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San Diego Software Maker Files Lawsuit Against Arthur Andersen

Seth Hettena

Peregrine accused Chicago-based Andersen and its worldwide parent company of negligence, fraud and breach of accounting duties and responsibilities.

The lawsuit, filed in San Diego Superior Court, claims Andersen's auditor not only failed to protect Peregrine from improper accounting practices but also "promoted, crafted and encouraged" their use.

The software maker claims Andersen "crafted defective policies on behalf of Peregrine relating to stock options and the 'sale' of receivables to financial institutions."

A multimillion dollar internal investigation found that Peregrine may have inflated revenues by as much as $250 million from April 1999 to the end of 2001 by, among other things, booking sales of accounts receivables as revenue. The U.S. Securities and Exchange Commission is investigating.

Patrick Dorton, an Andersen spokesman, called the lawsuit "ridiculous" and said blame lies with Peregrine's own board.

"First and foremost, this board should take responsibility for itself and its own management," Dorton said. "This is nothing more than a hysterical attempt by the board to scapegoat Andersen and distract from the failures of the board and their own hand-picked executives."

Andersen was convicted in June of obstruction of justice for shredding documents related to Enron audits and ended its role Aug. 31 as an auditor of public companies.

Peregrine retained Andersen from July 1996 through April and paid out $4 million for auditing, management and consulting fees.

Peregrine's disclosure of the accounting problems in May led the company on a downward spiral that culminated in its filing for Chapter 11 bankruptcy protection on Sunday. Peregrine listed assets of $1.7 billion and liabilities of more than $607 million in the filing in U.S. Bankruptcy Court in Delaware.

Peregrine's stock, which peaked at nearly $80 in 2000, has been removed from the Nasdaq Stock Market and now trades for only pennies. The company slashed its work force in half, by 1,400 jobs, and closed some offices in June.

To shore up a cash and credit crunch, Peregrine said it is selling its Remedy unit for $350 million to Houston-based BMC Software Inc. In exchange, BMC has committed up to $110 million in financing to help Peregrine pay off loans and meet its day-to-day needs for the next few months.

In the lawsuit, Peregrine disclosed that the chain of events began in April as company managers were "hours away" from signing a deal to sell the company for as much as $1.9 billion. Peregrine declined to name the buyer.

Representatives of the potential buyer told Peregrine they would not seal the deal until they received the software maker's audited financial statements for the previous 12 months.

The would-be buyer had uncovered accounting problems during a due diligence review of Peregrine's books, according to the lawsuit.

Asked why Peregrine's board appeared blind to problems uncovered by the would-be buyer, Peregrine attorney Charles LaBella said the management of the board and the audit committee weren't keeping the books.

"They hired Arthur Andersen to do that," he said. "They were our accounting experts, they were the people we relied on and they catastrophically and utterly failed us."

"They actually opined and encouraged us to take certain positions with respect to stock option plans that were absolutely dead-bang wrong," he said.

Copyright © 2002 The Associated Press. All rights reserved. The information contained in the AP News report may not be published, broadcast, rewritten or redistributed without the prior written authority of The Associated Press.

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