Larry Garlick says he distrusted venture capitalist John J. Moores from the moment they met in 1991. Garlick was founder of Remedy Corp., a hot Silicon Valley software startup. Moores, a big-shot tech entrepreneur who had launched BMC Software Inc. (BMC) and chaired Peregrine Systems Inc. (PRGNE), swaggered into Garlick's office and made an offer to invest in Remedy, Garlick recalls. Put off by behavior that he felt was overbearing, Garlick turned down the offer.
Last year, Garlick changed his mind--with reservations--after Peregrine made him a generous offer to buy Remedy for $1.2 billion in cash and stock. He wondered how Peregrine's core computer-support software business could grow at a peppy 25% per year while many other software companies were faltering. Peregrine execs credited their products and crack sales team. Still, Garlick adds: "I was skeptical."
Turns out his gut was right. In the past six months, San Diego-based Peregrine has warned that it may have to restate $250 million of the $1.3 billion in revenues it posted from 1999 to 2001. Two top executives have resigned, and the company has sued accountant Arthur Andersen LLP. It's also under investigation by the Securities & Exchange Commission. Moores, who was Peregrine's chairman during half of the questionable period and a regular board member during the rest, finds that his role is coming under attack.
Moores's critics, who have filed dozens of shareholder suits, note that he and entities associated with him sold some 14 million Peregrine shares from 1999 to 2001. That netted more than $630 million. A spokeswoman for Moores, best known as the owner of the San Diego Padres baseball team, says a large portion of the profits went to charities and trusts for nonfamily members. But other investors didn't do so well. After peaking at $79.50 in 2000, the stock was delisted in August. "He reaped a huge prize supported by false financials," says Michael J. Aguirre, a San Diego lawyer pressing a shareholder suit against Peregrine and Moores. "There's no way he wasn't paying attention."
Moores declined to comment. But Peregrine lawyer Charles G. LaBella contends that since Moores was an outside board member without operational responsibilities, he had no way of knowing what was behind Peregrine's impressive sales results and no reason to question them.
Still, Moores's reputation is under assault--quite the comedown for a guy who is a hometown hero in both San Diego and Houston. Back in 1980, Moores, 58, started BMC, a Houston maker of corporate software that now boasts $1.3 billion a year in sales. He has donated more than $200 million to charities in Houston and San Diego. In 1994, Moores bought the struggling Padres for $85 million and invested in hiring star players and boosting attendance. "He built support for the team," says Padres CEO Bob Vizas.
But it is Moores's support of Peregrine that has furious investors looking for answers. Peregrine's problems first came to light in April, when BMC, in which Moores is no longer involved, nearly acquired Peregrine for about $1.6 billion. An audit ordered by Peregrine uncovered numerous potential accounting violations. For example, the report cited irregularities in the way Peregrine booked sales to distributors. Then-chairman and CEO Stephen P. Gardner soon resigned. On Sept. 22, Peregrine filed for bankruptcy protection. Gardner could not be reached for comment.
So what did Moores know? So far, the evidence is only circumstantial. Former employees say it was impossible to miss disturbing signs right under Moores's nose. They say the constant pressure to hit astronomical sales targets was so oppressive that it defined the culture of Peregrine and forced the staff to do things they weren't comfortable with. Former employees say Gardner pressured the sales staff to boost revenues by pushing distributors to buy more Peregrine software than they could ever unload on their customers.
Critics complain that Peregrine's board has been dominated by insiders who didn't question the company's methods. For instance, the board in 2000 and 2001 was predominately made up of company executives, one of its founders, an in-law of Gardner's, Moores, and two of Moores's employees. The chairman of the audit committee now is Charles E. Noell III, CEO of JMI Services Inc., Moores's investment management firm. Noell and other board members would not comment on the matter.
Moores first got involved with Peregrine as an investor in 1989. He was named chairman in 1990, a role he played for 10 years straight. He boosted his total stake in the company to 62.8% by the time the company went public in 1997. Under his watch, Peregrine launched an aggressive expansion strategy in the late 1990s by acquiring more than a dozen software companies. Most of the deals were engineered by Gardner. Originally hired in 1997 as vice- president of strategic acquisitions, he was promoted by Moores and the board to CEO in 1998 and chairman in 2000.
Moores was reappointed chairman immediately after the scandal erupted last spring, but he's taking a backseat now. He quickly hired a new CEO, Gary G. Greenfield, and returned to focusing on the Padres and venture capital. But his ties to Peregrine could haunt him for years to come.
Corrections and Clarifications
``Just how much did John Moores know?'' (News: Analysis & Commentary, Oct. 14) ran an incorrect photo because of misidentification by agency Notimex/Newscom. The photo identified as John Moores, the owner of the San Diego Padres, was actually San Diego Padres CEO Bob Vizas. Here is Moores's photo as it should have appeared.
By Arlene Weintraub in Los Angeles