Employment Law Attorneys

SEC Charges Former Peregrine Systems Sales VP with Financial Fraud, Insider Trading2 min read

On June 16, the Commission filed civil fraud charges against Steven S.
Spitzer for his role in an 11-quarter financial fraud at Peregrine
Systems, Inc., a San Diego-based software company. The Commission’s
complaint alleges that Spitzer, a former vice president of sales,
participated in a scheme with other senior Peregrine executives and
other parties to inflate Peregrine’s revenue and stock price. The
complaint also alleges that Spitzer engaged in illegal insider trading
of Peregrine stock.
According to the complaint, the heart of the fraud was the recording of
millions of dollars of revenue in violation of Generally Accepted
Accounting Principles (GAAP). Spitzer negotiated some of the largest of
Peregrine’s fraudulent transactions at the urging of more senior
executives. These transactions consisted of non-binding sales of
software licenses to resellers (or purported resellers) with the
understanding that the resellers owed nothing to Peregrine unless the
software was sold to an end-user. Those involved in the scheme called
this “parking” the transaction. Spitzer knew, or was reckless in not
knowing, that parking transactions were intended to, and did,
fraudulently inflate Peregrine’s revenue. Spitzer generated millions of
dollars of bogus revenue through these parking transactions, enabling
Peregrine to meet quarterly revenue goals.
The complaint further alleges that Spitzer, during the time he was aware
of the ongoing fraud, illegally sold 185,000 shares of Peregrine common
stock for proceeds of approximately $5.2 million on the basis of
material, nonpublic information concerning Peregrine’s true financial
condition.
The Commission’s complaint seeks to permanently enjoin Spitzer from
violating certain antifraud provisions of the federal securities laws
(Section 17(a) of the Securities Act of 1933, Section 10(b) of the
Securities Exchange Act of 1934 (Exchange Act) and Exchange Act Rule 10b-
5), and from violating, or aiding and abetting violations of, certain
reporting, books and records, and internal controls provisions (Exchange
Act Sections 13(a), 13(b)(5), 13(b)(2)(A), 13(b)(2)(B), and Exchange Act
Rules 12b-20, 13a-1, 13a-13, and 13b2-1). The complaint also seeks an
accounting, disgorgement of ill-gotten gains, prejudgment interest,
civil money penalties, and an order prohibiting Spitzer from acting as
an officer or director of any reporting company.
The Commission’s investigation of the financial fraud at Peregrine is
continuing. [SEC v. Steven S. Spitzer, Civil Action No. 03 CV 1178 IEG,
NLS, SDCA)] (LR-18191; AAE Rel. 1802)
SEC News Digest Issue 2003-115