPITZER and his conspirators would then devise, structure or create fraudulent and misleading transactions, as described above, and the resulting "revenue" would be recognized in that quarter in order to mislead securities analysts and the investing public into believing that Peregrine's financial condition was significantly better than it really
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was and to maintain Peregrine's inflated stock price . 11 . In furtherance of this conspiracy and to effect its objects, acting at the direction and behest of Peregrine's senior management, defendant STEVEN S . SPITZER committed the following overt acts, among others, within the Southern District of California and elsewhere : (a) In or about December 1999, defendant SPITZER caused to be created documents that falsely described a sale ofPeregrine software to a certain entity. Defendant Spitzer told the entity that Peregrine was close to consummating a software transaction with a specific end user, and asked the entity to sign an agreement to purchase that software before the end of the present quarter, in order to allow Peregrine to book that revenue immediately rather than waiting for the anticipated transaction with the end user. SPITZER told the ebtity that Peregrine would not expect the entity to pay for the software it had supposedly purchased according to
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31 APPENDIX B
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the terms of the sales agreement ; Peregrine would either credit the entity
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with the sale Peregrine was negotiating with the cad user, or Peregrine would replace that sale with another sale that Peregrine itself would generate, or Peregrine would wait until the entity resold the software. (b) In or about June 2000, defendant SPTFZl~R caused to be created
6 7 8 9 10 12 12 13 14 i5 18 . 17 16 19 20 21 22 23 24 25 26 27
documents that falsely described two sales of Peregrine software to a certain entity, through the means described above. (c) In or about September 2000, defendant SPITZER caused to be created documents that falsely described a sale of Peregrine software to acerttain entity, through the means described above . (d) In or about March 2002, defendant SPITZER caused to be created documents that falsely described two sales of Peregrine software to two different entities, through the means described above.
12 . Defendant .SPTTZER admits that in committing the charged crimesshe and others used and caused to be used instrumentalities ofinterstate commerce, the mails, and the facilities of national eccurity exchanges . 13 . Defendant SPITZER admits that he and others knowingly, willfully, and with an intent to defraud, used the above-described schemes, devices and artifices to create the false impression that Peregrine's financial condition was significantly better than it really was, resulting in the artificial inflation of the value of Peregrine's stock, false inducement of the public to purchase and hold Peregrine's stock, fraud on securities analysts and the public, and unjust enrichment of the conspirators through compensation, stock options, and other means . U PENALTIES Defendant understands that the crime of conspiracy carries the fo llowing penalties : A. a maximum term of five years in p rison (18 U.S.C. 371);
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7 32 APPENDIX B
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B . a maximum fine of the greatest of $250 ,000, twice the gross pecuniary gain derived from the offense, or twice the gross pecuniary loss to a person other than the defendant as a result of the offense (18 U.S.C. 3571); C. a.mandatory special assessment of $100 (18 U.S.C. 3013); D . a term of supe rvised release of at least two years but not more than three years
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(USSG 5D 1 .1 .5D 1.2) . Defendant understands that failu re to comply with any of the conditions of supervised release may result in revocation .of supervised release, requiring defendant to se rve in prison all or part of th e term of supervised release; and
E. an order from the court pursuant to Title 18 , United States Code, Section 3663A that defendant make mandatory restitution to the victim(s) of the offense of conviction , or the estate(s) of the victims(s) in an amount to be specified by the Court in accordance with 18 U . S.C. 3663 , 3663A and 3664 . This amount shall be paid according to a plan established by the Court .
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Defendant understands that by pleading guilty to the above offense defendant may become ineli gible for federal benefits.
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DEFFND_ANT!,S3YA M QF TRIAL RIGHTS Defendant understands that this guilty plea waives the right to: A. continue to plead not guil ty and require the government to prove the elements of the crime beyond a reasonable dniibt;
ie
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B . a speedy and public trial by jury ; C the assistance of counsel at all stages of the criminal proceedings; D . confront and cro ss- examine adverse witnesses; E. present evidence and to have witnesses testify on behalf of defendant ; F. not testify or have any adverse inferences drawn from the failure to testify.
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33 APPENDIX B
^ ~ n ~ ~ ~ 3 z n vn~iv
w ( 7 'Iti CAA7 ' ; 7 'unr
V O
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DEFENDANT ACKNOWLEDGES NO PRETRIAL RIGHT TO B E p WDED W]T IMPE A EFENSEINFO
The government represents that any information establishing the factual innocence o f defendant known to the undersigned prosecutor in this case has been turned over to defendant . The government will con tinue to p rovide such information establishing the factual innocence of .
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defendant .
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Defendant understands that if this case proceeded to trial , the government would b e s required to provide impeachment information relating to any informants or other witnesses, In
9
addition , ifdefendant raised an affirmative defense, the gove rnment would berequired to p ro vide
is
information in its possession that supports such a defense. Defendant acknowledges , however,
1].
that by pleading guilty defendant will not be provided this information , if any, and Defendant 12 13
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also waives the ri ght to this information . Finally, defendant agrees not to atte mpt to withdraw
the guilty plea or to file a collateral a tt ack based on the existence of this information.
DEFENDANT ' S REPRESENTATION THAT GUILTY 16 17
PLEA IS XN
Defendant represents that :
GANDVOL
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A . Defendant has had a full opportunity to discuss all the facts and circumstances o f this case with defense counsel , and has a clear understanding of the charges an d the consequences of this plea; B, No one has made any p romises or offered any rewards in retu rn for this guilty
plea. Other than those contained in this agreement ;
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C. No one has threatened defendant or defendant 's family to induce this guilty plea ; and D . Defendant is pleading guilty because in truth and in fact defendant is guilty an d
for no other reason.
as
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9 34 APPENDIX B ~,,,, ~ ,~,n ~~ ~ ~~ IM urr'AI cnn7 '+, i 'unr
Vi l
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AGREEMENT LThIJTED TO U .S. ATTORNEY'S OFFICE A SOU ERN DISTRICT IF0 n This plea agreement is limited to the United States Atto rney's Office for the Souther District of Califbrnia and cannot bind any other federal, state or local prosecuting, administrative , or regulatory authorities, The government, however, will bring this plea agreement to th e
attention of other authorities, if requested by defendan t of
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SENTEMI-N-G GUIDELINE S
Defendant understands the sentence will be gove rn ed by the United States Sentencin g Commission Guidelines ("Guidelines"), Defendant has discussed the Guidelines with defens e
counsel, and understands that the sentence cannot be determined until a presentence report has
to
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been prepared by the U .S . Probation Office and defense Counsel and the gove rnment have had 13 an opportunity to review and challenge the presence ce report . Defendant understands that,
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under some circumstances, the Cou rt may "depart" from the Guidelines and impose a sentenc e more severe or less severe than the guidelines, up to the maxi mum i n the statute of conviction . The United States Attorney's Office will fully advise the District Court and the U.S.
Probation Office of all of defendant 's relevant conduct for sentencing . Nothing in this ple a
agreement shall be construed as limiting the information that the government may provide to th e
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Court or the Probation Office.

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21 SENTENCE JS M TM SPLE DISCRETION QE JUDGE

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This plea agreement is madepursuantto Federal Rule of Criminal Procedure 11(c)(1)(B) . Defendant understands that the sentence is within the sole discretion of the sentencing judge . The government has not made and will not make any representation as to what sentenc e defendant will receive. Defendant understands that the sentencing judge may impose th e
maximum sentence provided by statute, and is also aware that any estimate of the probabl e 10
as
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35 APPENDIX B
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iirte%

i 2 3 4 5 6 7 sentence by defense counsel is a prediction, not a promise, and is not binding on the court . Likewise, the recommendation made by the govemment is not binding on the work, and it i s uncertain at this time what defend'ant's sentence will bc . Defendant also has been advised and understands that if the sentencing judge does no t follow the parties' sentencing recommendations, defendant nevertheless has no rigbtto withdraw the plea. X
JARTIES SENTENV rNG RECOMMENDATIONS
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A. G L .
The parties will jointly recommend that the Court apply the United States Sentencin g Commission Guidelines Manual ["USSG") that was effective November 2000 .
B. B
OFFENSE L
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The government will make the following sentencing recommendations : 1 . Base offense level [ 2F1 .1) 2. Specific offense characteristics 6
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a. Loss Beater than $80 million [ 2F1 .1(b)(1)(S)j +1 8

b. Multiple victims [ 2FI,I(6)(2)]
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c. Mass marketing [ 2F1 .l(b)(3)] ** +2
3.
Acceptance of re?pondility r 3E1 .1
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Adjusted Offense Level 25 Defendant will j oin in each ofthese sentencing recommendations, except that defendan t may oppose application of the adjustment for mass marketing on the grounds that the plai n langnge, legislative history, and/or interpretive caselaw of 2F1 .1(b)(2) do not allow it s application in this case, The parties will propose a loss measurement system based upo n shareholder loss and specifically agree that the loss exceeds $80 million .
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11 36 APPENDIX B
, m 1 r Al r n n 7 L 7 i n n
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C. ACCEPTANCE QE RESPONEMR M
adjustment for AccUlance n ibi ' if defendant;
Notwithstanding paragraph B .3 . above, the government will not recommend an y
1 . Fails to admit a complete factual basis for the plea at the time it i s
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entered, or
2 . Denies involvement in the offense, gives conflicting statements about that involvement, or is untruthful with the court or probation officer, o r
3. Fails to appear in court, or
4. Engages in additional criminal conduct, or S. Attempts to withdraw the plea, o r 6. Refuses to abide by any lawful court order .
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D.
7'ME
The parties agree th at .neither party will seek any adjustment other than those referenced above, except that defendant may seek a two-level adjustment for minor role, Which th e
Government may oppose . The government remains free to defend on appeal any adjustments imposed by the Court .
B. DEPARTURES
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The government agrees that it will not seek, and will oppose, any upward departure, and that it may seek a downward departure under USSG 5(l .1 as specified in section XII, below, Defendant is free to make any motion for downward departure on any basis that may b e
permitted by law . The government may oppose any such departures . The government restrains free to defend on appeal any depa=es imposed by the Court,
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F.
NO AGREEMENT AS TO CRIMINAL HI TORY CATEGORY
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There is no agreement as to defendant's Criminal History Category .
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37 APPENDIX B
._ . . . . .,
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G, "RUM U IdN
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Defendant agrees that the facts contained in the "factual basis " section are true, andmay be considered as "relevant conduct" under USSG 1BI3 .
H.
GOVERN V !NTS1 ECO ATION REGARflJNGCUSTODY
The government will recommend that defendant be sentenced to the low end of the. . guideline range if the guideline range found by the Cowl is at or above the range suggested by the government at the time of sentencing , If the Court employs a guideline range b el ow that suggested by the government, the goverment may recommend a term anywhere within that range .
e
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to
SPECIAL ASSESSMENT/FINE
Special Assessment, The parties will jointly recommend that defendant pay a special 12
23
assessment in the amount of $100 to be paid forthwith at the time of sentencing . The special assessment shall be paid through the office of the Clerk of the District Court bybank orcashier's check or money order payable to the "Cleric, United States District Court ."
'ne. The . parties have no agreement with -respect to the applicable fine that maybe imposed . Both parties are free to assert any argument they feel is appropriate . J. RES1O N
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Defendant agrees that the amount of restitution ordered,by the court may include defendant's total offense conduct, and is not limited to the count ofeonviction . While the parties do not have any agreement with respect to the appropriate restitution order, defendant acknowledges that restitution is normally mandatory and that the United States retains the right to argue for complete restitution. . Defendant shall. pay any such court-ordered restitution (according to his financial ability as determined by the Court) through the inmate Responsibility program and during the period of supervised release . Defendant's restitution shall be paid by
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bank or cashier 's check or money order payable to the "Clerk, United States l)istrict Court "
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38 APPENDIX B
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Defendant's restitution liability will be joint and several to the restitution-liability of any
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coconspirators .
Financial Statement . Defendant agrees that, before sentencing, defendant shall provide to the United States, under penalty of perjury, a financial disclosure form listing all of defendant's assets and financial interests valued at more than 51,000 . Defendant understands that these assets and financial interests include all assets and financial interests in which defendant has an interest (or had an interest prior to May 6, 2002), direct or indirect, whether held in defendant's own name or in the name of another, in any property, real or personal . Defendant shall also identify all assets valued at more than $5000 which have been transferred to third parties sinceMay 6, 2002, including the location ofthe assets and the identityof the third
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party(ies). The parties will jointly recommend that as a condition ofprobationor supervised release, defendant will notify the Collections Unit, United States Attomey's Office, of any interest in property obtained, directly or indirectly, including any interest obtained under any other name, or entity, including a trust, partnership or corporation after the execution of this agreement until any fine or restitution ordered is paid in full. The parties will also jointly recommend that as a condition of probation or supervised release, defendant will notify the Collections Unit, United States Attorney's Office, before defendant transfers any interest in property owned directly or indirectly by defendant, including any interest held or owned under any other name or entity, including trusts, partnerships and/or corporations .
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RSIDANT WAIVES APPEAL AND COLLATERAL ATTAC K In exchange for the government' s concessions in this plea agreement, defendant waives, to the full extent of the law, any right to appeal or to collaterally attack the conviction and sentence , unless the court imposes a custodial sentence greater than the high end of the guideline
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39 APPENDIX B
u.
1 range (or statutory mandatory minimum terns, if applicable) recommended by the government
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pursuant to this plea agreement at the time of sentencing . if the custodial sentence is greater than the high end of that range, defendant may appeal, but the government will be free to support on appeal the sentence actually imposed . If defendant believes the government's recommendation is not in accord with this agreement, defendant will object at the time of sentencing, otherwise, the objection will be deemed waived, XII "0 FERATION A. Defendant has expressed a desire to provide substantial assistance to the government in the investigation and prosecution . of others, after entering a guilty plea . The government has made no evaluation whether the cooperation, if any, will be "substantial," or
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whether it will merit a downward departure from the Sentencing Guidelines .

B. Defendant agrees to be interviewed by federal and state law enforcement agents and attorneys and to tell everything defendant knows about every person involved presently or in the past in the incident which gave the to these charges as well as other violations of law . Defendant also agrees to produce all documents and other evidence in defendant's possession or control related to these violations. C. Defendant agrees not to do any undercover work or tape record any conversations or gather evidence unless instructed by the agent assigned to defendant. Defendant can be prosecuted for any criminal activity undertaken without instructions . D. Defendant agrees to provide statements under penalty of perjury and to testify before any federal or state grand jury, and at any pretrial, trial or post-trial proceedings . Defendant will provide complete, truthful and accurate information and testimony . Defendant agrees to submit to a polygraph examination to test the truthfulness of defendant's statements, upon request by the government,
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40 APPENDIX B
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B. The government agrees that, if defendant fully complies with this agreement, it will not make use of any statements made by defendant during the period of post-plea cooperation in any further prosecution of defendant for any offense, or in defendant's seatin g
as provided in Guideline section 1 B I.S . If defendant does not fully complywith this agreement,
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all statements made by defendant before, during and after this agreement, and any leads o r
evidence derived from such statements can be used against defendant . F. Statements made by defendant pursuant to this agreement are not statements "made in the course of any proceedings under Rule 11 of the Federal Rules of Criminal Procedure" and are not statements "made in the course of plea discussions, "
G. If the United States Attorney's Office decides that the defendant has provide d
substantial assistance, it may, in its sole discretion, file amotion for a downward departure uuder
12 . IS U.S.C. 3553, or 5KI .I of the United States Sentencing Guidelines . The defendant
13 14 15 acknowledges that even ifthe government makes a motion, the court mayreject the government' s recommendation and refuse to depart downward . H. If the United States Attorneys Office decides .to make a substantial, assistanc e
6 17
1s
motion, it will inform the sentencing judge of: (1) this plea agreement; (2) the nature and extent of defendant's activities in this case; (3) the full nature and extent of defendant's cooperation wit h
the government and the date when such cooperation commenced ; and (4) all information in the
19
20 21 22
possession of the government relevant to sentencing . I.

If defendant provides mate ri a lly false, incomplete,
or misleading testimony or
Information, or breaches this agreement in any other way, the government may prosecute th e defendant in connection with all offenses in the present information as well as for any othe r
23
24
federal criminal violation of which it is swam, including false statements, perjiuy and obstruction
of justice, and defendant's sentencing guidelines maybe adjusted for mating false statement s (e.g , 3C1 .1 and 3E1,1) . Any prosecution and sentence may be based on informatio n
25
26
27
provided by defendant. In addition, the government may move to set aside this plea agreement,
aB
16
41 APPENDIX B
._ .
. . . . t~
., ., .,u .,unr .ni rnn7 4i7 .nn
and prosecute defendant on the underlying charges, However, if the government elects not to so asidetheplea agreement, defendant agrees that the government may recommend any sentence
3
without restriction by this agreement .
4 5 6 7 6 9
J. The parties will rcquest that the court continue the sentencing in this case beyond the normal period to allow defendant to cooperate under this plea agreement . Defendant acknowledges that the court may deny this request and require that sentencing proceed according to the court's schedule. XAI CRIMES AV ER ARREST OR BREACH OF THE AGREEMEN T WILL PERMIT THE GOVERNMENT TO RECOMMEND A RICHER SENTENCE OR_SET ASIDE THE PLEA
This agreement is based on the understanding that defendant has not committed or been arrested for any offense not known to the government at the time of this agreement . This agreement is further based on the understanding that defendant has committed no criminal conduct since agreeing to cooperate with the government's investigation , and that defendant will commit no additional c riminal conduct before sentencing . If defendant has engaged in or engages in additional criminal conduct during this period , or breaches any of the terms of this agreement, the government will not be bound by the recommendations in this agreement, and may recommend any lawful sentence . In additi on, at its option, the government may move to set aside the plea.
xw
1o
11 12
13 14
is 16 17 18 19
ao ai
22 23
ENTIRE AGREEMENT
This plea agreement embodies the entire agreement between the parties and supersedes
any wher ag reement, written or oml .
24
25
26
IJ 1!
a7
2e
17
42 APPENDIX B
Q31TANIQ yr
uC
: AI W7 1,7 UP
xv
DEFENDANT AND COUNSEL LY 11NAERSTAND A GREEMENT discussed its terms with defense come] and fully understands its me an ing and effect . xvi DEFENDANT S
3 By signing this agreement , defendant ccrdfies that defendant has read it in its entirety and 4 s 6
7 Defendant has consulted with counse l and is satisfied with counsel' s representation. 8 CAROL C. LAM s United States Attorney 10
i1 D T BARBARA L . MAJOR/ Ass' t U. S. Attorney C11&10 3 DATED DAN MMDTE-FSff 14 Defense Counsel for STEVEN S. SPTIYER 23
is 6116103
___
DATED JAN L. HANDZL1K 17 Defense Counsel for STEVEN S . SPITZER 3. e

19 IN ADDITION TO THE FOREGOING PROVISIONS TO WHICH I AGREE , I SWEAR UNDER PENALTY OF PER JURY THAT THE FACTS IN THE "FACTUAL BASIS" 20 PARAGRAPH ARE TRUE AND CORRECT . 22 22
23
- 61103 DA
EVEN
S . SPIT
//Alf
Defendant
ad 25 26 27
29
19 43 APPENDIX B
QY11 AUQ YflJ MC : Al c(7 %7 'unr
. .
..y
1 .
CAROL C . . LAM
United States Attorney Assistant U .S . Attorney California state Bar No . 86037 SANJAY BHANDAR I Assistant U .S . Attorney California State Bar No . 181920 Federal Office Building 980 Front Street, Room 629 3 San Diego, California 92101 .-8893 Telephone : (619) 557-6787 Attorneys for Plaintif f United States of America
FILE D
2 J52 ~ : ;122 Pit h a4XI CS . 17 of t
2 GEORGE D . HARDY
3 4 5 6 7
9
UNITED STATES DISTRICT COURT
11 12 13 14
v.
SOUTHERN DISTRICT OF CALIFORNIA, UNITED STATES OF AMERICA, ) Criminal Case No . 02 Coe 3lo410J Plaintiff ,
F1 EA ARMEWT
15 16 17 18
ILSE CAPPEL, Defendant .
IT IS HEREBY AGREED between the plaintiff, UNITED STATES OF
19 A ICA, through its counsel, CAROL C . LAM, united States Attorney, 20 and GEORGE D . HARDY and SANJAY BI ;ANDARI, Aaeistafit United States 21 Attorneys, and defendant, ILSE CAPPEL, with the advice and consent of 22 COUGHLAN, SEMMER & LIPMAN, LLP, by MICHAEL L . LIPMAN, counsel for 23 24 25 26 27 28
Defendant agrees to waive Indictment and plead guilty to an Information charging defendant with :
CONSPIRACY TO COMMIT SANK FRAUD
defendant, as follows :
J ~
44 APPENDIX C
srtr .1r rnn, i tm.
i . ,
1 3 4 5 6 7
A. A LL I EXPLAINED P
zr
O F S
In exchange for Defendant's guilty plea the Government agrees not
2 to bring any further charges against the Defendant for criminal conduct related to Defendant's activities at Peregrine Syetems, Inc .
Defendant understands that the offense to which defendant is
8 pleading guilty has the following elements : 9 10 11 12 13 14 1S 16 17 18 19 20 21 22 23 24 25 26 27 28 First, beginning at a date unknown, but no later tha n
June, 1999, and continuing thereafter to in or about June, li 2002, there was an agreement between two or more persons to commit the offense of Bank Fraud ( 1 8 V .S .C . fi i344), the elements of which are : knowingly, and with intent to defraud, carrying out a scheme or plan to defraud, or to obtain money or property from a federally insured bank by making false statements or promises, knowing that the statements or promises are false and material , Second, the defendant became a member of the conspiracy knowing of at least one of its objects and intending to help accomplish it ; and Third, one of the members of the conspiracy performed at least one overt act for the purpose of carrying out the conspiracy .
B. ELEMENTS UNDERSTOOD- z.M A01=-- FACnM BASE
Defendant has fully discussed the facts of this case with defense counsel . Defendant has committed each of the elements of the crime ,
45 APPENDIX C JV
i
I 2
3 4
and admits that there is a factual basis for this guilty plea . The following facts are true and undisputed :
1 . Peregrine Systems, Inc . is a cottputer software company headquartered in San Diego, California . From April 199 7
5 6 7
8 9
through August 30, 20,02, . Peregrine's stock was publicl y traded on the NASDAQ stock market . Following its initia l public offering in April 1997, Peregrine Systems, Inc .
reported 17 consecutive quarters of revenue growth throug h and including the quarter ending June 30, 2001 . During -
10
11 12 13 14 15 16 17
this period, Peregrirne'e reported financial results always

met or exceeded analysts, expectations, and the company' s stock price rose dramatically . Beginning in May 2002 , Peregrine disclosed that it had engaged in large-scal e accounting irregularities over an extended period of tim e to make k'eregrine'e financial condition and busines s were .
performance appear far healthier than they Peregrine's stock price dropped precipitously .
18
19 20
2 . Among the accounting irregularities engaged in b y

peregrine was the manipulation of the "AS01, which stand s for Days Sales Outstanding . This is a numerica l
21
22 23 24
calculation that, in essence, reveals how many days i t

takes a company to collect its accounts receivable, Th e larger the number, the more likely analysts will call int o question the quality of the receivables, and the relate d
25
26
revenue, Securities analysts pay attention to a company' s DSO in judging the health of the company, and the value o f its stock . 3 . - Peregrine's management was very concerned abou t
27 28
46 APPENDIX C
keeping its DSO below a certain number in part becaus e 2

3 4 5
management had previously provided guidance to analyst s

about the expected DSO number, Keeping the DSO. low was problematic for management in part because of Peregrine' s practice of recording contingent sales (e .g . sales t o
6
7 8 9 10
resellers who were allowed to delay payment until thei r

sell-through to an end user) as revenue before satisfactio n of the contingency on which payment to Peregrine depended . These revenues, once improperly recorded, would remai n uncollected receivables for extended periods, raisin g
11
12
Peregrine's DSO beyond normal levels, thereby raising

concern among' securities analysts and possibly exposin g
13
14 15 16 17 l8 19 20 21 22
23,
Peregrine's improper revenue recognition practices . To

avoid this, Peregrine sold accounts receivable to banks . By doing so, the DSO could be lowered significantly . Th e
banks, however, would purchase the accounts receivable onl y if they were valid, enforceable, and based on complete d transactions . 4 . For the purpose of improperly manipulating the DSD , Peregrine sold accounts receivable to Wells Fargo HSH C Trade Bank, N,A ., that were not valid, enforceable an d based on completed transactions . Peregrine thereby
defrauded a bank, the deposits of which were insured by th e

Federal Deposit Insurance Corporation .
5 . Defendant ILSE CAPPEL began working in Peregrine' s
24 25
26
accounting department in 1993 . After peregrine went publi c

in 1997, CAPPEL became the Treasury Manager, and wa s
27
28
responsible for
cash
management and forecasting , 4 47 APPENDIX C
m ir`7 r
rnn7
) ivw
I 2
3
collection , and accounts receivab l e, among other things . Although her responsibilities changed somewhat over time , CAPPEL remained responsible for the sale of account s receivable until she left Peregrine in Ju ne, 2002 . Her title at the time was Assistant Treasurer .
6 . Between in or about June 1999 and June 2002, defendan t ILSE CAPPEL conspired with others at Peregrine t o improperly manipulate Peregrine ' s DSO by creating
4 5
6 7 8
9
10 11
fictitious Invoices with various transaction partners that

were sold to the bank as if they were valid , enforceabl e accounts receivable ,
12
13
14 15 16
7, As part of this conspiracy and scheme to defraud ,

defendant ILSE CAPPEL , Assistant Treasurer of Peregrine ,
and others , fabricated a Peregrine invoice to . KPMG for $19 , 580,596 .00 ,
Consulting LLC, dated June 29, 2001 ,
that was sold to Wells Fargo HSBC Trade Bank, N .A ., as i f
I7 is 19 20 21 22 23
it were a valid, enforceable account receivable , based on a completed transaction with KPMG Consulting, when i n actual fact , it was not , because Peregrine had no vali d
contract with XPMG Consulting LLC at that time for tha t amount under those terms .
II I PENA___
24
'25 26
27
Defendant understands that the crime to which defendant i s

pleading guilty carries the following penalties : A . a maximum 5 years in prison ;
B . a maximum $250 , 000 fine ;
28
C . a mandatory special assessment of $100 ; and
s
48 APPENDIX C
m,r.7-C W7 'I 'v ~rm .
E
D . , a term of supervised release of not more than 3 . years . 2 3 4 C 6 7 8 9 Defendant understands that failure to comply with any of the conditions of supervised release may result in revocation of supervised release, requiring defendant to serve i n prison all or part of the term of supervised release . E . an order from the court pursuant to . Title 2 8, united States Code, Sections 3663 that defendant make restitution to the victim(s) of the . offense of conviction .
10 Defendant further understand s that by pleading guilty defendant may 11 12 13 14 D become ineligible for federal benefits .
xv
A1+TT! S_ WAIVER OF TRIAL RIGHTS
Defendant understands that this guilty plea waives the right to : A . continue to plead not guilty and require the Government to prove the elements of the crime beyond a reasonable doubt ; B . a speedy and public trial by jury = C . the assistance of counsel at all stages of trial ; D . confront and cross - examine adverse witnesses = E . present evidence and to have witnesses testify on behalf of defendant ; and F . not testify or have any adverse inferences drawn from the failure to testify .
15 16 171 18 19 20 21 22 23 24 25 26
V
DEFENDANT ACKNOWLEDGES NO PRETRIAL RIGHT TO BE PROVJDED WITH PEACF [9 _ AND AFFIRMATIVE DEFENSE jMMMT.ON
The Government represents that any i nformation establishing the 27 factual innocence of defendant known to the undersigned prosecutor in 28 this case has been turned over to defendant . The Government wil l
49 APPENDIX Ck I
WJc7'c Cnn7 '1 . 'Avw
I~-
1 2 3 4 5 6 7 8 9
continue to provide such information establishing the factual innocence of defendant . Defendant understands that if this case proceeded to trial, the Government would be required to provide impeachment information relating to any informants or other witnesses . In addition, if defendant raised an affirmative defense, the Government would be
required to provide -i nformation in its possession that s upports such a defense . defendant Defendant acknowledges, however, that by pleading guilty will not be provided this information, if any, and
18 Defendant also waives the right to this information . Finally, 11 12 13 14 defendant agrees not to attempt to . withdraw the guilty plea or to file a collateral attack based on the existence of this information .
1TI DEFENDANT ' S REPRESENTATION THAT GUILTY ELM Is -KNOWING ND QLUNTARY Defendant represents that :
~ 0
15 16 A . Defendant has had a full opportunity to diBcuss all the 17 facts and circumstances of this case with defense counsel, 18 and has a clear understanding of the charges 19 consequences of this plea ; 20 B . No one has made any promises or offered any rewards in 21 return for this guilty plea , other than those contained in 22 this plea agreement or otherwise disclosed to the court ; 23 C . No one has threatened defendant or defendant's family to 24 induce this guilty plea ; and 25 D . Defendant is pleading guilty because in truth and in fact 26 defendant is guilty and for no other reason . 27 28 and -the
' I
50 APPENDIX C
w vo , r c n r17 i vu,~r
1 2
VI I AGREEMENT LIMITED TO U . S . ATTORNSY'S OFPICB SD RN DISTRICT F CUIEMIA This plea agreement is limited to the United States Attorney' s
3
4 Office for the Southe rn District of Califo rn ia, and cannot bind any
5
other federal , state or local prosecuting, administrative, or
6
regulatory authorities , although the Government will bring this plea 7 agreement to the-attention of other authorities if requested b y 8
defendant . 9
VII I
10 nENTENCING GU LI 11 12 S Defendant understands the sentence will be governed by the Unite d states Sentencing Guidelines ( Guidelines ) . Defendant has discusse d
13
14
the Guidelines with defense counsel, and understands that the sentenc e cannot be determined until a presentence report has been prepared b y
li
the U . S . Probation Office and defense counsel and the Gove rnment hav e 1b had an opportunity to review and challenge the presentence report .
17
18
Defendant understands that, under some circumstances ,
the court may
' depart" from the Guidelines and impose a sentence more severe or les s 19
severe than the Guidelines , 20 conviction . up to the maximum in the statute o f
21
22
23 24 25 26
Ix
SENTENCE IS WI IN SOLE DISCRETION OF J U
This plea agreement is made pursuant to Federal Rule of Crimina l
Procedure 11 (e) (1 ) ( B) . Defendant understands that the sentence i s

within the sole discretion of the sentencing judge . The Gove rnment
21
28
has not made and will not make any representation an to what'sentenc e
defendant will receive ,
Defendant understands that the sentencin g
judge may impose the maximum sentence provided by statute, and is als o
8 51 APPENDIX C
mJn~ ( cnn~ 'r uum

1 2 3 4 5 6 7 8
aware that any estimate of the probable sentence by defense counsel is a prediction, not a promise, and is not binding oa the court . Likewise, the recommendation made by the Government is not binding on the court, and it is uncertain at this time what defendant's sentence will be . Defendant also has been advised and understands that if thei sentencing judge does not follow any of the parties' sentencing recommendations, defendant nevertheless has no right to withdraw they
9 plea . ]0 11 12 13 14 I5
A.
X
PARTIES' SENTENCING RECOMNfPTDATIQNS BASE OFF SE L,yEL AND ADJ US1'11F)
The parties will jointly recommend the following Base Offense Level and Adjustments under the GuidelinesV : 1 . Base Offense Level' [5 281 .1(a)] 6
16 17 18 19 20 21 22 23 24 25 26 27 28
2 . Sophisticated Means (6 2B1 .1(b)(8)] +6 3 . Acceptance of Responsibility 1 5 3E1 .1 1 -2
The parties also agree that with respect to the fabricated $19,580,596 .00 invoice,-Wells Fargo HSBC Trade Bank, N .A. did not suffer a lose because Peregrine paid the receivable for KPMG Consulting during the second succeeding quarter, without revealing to the bank that XPMG Consulting was not the payor . Because the money was returned before the offense was detected, the defendant is entitled to a credit against lose . [8 221 .1, Application Note 2(E)] The parties have no agreement with respect to possible other losses that may have resulted from the criminal conduct . .' The parties utilized the Sentencing Guidelines effective November 1, 2002, believed to be the Guidelines that will be in effect at the time of sentencing . [S 181 .11] .
32 APPENDIX C J W
--
w1n, c cnn .7 '~ usrm

1
0 B. ACCEPTANCZ QE RESPOXSIBILIT Y
2 3
Notwithstanding paragraph A .3 above, the Government will recommend any adjustment for defendant : Acc ance af_ RgsoOn eibility if
5 6
7
1 . Fails to admit a complete factual basis for the plea at the time it is entered, or 2 . Denies involvement in the offense , gives conflicting statements about that involvement, or is untruthful
9 10 11 12 13
with the Government , the court or probation officer , or 3 . Fails to appear in court, or 4 . Engages in additional criminal conduct, or S . Attempts to withdraw the plea, o r 6 . Refuses to abide by any lawful court order, o r 7.. In any enforcement action filed by the Securities and Exchange Commission against defendant, takes a position inconsistent with the terms and representations of this plea agreement . C. NQ QIM ME _AR& P_EZQMKgM= C
14 15 0 16 17 18 19 20 21 22 23 24 25 26
The parties agree not to . recommend any upward or downward adjustments other than those referenced above .
D. $10 AGREEMENT AS TO CRrMINAL HISTORY CATEGOR Y
There is no agreement as to defendant's -Criminal Histor y

Category . 8 .' PTO ~EPARTtJRES AR RECON ND~s'D
The Government agrees not to recommend any upward or downward The Defendant is free to make any motion for downward
27 departures . 28
departure that may be appropriate under the . Guidelines . Th e 53 C
10 APPENDIX

F T" -INEQRMATION
Government is free to oppose any such departure motion .
2
3
A
Defendant agrees that the facts in the "factual basis" paragraph of this plea agreement are true, and may be considered a s "relevant conduct" under 5 191 .3 .
5 6 7 8 9
10 11 12 13 14
G,
GOVERNMENT'S
RECD- M MATION REGARDING CUSTOD Y
The Government will recommend- that defendant be sentenced to the low end of the guideline range found by the court . However, if the court adopts an offense level or downward adjustment or departure below the Government's recommendations "in this plea agreement, the Government will recommend a sentence as near as possible to what the sentence would have been if the Government's recommendations had been followed .
1.
,SPECIAL
ASSESSMENT/ F
NEIRESTITUTION
15 16 17 18 19 20 21 22 23 24 25 26 27 28
men . The parties will jointly recommend that defendant pay a .special aseeaement in the amount of $100 to be paid forthwith at time of sentencing . The special assessment shall be paid through the office of the Clerk of the District Court by bank or cashier's check or money order made payable to the "Clerk, United States District Court, "
F_ine/Restitution . The parties have no agreement with respect to a fine,' or order of restitution, that may . be imposed .XI . PEFE1DANT WAIVES AFPE U AND _COLLATERAL ATTACK
In exchange for the Government's concessions in this plea agreement, defendant waives, to the full extent of the law, any right to appeal or to collaterally attack the conviction and sentence, including .any restitution order, unless the court imposes a custodia l
_ rr rA '
11
54 APPENDIX C
A.A
AST
fidLZ : C EOOZ 'L '8VY
1 2 3 4 5
sentence greater than the high end of the guideline range (or statutory mandatory minimum term, if applicable) recommended by the Government pursuant to this plea agreement at the time of sentencing . If the custodial sentence is greater than the high end-of that range, defendant may appeal, but the Government will be free to support on
6 appeal the sentence actually imposed . If defendant believes the 7

Governments recommendation is not in accord with this plea agreement,
S defendant will object at the . time of sentencing ; otherwise the 9 objection will be deemed waived . 10 11 12 13
XI I .
CRIMES AFTER ARREST OR BREACH OF THE AGREEMENT WILL PERMIT THE GOVERNMENT TO RECOMMEND A HIGHER SENTENCE O R SEA' ASIDE THE PLEA - - -
This plea agreement is based on the understanding that , prior to
14 defendant ' s sentencing in this case, defendant has not committed or
15
been arrested for any offense not known to the Government prior. to
16 defendant ' s sentencing . This plea agreement is further based on the 17 understanding that defendant has committed no criminal conduct since . IS 19
defendant's arrest on the present charges , and that defendant will if defendant
commit no additional criminal conduct before sentencing .
20 has engaged in or engages in additional criminal conduct during this 21

period , or breaches any of the terms of any agreement with the .
22 Government , the Government will not be bound by the recommendations 23 24

in this plea agreement , and may recommend any lawful sentence, In
addition, at its option, the Government may move to set aside the
25 plea . 26 27 28
XIII
ooP Q A . Defendant has expressed a desire to provide substantia l
E
- . .
12
55 APPENDIX C
01 n lA 1A
W911 : P.
PH? '1. 70
1 assistance to the Government in the investigation and prosecution of 2 others, after entering her guilty plea . The Government has made noel 3 evaluation whether the cooperation, if any, will be "substantial," or 4 whether it will merit a downward departure from the Sentencing 5 Guidelines . 6 B . Defendant agrees to be interviewed by federal and state law
7 enforcement agents and attorneys and to tell 'everything defendant 8 knows about 'every person involved presently or in the past in bank 9 fraud, securities fraud, and insider trading, as well as other 10 violations of law, at Peregrine Systems, Inc . Defendant also agrees 11 to produce all documents and other evidence in defendant's possession 12 or control related to these violations . 13 C . - Defendant agrees not to do any 'undercover work or tape
14 record any conversations or gather evidence unless instructed by the" 15 agent assigned to defendant . Defendant can be prosecuted for any 16 criminal activity undertaken without instructions . 17 D . Defendant agrees to provide statements under penalty of
18 perjury and to testify before any federal or state grand jury, and at 19 any pretrial, trial or post-trial proceedings . Defendant will provide 20 complete, truthful and accurate information and testimony . 'Defendant 21 agrees to submit to a polygraph examination to test the truthfulness 22 of defendant's statements, upon request by the Government . 23 E . The Government agrees that, if defendant fully complies with
24 this plea agreement, it will not make use of any statements made by 25 defendant during the period of post-'plea cooperation in any further 26 prosecution of defendant for any offense, or in defendant a sentencing 27 as provided in Guideline 5 lel,e . If defendant does not fully comply 28 with this plea agreement, all statements made by defendant before,
13
56 APPENDIX C
V1 .7 :'' Cflf17. ' I. '}NNW
0
1 2 3 4 C 6 7
during and after this plea agreement, and any leads or evidence derived from such statements can be used against defendant and are admissible in court . F . Statements made by defendant pursuant to this plea agreement are not statements "made in the course of any proceedings under Rule 11 of the Federal Rules of Criminal Procedure" and are not statements "made in the course of plea discussions . "
0. If the United States Attorney's Office decides that
9 10 11 12 13 14 '15 16 17 18 19
defendant has provided substantial assistance, and has fully complied with this plea agreement, it will file a motion for a downward departure under 18 U .S .C . S 3553, or I 5K1 .1 of, the Sentencing Guidelines . Defendant acknowledges that even if the Government makes a motion, . the court may reject the Government's motion and recommendation for departure and refuse to depart downward, and defendant . would not be allowed to withdraw her guilty plea .
H, If the United States Attorney's office decides to make a substantial assistance motion, it will inform the sentencing judge of ; (1) this plea agreement ; (2) the nature and . .extent'of defendant's activities in this case ; (3) the full nature and extent of defendant's
20 cooperation with the Government and the date :when such cooperation 21 22 23, 24 25 26 27 28 commenced ; and (4) all information in the possession of the Government relevant to sentencing . 1. If defendant provides materially false, incomplete,' or
misleading testimony or information, or breaches this plea agreement in any other way, the Government may prosecute defendant in connection with all federal criminal violations of which it is aware, including false statements, perjury and obstruction of justice, and defendant's sentencing guidelines may be, adjusted for making false statement s
14
57 APPENDIX C
m,o'2 'r rnn7 'i wVm
0
I
. 0
(e .g ., 6 3C1 .1 and 381 .1) . In addition, the Government may move to set aside this plea agreement, and prosecute defendant on all charges in the indictment in this case . However, if the Government elects not to set aside the plea agreement, defendant agrees that the Government may recommend any lawful aentetce without restriction by this plea agreement . .Any. prosecution and sentence resulting from a breach of
2 3 4 S 6 7 8 9
this plea agreement may be based on information provided by defendant . J . The parties will request that the court continue the sentencing'in thin case to allow defendant to cooperate under this .Defendant acknowledges that the court may deny this
10 plea agreement . 11 12 13 14 15
request and require that sentencing proceed according to the court's schedule . The time may be further extended upon consent of both, parties and the approval of the court .
xIv
EN'T'IRE - AgREEMENT
16 17 18 19 20 21 22 23 24 25 26 27 28
This plea agreement embodies the entir e plea agreement between the parties and supersedes any other plea agreement , written or oral .
xv
M0DIFICATroN OF AGREEMENT MUST BE IN WRITING
No modification of this plea agreement shall be effective unless in writing signed by all parties .
xvI
DEFENDANT AND COUNSEL FULLY UNDERSTAND AGtEEbF ~
By
signing
this
plea agreement ,
defendant
certifies that
defendant has read it .
Defendant has discussed the terms of this plea
agreement with defense counsel and fully . understands its meaning and effect . /1
58 15 APPENDIX C
m tn7 ' P
rnn5
.' 1 V%M
0
XV1 I
it
DEFENDANT SATISFIED WITH COUNSE L
Defendant has consulted with counsel
and is satisfied with
4 Counsel ' s representation . 5 6 7 8

DA7ED
GECRG D . HARD Assistant U .S . torne y
CAROL C . LAM United States Attorney
9 10 11 12 13 14 15 16 17 18 DATED 19 20 21
DATED
iize?o -0
SANJAY BHANDARI Assistant U .S . Attorne y
A
GHLANO & LIPMAN, LLP by MI CHAEL LI PMAN
Atto rn ey for Defendan t
IN ADDITION TO THE FOREGOING PROVISIONS TO WHICH I AGREE, I SWEAR
22 UNIEA PENALTY OF PERJURY THAT THE PACTS IN TSB "FACTUAAL BASIS"

PARAGRAPH ABOVE ARE TRUE .
23 24 25 DATED 26 27 28
f IL 4E CAPPEL Defendant
16
59 APPENDIX C ~ ~ }
~l d 5LQ'ON
wAAZ : r rnnz i . xvw
APPENDIX D PEREGRINE CLASS PERIOD ACQUISITIONS

Company Acquired Knowli x Corporation Date Cash
Peregrine Shares 706,000
Total Consideratio n
September 29, 1999
$ 17.8 millio n
Telco Research Corporation Limited Barnhil l Management Corporation Harbinger Corporation Loran Network Holdin g Corporation, Inc . Tivoli Service Des k Suite
March 23, 2000
2,563,000
$123 . 9 millio n
March 24, 2000
273,000
$32 .2 millio n
June 16, 2000
30,157,000
$1 .48 billio n
September 1, 2000
2,861,000
$109 .8 million
December 29, 2000
$45 million
3,015,000
$133 .1 million
Extricity, Inc.
Remedy Corporation XTRA On-Lin e Corporation Bodha.com, Inc. Goldmine Software Corporation
March 23, 2001

August 27, 2001 November 30, 2001 $280 million
707,000
28 ,300,000 114,90 8
$202.5 million
$1 .2 billio n
December 24, 2001 $74 . 5 millio n
54,66 2
SupplyAccess , Inc.
$9.1 million 60 APPENDIX D
#105471
APPENDIX E Page
A.
Prokom Software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
(Gardener, Gless )
B.
BullS .A. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
(Gardener , Gless )
C.
International Computers Limited /Fujitsu . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
D.
eXchangeBridge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 0
(Nelson )
E.
British Telecom . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2
(Gardner, Luddy, Nelson )
F.
Critical Path . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 7
(Gardner , Gless, Cappel, Nelson)
G.
RTC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
(Gardner)
H.
Barnhill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 (Powanda)
1.
O/E Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
(Spitzer)
J.
Systematics AG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 (Gardner, Gless, Powanda , Spitzer)
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61 APPENDIX E
APPENDIX E (Continued) Page I
K.
Corporate Software & Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 (Gardner, Gless, Spitzer)
L.
FM International . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
(Spitzer)
M.
Action Computer Supplies . . . . . . . . . . . . . . . . . . . . . . . (Gless, Spitzer, Powanda)
36
N.
MGX Enterprise Solutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 (Gardner, Gless)
0.
IBM/Tivoli . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
(Gardner, Cappel, Nelson, Powanda)
P.
CI Software Solutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 (Gardner, Gless, Spitzer, Nelson )
Q.
Hyperion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
(Gardner, Gless, Powanda)
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62 APPENDIX E

APPENDIX E A. Prokom Software Prokom Software, S .A., a Polish company, was a reseller of Peregrine software in Europe. In September 2000, Peregrine entered into a transaction with Prokom . The Schedule A to the software license agreement provided as follows: Peregrine's commitment : I - to replicate the Peregrine hubs in Atlanta and Karisruhe and offer ASP Portal infrastructure services to Electronic Marketplaces providing the following e-market capabilities in Poland, targeting customers who have the need to exchange large volumes of standardized business transactions . . . 2- to deliver a solution for the near-term opportunity to build a marketplace for non-ferrous metals community . . . 3 - to provide the full asset lifecycle management, employee selfservice with e-procurement solutions through connection to e marketplaces and providing business community connectivity and integration via an ASP Service: e-ServiceCenter, Facility Center . . . In November 2000, Peregri ne and Prokom entered into a le tter of intent which set forth Peregrine's role in support of Prokom's operation of the ASP model . The letter of intent was signed by Richard Day, head of Peregrine's Emerging Markets business in East Europe an d Africa. It provided for a total set-up cost of $3,900,000, which consisted primarily of a licens e for the full suite of Market Enablement products . The letter further provides that Peregrine will make a "capital investment of 100% of the set-up cost ," i.e., $3,900,000 . This transaction contained several terms that rendered Peregrine's revenue recognition inappropriate . Most significantly, the Schedule A does not provide that Prokom was licensin g
any software. It identifies Prokom's commitment as that described in the November 2000 lette r
of intent . This arrangement is fundamentally not a license of software products but merely an
#105632 63 APPENDIX E
agreement between Peregrine and Prokom to further develop an ASP infrastructure . Such a
commitment does not meet any of the criteria for revenue recognition .
In June 2001, Peregrine and Prokom entered into another deal in which Prokom agreed t o take $12 million in Peregrine software for future sale to end-users . Richard Day signed a sid e letter that stated that Prokom did not have to pay Peregrine if it could not resell the software to an end-user . The side letter stated : PROKOM Software SA will pay Peregrine Systems the net value of $12,000,000 for software licenses sold to their customers. In the unlikely event that the level of software licenses sold, net to Peregrine Systems, does not meet or exceed the figures from the payment schedule (Schedule A), PROKOM Software SA will only be liable for the net value of software licenses that have been sold. PROKOM Software SA will not be liable for software used internally . (Emphasis added .) A former Peregrine employee , who was a product specialist in the InfraTools business unit, recalled the Prokom sidI letter and the general use of side letters in Europe as follows : . . . Chip Shore was the sales person for the Prokom account ; and Richard Day was the sales director responsible for Emerging Markets who had replaced Dominic O'Reilly . It was O'Reilly and Jerry Crook that started the practice of side letters in Europe anything that Day would have done he would have learned from working with O'Reilly. A side letter basically confirmed to the re-seller account that they only had to pay the difference between what they actually sold regarding the purchase order specific to the appropriate date and what was committed for - this came into play only if the account failed to meet its commitment by the time date specified on the P.O. One quarter before Alan Kerr was brought on to clean up the U .K operation, Jerry Crook dismissed both Chip Stone and Richard Day regarding accusations of stuffing the channel and the use of side letters . I believe that Crook knew and condoned the side letters
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and fired Stone and Day to protect his position . Day was fired around the time that the Prokom commitment was expiring and they would be forced to pay the difference between what they committed to and what they actually sold . When Prokom was pushed to pay-up they showed the side letter which confirmed that they only had to pay for what they sold . Another former Peregrine employee, who was in sales, recalls the Prokom transaction as follows: I remember that it was announced at the end of the quarter that we had closed a $10 million dollar deal internationally right at the end of the quarter with an international company called `Prokom' . I knew this to be a fact because it was announced at the President's Club venue in July or August 2001 in the Cayman Islands . It was during a subsequent lunch with several ex-employees several months after I had been laid off, that I learned that this was a `fishy' deal in that it was just a commitment to sell our product with no cash exchanging hands - but that the company had booked the commitment nonetheless as revenue . Defendants Gardner and Gless were aware of the existence of a side letter relating to thi s transaction . On November 15, 2001, VP of Finance and Chief Accountant B.J . Rassam sent an
e-mail to defendant Gless stating :

Someone came by my office and told me that Geoffroy [ Boonen] was extremely upset because he found a side letter . Apparently on a call w/ Prokom, Prokom told Geoffory [sic] that we gave Prokom a side letter saying they never had to pay us the $12M (or whatever the balan ce is) unless they sold the product thru . . . . That's all I know based on what I heard yesterday, so I thought I would contact you to see what's really going on . Peregrine's Area Vice President for Southern Europe, Michel Isnard, also sent an e-mail , dated December 21, 2001, to Gardner and Gless informing them that Prokom claimed it wa s
never obligated to pay for the September 2000 transaction and they "were not open to do it ever ."
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65 APPENDIX E
A former Director of the Alliance Group recalled the use of the side-letter in the Proko m
transaction in order to document that Prokom had no payment obligation until it sold Peregrine's product to an end-user . Nevertheless, Peregrine booked revenue from this transaction in June 2001 . When Peregrine employees subsequently contacted Prokom concerning payment on the receivable, they were told that Prokom had no obligation to pay because of the side agreement s as alleged above . Peregri ne 's accounting for this transaction was not in accordance with GAAP . The side le tter made it clear that Prokom w as not obligated to pay until it sold -through to end users and that the payment terms were subject to further negotiation . Thus , the fee was not fixed or determinable an d Peregrine ' s immediate recognition of revenue violated GAAP .
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B.
Bull S.A.
In the first quarter of fi scal year 2001, Peregrine entered into a transaction with Bull S .A. ("Bull") . Defendant Gardner had worked for Bull prior to joining Peregrine . Bull licensed ServiceCenter, AssetCenter and Get . Resources for $5,000,000 . Of this amount, $1,000,000 wa s payable in 90 days and the balance was due upon the earlier of sell-through or 12 months .
Defendant Gardner participated in the negotiations by telephone . The arrangement wa s

memorialized in a software license agreement and a Schedule A . Pereg rine recorded $4,300,000 in license revenue immediately . Defendants Gardner and Powanda knew that this revenue was being booked even though the deal had not yet bee n completed . In an e-mail dated July 5, 2000 - five days after the end of the fiscal quarter Jeremy Crook (Peregrine's Vice President of EMEA) sent defendants Gardner and Powanda an email stating "Bull should happen today." Thus, Gardner and Powanda knew this revenue w as recorded in the quarter pursut to an agreement made after the end of the quarter . On July 5, 2000, Crook wrote two side letters to Bull . The first side letter defines th e payment obligation as $1 million down with the remainder payable upon sell-through or in 1 2 months, whichever came first . The first side le tter also commits Peregrine to deliver $5 millio n
of business to Bull. This letter alone provides evidence that revenue recognition was improper ,
as the fee was not fixed or determinable . The second side letter defines the payment terms differently : Bull S.A. will pay Peregrine Systems, Inc . in full to the value of $5m over the l2 month period . In the unlikely event that the level of Licenses used does not meet or exceed this figure, Bull is entitled to raise a Services invoice to Peregrine of amount not exceeding $2 .5m and corresponding to the balance of the $5m Bul l
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67 APPENDIX E
commitment and actual Bull achievement . This amount corresponds to the Service costs incurred by Bull to implement Peregrine Platforms . Peregrine will pay the invoice on its presentation . Jeremy Crook's July 5, 2000 e-mail to Gardner and Powanda further documents thi s agreement . Crook noted that Peregrine would "pay back" the difference between Bull' s commitment and actual achievement with up to $ 2.5 million in professional services. This provision guaranteed that if Bull failed to meet its sales commitment, Peregrine would purchas e services from Bull to ensure that Bull could turn around and pay Peregrine . The paymen t provision set forth in the second side lett er also violates the fixed or determinable revenu e recognition principle in that there is no enforceable payment obligation . Defendants Gardner an d Powanda clearly knew of this bogus accounting treatment . Thus, Peregrine recorded revenue prior to the execution of the agreement, which is a violation of GAAP . Peregrine only collected $1,000,000 of the $4,300,000 contract amount. It improperly wrote-off the $3,300,000 balance by reducing an accrual established in the accountin g for the Harbinger acquisition .
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68 APPENDIX E
C.
International Computers Limited/Fujits u
Fujitsu is a Japanese conglomerate that is one of the largest companies in the world . Peregri ne entered into deals with both Fujitsu and Inte rn ational Computers Limited ("ICL"), a subsidiary of Fujitsu. In December 1999, Pereg ri ne entered into an agreement worth 12,000,000 with ICL . Under the agreement , ICL granted Peregrine : (1) the right to an ICL product called " Framework " for 8,500,000; and (2) the option to use the word "Framework" for fifteen (15) months fo r 3,500,000 . In turn, ICL licenced software from Peregrine for a total of l 2,000,000 through contracts entered into in December 1999, January 2000, and June 2000 . The licenses included the Get.It suite of products, ServiceCenter, AssetCenter, and FacilityCenter . According to a former Peregrine employee, who was a product specialist in the InfraTool s business unit, these transactions were nothing more than a "swap" arrangement between the companies . To avoid the appearance that the transactions were a software swap, ICL an d Peregrine prepared separate contracts for the purchases . The "swap" nature of the deals is evidenced by: (1) the proximity of the dates the contracts were executed ; (2) the lack of cash exchanged ; and (3) the lack of resale by either company for'software acquired through prio r transactions before ente ri ng into subsequent deals . Since the software exchanged was held fo r resale by both comp anies in similar lines of business , GAAP requires that revenue be recorded a t Peregrine's historical cost basis, which is zero . Peregrine did not sell or otherwise use th e Framework product and there was no resale of Peregrine ' s product by ICL. By structuring these software purchases as two separate and independent transactions, the true nature of th e
transactions was disguised and improperly booked based upon ICL's order of Peregrine product .
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69 APPENDIX E
The recognition of revenue from this swap transaction was improper and resulted in the overstatement of Peregrine ' s revenue in violation of GAAP . In addition , one of the June 2000 transactions was for the internal use of Peregrine' s
software and access to Harbinger .net . There does not appear to be a reasonable basis on which to
determine the fair value of this software and access to Harbinger .net . Thus, this transaction als o should have been recorded at Peregrine's historical cost basis of zero . Defendants Gless and Cappel were well aware of the "swap" nature of the transaction . In a March 28, 2001 e-mail sent to several Peregrine employees, Cappel wrote : As you may be aware, Fujitsu/ICL owes us $1 .8 MM . $900,000 was due at December 31, and an additional $900,000 is due on Friday. As it happens, we also owe them $566 K . . . Unless there are any objections, Matt [Gless] has agreed to allow the amounts owing to FujitsullCL to be offset against amounts owed to us by them (which would help us out from a DSO standpoint at match 31) . . . . On the [accounts receivable] side, the invoice for the first $900,000 should be reissued for the net amount. . . . In December 2001, Peregrine entered into another software swap with Fujitsu . Th e transaction provided that Fujitsu would take $10 million of Peregrine product . Peregrine was in turn obligated to provide "solution" software to Fujitsu . Neither company actually paid for th e software or services . The details of the Fujitsu swap, as recalled by a former Peregrine employee who was a Senior Manager, Strategic Corporate Accounts, are as follows :
One example of a swap . . . was a swap transaction between Peregrine and Fujitsu for approximately $3-5 million in equivalent value . It was proposed that Fujitsu develop solutions with Peregrine and jointly market the resulting product naming i t
#105632
-870 APPENDIX E
"Peregrine Retail" - Peregrine obligated Fujitsu to $5 million in license fees for product ; and after 9-12 months another $5 million . Fujitsu was getting services and invoices from Peregrine but was not paying Peregrine . Peregrine was getting invoices from Fujitsu but was not paying Fujitsu . I realized in March 2002 that Fujitsu was not paying its invoices to Peregrine and I was not certain that we should continue to provide support services . I went to a financial analyst in the Financ e department who was responsible for invoices to inquire about this situation. I was shown two invoices with notes written in pen and signed by Matt Gless on each invoice stating that Peregrine was waiving the fees owed by Fujitsu in lieu of services . The note stated that it was "ok" that Fujitsu did not have to pay and the service was not rendered . The two invoices were put into the accounting system as revenue, however . The company's finance person traced the 2 Fujitsu invoices amounting to $500,000 to $1 million each in the system that had not been paid and showed me that they has been posted as revenue - yet I knew that Fujitsu was not paying Peregrine . The note in the accounting system stated that neither Fujitsu nor Peregrine werg providing services - there was also an override in the system that instructed that the situation was ongoing . Dave Roudenbush, Director, Alliances told me when I brought this issue specifically up with him the first time that "we will take care of it ;" and then after 2-3 weeks when I head nothing but kep t inquiring, I was told by Roudenbush that the matter was taken care of. I was told specifically by Rodenbush, "we can take care of it you have more important things to do!" Right then and there I knew that something was wrong ! Finally, I was able to verify that Fujitsu paid only $1 to $1 .5 million in fees to Peregrine -- this showed up on the invoice report - only later did I realize that $8 .5 million was missing in payment to Peregrine . In December 2001, Peregrine improperly booked revenue on all or a significant portion o f the $10 million transaction .
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D.
eXchangeBridge
eXchangeBridge, Inc . ("EXB") is a Delaware corporation with its principal place of business in Atlanta, Georgia . EXB provides electronic and paper transaction processing service s to the food brokerage industry. By February 2001, Peregrine had become the majority shareholder in EXB, with roughl y 78% of the preferred stock (with voting rights) . Peregrine acquired 1,750,000 shares through a capital contribution of $1,750 ,000 and purchased another 1 , 750,000 shares from Crossmark in February 2001 at $1 .74 per share in Peregrine stock. Defendant Nelson and Eric Deller o f Peregrine were two of the three members of EXB's board of directors . Crossmark, EXB's only significant customer, had signed an exclusive service agreemen t with EXB for all of its transaction processing at a price of $3 .50 for each electronic tr an sactio n and $7 .00 for each paper transaction. Within a matter of months, Nelson was pushing t o renegotiate the deal in an attempt to artificially increase reported revenues for the June 200 1 quarter at Peregrine . At the close of the quarter on June 30, 2001, Nelson signed an agreement with Crossmark to reduce the price to $1 .25 for each electronic transaction up to 593,000 transactions per annu m and to $6 . 50 for each paper tr an saction up to 331, 000 transactions per annum . Crossmark was running roughly at those volume levels and this deal would save them approximately $1 .5 million per year. On behalf of Peregrine, Nelson also agreed to purchase an EXB note an d another debt owed to Crossmark for $1 .5 million in Peregrine stock . In exchange, Crossmark agreed to "purchase" approximately $1 .6 million of software
from Peregrine through EXB . Nelson planned to book the software as $1 .6 million in revenue
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72 APPENDIX E
for the June 2001 quarter for EXB and for Peregrine . This additional amount of repo rt ed revenue would allow Peregrine to continue its sequential repo rt ed revenue growth . In violation of GAAP, Nelson insisted that EXB - and thus Peregrine - recognize the full $ 1 .6 million software license fee immediately in the June 2001 quarter despite the fact that th e transaction was nothing more than a contingent swap transaction . After the CFO at EXB objected to Nelson's accounting treatment for the transaction, she was terminated . With the addition of the full $1 .6 million in revenue in the June 2001 quarter, Peregrine was able t o improperly report sequential revenue growth of $1 million - growing from $171 million in reported revenue to $172 million in reported revenue.
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73 APPENDIX E
E.
British Teleco m
In the third quarter of fiscal year 2001, Peregrine entered into an arrangement with Britis h Telecom ("BT") under which BT licensed several of Peregrine's software products . The deal was for 10,000,000 payable in installments over 2001 an d 2002 . The arrangement was evidenced by a Schedule A and Software License Agreement - Hosted Services ("SLA"). The SLA contained a 30 day money back guarantee if BT was not satisfied with the products . Peregrine recorded $12,546,000 of license revenue in the quarter in connection with thi s transaction . The arrangement was later modified through an amendment to the SLA dated August 23 , 2001 (the "August Amendment") . Among other changes, the August Amendment require d Peregrine, at its discretion, to either procure products or services from BT in an amount equal t o 120% of any outstanding payment under the Schedule A, or provide business opportunities to BT in the equivalent value of an ) outstanding payments due under the Schedule A, in the event BT i s unable to fulfill its payment obligations . Correspondence between Peregrine and BT indicates that final negotiations occurred i n January 2001 - the quarter after revenue was recorded . The correspondence also evidences th e underlying reason for the 30 day money back guarantee clause and discloses Peregrine's effort s to address BT's cancellation of the contract over a period of three quarters . In a le tter dated J an uary 8 , 2001, David Hill ( Senior Buyer at BT) wrote to Emma Wilson , ( Peregrine 's Legal Director for EMEA):
Please find enclosed two signed copies of the Software License Agreement also two signed copies of Schedule A . Can you please arrange to have them signed by the appropriate person in Peregrin e
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APPENDIX E
and return one copy of each to me at the address below . With regards to contract should BT Consulting not contract with Quardant within 30 days from 29 December 2000 then the contract between BT plc and Peregrine Systems will be cancelled . From this side letter , it is clear that two of the four basic revenue recognition criteria were not met when Peregrine recorded revenue : (1) the January 8, 2001 date of the letter indicates that Peregrine recorded revenue in the quarter prior to obtaining evidence of an arrangement ( a written contract signed by both parties) ; and (2) the letter demonstrates that the 30 day money back clause is in substance a cancellation provision . Fees from licenses cancelable by th e customer are neither fixed nor determinable until the cancellation provision lapses . In a letter dated April 4, 2001, BT's cancellation provision is extended until April 6 , 2001 . This extension is further evidence that the 30 day money back guarantee was substantively a cancellation provision and is an example of Peregrine's practice of granting concessions t o customers . In fact, in a letter dated April 5, 2001, BT did cancel the arr an gement, stating : "I refe r to your correspondence of 4th April 2001 in respect of the above agreement . BT is exercising its right to cancel the agreement as outlined in the aforementioned letter, which shall mean that B T has no commitment to you under the agreement ." in an e-mail dated August 7, 2001, from Christopher Manton-Jones (Peregrine's Directo r of Global Accounts - EMEA) to defendan t Gless, Jones states in reference to the draft Augus t Amendment: Please see attached what we hope to be the last version of the BT addendum for your approval . BT Group Legal came back with what we were told was one last point today. Emma h as reviewed and incorporated this and we proposed to accept it on the basis that there are no other changes .
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Although I'm covering old ground, for the sake of clarity I'd like to highlight two points . 1) Para 4 covers the essence of the agreement. It is a combination of the two routes that we discussed previously, i.e., we have an option to execute " pass through " or "barter" . The timetable for this is not a "cliff' at completion of the payment term but is effectively reconciled within each accounting period that a payment is due . 2) Para 6 covers the resale elements . I have an action to document the guidelines under which BT receive[s] the margin level specified . Had we incorporated those into the process now it would have drawn it out even further. Whilst we would have liked to include stronger wording here relating to "best commercial endeavors" it would not have been acceptable to BT, therefore regrettably the agreement technically does not place obligation on BT to actually resell our software .
Whilst none of this is what we would wish it to be, I believe we have worked within the boundaries you defined to ensure the liability was accepted and offset . (Emphasis added .)
Defendant Gless apprpved the signing of the August Amendment in an e-mail message sent on August 14, 2001 . The fact that the transaction lacked substance is further evidenced by an e-mail sent b y defendant Gless to several people including defendant Cappel on October 24, 2001 . Gless wrote :
We have the right per the agreement to offset rec[ievable] against services purchased from BT. I suggest we explore offsetting the current rec[ievable] for service or product we will purchase from BT for the current o/s amount . We can swap checks if necessary . I believe this will be the best course of action and allows for immediate resolution . (Emphasis added .)
In a memorandum dated June 13, 2002, defendant Cappel acknowledged that he r

department knew of BT's lack of any real payment obligation at or near the time the Augus t
Amendment was signed : #105632

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APPENDIX E
By mid Q2 [2002], a copy of an amendment to the BT agreement came to Treasury's attention . This amendment effectively provided that if BT were unable to sell through to an end user or deploy internally, then Peregrine would purchase product or services, which would then enable BT to pay Peregrine . In December, the companies exchanged funds in the amount of I MM GBP, and BT deployed product to an affiliate in the amount of 300K GBP, so altogether they were past due by about 200K GBP . During Q4, various executives continued efforts to coordinate payment or sell through, but these efforts were unsuccessful . . . . As noted above, the language in the final August Amendment does not obligate BT to pay Peregrine unless the software is sold through . Thus, Peregrine should not have recognize d revenue from this transaction until such sell-through occurred . In fact, Peregrine had significant problems collecting payment from BT for this deal . O n November 7, 2001, defendant Gless sent an e-mail message to defendant Gardner stating : "It is imperative Lenz or other BT reps gets cash out of BT this qtr . Otherwise, we will be subject to provisions and reversals . This we can 't afford !" Then, on November 27, Dorothy Tril l (Peregrine's European Finance Controller) sent an e-mail to Gless stating, "I am not so convince d that we are going to receive this cash . Getting cash out of BT has been a complete nightmare ..." Despite having payment problems with BT, Peregrine entered into yet another deal wit h
BT . According to a former Peregrine employee, who was a product specialist in the InfraTool s
business unit, in late 2001, BT entered in a contract for the purchase of Peregrine software . Andrew Highland , Peregrine ' s European Sales Executive, obtained the order from BT. The B T transaction was described as a $30 million deal within the company . Under the arrangement , Peregrine agreed to deliver Xanadu and, to a lesser extent, Peregrine's Service Center product . X anadu w as a combination of technology derived from Loran and Peregrine ' s Kinnetics Network
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Management Product, a Linux-based appliance integrated with Service Center and othe r Peregrine applications . At that time, defendants Gardner and Luddy were directly informed tha t
Xanadu was not close to being deliverable as a working product and would require many months
of intense development effort to make it work according to specifications and to be delivered as a revenue producing product . Peregrine was not in a position to deliver a commercially viabl e product to BT by the end of 2001 . Defendant Luddy nevertheless recommended the commercia l rele as e to BT at this time . In order to recognize revenue in the quarter, Peregrine delivered th e product prematurely . BT, however, refused to accept the product . Peregrine improperl y recognized revenue on the sale in late 2001 even though it knew BT had not accepted the produc t which made collection of the receivable doubtful . According to a former Peregrine employee, who was a Vice President, Supply Chai n Group, in January 2002, Alan Kerr of Peregrine investigated the BT transaction and determined that Highl and "had got into JT and [the transaction ] was not real and it was a wonder that And y [Highland] could sell anything ." The product was not commercially viable at that time . As a result, Peregrine refused to pay Highland any commission on the transaction . Highland threatened to expose Peregrine's improper revenue recognition practices unless he was paid . Subsequently, Highland brought suit against Peregrine in the United Kingdom for unpai d commissions .
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78 APPENDIX E
F.
Critical Pat h
A software swap between Peregrine and Critical Path, Inc . gave rise to improper revenu e recognition by Peregrine . David Thatcher, the former president of Critical Path , pled guilty t o federal charges of criminal conspiracy to commit securities fraud . In his plea agreement, Thatcher described the transaction as follows : Critical Path agreed to a software exchange with Peregrine . From Critical Path's perspective, this transaction was driven by the need to report revenue during the third quarter . At the end o f September, 2000, Critical Path bought software from Peregrine, and Peregrine bought software from Critical Path . To avoid the appearance that the transaction was a software swap, Critical Path and Peregrine prepared separate contracts for each purchase, each paid the full amounts owed, and made payment to each other on different days . I participated in the negotiations with Peregrine for this software swap. I spoke with the CEO of Peregrine [i.e., defendant Gardner] about the software swap. I also helped to set the value of the transaction. BV structuring the software swap as two independent transactions, I ealized that I and others working on the deal were consciously avoiding disclosure of the true nature of the transaction. The software that Peregrine agreed to "buy" from Critical Path was priced a t approximately $3 .09 million . The software that Peregrine agreed to "sell" to Critical Path wa s
also priced at approximately $3 million .

E-mail correspondence also shows that defendants Gardner, Cappel, Gless, and Nelso n knew that the transaction was merely a software swap for which revenue could not b e recognized . For instance, in an e-mail dated September 14, 2000, Gardner wrote to Dian a Hyland, Peregrine's Technology Alliance Manager, that: I talked to David Gardner last quarter about increasing the size o f
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79 APPENDIX E
the Reserve software rights and them [sic] becoming a Peregrine customer . Dave called me this week to ask if we could still do this . That is as far as it goes - discussion of a basic barter deal . . . . (Emphasis added .) Defendant Gless also participated in a series of e-mails on September 19-20, 2000 whic h
demonstrate his knowledge of the nature of the deal . On September 19, 2000, Gless was emailed the license agreement and other documents related to the transaction. Gless then sent an e-mail to Taylor Barada ( whose title was "Director , Special Projects , Office of the CEO) askin g "why are we buying from these guys? I presume this is a barter transaction ." (Emphasi s added .) Barada responded, "You are correct . This is a barter deal . . ." (Emphasis added .) Defendant Nelson was provided with "the latest" version of the Critical Path document s on September 27, 2000, when they were e-mailed to him by Taylor Barada. Later that day , Barada sent another e-mail to Nelson attaching the "Final, Final" version of the documents . Defendants Gless and Cappel engaged in a series of e-mails on September 28, 2000 i n which they discussed the accounting for the Critical Path deal . Cappel asked Gless, "Can w e swap checks on the 29th?" Gless responded, "yes, work with Taylor [Barada] ." Cappel then sen t another e-mail to Gless asking, "On second thought, which is better : Cash or DSO [days sales outstanding]?" Gless replied, "dso ." Cappel then wrote an e-mail message to Taylor Barad a stating , "Matt [Gless] asked me to contact you on this directly . In your dealings on the Critica l Path transactions, do you think you could arrange for us to swap checks with tomorrow's date ? [] This is very important to us in terms of managing our quarter-end DSO . " The recognition of revenue from these transactions was improper and resulted in th e
overstatement of Peregrine ' s revenue in violation of GAAP . GAAP required that barter
#105632
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-18-
APPENDIX E
transactions be recorded at historical cost whenever the asset received will be resold in a similar
line of business or the fair value of the exchange cannot be reasonably determined . That cost was zero. This transaction was discussed by the full Board of Directors at a Board meeting on Jul y 18, 2001 and at a special Audit Committee meeting attended by defendant Moores and Audit
Commi ttee members on February 12, 2002 .
#105632
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APPENDIX E
G.
RT G
In March 2001, Peregrine improperly recognized revenue on a transaction with Rainie r Technology Group Inc . ("RTG"), based in Seattle , Washington . Peregrine pressured RTG to sig n purchase orders totaling at least $2 million for copies of Xanadu, one of Peregrine's softwar e packages . There was never any intention on the part of either Peregrine or RTG that RTG woul d actually pay the monies unless the product sold-through to the end-user. RTG was a "shell " company with very few assets and no revenue . A former senior officer of a Peregrine reseller recalls his dealings with Peregrine on thi s transaction as follows : I had a flurry of contacts starting in December 2001 through March 2002, e-mails and telephone conversations with Gary Lenz, a Peregrine officer and President of Infrastructure ; Joe Reichner, EVP of Worldwide Channel Sales, Steve Gardner, Peregrine's CEO and VP, Partner Relations, David Roudenbush . I dealt directly with Roudenbush . . . I kept telling them that Xanadu was not engineered and did not work and that it was at least one year away from being able to be sold off the shelf so that they were fully aware of these issues . I also told these individuals speci fi cally that RTG had no revenues, no D&B , was a shell company an d would be bankrupt before the invoice arrived. I told them in va rious conversations , e-mails and in writing. I also told them that I had heard that they had booked this transaction as revenue in Q4, 2001 and that I was really surprised as such . It was a little later that they re-approached us offering us luxury box seats to the Buick Open to ostensibly keep the lid on this matter .
There was never any intent by RTG to pay Peregrine . This was agreed upon between Peregrine's Roudebush and RTG's Kirb y
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APPENDIX E
orally and was confirmed later in a side e-mail from Roudebush . Gardner was aware of all of these facts . Nevertheless, Peregrine improperly booked th e deal as revenue in March 2001 in order to meet publicly announced revenue goals .
#105632
-2183 APPENDIX E
H. Barnhill
In 1999, Barnhill Management Corporation ("Barnhill") was a small reseller of Peregrin e

software . According to a former Peregrine employee who was a Director of the ICW Group , Peregrine obtained a $3 million commitment from Barnhill only by slipping Bamhill's president , Michael Witt, a significant amount of cash . The former employee remembers seeing that at a sales kick-off meeting in the Spring or Summer of 1999, defendant Powanda handed Witt a n envelope with $25,000 to $50,000 in cash inside . The former employee heard Powanda say t o Witt that if he "made the commitment," Peregrine "would take care of him ." Witt also told th e former employee that he (Witt) was "walking around with the biggest amount of money that h e ever had on his person in his life ." The cash pay-off was to get Barnhi ll to increase its commitment to $3 million, which wa s unrealistic for Barnhill . The Director of the ICW Group recalls being told by Witt that he was very uncomfortable with the amount of the deal . Powanda also knew that Barnhill did not have the financial resources to pay for the Peregrine software . Thus, the arrangement betwee n Powanda and Barnhill provided that Barnhill would not be obligated to pay Peregrine until sellthrough to an end-user. According to a former sales executive involved in sales to the Alliance Group, the tota l amount of "bad deals" placed at Barnhill was approximately $15 million . Peregrine knew that these "receivables" from Barnhill would never be paid . In order to avoid the receivables fro m having to be written off, Peregrine acquired Barnhill as of March 24, 2000 . According to a former Vice President, Product Marketing, Peregrine had no plan to integrate Barnhill into it s operations . The acquisition of Barnhill allowed Peregrine to avoid the write-off of Barnhill' s
#105632
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APPENDIX E
large receivables at year-end March 3 1 , 2000 . Instead, Peregrine improperly buried the write-of f
in the line item "Acquisition Costs and Other." Because this failed reseller transaction with Barnhill had no relationship to a true "acquisition," it was clearly improper to write the value o f the deal off under that line item .
#105632
-2385 APPENDIX E
1.
O/E System s
Peregrine engaged in a fraudulent revenue recognition transaction with a reseller calle d

O-E Systems, Inc . In September 1999, O/E Systems entered into a transaction with Peregrine i n which it agreed to resell $500,000 of Peregrine software . Defendant Powanda's name is typed o n the Schedule A memorializing the deal . The Schedule A, which is dated September 30, 1999, provides O/E Systems with license s for resale for Peregrine 's ServiceCenter, AssetCenter, InfraCenter for WorkGroups, an d InfraTools software . On two separate places on the Schedule A, there is a handwritten note stating that O/E's payment to Peregrine was "subject to Peregrine's fulfillment of all obligations outlined in the letter dated September 27, 1999 from Steven Spitzer to Tom Sieja [of 0/ E Systems] ." Spitzer's September 27, 1999 letter provided that O/E Systems would have a semiexclusive sales territory and that Peregrine would provide substantial assistance to O/E Systems i so it could make sales to end users . A former Pereg ri ne employee , who was a sales representative in the ICW Group, recalled the situation as follows : A sales commitment was entered into in September 1999 by reseller O/E Systems for between $500,000 to $750,000 by Spitzer. Peregrine's Blaine Bragg was the sales representative responsible for this account . Bragg was paid 100% of his commission up front at the time of commitment. O/E Systems was given semi-exclusivity and in order to meet their commitment [and] were also allowed to sell Peregrine's Asset and Service Center products . O/E Systems had not paid anything toward their commitment by August 2000 and I was now involved in dealing with them directly to negotiate payment. O/E had simply refused to pay, claiming
#105632
-2486
APPENDIX E
that Peregrine had not provided the agreed upon support and that the IC W product was not selling - and that Peregrine had misrepresented the product and market potential when the commitment was entered into . [ was dealing with Scott Goemmel at O/E . In subsequent conversations with Goemmel after I left Peregrine, he indicated that O/E Systems had still not paid a dime to Peregrine . O/E Systems did not pay Peregrine because the conditions precedent to payment that wer e set forth in Spitzer's September 27, 1999 letter were not satisfied . In a letter dated July 24, 2000 , OIE Systems outlined how Peregrine had failed to satisfy almost all of its obligation s memorialized in the Spitzer letter . It further states : We have also learned that other preferred providers of Peregrine software have refused to pay any amount towards the purchase of a software reseller license until actual sales were made . While O/E believes in the Peregrine software and believes it can become a necessary tool for many customers, O/E also believes that it has not received the benefits it was promised in the Schedule A that were a prerequisite to the $500,000 payment. Therefore O/E is suspending the payment of the $500,000 . Peregrine will receive its license fee from O/E when sales of the various software modules are made to O/E customers . (Emphasis added .) Defendant Spitzer was copied on O/E Systems ' July 24 , 2000 letter. Notwithstanding the contingent nature of the transaction and Peregrine's obligation t o provide subsequent support for the sale to the end-user, Peregrine improperly recorded th e transaction as revenue in September 1999 . Only approximately $39,000 of the $500,000 wa s ever collected by Peregrine, and this money was paid after software had been sold-through to a n end user. In addition, the software was shipped to O/E Systems after revenue was recognized .
#105632
-2587 APPENDIX E
According to the shipping documentation, the software was shipped on September 30, 1999 fo r "Second Day " delivery. Shipping terms are FOB Destination according to the Value Added Reseller Agreement between Peregrine and 0/B Systems .
#105632
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APPENDIX E
J.
Systematics A G
Systematics AG ("Systematics") was a German software reseller. In March 2001 ,

Peregrine entered into an arrangement with Systematics involving $12 million of Peregrin e software . A payment of $5 million was due in twelve (12) months and the $7 million balanc e was due twenty-four (24) months later . Defendant Powanda negotiated this deal . There was a side letter involved in this transaction which made any payment obligation o f Systematics dependent on Systematics' ability to sell the product through to the end-user . It
stated:
Systematics AG shall pay Peregrine Systems GnThH the full amount of $5,000,000 for the first twelve months, and $7,000,000 for the ensuing twelve months . In the unlikely event that the number of acquired software licenses does not reach or exceed the agreed annual target, Peregrine Systems will submit licensing earnings from Peregrine direct business in the amount of the difference for the respectively de fi ned period to Systematics AG for direct settlement with the final customer . (Emphasis added .) In light of the size and importance of this transaction , this side letter was signed on the instruction and with the knowledge of defendants Gardner, Gless, and Powanda. In connection with the side-letter issued to Systematics, a former Director of the Allianc e Group recalled a discussion he had with defendant Gless and Andrew Cahill of Peregrine : In February or March 2002, 1 was in Matt Gless' office with Andy Cahill . The side-letter [involving Systematics AG] was signed by Sven Ereletich of PRGN who was the acting general manager of PRGN's office in Germany . I remember Gless and Cahil l instructing me to take the side letter to my office because they stated specifically that neither of them wanted a copy in their office . Peregrine initially contemplated including a clause in either the contract or the side lette r
4105632
-2789 APPENDIX E
providing that if Systematics was unable to bum through its inventory, it could issue an invoic e for services to Pereg rine . Cahill told investigators that he believed the Finance department kne w of this agreement and approved it, based upon discussions between Powanda and Gless . While
the final contract documents do not contain such a provision, there is what appears to be a draf t
addendum (which was found by investigators on defendant Powanda's computer hard drive ) which contains this language . When interviewed in connection with the investigation by Peregrine, after May 2002, Powanda suggested that someone else changed this draft addendu m without his knowledge to delete the professional services language and add the out clause ." However, Sven Erhatic, EMEA Business Relationship Manager, stated that Powanda an d Tumulty approved the language in the final version of the side letter . By the end of the second quarter of fiscal year 2002, Peregrine became concerned abou t the outstanding Systematics receivable even though it was not yet past due, because Peregrine wanted to sell the Systematic receivable and to do so required a "hell or high water letter" from Systematics . In September 2001, defendant Gardner visited David Thorpe of EDS, which had acquired Systematics . Gardner had worked with Thorpe at Data General . On September 28 , 2001, defendant Gardner sent Thorpe an e-mail regarding Peregrine's attempted sale of the Systematics receivable, with an attached "hell or high water letter" (Amendment #1 to th e
Schedule A) for Thorpe to sign . Thorpe ultimately signed the document and Peregrine sold th e
receivable to Fleet Bank. In November 2001, Cahill met with Systematics to determine how Peregrine could hel p Systematics sell-through Peregrine's product . At this meeting, Systematics stated that there wa s a side letter and that if Systematics did not sell-through, it was under no obligation to pay .
#105632
-28-
90 APPENDIX E
Systematics did not believe the receivable was enforceable because defendant Gardner kne w about the side letter when he requested that Systematics sign the "hell or high water letter ." By December 2001, others within Peregrine had become aware of the side letters. Attached to an e-mail message dated December 6, 2001, Geoffroy Boonen sent translated copies of the side letters to defendant Gless . In April 2002, the Systematics receivable became past due . John Benjamin, who worked in Peregrine 's Treasury Department , learned that there was a side le tt er . Without seeking permission from Gless, Benjamin immediately notified Fleet, which demanded that Peregrine repurchase the receivable. A former Peregrine employee in the Alliance Group also recalled attempts to collect fro m Systematics as follows : One year after the contract is signed and payment comes due, I was aware that Systematics had no intention to pay - I had seen the side -letter whilh Spitzer and Cahill were also aware of - I had told them that we should not have booked this transaction because Systematics had a side letter from us and they had no intention of paying the contract amount due after the first 12 months of the con tract . In March of 2002, 1 was on a conference call with Spitzer and Cahill trying to resolve this deal - Systematics on the call told us they had no intention of paying and referred to their side le tter and Peregrine ' s commitment to either reduce the payment or drive business through Systematics . Peregrine did not have the business to d ri ve through Systematics . In March 2001, Peregrine improperly booked $9,300,000 from this transaction and "sold " the resulting receivable to Fleet Bank . Recognizing any revenue on this transaction was a n intentional violation of GAAP because of the terms of the side letter which negated Systematics '
obligation to pay Pereg rine until and unless sell-through of the product had occurred .
#105632
-2991 APPENDIX E
K.
Corporate Software & Technolo
In the fourth quarter of fiscal year 2000, Peregrine entered into an arrangement wit h Corporate Software & Technology, Inc . ("Corporate Software"), a company based i n Massachusetts that had annual revenue of more than $1 billion . Corporate Software provide s software licensing services, technology procurement tools and methodologies and productselection consultation . Under the arrangement , Corporate Software licensed any currentl y available Peregrine software in exchange for $5,000,000 payable in 60 days . The arrangement was evidenced by a Schedule A and a Solution Connections Systems Integrator Alliance Agreement ("Systems Integrator Agreement") . The Schedule A was signed by defendant Gardne r and the Systems Integrator Agreement was signed by Eric Deller ( Peregrine 's Vice President and General Counsel) . Peregrine recorded $3,875,000 of license revenue immediately upo n execution of the agreement . A former Peregrine employee who was a Director of the ICW Group
recalled :
Chad White told me that in Q4, March 2000, his account Corporate Software, after Gardner and Spitzer talked with them, had entered into an additional $3 .5 million commitment . White told me that Spitzer told him in the airport prior to meeting with this customer that Gardner had already negotiated the additional commitment and that the purpose of the meeting was window dressing -- and since the deal was already done by Gardner, nothing should be said or done to mess it up . On May 23, 2000, Gardner sent an e-mail to Deller and Nolan Schiffer ( a contracts manager), with a copy to defendant Gless . Gardner stated : " I am not sure why we have n o contract closure on an item that we booked last quarter and which we are now looking fo r
payment on . This is going to place this payable in jeopardy, since CS&T has already indicate d
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APPENDIX E
that they are well aware of the lack of closure . Please make this a priority and explain why it ha s
taken so long to get done ?" Gardner' s message was in response to an e-mail dated May 19, 200 0 from Schiffer to defendant Spitzer indicating that Corporate Software was still reviewing th e
contract. On June 6, 2000, Spitzer sent an e-mail to Gardner in which he referred to th e Corporate Software contract as not yet finalized . Recording revenue prior to obtainin g completed and signed contracts from the customer is a violation of GAAP . As of September 2000, Corporate Software still had not sold any product from the Marc h contract . In a September 4, 2000 e-mail from Johanna Cheung of Peregrine to defendant Spitzer , Cheung states: "CS&T is worried about their $5M commitment, and they have not sold anythin g either in the US or EMEA . A couple of weeks ago, I hear the CEO was going to call Stev e Gardner to discuss cancelling the agreement and the commitment ." On September 29, 2000, Robert Flintoff of Peregrine sent David Cumming of Corporate Software a le tter referri ng to I software license agreement between AXA Shared Services an d Peregrine . The letter states : Please accept this letter as confirmation that you may invoice us for the sum of $1,309,901 as set out in the attached Schedule A which is due and payable from AXA Shared Services Limited under the Agreement and that the sum of $1,244,406 shall be allocated from this amount against the prepayment of $5,000 , 000 in the Integrator Alliance Agreement between Peregrine Systems , Inc. and Corporate Software Technology, Inc. dated 24 March 2000 . (Emphasis added .) In other words, Peregrine agreed to refund a portion of the $5,000,000 fee collected fro m Corporate Software. Under GAAP, any fee that is subject to refund or forfeiture is not fixed o r determinable and precludes the recognition of revenue .
#105632
-3193 APPENDIX E
In the second quarter of fiscal year 2001, Peregrine entered into another arrangement wit h
Corporate Software under which Corporate Software licensed any currently available software
modules in exchange for $8,000,000 payable in 90 days . The arrangement was evidenced by a Schedule A and an "amendment" to the Systems Integrator Agreement . This "amendment" is i n reality a side letter. The September 2000 Schedule A states " this reseller order form replace[s ] and cancel[s] the previously sent order form number 00LS29/09/001 A ." The previously sen t reseller form totaled $6,000,000 and was dated October 2, 2000 . Peregrine recorded $6,429,00 0 of license revenue in the second quarter of 2001 . The Schedule A was modified to eliminate language that would have precluded th e recognition of revenue . The following provisions were deleted : (1) "This purchase is subject t o the parties' UK business model throughout Europe as discussed by Mr. Mark Chatel and Jerr y Crook and successful resolution of the current business issues in the United States ;" and (2) "I n
the event the obligations in this reseller order form are not fulfilled, then CS&T will have n o
obligation to purchase the licenses and this reseller form will be terminated." The modified Schedule A was then executed, with an increase in the total value from $6,000,000 to $8,000,000, and revenue was recorded . However, the problematic language in the origina l Schedule A was included in the amendment . A letter dated September 29, 2000 from Corporate Software's Senior Vice President o f
Operations to Jeremy Crook of Peregrine references the provisions of the arrangement betwee n
CS&T and Peregrine . The letter states that additional purchases are subject to the partie s implementing the UK Business Model throughout Europe and the successful resolution of th e current business issues in the United States . Additionally, the letter states :
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APPENDIX E
The parties will use their best efforts to agree upon and execute an amendment to the Peregrine Agreement within the next few weeks . The amendment will formally add the above terms to the Peregrine Agreement . In the event the obligations in this letter are no t fulfilled, then [Corporate Software] will have no obligation to purchase the licenses . The September 2000 transaction was, in fact, amended after the quarter in which revenue was recorded . This is evidenced by a fax cover sheet from Emma Wilson (Peregrine' s Legal Counsel - EMEA) to Corporate Software's Senior Vice President of Operations, dated October 5 , 2000 - five days after the end of the quarter . Wilson wrote : "Please sign the attached - date 29 September 2000 - and fax back to me asap ." (Emphasis original .) The attachment was th e
amendment to the Systems Integrator Agreement. This amendment included the language
requested in Corporate Software's September 29, 2000 letter and in an October 5, 2000 fax fro m Corporate Software confirming that the transaction would be cancelled if various objectives wer e not met and requesting that s1ch language be included in the amendment . Recording revenu e prior to obtaining a customer ' s signature is inconsistent with GAAP . The provisions in the amendment to the Systems Integrator Agreement included th e language referenced in Corporate Software's September 29, 2000 letter and October 5, 2000 fax providing for the cancellation of the $5,000,000 obligation in the event the parties were unable o r failed to meet the defined commercial objectives . Such objectives included implementation o f
the UK business model in Europe and resolution of current business issues in the U .S.
Furthermore, Peregrine agreed to use its best efforts to help Corporate Software sell the inventor y to end users. This l an guage negates the conclusion that Peregrine's fee was fixed or determinable when it recorded revenue . Peregrine and Corporate Software were never able t o
#105632
-3395
APPENDIX E
implement the UK business model or resolve the existing business issues in the U .S . Peregrine never received any payment under the September 2000 transaction and Peregrine wrote off th e entire receivable balance in Q2 02 . In addition, in the second quarter of fiscal year 2002, Peregrine wrote off $6,367,000 o f the outstanding accounts receivable balance from CS&T as a component of the "acquisition cos t and other" line item in the income statement. Defendants Gless and Nelson knew of an d approved this improper write-off. By writing off the receivable in this manner, Peregrin e inappropriately avoided restating revenue and hid the nature of the write-offs from users of th e Company's financial statements .
4105632
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APPENDIX E
L.
FM Internationa l
FM international ("FM") was a small org an ization in 2001 . It consisted of approximately fifteen (15) people including two (2) outside sales persons . In March 2001, Peregrine entered into a tran saction with FM . The arrangement was for the license of FacilityCenter products fo r $2,875,000 . Defendant Spitzer w as the sales representative for this transaction . Peregrin e immediately recorded $2,500,000 of license revenue from the deal . However, the transactio n was not completed in the fourth quarter of fiscal year 2001 . On April 3, 2001, three days after the close of that quarter, defendant Spitzer sent an e-mail to FM's president . Attached to the email is the Schedule A for the deal, which was apparently being sent to FM for the first time . Spitzer's April 3, 2001 e-mail also provides that, Should issues develop around the deployment of this software at LA County, Peregrine will provide FM International the rights to license this software to another end-user client . This would include clients in which FMI is providing services and Peregrine is licensing the software direct to the end-user . Peregrine will also provide FMI flexibility on payment terms, should that be necessary . (Emphasis added .) FM's president responded to the e-mail stating : To clarify payment terms. My understanding is that FMI will pay Peregrine after we receive collection from the mutual end user clients. We will not be obligated to make any software payments to Peregrine prior to the collection from out Mutual end users . Can you please verify this . (Emphasis added .) Defendant Spitzer responded, "Your understanding is correct . " As noted above, Peregrine immediately recorded $2,500,000 of license revenue from th e deal. However, Spitzer's e-mail side letter negates the conclusion that the fee is fixed o r determinable . Thus, revenue should not have been recorded until the software was in fact sol d through to end users and Peregrine improperly booked the FM commitment as revenue i n
violation of GAAP . 97 APPENDIX E

#105632 -35-
M.
Action Computer Supplies
In the third quarter of fiscal year 2001, Peregrine entered into a transaction with Actio n
Computer Supplies Holdings PLC ("Action Computer") in which Action Computer license d several Peregrine products for 10,000,000 . Documents memorializing the deal indicate tha t 4,500,000 of the software was for Action Computer's own use and 5,500,000 was to be resol d
by Action Computer . Peregrine recorded $12,580,000 in license revenue in the reference d

quarter. That same quarter , Peregrine placed an order for the rights to Action Computer's XMLbased component catalog for use in Peregrine's e-procurement software products for 3,000,000 . In the following quarter, Peregrine licensed additional software products from Action Compute r for 2,750,000 . The latter transaction was negotiated by defendant Powanda and known by hi m to involve a barter, rendering revenue recognition improper . Peregrine improperly recognized revenue in connection with these transactions . A n exhibit to Action Computer's Master Distribution Agreement states that Peregrine will provide " relief' or the difference between the amount of software Action Computer sells and 5,500,000 (the total amount of product Action Computer purchased for resale) . Peregrine , through defendant Powanda, agreed that, if Action Computer had not sold Peregrine software in th e amount owed, Peregrine would either bring end-users to Action Computer to cover the shortfal l or purchase services in that amount from Action Computer . In addition, the concurrent nature of the transactions between Peregrine and Actio n Computer also indicates that Peregrine's accounting and Powanda's involvement was improper.
A fundamental premise in evaluating concurrent transactions is whether there exists a vali d
#105632
-3698 APPENDIX E
business purpose such that the products received in the exchange are expected, at the time of the exchange, to be deployed and utilized, and the value ascribed to the transaction reasonably reflects such expected use . The Action Computer Catalog was similar to pre -existing Peregrine product . GAAP also requires software exchanged for software that will be sold in the ordinar y course of business to be recorded at the software's historical cost . If the transaction was a concurrent exchange of software to be resold by each party, Peregrine's revenue should hav e been recorded at its historical software cost, which is zero . Peregrine recorded a total of $3,128,000. in revenue in connection with Action Compute r transactions in the fourth quarter of fiscal year 2001 . Some or all of this revenue came from a transaction with Action Computer that was purportedly completed in that quarter . Peregrine licensed AssetCenter, IND, and IDD to Action Computer for 2,7500,000 . Computer Science s Corporation ("CSC") was identified as the end user . The Schedule A was purportedly execute d in March 2001 . However, defendant Powanda asked Kevin Tumulty of Peregrine to prepare a Schedule A for the transaction on April 2, 2001, after the quarter in which revenue was recorded. Therefore, Powanda knew that Peregrine failed to meet the requirement that it have persuasiv e evidence of an arrangement (i .e., a contract signed by both parties) prior to recording revenue . In addition, a side letter provides that Action Computer would not be liable for payment on the CSC deal until a transaction with CSC or some other end-user materialized . The terms of the side letter are referenced in a May 10, 2001 e-mail from Kevin Tumulty to defend ant Spitzer, in which Tumulty states : "A big concern is that Doug [Powanda] got Action Computers to take a $3m contract in Q4 to cover and it would be backed out when CSC sign with us ."
On May 23, 2001, Mark Timmins (Pereg rine 's Credit Control for EMEA) sent defendan t
#105632
-3799
APPENDIX E
Gless an e-mail stating : "Action are waiting on a full credit for this amount [2,750,000], n o reason was given other than numerous discussions possibly with Jerry [Crook of Peregrine] ." In a letter from Crook dated August 14, 2001, Peregrine did in fact provide a credit to Actio n Computer for the entire 2,750,000, citing "the joint efforts of Action and Peregrine in closing sales at the following accounts : Dr . Materna GmbH, Mebit ." The letter further provided tha t "All fees in respect to the above invoice , in the amount of 2,750, 000 Pounds Sterling, have bee n credited, leaving no liability for this amount for Action ."
#105632
-38100
APPENDIX E
N.
MGX Enterprise Solutions
In early 1999, Peregrine's EMEA Division established an Emerging Market Group whic h had as one of its primary objectives the development of business in South Africa. In November 1998, Peregrine entered into a distributorship agreement with Software Futures, a South Africa n distributor, and sold software licenses on which Peregrine recognized revenues of approximatel y $340,000 in June 1999 and $724,000 in September 1999 . Software Futures was subsequentl y acquired by CCH at the end of 1999 . Shortly thereafter , MGX, a publicly traded South African company, acquired CCH . To support the acquisition , Peregrine, at MGX' s request, acquired approximately $2 million worth of MGX stock on the open market (constituting a n approximately 3% stake in MGX) . Peregrine's acquisition of Harbinger in June 2000, prompte d further discussions between Peregrine and MGX, which ultimately resulted in a transaction in June 2000 in which Peregrine sold approximately $7 million of e-business software to MGX an d Peregrine purchased approximately $2 million of product from MGX . Peregrine recognized approximately $4 .2 million of license revenue on this transaction . By June 2001, MGX had paid the amounts owing under the June 2000 transaction , although it had resold little of the licenses acquired the previous year. Nonetheless, sometime i n or about June 2001, Peregrine's Richard Day, with the approval and authority of defendant s Gardner and Gless, and MGX's Aletha Ling signed an undated "Heads of Agreement - Strategi c Partnership of MGX As Master Distributor," which proposed a new Master Distributio n Agreement between the parties . The Heads of Agreement document was later determined b y Peregrine's General Counsel to be a non-binding letter of intent . Nonetheless, it committed MGX to purchase $12 million of software licenses "with flexible payment terms over 2 years "
#105632
-3910 1
APPENDIX E
and provided that if "MGX falls behind in revenue sold vs . payment to [Peregrine ], Peregrin e will provide relief to MGX . . . until sales are back on target ." The parties thereafter entered int o a Schedule A and a Solutions Connections Master Distribution Agreement dated June 29, 200 1 in which MGX licensed all currently available Peregrine software products and agreed to th e
following payment schedule : $2,000,000 on January 1, 2002 ; $3,000,000 on July 1, 2002; $3,000,000 on January 1, 2003 ; and $4,000,000 on January 1, 2004 . Peregrine recognized
$8,543,000 in license revenue in June 2001 . In August 2001, Peregrine acquired Remedy and thereby succeeded to Remedy' s distribution arrangement in South Africa with AST, another publicly held company and a competitor of MGX. At the same time, the new Peregrine executive responsible for Sout h Africa, Michel Isnard , expressed concern to defendant Gardner about MGX's intention and ability to make the payments that would soon be due under the June 29, 2001 Schedule A . Defendant G ar dner and Isnar~ therefore scheduled meetings with MGX in late November 200 1
in Johannesburg.
At these meetings in South Africa, MGX showed defendant Gardner and Isnard th e "Heads of Agreement" and stated their position that the document conditioned MGX's obligatio n
to pay on sell-through of the Peregrine software. At about the same time, defendant Gardner emailed to the Investment Committee of Peregrine's Board a request for authorization to procee d to expand Peregri ne 's investment in MGX by $15 to $20 million in order to support a proposed joint venture between MGX and AST to distribute both Peregrine and Remedy product . In
support of the request, defendant Gardner noted that Peregrine would "insist upon accelerate d
payment of the long-term receivables due" it under the June 29, 2001 Schedule A as a partial use
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APPENDIX E
of the proceeds of the investment. Ultimately, before the end of December 2001, MGX and Peregrine reached the following agreements : (a) the June 29, 2001 Agreements were amended to increase MGX's paymen t obligations by $500,000 and include the license of Remedy products as evidenced by a Firs t Amendment to Master Distribution Agreement dated December 24, 2001 (the "First Amendment "), unsigned by Peregrine ; (b) MGX provided promissory notes to Peregrine in th e amounts of $2,000,000 and $3,000,000, representing the January and July 2002 payments du e
under the June 29, 2001 Schedule A ; (c) Peregrine purchased MGX's convertible promissory
note in the approximate amount of $12 million in exchange for 1 .5 million shares of Peregrine stock agreed to establish a joint venture with AST to market Peregrine and Remedy products . The payments under the promissory notes were delayed because of problems with South Africa n currency restrictions . Peregrine subsequently entered into a settlement with MGX in which all relationships between Peregrine and MGX were cancelled in exchange for a cash payment b y MGX of approximately $ 8.3 million . The Heads of Agreement side letter authorized and approved by defendant Gardne r contained several provisions which show that Peregrine's fee was not fixed or determinable at the time it recorded revenue , i.e., the offset of any reseller partner agreements against th e $12,000,000 commitment, flexible payment terms, and Peregrine's agreement to provide relief to MGX by providing a margin variance on future sales .
#105632
-41103 APPENDIX E
0.
IBM/Tivol i
Defendant Powanda oversaw a major relationship with IBM and had knowledge that the transactions with IBM gave rise to improper revenue recognition . IBM Global Services ("IBM") regularly received side letters which provided that it was not obligated to pay Peregrine fo r
product until the product had sold-through to the end-user . On a regular and re-occurring basi s
during the Class Period, IBM would place orders ranging from $2-$4 million at the request o f Peregrine at the end of a reporting period and Peregrine would improperly record this as revenue . IBM would hold the product for Peregrine until Peregrine or IBM sold the product through to th e end-user. A former member of the Alliance Group summarized these transactions as follows : IBM "would buy inventory at our request and hold it until Peregrine could sell it through - IB M was acting like a bank ." These transactions would generally come at the end of a reporting period. As a former member of the Alliance Group noted : Doug Powanda was very close to [BM and EDS and would go to IBM regularly at the end of a quarter to close a deal with IBM because we needed X millions to make the quarter. It was common knowledge around the company in 1999 and 2000 when Powanda was North America sales manager, that he would go to IBM and EDS to make this happen - he was a great talker, he was known as someone who could make things happen, he was known as the "miracle worker ." A former sales executive involved in sales to the Alliance Group similarly confirmed tha t IBM was used regularly at the end of quarters to "carry the paper" while Peregrine continue d after the close of the quarter to attempt to sell product to end-users. A former Director of InfraCenter for Workgroup also confirmed that deals that were no t
#105632
-42144 APPENDIX E
yet finalized were placed temporarily with IBM : I was involved directly in a conversation in early 1999 with Doug Powanda . . . Powanda stated to me that Farley had told him that "we can begin to recognize pre-commitment sales in Q4 , January-March 1999." Powanda told me that "we can really start to use it" referring to booking pre-commitments . He told me further that "the IBM deal was used as such to meet earnings for the October-December 1998 quarter ." When I commented him that we can't do this since I believed it to be wrong based on my prior experience with these matters [elsewhere], Powanda just naively shrugged his shoulders . I also remember that both Farley and Gardiner popped their heads into Powanda's office during this meeting and acknowledged that we 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 i n Powanda's office, things really sta rted to go downhill for Peregrine . In fiscal year 2001, Peregrine recognized $61,790,000 in license revenue from two deal s with IBM and Tivoli Systems, Inc . ("Tivoli"), a wholly-owned subsidiary of IBM. Thi s represented 17% of Peregrine's reported total license revenue for the entire fiscal year . Peregri ne's strategic objective was to "sunset " the Tivoli Service Desk ("TSD") products tha t competed with Peregrine's ServiceCenter products . Peregrine purchased the TSD assets fro m Tivoli in the third quarter of fiscal year 2001 for $45,000,000 in cash plus $60,000,000 i n common stock . IBM did not want its customers to be harmed when TSD was phased out an d sought to accommodate customers who wanted the Peregrine product . Therefore, in December 2000, at the same time Peregrine was purchasing TSD, IBM licensed certain Peregrine product s related .to the migration of TSD customers for up to an aggregate of $33,900,000 . Concurrent with the closing of the TSD purchase, Peregrine and Tivoli signed a Participation Agreement . Defendant Nelson signed the agreement on behalf of Peregrine . Th e
#105632
-43105 APPENDIX E
Participation Agreement entitled Tivoli to license currently available Peregrine products at a discount for inte rn al use or resale to third parties . Under the Part icipation Agreement , Tivoli committed to pay Peregrine $33,900,000 as a net license commitment (excluding maintenanc e and support fees) on or before the first anniversary date of the Participation Agreement, i .e., by December 29, 2001 . Any net license payments made to Peregrine for products used internally o r resold to customers before December 29, 2001 were to be credited ("burned") against th e $33,900,000 net license commitment . The Participation Agreement also entitled Tivoli to a 10% referral fee for providing sale s leads to Peregrine. Referral fees were credited, or "burned," against Tivoli's $33,900,00 0 obligation to Peregrine . The arrangement between Peregrine, IBM, and Tivoli was evidenced b y the Participation Agreement, the Customer Solutions Agreement ("CSA") and the Statement o f Work ("SOW') to the CSA, each of which were signed by defendant Nelson . In the fourth quarter of fiscal year 2001, the Participation Agreement was amended to (1 ) entitle Tivoli to purchase any Peregrine products commercially available at the time of th e amendment ; ( 2) allow the $33, 900,000 commitment to be "burned " by maintenance as well a s licensee fees ; (3) increase Tivoli's discounts from 40% of the list price to 70% off the list pric e on an aggregate of $27,120,000 in licensed products ; and (4) provide a discount of 13.5% of th e license net price for an aggregate of $6,780, 000 for maintenance services on such products . Additionally, the amendment provided that "on or before March 31, 2001, Tivoli shall make a
$10 million payment via wire transfer to [Peregrine], which shall be fully credited towards th e
$33 .9 million commitment ." In the third quarter of fiscal year 2002, Peregrine, Tivoli, and IBM entered into Lette r
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APPENDIX E
Agreement No . I whereby Peregrine agreed to assume ce rtain obligations of IBM to provid e products and maintenance to the Federal Aviation Administration . In exchange, IBM agreed to
pay Peregrine $2,500,000 by December 31, 2001 and $2,500,000 by March 31, 2002 . This
represented a concession of at least $5 million because the value of the software committed to th e FAA was greater than $10 million . These payments were credited ("burned") against IBM' s minimum license commitments . Per Letter Agreement No . 1, IBM also agreed to provide a $1,800,000 credit to Peregrine towards the purchase of future IBM products or services expirin g in December 2002 . Letter Agreement No . 2 clarifies that the second payment was credite d against a $44,000,000 commitment and implies that the first payment was credited against a $33,900,000 commitment . Before the end of the fourth quarter of fiscal year 2001, it became clear that TSD users were successfully migrating to Peregrine ServiceCenter in large numbers, and IBM wanted to further promote and market PLegrine products to it customers . Additionally, Peregrine and IB M
realized that $33,900,000 would not cover the migration . Accordingly, the par-tics entered into a
second arrangement whereby IBM' s minimum commitment would be increased in exchange fo r IBM receiving additional discounts on the ServiceCenter product line . In Q4 01, Peregrine and IBM entered into a SOW (the "March 2001 SOW") whereb y IBM committed to purchase an additional $44,000,000 worth of Peregrine products an d
maintenance services over a 24 month pe riod . The products available for license were any of
Peregrine's currently commercially available products (including future versions and releases) , products with similar functionality an d maintenance services , including products and maintenance services obtained through Peregrine's current and future subsidiaries . The
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APPENDIX E
$44,000,000 was payable in two installments: $13,200 ,000 on or before March 31, 2002 an d $30,800,000 on or before March 31, 2003 . Peregrine and IBM each were to track produc t deployment , i.e., burn . The March 2001 SOW increased IBM's total commitment b y
$44,000,000, but also provided IBM with similar discounts on Peregrine's ServiceCenter produc t line that were provided to Tivoli in the amendment to the Participation Agreement : a discount o f
70% off on an aggregate of $15,000,000 in licensed products and a discount of 13 .5% of th e license net price for an aggregate of $10,000,000 for maintenance services . IBM also was given the right to purchase : (1) an unlimited amount of additional ServiceCenter products an d maintenance through June 16, 2001 ; and (2) up to an additional $20,000,000 of ServiceCente r products and maintenance from June 17, 2001 to December 15, 2001, at the same discount levels . The March 2001 SOW was signed by Ryall on behalf of defendant Gardner.
In the fou rth quarter of fiscal year 2002, Peregrine , Tivoli and IBM entered into Lette r
Agreement No . 2 in which : ( 1) Peregrine acknowledged that Tivoli had satisfied its obligations t o pay Peregrine $33,900,000 under the Participation Agreement; (2) IBM agreed to pay Peregrin e $23,100, 000 on the effective date of Letter Agreement No . 2 for a credit of $25,000, 000 against
IBM's $44,000,000 commitment per the March 2001 SOW (the second $2,500,000 paymen t
referenced in Letter Agreement No . 1 counted against the $23,100,000 payment) ; and (3 ) Peregrine agreed to assume all existing obligations for TSD and/or any and all requirements fo r Peregrine ServiceCenter for approximately 63 specified customers and to provide licenses t o other specified customers . Peregrine recorded $26,950,000 of license revenue on December 31, 2000 (Q3/01) an d $34,840,000 of license revenue on March 31, 2001 (Q4701) . Peregrine recorded an
#105632
-4610 8 APPENDIX E
additional $7, 100,000 in license revenue in Q3/02 and $4, 800,000 in license revenue in Q4 02, which was a portion of the same license revenue that had been previously recorded under th e March 2001 transaction . In total, Peregrine recognized $11,900,000 in license revenue to IB M during Q3 02 and Q4 02 . Since IBM had not yet fulfilled its entire obligation related to th e previous transaction this revenue was, in effect, a portion of the same license revenue that ha d been previously recorded under the March 2001 transaction. In other words, Peregrine recorde d revenue at the time the arrangement was executed . IBM's $33,900,000 commitment and approximately half of the $44,000,000 commitmen t were satisfied ( i.e., burned) through resale to end users by January 2002 , more than one yea r ahead of schedule . However, the underlying end-user sales required Peregrine to have significan t involvement with the selling process, and to deliver the software to the end users . Peregrine negotiated with the end-users directly to determine the type and extent of software licenses to b e used. Peregrine then delivered the software product to the end user and sometimes provide d services to the end user to assure that the software was functioning properly . Peregrine has asserted that a "golden master" of all of their currently available products was delivered to IB M at the time Peregrine recorded license revenue . However, the practice of subsequently deliverin g software directly to the end user is inconsistent with the assertion that delivery occurred at th e time revenue was initially recorded . Peregrine's involvement with end user sales, service, an d delivery supports recognizing revenue on a sell-through basis versus a sell-in basis, assuming al l other revenue recognition criteria have been met .
The CSA and the SOW to the CSA were dated by IBM on January 25, 2001, the qua rter
after revenue was recorded . Since the CSA and SOW to the CSA are components of the overal l
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APPENDIX E
arrangement , it was inappropriate to record revenue prior to obtainin g
IBM's signature and therefore inappropriate to sell the IBM receivable to a bank in the thir d
quarter of fiscal year 2001 . Peregrine's Cappel, who supervised accounts receivable sales, noted : in December when we sold the IBM receivable to Fleet, we agreed to provide the associated Customer Solutions Agreement (which at the time had not been signed) within 15 days . As you may know, this agreement is still not signed, and we are technically required to repurchase this receivable . Peregrine maintained schedules to track the IBM burn . Peregrine recorded $11,900,000 of additional license revenue in Q3/02 and Q4/02, evidenced by Schedule Ps, before the IB M commitment was satisfied . Peregrine recorded revenue at the time the arrangement was execute d and when the software was subsequently burned . Separately, Peregrine also recorded transactions as revenue that would otherwise have been considered usage against IBM' s commitment . This was done to manage earnings and/or to meet sales quotas . In a September 10 , 2001 e-mail, Ryall states : but biggest challenge is managing the `burn' vs `new' issue . Last quarter [the one ending June 30, 20011 we tool [sic] some deals direct in EMEA and NA to make sure we were solid for the quarter (I was party to it as well in spite of my role), but we will have a hard time developing a real alliance with these guys if we keep doing it. Peregrine's practice of discretionally recording certain transactions as direct was inappropriate . With respect to crediting payments against the initial $33,900,000 purchas e commitment, the Participation Agreement provides that "any and all net license payments mad e to [Peregrine] for Program Products resold to Customers or used internally by Tivoli and it s
Affiliates and all amounts associated with referrals pursuant to section 4 shall be credited agains t
#105632
-4811 0 APPENDIX E
the $33 .9 million commitment ." Additionally, under the March 2001 SOW, Peregrine and IB M were to jointly track product deployment, and Peregrine was to generate an invoice immediatel y upon deployment of a Peregrine product or maintenance service . If, on the respective paymen t dates, IBM did not have invoices from Peregrine to meet its payment obligations, it was require d to pay the difference and Peregrine would give IBM a product credit to be applied towar d Peregrine's currently commercially available product, including future versions and releases an d products with similar functionality. Additionally, Peregrine recorded a $10,000,000 wire transfer from IBM in Marc h 2001 even though the wire date on the Bank of American Bamtrac Report was April 2 , 2001 . Per an e-mail dated April 6, 2001 from Michael Parker (Business Development Finance a t Tivoli) to defendant Cappel, the wire was initiated on March 30, 2001 . An e-mail dated April 8, 2001 from Cappel to Bush (a Cash Analyst) includes Parker' s e-mail an d states :
Hi Jeff:
The below is documentation on the wire received from IBM . Would you please put this along with the wire audit info I'm putting on your chair into your binder as support for the posting into March . The IBM contracts described above were not accounted for properly . The contract s include several provisions that impact the recognition of revenue including, for example, enduser services or discounts off future purchases . Thus, Peregrine's revenue recognition wa s inappropriate . Nonetheless, defendant Powanda alone reaped $290,357 in commissions from th e deal .
#105632
-4911 1
APPENDIX E
P.
CI Software Solution s
Peregrine entered into several transactions with Cl Software Solutions (Europe) Limite d ("Cl Software"), an English company . The transactions included : (1) a total of $8,000,000 i n licenses and mainten ance ; (2) an equity investment by Peregrine in CI Software ; (3) the sale of Peregrine's Templar software to Cl Software for $3,500,000 ; and (4) the commitment by Peregrine to sell $6,500,000 of Cl Software's Kryptomax software . In the fourth quarter of fiscal year 2000, Peregrine made a deal with CI Software for th e license of AssetCenter for 1,000,000 . The end- user was identified as a company called CSC . Paperwork for the transaction called for payments to be made on June 30, 2000 , September 30, 2000, December 31, 2000, and March 31, 2000 . However, as of March 31, 200 1 no cash had been collected by Peregrine. In a letter dated April 18, 2001, defendant Nelson wrote to Sean Scully of Cl Software (with copies to defendants Gardner and Spitzer) to discuss this problem . Nelson acknowlledged in the letter that he and others knew from the beginning tha t a deal with CSC had not been completed when Peregrine and Cl Software entered into th e transaction . Nelson wrote: "The original Reseller Agreement between the companies was put i n place largely because we were led to believe that CI would be successful in winning CSC as a Peregrine Systems customer for asset management, which has yet to happen ." At the time of the March 2000 transaction , CI Software had been operating for less tha n one year. Thus, Nelson had clear evidence that CI Software lacked the ability to pay Peregrin e absent resale to CSC . Collection of payment must be probable at the time of revenue recognitio n and cannot be contingent upon payment from the end-user . Nonetheless, Peregrine recorde d $1,300,000 in license revenue in the fourth quarter of fiscal year 2000, which Nelson knew was
#105632
-5011 2 APPENDIX E
improper . In the first quarter of fiscal year 2001, Peregrine entered into a deal with Cl Software for the license of the Get .It! suite of products for 2,000,000 payable within 30 days . However, th e written agreement for the deal requires that Cl Software pay only the difference betwee n 2,000,000 and the amount received from the sell-through of licensed products at the end of one year. The following quarter, Peregrine entered into a deal with Cl Software for the license o f Get .Resources! and Get .Services! for $3,500,000 payable in 30 days . Also in the second quarte r of fiscal year 2001, Peregrine and Cl Software entered into an asset purchase agreement throug h which Cl Software bought Peregrine's Templar Software in exchange for a $3,500,000 secure d note. In addition, Peregrine entered into a distribution agreement with CI Software for th e license of Cis Kryptomax software to distribute $6,500,000 of the product . The fact that Peregrine improperly recognized revenue from this transaction is furthe r supported by e-mail messages exchanged between defendants Powanda and Gless in Septembe r 2000 . An employee in Europe asked Powanda about the invoicing of Cl Software . Powanda responded in an e-mail dated September 15, 2000, with a copy sent to defendant Gless, in whic h
he stated :
Matt Gless will provide the direction here . We should be writing off $$ due against our purchase of security software from CI . Matt, to you . . . . Gless responded on September 17, 2000 by writing :
"Write-off' is not the proper term. To the extent Powanda is successful in current deal negotiations, the company will re-class the current receivable into the other assets category as we wil l
#105632
-5111 3 APPENDIX E
receive an asset (inventory) in lieu of the receivable (treated as a barter transaction) . Will discuss further upon completion of the deal . Peregrine recognized $1,450,000 in license revenue in the first quarter of fiscal year 200 0 and $3,000,000 in license revenue in the second quarter of fiscal year 2000 . However, much o r all of this revenue was improperly recorded . The first quarter and second quarter of fiscal yea r 2000 deals and the license of CI's Kryptomax software were reciprocal transactions, as evidenced by: (1) the proximity of the execution of the agreements ; (2) the lack of any cash exchanged o r collected ; (3) the lack of use of the Kryptomax software by Peregrine as confirmed during the course of the investigation; and (4) Cl Software' s perspective that the contractual commitment s were reciprocal transactions . Since software exchanged and held for resale by both parties to th e tran saction is software exchanged in a similar line of business , GAAP requires that revenue b e recorded at Peregrine ' s historical cost , which is zero . The reciprocal nature bf the deal is fu rther evidenced by an e-mail from Mark Webb of C I Software to defendant Nelson dated April 11, 2001 . Attached to the e-mail was a documen t titled "Cl Solutions Contractual Commitments and reciprocal obligations," which stated : As part of an M&A contract between CI Solutions and Peregrine systems. [sic] Certain commitments and obligations were entered into by both parties for the reciprocal sales of products . These are defined within the contracts entered into by both parties and form the basis of this document . CI obligations to Peregrine systems [sic] : $6 Million of Peregrine Software product s
To pay annually $1 .3 Million, for the purchase of the Templar product, for 3 years, a total owing of $3 .9 Million, first payment falling due in September 2001 .
#105632
-5211 4 APPENDIX E
Peregrine Systems obligations to CI .
Kryptomax purchases of $6 .5 Million over 3 years.

Current Take [sic] up of Commitments : Peregrine to Cl: Nil Current negotiations between Sean Scully and Peregrine are in progress . . . . (Emphasis added .) Further, since CI Software only started operations in June 1999, it was highly unlikely that the company had the financial ability to pay Peregrine absent reselling the software . Nelson knew this when the June 2000 and September 2000 deals were made . Cl Software's lack of financial wherewithal is demonstrated in a February 20, 2002 e-mail from a representative of a UK law firm to Eric Deller of Peregrine . It indicated that Cl Software was in the process o f being liquidated. In the fourth quarter If fiscal year 2001, Gless and Nelson caused Peregrine to improperly write off $3,997,000 of its outstanding Cl accounts receivable balance as a component of the "acquisition costs and other" line item on its income statement.
#105632
-5311 5 APPENDIX E
Q.
Hyperio n
In September 2000 , Peregrine granted Hyperion a license to resell ServiceCenter, AssetCenter , Infratools , an d Get-It suites for $3,220, 000 . According to the Schedule A, payment was due in 90 days . This transaction is an example of where Peregrine "parked" software with a reseller until the real deal (i .e., Peregrine ' s deal directly with the end-user) could be completed . Peregrine recognized $ 2,800,000 in revenue from this transaction in September 2000 . However, Peregrine never enforced payment by Hyperion . To the contrary, Peregrine never intended to collect any money from Hyperion . A handwritten note on an invoice for the deal states, "Per Doug Powanda - this is being credited later . Hyperion is a reseller. We will rebill end-user ." Indeed, on March 13, 2001, Peregrine issued a credit invoice for the entire amount of the September 2000 deal . Defendants Gardner and Gless were also aware that revenue was being prematurely recognized for this transaction . A November 20, 2000 e-mail message from defendant Gless t o defendant Gardner notes that "we all recognize current period effects associated with prior quarter activities ." The Hyperion deal was one of those listed by Gless as falling into thi s category .
#105632
-5411 6
APPENDIX E

1 2 3 4 5 6 7 8 9
0
CERTIFICATE OF SERVIC E
I, KimLane E . Gantan, hereby declare under penalty of perjury as follows : I am employed by Gold Bennett Cera & Sidener LLP, 595 Market Street, Suite 2300, S an Francisco , California, 94105-2835 . I am over the age of eighteen years and am not a pa rty to thi s
action .
On April 5, 2004, I served a copy of the aforementioned "FIRST AMENDED CONSOLIDATED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS" on all parties listed on the attached Exhibit I, by causing true and correct copies of same
10 to be enclosed in sealed envelopes and deposited in the U .S. Mail, postage prepaid, and by same 11 12 13 14 KimLane E . Gantan 15 16 17 18 19 20 21 22 23 24 25 26 27 28 day facsimile. Executed on April 5, 2004, at San Francisco, California .
102201 CERTIFICATE OF SERVICE - Case No . 02-CV-0870 J(RBB)
EXHIBIT I
Counsel for Plaintiff Heywood Waaa Counsel for Plaintiff Heywood Wag a Jeffrey B. Abraham, Esq . Lawrence D . Levit, Esq . Abraham & Associates Jules Brody, Esq . Howard T. Longman, Esq . Patrick Slyne, Esq .
One Penn Plaza, Suite 1910 New York, NY 10119-0165 Tel: (212) 714-2444
Fax : (212) 279-3655 Counsel for Plaintiff Heywood Wag Michael D. Braun, Esq . Marc L . Godino, Esq . Stull Stull & Brody 10940 Wilshire Blvd ., Suite 2300 Los Angeles, CA 90024 Tel : (310) 209-2468 Fax : (310) 209-208 7
Stull Stull & Brody 6 East 45th Street New York, NY 1001 7
Tel : (212) 687-723 0
Fax : (212) 490-2022
10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28
Counsel for Defendants Arthur Andersen Counsel for Defendants Arthur Andersen LL P
LLP
Douglas M . Butz, Esq . Kevin V . DeSantis, Esq . Butz Dunn DeSantis & Bingham
Marshall B. Grossman, Esq.

C. Stephen Howard, Esq . T. Scott Vick, Esq . Daniel Fiore, Esq . Alschuler Grossman Stein & Kahan, LL P
101 West Broadway, Suite 1700

San Diego, CA 92101 Tel : (619) 233-4777 Fax : (619) 231-0341
The Water Garden

1620 26`h Street, Fourth Floor North Tower Santa Monica, CA 90404-4060 Tel: (310) 907-100 0 Fax: (310) 907-200 0
Counsel for Defendant Christopher A . Cole Counsel for Defendant Douglas S . Powanda Leighton M. Anderson, Esq . David A . Brady, Esq. Bewley Lassleben & Mille, LLP 13215 East Penn Street, Suite 510 Whittier, CA 90602-1797 Robert H. Logan, Esq . Jeff Feasby, Esq . Keesal Young & Logan 400 Oceangate P.O. Box 173 0 Long Beach, CA 90801-1730 Tel : (562) 436-200 0 Fax: (562) 436-741 6
Tel : (562) 698-9771 Fax: (562) 696-6357
102201 CERTIFICATE OF SERVICE - Case No . 02- CV-0870 J(RBB)
Counsel for Defendant Daniel F . Stula c Michael A . Attanasio, Esq . Cooley Godward LLP 4401 Eastgate Mall San Diego, CA 92121 Tel : (858) 550-600 0
Counsel for Defendant Steve Gardner
2 Daniel J . Bergeson, Esq . 3 Caroline McIntyre, Esq . Bergeson, LL P
4 303 Almaden Blvd ., Suite 500 San Jose, CA 95110-271 2

5 Tel: (408) 291-6200 Fax: (408) 297-600 0 6 Counsel for Defendant use Cappel
Counsel for Defendant John J . Moores VIA FEDEx John B . Quinn, Esq. Harry A . Olivar, Jr ., Esq . Quinn Em anuel Urquhart Oliver & Hedges, LL P 865 South Figueroa Street , 10th Floor Los Angeles, CA 9001 7 Tel : (213) 624-7707 Fax : (213) 624-064 3 Counsel for Defendant William D . Savo Cyrus R . Vance, Jr ., Esq . Robert P . Stewart, Esq. McNaul Ebel Nawrot Helgren & Vance, LLC 600 University Street, Suite 270 0 Seattle, WA 98101-3143 Tel : (206) 467-1816 Fax : (206) 624-512 8 Counsel for Defendant Charles E . Noell . Norris van den Ber n Brian E . Pastuszenski, Esq . Kenneth 1 . Weissman, Esq . Testa Hurwitz & Thibeault, LLP 125 High Street High Street Tower Boston , MA 02110 Tel : (617) 248-7253 Fax : (617) 790-021 7
7 Michael L. Lipman, Esq . Barbara Howe Murray, Esq . 8 Coughlan Semmer & Lipman, LLP 501 West Broadway, Suite 400 9 San Diego, CA 92101 Tel : (619) 232-0800 10 Fax: (619) 232-0107 11 12 Counsel for Defendant John J . Moores 13 Walter B . Stuart, Esq . 14 Jeffrey S . Johnston, Esq . Vinson & Elkins, LLP 15 2300 First City Tower 1001 Fanni n 16 Houston, TX 77002-6760 Tel : (713) 758-219 8 17 Fax: (713) 615-592 0 18 Counsel for Defendant William Savoy
19 George J . Berger, Esq . Yvonne M. Dutton, Esq . 20 Allen Matkins Leck Gamble & Mallory, LLP 501 West Broadway, 9'' Floo r 21 San Diego, CA 92101 Tel : (619) 233-1155 22 Fax : (619) 233-1158 23 24 25 26 27 28
Counsel for Defendant Richard T . Nelson Robert S . Brewer, Jr., Esq . Jim McNeill, Esq . McKenna Long & Aldridge, LLP Symphony Tower s 750 B Street, Suite 3300 San Diego, CA 92101 Tel : (619) 595-5400 Fax : (619) 595-545 0
2 3 4 5 6 7
Counsel for Defendant Charles E . Noell,III and Norris van den Berg Jane Hahn, Esq. Alison P . Adema, Esq . Hahn & Adem a 501 W. Broadway, Suite 1730 San Diego, CA 9210 1
Tel: (619) 235-2100 Fax: (619) 235-2101
Counsel for Defendant Richard A. Hosley I Counsel for Defendant Richard A . Hoslev l I Gerard G . Pecht, Esq . Fulbright & Jaworski, LLP 1301 McKinney, Suite 5100 Houston, TX 77010-3095 Tel : (713) 651-515 1 Fax: 713) 651-5246 Counsel for Defendant Richard A . Hosley I I Michael A . Swartzendruber, Esq . Fulbright & Jaworski, LLP 2200 Ross Avenue, Suite 2800 Dallas, TX 7520 1 Tel : (214) 855-8000 Fax : (214) 855-820 0
Counsel for Defendant Fredrick B . Ludd y
9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27
Peter H. Mason, Esq . Fulbright & Jaworski, LL P 865 South Figueroa Street, Suite 2900 Los Angeles, CA 9001 7 Tel : (213) 892-9200 Fax : (213) 680-451 8 Counsel for Defendant Steve S . Spitzer James P. Maniscalco, Esq . Dan Marmalefsky, Esq . Morrison & Foreste r 555 West Fifth Street, Suite 3500 Los Angeles, CA 90013-1024 Tel : (213) 892-521 7 Fax: (213) 892-5454 Counsel for Defendant Thomas Watrou s Wayne T . Lamprey, Esq . Anne H. Hartm an, Esq . Goodin MacBride Squeri Ritchie & Day, LL P 505 Sansome S tr eet, Suite 900 San Francisco , CA 9411 1 Tel: (415) 392-7900 Fax : (415) 398-4321
Christopher H . McGrath, Esq .

Paul Hastings Janofsky & Walker, LLP 3579 Valley Centre Driv e San Diego, CA 92130 Tel : (858) 720-2500 Fax : (858) 720-255 5 Counsel for Defendant Matthew C . Gless Thomas L . Vance, Esq . Vance Blair & Grad y 1201 Camino Del Mar, Suite 205 Del Mar, CA 9201 4 Tel: (858) 793-0049 Fax: (858) 793-165 5 Counsel for Defendant AWSC Societe Cooperative, En Liquidatio n Robert S . Gerber, Esq.
Sheppard Mullin Richter & Hampton, LLP 12544 High Bluff Drive, Suite 30 0
San Diego, CA 92130-3051 Tel : (858) 720-890 0 Fax : (858) 509-369 1
28
I 2
Counsel for Defendant AWSC Societe Cooperative, En Liquidatio n
3 Martha H . Sottosanti, Esq . Sheppard Mullin Richter & Hampton, LLP 4 501 West Broadway, 19`h Floo r San Diego, CA 92101-3598 5 Tel : (619) 338-650 0
Fax: (619) 234-3815 6

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

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0

The individually named defendants (other than defendants Rodda, Hosley, an d

8 1 Vice President of Finance and Chief Accounting Officer .

0 1 second quarter of fiscal 2001 .

19 1 reports which would be disseminated to the investing public .

financial results , CIBC gave Peregrine's stock a "buy" rating .

28 reasons set forth above.

1 THERE IS NO STATUTORY SAFE HARBO R

APPLICABLE TO THE ALLEGATIONS OF THIS COMPLAINT 2

Plaintiffs incorporate by reference Paragraphs 1 through 656, as though fully set

Master File No . 02-CV-0870 J(RBB) 215

8 of the Exchange Act and Rule I Ob- 5 promulgated thereunder.

661 . In addition to the duties of full disclosure imposed on defend an ts as a result o f

28 1 materially misleading statements as alleged herein ;

financial results ; and

false and misleading .

#105317 Master File No . 02-CV-0870 J(RBB) 219

20 acquisition of shares of Peregrine.

26 a problem existed at Peregrine . 27

Peregrine's acquisition of Remedy .

significant portion of our total license revenues . . .

2 I statements made misleading . These defendants failed to do so. 3 4

therein not misleading.

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

Services 6 Total revenues

$ 210, 073 $ 564,683

As Contained in Registration Statement As Restate d (in $000) (in $000)

Dated : April 3, 2004 GOLD BENNETT CERA & SIDENER LL P

ABRAHAM & ASSOCIATES By_ Ce,J t Lawrence D. Levi

TABLE OF CONTENTS FOR APPENDICES

2083 APR 16 FM 12~ 5 5

Assistant U.S . Attorney California State Bar No .131812 SANJAY BHANDARI

United States of America -

UNTIED STATES DISTRICT COURT

SOUTHERN DISTRICT OF CALIFORNIA

UNITED STATES OF AMERICA, ) Criminal Case No . 03crl090W

P ~ AGREEMENT MATTHEW C. GLESS, )

employed a device, scheme or a rtifice to defraud;

03~1A117C Vf~W}I IN,J{~~

b. made an untxve statement of a material fact or omitted to state a materia l

1 . Pereg rine Systems , Inc. CTereg ne ") is a computer software compan y

headquartered in San Diego, California. Peregrine was incorporated in California in 1981 an d

or "chael" sales) became a critical component of Peregrine' s revenue.

(a) recognizing and maintaining as revenue, and causing to - be

tr ansactions that could not berecognized as revenue under GA .AP

and those that may never be completed ;

creating and causing to be created false records including false

2 contracts and invoices in order to continue , maintain , and conceal

14 4, 2002, Pereg rine claimed to recognize revenue in accordance with GAAP .

24 GLESS falsely represented that Peregrine 's "[r)evenues from

license agreements are recognized currently, provided that all of

26 the following conditions are met :

Peregrine 's "[r)evenues from direct and indireef license

ntnl 4 tIA V/111fi

oral, to its [Peregrine's] software revenue arrangements ."

provisions of SOP 97-2 and other authoritative literature "

ca1IANI-q Xfj I : r c(1fl '7 %VW

receivable balances without recourse ."

C . a mandatory special'assessment of 8100 (18 U .S .C. 3013);

C. a mandatory special assessment of $100 (18 U .S .C. 3013);

conviction, or the estate(s) of the victims(s)in an amount to be specified by th e

become ineligible for federal benefits .

DE1 DA rS w R of TEAL LUG$T ,