Attempt to dismiss Enterasys charges fails

Former Enterasys Networks auditors, who will be testifying against the top executives of the company they once worked for, might themselves once have been targets of a federal fraud investigation, charge the attorneys for the executives in a last-minute and eventually futile motion to dismiss the charges facing their clients.

The motion — which was thrown out Wednesday by U.S. District Court Judge Paul Barbadoro — cites last-minute documents referring to a statute of limitations agreement reached between KPMG – Enterasys’ auditors – and the Securities and Exchange Commission. The defendants’ attorneys say that the documents indicate that KPMG was targeted, and that the investigation could have been dropped in exchange for the auditors’ cooperation.

Since the federal prosecutors are accusing the five defendants of lying to auditors, the defendants’ attorneys argue, their testimony is crucial, and the defense should have been informed if their testimony was tainted before the trial, which is scheduled to begin Nov. 7.

Prosecutors, however, say that they were informed by KPMG’s attorneys that they did not receive any “Wells letters” from the SEC. Such letters indicate if a person is a target of any investigation. While the SEC does not have to issue such letters to its targets, it has customarily done so in recent years.

KPMG referred all questions on the matter to the SEC, which normally declines to comment on past or pending investigations. But the accounting firm did attempt in a filing late Wednesday to squash a wide-ranging subpoena for documents from the defendants’ attorneys, which they termed was “a fishing expedition” with the intent to “harass” government witnesses.

Enterasys was the main spinoff of Cabletron Systems, once New Hampshire’s largest company. It has since become a privately held firm, but during the company’s five-year life as a public company, it has been plagued by charges that it wildly inflated revenue — using secret agreements with third-party companies — during and immediately after its birth in 2001. Executives with the company allegedly hid these agreements from auditors and stockholders by not spelling them out in SEC filings.

The defendants’ filing also charged that prosecutors interfered with the SEC investigation by asking the agency not to depose KPMG auditors James Boyers and David Wilson. Such interference, the lawyers claim, amounts to intermingling the two investigations, which by law should be separate. Having access to the auditors’ depositions could have helped their case, they say.

Prosecutors argued that requesting agencies not to damage a criminal prosecution is both customary and legal. – BOB SANDERS

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