>>"I notice that one of your directors, an awfully astute seller, sold half a million shares between February 5th and February 14th," said an analyst, in a tone that dripped with sarcasm.
"Is he still involved? Ever ask him why he sold such a large position?" continued the analyst.
The question came up at yesterday's Peregrine Systems conference call, during which the company revealed that it is investigating the accounting for at least $100 million in sales. It also said the chief executive and chief financial officers had quit.
Dubious transactions may have been recorded during fiscal 2001 and 2002 and may impact results of 2002 and before, said the company, which has informed the Securities and Exchange Commission.
Management replied to the analyst by saying that Christopher A. Cole, Peregrine's founder, is still on the board and still owns a substantial amount of stock (although officers didn't know how much).
"A smart guy," growled the analyst.
Peregrine stock plummeted 65 percent to 89 cents yesterday. Its split-adjusted high was $79.50 in March of 2000, just as the tech bubble began bursting.
The analyst's question went right to the heart of how investors typically react to bad corporate news – particularly related to accounting – when there has been heavy insider selling.
Investors shoot first and look for a smoking gun later.
Cole founded the company in 1981 and paid a "nominal" amount for his shares, according to the prospectus for the company's initial public offering in early 1997.
Trading records show he sold 500,000 shares at prices between $6.53 and $7.62 between Feb. 5 and 14 of this year, raking in proceeds of $3.54 million. Yesterday he did not respond to a message seeking comment, but earlier had said he sold the stock to start other companies.
By the time of the IPO in 1997, Cole had 4.1 percent of the company's stock. John Moores, majority owner of the Padres, had 62.8 percent, at 9.55 million shares, after the offering.
The stock subsequently split 2 for 1 twice. That reduced Moores' original purchase price to a range of 33 cents to 59 cents a share.
According to Nasdaq records, Moores has sold more than $500 million worth of Peregrine stock since 1997. That includes stock held by family members and Moores-controlled entities.
His most astute sale was in March 2000, when he brought in $92.7 million.
Still holding 1.27 million shares, Moores became chairman again yesterday. He has been a member of Peregrine's board since 1989 and was chairman between 1990 and 2000.
Moores recruited two of his associates to Peregrine: Fred Gerson, current chief financial officer of the Padres, assumed the acting CFO position. Former Acting U.S. Attorney Charles La Bella, who assisted Moores when he was being investigated and later cleared in the gift-giving episode with former City Councilwoman Valerie Stallings, came in as executive vice president and senior counsel.
Moores did not return a phone call yesterday. Peregrine failed to give any information.
Long before yesterday, there were questions about Peregrine's accounting. One reason was that, in early February, David A. Thatcher of Rancho Santa Fe, a former Peregrine executive, was charged both civilly and criminally with securities fraud for allegedly manipulating a company's books.
I reported then that Thatcher's company, San Francisco-based Critical Path, had entered into a swap transaction for $3 million with Peregrine. (In a swap, companies trade assets to bolster each other's sales.)
The two companies had disguised the true nature of the transaction, according to the government. I asked Lawrence A. West, assistant director of the SEC in Washington, why Peregrine had not been charged. He said the investigation was continuing. Yesterday, he had no comment.
On Feb. 12, in a plea agreement, Thatcher admitted, "At the end of 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 about the software swap. By structuring the software swap as two independent transactions, I realized that I and others working on the deal were consciously avoiding disclosure of the true nature of the transaction."
The CEO during that transaction was Steve Gardner, whose resignation was reported yesterday.
Peregrine stock initially dropped on the news in early February, but recovered. In March, it said it would jettison some of its many acquisitions. Then last Wednesday, the stock plunged 50 percent after the company delayed release of fourth-quarter results.
Then came yesterday's announcements. Next will certainly come civil suits. Tort lawyers zero in on insider selling in combination with other transgressions, such as overbold earnings projections or accounting irregularities.<<
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