3 Enterasys execs face federal trial

Three former top executives of Enterasys Networks Inc. have pleaded not guilty and two more have pleaded guilty to charges stemming from what federal prosecutors describe as a $1.3 billion fraud against investors.

The charges resulted from an investigation into an alleged conspiracy to inflate the company’s revenue and bolster the value of Enterasys’ stock. The Andover, Mass., firm — formerly based in New Hampshire — was the largest spin-off of Cabletron Systems Inc., the former Rochester-based firm co-founded by Gov. Craig Benson.

Pleading innocent in U.S. District Court in Concord to charges of securities and wire fraud were former chief financial officer Robert Gagalis, 49, of Rye; former senior vice president for finance Bruce Kay, 53, of Yarmouth, Maine, and Gayle Spence, 45, of Newfields, a former executive assistant to the CEO and vice president for internal sales.

Gagalis, Kay and Spence all were employed by Cabletron before working for Enterasys.

Anthony Hurley, 34, of Georgetown, Mass., the company’s former assistant controller, pleaded guilty in a closed hearing to one count of wire fraud in the alleged conspiracy to inflate the company’s revenue. He faces up to five years in prison and a fine of $250,000.

Hurley admitted to sending statements to a financial publishing company in Boston that reflected $3.5 million in net revenues that were not actually received in the quarter and were reported to the Securities and Exchange Commission.

Also pleading guilty was Gary Workman, 57, of San Ramon, Calif., who will be sentenced in September. Workman, who was president of Enterasys’ Asia-Pacific sales division, pleaded guilty to wire fraud for transmitting “a falsified, altered and backdated sales document” to deceive outside auditors reviewing Enterasys’ financial statements.

The indictment also includes references to at least four unnamed co-conspirators.

In October 2003, Enterasys agreed to a $50 million settlement with investors who had accused top executives, including Gagalis, of regularly orchestrating phony deals and accounting tricks to inflate revenue.

Earlier, in February 2003, the Securities and Exchange Commission reached a settlement with Enterasys that stemmed from its investigation into allegations similar to those contained in the shareholder lawsuit. Enterasys was not fined, but the SEC found that there was fraud.

Benson resigned from the Enterasys board when he was inaugurated in January 2003. At the time he was the company’s largest single shareholder. He has since sold most of his Enterasys stock.

Benson, who sat on the company’s audit committee, was not named in the original lawsuit that prompted the settlement with Enterasys. He was, however, named in an earlier lawsuit against Cabletron that contained similar allegations. That suit is still ongoing.

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