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— At next month's Peregrine Systems criminal trial, defense lawyers will probably ask if the U.S. attorney's office selected defendants on the basis of a highly biased report prepared after the company plunged into bankruptcy in late September 2002. The report, by the law firm of Latham & Watkins, was coordinated by Chuck La Bella, then a lawyer for John Moores, the former director who unloaded $487 million worth of stock during the fraud period and $650 million during the public life of the company. In a bankruptcy filing, the unsecured creditors' committee called the report a "whitewash" -- a gentle way to put it.

In hearings prior to the criminal case, a defense lawyer asked the judge if his side would be precluded from arguing that the government had fingered defendants from a report prepared for Moores. U.S. District judge Thomas J. Whelan said he would permit such argument. The government won't introduce the Latham & Watkins document, but it can be used for evidentiary purposes. (Most defense lawyers did not respond to requests for information.)

La Bella, a former U.S. attorney, had gotten Moores off the hook in the federal investigation of his gifts to former city councilwoman Valerie Stallings. In early February 2002, eight months before the bankruptcy, when the government was investigating Peregrine for inflating its sales through a swap deal, Moores e-mailed Richard T. Nelson, a longtime close associate and top Peregrine executive, "I wonder if Peregrine should bring in Chuck La Bella." It was a prelude to the Latham & Watkins whitewash. The general public, however, had no idea then that Peregrine was bleeding.

In the upcoming criminal trial, San Diego attorney Eugene G. Iredale represents a former Peregrine executive who raked in comparatively little during the fraud period. "I have a client who only made $500,000, and here is somebody who made $650 million," says Iredale. "I have questions about that, and I think anybody who looks at this would have questions about that."

Iredale continues, "The other thing that gives me some skepticism is that the government's case was based on a template based on the Latham & Watkins internal investigation [controlled] by Moores." In preparing for trial, Iredale interviewed a number of people who had supplied information to Latham & Watkins researchers. "They said with a surprising degree of unanimity that the thrust was to exculpate Moores and the board and point fingers downward, not upward." Matthew Gless, another close Moores associate who confessed early and is a key government witness, testified that "the Latham & Watkins report was designed to cover for the board of directors," says Iredale.

Attorney Mark F. Adams, whose client pleaded guilty sometime ago, says that such studies are common: "The corporation will conduct an internal investigation and hire former prosecutors at large law firms like Latham & Watkins. Their job is to protect the board. Employees can find themselves thrown under the bus. The reports are oftentimes a roadmap for the prosecution."

If that's true in this case, it is disgraceful. The report "was done too early to be relied on today," says Robert Friese, San Francisco lawyer and the litigation trustee appointed by the bankruptcy court. "A lot more is known now" and has been incorporated into civil suits such as the one he is steering. "We're waiting to hear more testimony if and when some people cease asserting their Fifth Amendment rights."

The Latham & Watkins report is under seal but has been leaked to some reporters. According to the publication Corporate Counsel, the report is particularly hard on Moores's friend and colleague, Nelson. He goes to trial later this year, charged with concealing evidence, helping the company to book fraudulent revenues, and misrepresenting the company's financial state. As corporate counsel, he should have stopped some of the sales manipulation practices, according to the Latham & Watkins report. But what would have happened to him if he had?

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