‘Corrupt corporate culture’ blamed at Enterasys sentencing

Three Enterasys Networks executives who cooperated with the government were sentenced to federal prison Wednesday, even though they were mainly “victims of a corrupt corporate culture” at the Cabletron Systems spinoff, in the words of Judge Paul Barbadoro.

Sitting in U.S. District Court in Concord, Barbadoro sentenced Gary Workman, former president of Enterasys’ Asia Pacific division, to 41 months, with a $17,500 fine. The judge gave former comptroller Anthony Hurley a one-year term with no fine. Gayle Spence — former executive assistant to former CEO Enrique “Henry” Fiallo – received a 27-months sentence and a $15,000 fine. Fiallo, who also cooperated with prosecutors, is scheduled to be sentenced in October.

“I gave into the pressure,” said Spence in a statement that was read by one of her attorneys while she sobbed out of control. “I should have blown the whistle. I disgraced my family, my friends, for fear of not being part of the team.”

All of those sentenced testified in a December trial against five other former Enterasys executives for conspiring to use accounting schemes to inflate revenue when the former Rochester-based Cabletron spun off Enterasys in 2001.

The jury found that four of the defendants — including CFO Robert Gagalis, who was sentenced last month to 11-1/2 years – were guilty, but didn’t reach a decision on former Jerry Shanahan, former chief operating officer, who the government intends to retry.

The three sentenced Wednesday plea-bargained for a maximum sentence of five years, and Barbadoro acceded – but sometimes exceeded – the prosecution’s recommendation for leniency.

Assistant U.S. Attorney William Morse, in pleading for leniency for Spence, said the pressure went “beyond Fiallo,” a sentiment echoed by her attorney, David Vicinanzo, who said there were threats by “others above” the then-CEO that prompted his client’s criminal actions.

Barbadoro, who named Fiallo as the must culpable person indicted, said he too was troubled by the “corrupt corporate culture” at a high level of the company, but declined to mention anyone by name who was not charged.

The only officials at Enterasys above Fiallo would either be high-ranking Cabletron executives, or Enterasys board members, which would include Craig Benson, a Cabletron co-founder who was the largest shareholder at the time. (Benson went on to serve a term as New Hampshire governor.) The Securities and Exchange Commission has pressed civil securities fraud charges against former Cabletron CEO Piyush Patel and nine other Cabletron/Enterasys officials, including the five defendants in the criminal case, but Benson, who picked Patel to succeed him, has not been charged criminally or civilly.

Spence, who was literally the captain of the cheerleading squad at Spaulding High School in Rochester, admittedly played that role at Cabletron for nine years, working her way up from a job as the company’s travel agent to becoming one of the highest-ranking women executives at Cabletron, and then Enterasys.

While she pleaded guilty to one particular transaction — passing on orders to change a $3.5 million transaction in order for it to meet revenue recognition goals — Spence testified that she also was involved in other parts of the conspiracy, including running meetings on so-called three-corner deals, in which Enterasys investments in shaky companies were funneled through a third-party distributor to buy its own products, inflating the company’s reported sales figures.

Spence, “clearly a subordinate, was a key enforcer” who was “vital to the success of the criminal enterprise,” said Barbadoro. She was “so enthralled with the corporate culture that she lost sight of the criminal consequences.”

The judge agreed with her attorney that Spence – without a college degree, surrounded by accountants — might not be as culpable, but “she was not dumb.” Still, emphasized Morse, Spence was key in getting Fiallo to plead guilty, and in convicting Gagalis and others and went beyond the call of duty, spending “hundreds of hours” helping the prosecution prepare their case.

Barbadoro accepted the prosecution’s recommendation of a 27-month sentence.

The 61-year-old Workman was given credit for being the first to plea — and for repeatedly traveling from the Philippines at his own expense — but unlike Spence he was not as crucial or effective a witness.

Workman testified how he passed on orders to his comptroller, David Boey to change the terms of transactions so that they would be recognized as revenue (terms that Boey included anyway in a secret side agreement). But Workman’s testimony backfired when documents showed that his testimony concerning Shanahan was inaccurate – and that may have helped the former COO escape conviction. For this reason, Morse said, he didn’t recommend a specific reduction for his cooperation, leaving it entirely up to the judge.

Barbadoro said that Workman got into trouble on the stand because he was simply trying to give the prosecution what it wanted, and told Morse “I’m inclined to lay the blame on you, not him.”

Still, it was Workman’s orders that resulted in Boey’s criminal actions and his three-year prison term, so in order to be “proportional,” Barbadoro sentenced him to a term that was five months longer than Boey’s though more than 18 months less than what he faced.

The judge first fined Workman $50,000, but then lowered it to $17,500 after considering that he would be of retirement age when he was released from prison.

“I took the easy way out,” Workman said before Barbadoro pronounced judgment. “I apologize to investors and my family. My future is bleak, and I tarnished a 40-year career.”

Hurley, who pleaded shortly after Workman, was the prosecution’s “most effective witness” because “he was not a salesman form the government but was willing to simply relate what he knew, whatever the consequences,” said Barbadoro. He was also praised for his extensive cooperation.

And since Hurley was, in Barbadoro’s words, “truly at the bottom of the ladder” he didn’t involve others in the wrongdoing.

While Barbadoro thought some jail time for Hurley was necessary as a deterrent to others, he knocked six months off the prison term that the prosecution was seeking.

“I deeply regret my part in the fraud,” said Hurley before sentencing. “I wish I had the guts to follow my instincts in upholding the accounting rules. I’m ashamed of myself.” – BOB SANDERS