May 24, 2002
With federal investigators poring over its books, Peregrine Systems revealed yesterday that its accounting problems go back further than previously thought – back to a time when Padres owner John Moores helped lead the company.
Peregrine also said yesterday that the Securities and Exchange Commission has begun a "formal order of private investigation" into the company, which means the agency can subpoena testimony as well as banking and telephone records.
The San Diego business-software company said it would restate its earnings for nearly three years, not two. Peregrine had said earlier this month that it may have overstated its sales by as much as $100 million over the past two years.
That inquiry could involve Moores, whose 10-year term as Peregrine's chairman ended in July 2000. Peregrine's restatement period runs from April 1999 through December 2001, and includes 15 months of Moores' chairmanship.
Moores returned as chairman of the company this month, when Peregrine's auditor, KPMG, uncovered the accounting problems. Peregrine fired Andersen as its auditor in early April and brought in KPMG as a replacement.
Andersen has been fired by hundreds of companies since its involvement in the Enron accounting scandal came to light.
KPMG's discoveries led to the resignations of Stephen Gardner, 47, as chairman and chief executive officer, and Matthew Gless, 35, as chief financial officer.
Moores would not comment on yesterday's developments.
Moores made nearly $420 million selling Peregrine shares during the restatement period, according to the Nasdaq stock exchange. That's about 80 percent of the half-billion dollars he made on Peregrine stock since the company went public in 1997.
One month was especially profitable. Moores sold $203 million in Peregrine stock in February 2000, just before the Nasdaq stock market hit its peak in March.
Moores still holds about 1.1 million Peregrine shares.
Peregrine said it intends to cooperate with the SEC investigation, but would not say when it would release its restated earnings.
The company also said it is looking at ways to cut costs, including employee layoffs, and will explore "financing alternatives." Peregrine would not say whether the layoffs would be in San Diego, where the company employs 800 workers.
Peregrine cut 450 jobs in February and 730 last year, and plans to sell a supply-chain unit that employs 550 people. Peregrine employs 3,450 people worldwide.
Despite yesterday's news, Peregrine shares closed up 6 cents at $1.59. Shares were as high as $8 in the past month, before a series of announcements cut deeply into investor confidence.
The company said yesterday it would restate results for its 2000 and 2001 fiscal years and the first three quarters of fiscal year 2002. During that period the company reported $1.3 billion in revenue.
Analysts said it is too early to identify the source of Peregrine's problems.
"Investors are going to have to make up their own minds about who's responsible," said U.S. Bancorp Piper Jaffray analyst Timothy Klein, who rates the stock "market perform" and doesn't own it.
Some investors have already decided, and have filed dozens of class-action securities fraud lawsuits against the company and its executives.
One San Diego law firm expanded its lawsuit yesterday to represent shareholders who bought Peregrine shares throughout the restatement period. The firm, Finkelstein & Krinsk, received three dozen calls from outraged investors yesterday after Peregrine's announcement, according to attorney Jeffrey Krinsk.
Many shareholders were initially skeptical about the class-action lawsuits and were waiting for Peregrine's stock price to bounce back, Krinsk said. When that didn't happen, and bad news was followed by still more bad news, an "extensive amount of shareholder disenchantment" occurred, he said.
The SEC may have already been investigating Peregrine. The agency brought charges earlier this year against Critical Path, a Bay Area software company with ties to Peregrine.
Critical Path's president, David Thatcher of Rancho Santa Fe, pleaded guilty to committing securities fraud, and described a September 2000 deal in which the two companies exchanged software and recorded the transaction as a cash sale.
When asked in February why Peregrine was not charged for its role in the software swap, an SEC director said the agency's investigation was continuing.
Restatements of earnings are becoming more common, particularly in the software industry, as companies face increased scrutiny from investors and regulators.
Video-game maker Take-Two Interactive Software recently restated almost two years of financial results and said it is under investigation by the SEC.
Other industries are not immune from restatements, either.
Retailer Restoration Hardware recently said it would restate earnings for 2000 and the first three quarters of 2001. The move came after the SEC reviewed how the company booked its furniture sales.
Xerox Corp. said it will pay a $10 million fine and restate earnings from 1997 through 2000 after the SEC filed a civil fraud suit against the office equipment maker.
"It's more common in the last few months than I've seen in many years," said Ginny Grace, an accounting professor at San Jose State University.
Grace said the increased restatements are probably due in part to the way the Enron scandal heightened concerns over accounting. Software and other tech firms have been using "aggressive" accounting measures that could not continue in a depressed economy, she said.
"Had the economy not turned on firms, the aggressiveness of their accounting probably would not have caught up with them and things might have evened out over time," she said. "Now there's really no room to hide."
Bloomberg News contributed to this report.
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