Monday, March 23, 2009
Court of Appeal Rejects Shareholders’ Suit Over Fraud at Peregrine Systems
By KENNETH OFGANG, Staff Writer
Former shareholders in Peregrine Systems, Inc. lack sufficient evidence to go to trial on their claims that the majority shareholder and two other directors knew about the massive accounting fraud that preceded the software maker’s bankruptcy filing, the Fourth District Court of Appeal ruled Friday.
The ruling came in one of the last shareholder suits arising from the collapse of Peregrine in 2002. John Moores was chairman of the board and owned or controlled a majority of the company’s shares when it went public in 1997.
By the time the accounting problems became public in 2002, Moores—who was the driving force behind the construction of Petco Park and recently announced the sale of his controlling interest in the San Diego Padres baseball team—had sold more than $600 million worth of the company’s stock.
The company went through Chapter 11 following discovery of irregularities that sent several of its executives, including a former chief executive officer and a former chief financial officer, to prison. It emerged from Chapter 11 in 2003 and was sold to Hewlett-Packard in 2005 for $425 million.
Moores was never charged with a crime and has consistently claimed that he was duped by the crooked executives. But he and others became the targets of dozens of suits by shareholders who claimed to have lost money because of the fraud.
Friday’s ruling came in an appeal by Houston, Texas businessman Robert Reese Bains III and others. Bains said he lost $6.5 million on his investment in Peregrine.
San Diego Superior Court Judge Jeffrey Barton granted summary judgment to Moores and fellow directors Charles E. Noell III and Christopher A. Cole in December 2007, while allowing the case to proceed against defendants involved in day-to-day company operations.
The directors, he explained, “have met their burden of proof to show they had no actual knowledge of the financial fraud committed by the employees and officers of Peregrine,” while the plaintiffs “failed to raise a material fact that defendants, as outside directors, should be held liable for fraud.”
The defendants, Barton noted, presented direct evidence that they did not know about the fraud committed by Peregrine employees at the time they signed the various financial statements. Defendants also presented evidence that they had relied on the recommendations of Peregrine’s in-house counsel, outside counsel, and outside accounting firm, in signing those statements.
Justice Cynthia Aaron, in Friday’s opinion for Div. One of the Court of Appeal, rejected the plaintiffs’ claims that knowledge of the fraud could be inferred from the defendants’ sales of stock, among other things.
Aaron acknowledged that stock sales by a corporate insider may constitute evidence of scienter for purposes of establishing a claim of securities fraud. But the plaintiffs must identify the specific sales they claim are suspicious enough to raise an inference the defendants knew the company’s financial information was false, Aaron said.
Sales Outside Period
The justice noted that Moores sold over 18 million shares between October 1997 and February 2001, and that nearly two-thirds of those shares were sold outside the period in which he allegedly knew of the accounting fraud. She distinguished cases in which federal courts have held that suspicious sales created an inference of scienter.
“Unlike the stock sales in the cases on which plaintiffs principally rely...in which the defendants sold shares at ‘sensitive times’...after having acquired discrete pieces of nonpublic information that were likely to be material to their company’s share price...plaintiffs in this case have demonstrated, at most, that Moores and the other defendants were provided with some negative information about Peregrine’s economic prospects over a period of nine months...prior to the allegedly suspicious sales.”
Mere statements, by the company’s auditor and chief executive order, expressing concern about some of the company’s accounting practices did not constitute evidence that the defendants knew about the fraud that was yet to become public, Aaron said.
With respect to Noell, the justice said, any inference of scienter is weakened by evidence that less than 30 percent of the shares he sold occurred before the fraud became public, that he sold similar amounts of stock in each of the prior three years, and that he sold additional shares after the fraud was disclosed.
As for Cole, she noted, only 23 percent of his sales incurred during the period in which he is alleged to have had nonpublic information about the problems, and he retained more than 1 million shares, a fact that “greatly weakens any inference of scienter.”
The case is Bains v. Moores, 09 S.O.S. 1706.
Copyright 2009, Metropolitan News Company