Ex-Peregrine Directors Must Face Fraud Claims

(CN) - The 9th Circuit on Monday reinstated a securities fraud lawsuit against former outside directors of Peregrine Systems, a software firm brought down by an accounting scandal in 2002.

The company's former directors and auditing firm Arthur Andersen LLP were sued by shareholders of Harbinger, an Atlanta-based ecommerce software provider that merged with Peregrine in 2000.

Harbinger investors claimed Peregrine directors lied about the company's revenue in financial statements leading up to the merger. As a result, Peregrine's stock price was artificially inflated when the merger closed on June 16, 2000, investors claimed.

Peregrine was a hot stock from 1997 until 2002, when it came to light that various executives had juggled the books to meet Wall Street expectations. The stock price collapsed, and Peregrine declared bankruptcy and eventually was sold to Hewlett-Packard.

Shareholders lost $3 billion, and four former executives were sentenced to prison for their roles in the scandal: Former CEO Stephen Parker Gardner was sentenced to eight years and one month in prison for conspiracy, securities fraud and obstructing justice. Former CFO Matthew Gless and former Executive Vice President Douglas Powanda each received multiyear prison terms for conspiracy and securities fraud, and former Vice President Jeremy Reeve Cook was sentenced to two years and three months in federal prison for wire fraud.

Harbinger shareholders said the Harbinger-Peregrine merger would have collapsed had the directors not overstated Peregrine's revenues by more than $120 million and understated its net losses by more than $190 million.

Arthur Andersen moved to dismiss the case, and lead plaintiff David Hildes asked a federal judge for leave to amend his complaint to add securities fraud allegations against former Peregrine directors John Moores, Charles Noell III, Richard Hosley, Norris Van Den Berg and Christopher Cole.

U.S. District Judge Roger Benitez denied Hildes' motion to add claims against the former outside directors on the grounds that doing so would be futile. Hildes had agreed to approve the merger by proxy before the purported misstatements were made, Benitez concluded, so any losses could not logically be tied to the alleged fraud.

The 9th Circuit panel in Pasadena, Calif., disagreed.

"Although the voting agreement and irrevocable proxy irrevocably committed Hildes to having his shares voted in favor of the merger, it did not irrevocably commit him to exchange his Harbinger shares for Peregrine stock," Judge Carlos Lucero wrote for the three-judge panel. "Any exchange of shares remained contingent on the consummation of the merger."

As Hildes argued, the merger would not have occurred had the directors' financial statements been truthful, Lucero noted.

Thus, his losses "can be causally traced to the misrepresentations."

"This is enough to state a Section 11 claim," Lucero wrote, referring to the Securities Act provision that imposes liability on anyone who signs a registration statement containing material misrepresentations or omissions.

Lucero, a 10th Circuit judge, sat on the 9th Circuit panel by designation.

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