After two hung-jury trials, a federal judge has dropped the criminal charges against a former Arthur Andersen accountant and an accounting manager who worked on Peregrine Systems’ financial statements while fraud was going on at the software company.
On Tuesday, U.S. District Judge Thomas Whelan dismissed six counts of conspiracy, securities fraud, and wire fraud charges against Daniel Stulac, the ex-Andersen partner, and Patrick Towle, Peregrine’s one-time revenue accounting manager. They, along with former Peregrine CFO Matt Gless and former CEO Stephen Gardner, were accused of participating in the company’s accounting scandal earlier this decade. Gless and Gardner have pleaded guilty to criminal charges.
Peregrine’s fraud was brought to light in 2003 after the company restated its financial results for 11 previous quarters, reducing its reported revenue of $1.34 billion by more than $507 million. It was later sold to Hewlett-Packard.
U.S. prosecutors accused Peregrine’s executives and Stulac, who headed Andersen’s audit team for Peregrine, of improperly recording revenue, concealing overdue and uncollectible receivables from investors, and using “various accounting tricks” to fluff up financial results on a quarterly basis.
During the two trials, Stulac’s and Towle’s attorneys argued that their clients were not aware of the fraud inherent in Peregrine’s regulatory filings for fiscal year 2000 through the third quarter of its 2002 fiscal year. “Mr. Towle should never have been charged,” his attorney, Kathryn Thickstun, told CFO.com. “I think he was charged because of the title he held — revenue accounting manager — without regard for what he did on a day-to-day basis.”
Moreover, Thickstun said, Towle did not benefit financially from the tight-knit conspiracy at Peregrine to inflate sales figures and its stock value. Stulac’s attorney, Mike Attanasio, a partner at Cooley Godward Kronish, used the same argument in court and says that the people involved in the fraud lied to his client to hide it. “There was clearly a conspiracy at Peregrine, there was clearly substantial financial fraud,” he told CFO.com. “Our defense was our client did not know about it and did not become involved in it.”
Attanasio acknowledged that convincing the jurors of Stulac’s innocence wasn’t easy, even though the majority of both juries voted for his acquittal. “Several jurors had the impression that because my client was a CPA and because he worked for a large accounting firm at the time and he was well-educated, he should have known or must have known of the fraud given his role as an outside auditor,” Attanasio says. “It was tremendously difficult to dispel that notion in the jury selection and throughout the trial.”
Stulac and Towle were initially tried last year alongside five other defendants, including former Peregrine sales executives and attorneys, but the government’s case faltered when the jury returned a split verdict after two weeks of deliberations.
The second trial for just Stulac and Towle began in late January. After the second jury returned after a week with the same results, Whelan declared a mistrial and subsequently dismissed all the charges several days later.