Sugar, spice; snips, snails; bubbles, dust?
Don Bauder
Uniontrib.com
June 7, 2002
If girls are made of sugar and spice and everything nice, and boys are made of snips and snails and puppy dogs' tails, then what are financial bubbles made of?
A handful of dust?
Increasingly, tragically, it looks that way.
And, my oh my, can insiders get rich on that handful of dust.
Just look at the cases of insiders who have amassed hundreds of millions of dollars by selling off stock in companies whose accounting is now being widely challenged: Kenneth Lay of Enron, Philip F. Anschutz of Qwest, Gary Winnick of Global Crossing, John Moores of San Diego's Peregrine – the list goes on and on.
The Securities and Exchange Commission is investigating accounting in a large number of bubbles that burst, including all of those listed above. Civil suits abound.
There have been criminal charges filed in some cases, particularly in software companies whose insiders were jettisoning shares for enormous profits while monkeying with the books.
The civil and criminal suits will hinge on a number of questions: Was the insider involved in or aware of the book-cooking while dumping shares? Can the insider show convincingly that the selling was part of a long-term plan of share disposal? (That alibi is still not court-tested.) Was the insider acting more as a venture capitalist than corporate decision maker?
Was the company merely pushing the envelope, engaging in aggressive accounting, taking maximum advantage of loopholes in generally accepted accounting principles? Or did it cross the line? Or, even, was the company more like an accounting hoax? In short, how serious were the alleged violations?
The charges that accounting firm KPMG made this week against Peregrine Systems are extremely serious. KPMG says that, in its short tenure as Peregrine's auditor, it spotted "possible fraud" that might require the hiring of "forensic accounting experts."
The audit committee did not produce formal minutes of its meetings. The corporate secretary refused to allow KPMG to review manually prepared notes of board and audit committee meetings, according to KPMG.
There were substantial delays in providing – or an inability to provide – basic information such as trial balances and general ledgers, said KPMG.
The accounting firm said Peregrine management made misrepresentations of swap deals (by which two companies sell each other products at the same time to bloat sales and earnings statements of both).
Peregrine management made inconsistent statements about side agreements it had with customers. Often, software companies overstate their sales by giving ridiculously easy terms to potential buyers. The companies know they will never get paid in full, if at all, but they are anxious to record the revenue so they can match or beat Wall Street's quarterly earnings expectations. Juicing up the stock is more important than doing prudent business.
These were just a few of the alleged irregularities KPMG reported.
Now come the bigger questions. Beginning in the early 1990s, Moores, through his JMI Equity Fund and other entities, put substantial money into a number of initial public offerings of software stocks, as well as privately held software companies. IPOs were hot then. Many, such as Neon Systems, soared.
A study of financial filings indicates that some Moores-financed companies did business with other Moores-financed companies. For example, when Neon went public in 1999, it distributed software of Peregrine/Bridge Transfer, of which Moores was chairman and a major shareholder. On the Neon board were representatives of JMI, Peregrine, Peregrine/Bridge Transfer and Skunkware, a company in which Moores still has a big stake.
Such interlocking directorates and business interties may be perfectly innocent. But in light of recent software revelations, there is a big question: Were the companies doing actual business with each other? Or were there swap arrangements, side deals, vendor financing and other such tricks that produced inflated revenue but little substantial economic activity?
We don't know, but it's a certainty that attorneys and investigators will be trying to find out.
A spokeswoman for Peregrine Systems could not explain the relationships between the Moores-financed companies. Moores declined to comment.
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Don Bauder: (619) 293-1523; don.bauder@uniontrib.com |
