Enterasys juror dismissed
The jury assessing whether five former Enterasys Network officials committed securities fraud watched one of their own excused from the trial, were showed an apparently incriminating e-mail without comment, and heard the testimony on an intriguing million-dollar offer by Enterasys to a company on the edge of collapse.
U.S. District Court Judge Paul Barbadoro dismissed the juror Tuesday because, as a software consultant he had trained the government’s first witness of the day – Susan Levenson, a former Enterasys credit manager — after Levenson left the company to work for Pannaway Technologies, which happened to be founded by defendant Robert Barber.
Levenson testified that one of the deals used by Enterasys to allegedly inflate revenue in the quarter that it was being spun off by Cabletron Systems in 2001. It was Levenson who first brought up several troublesome clauses in a contract with Tech Data Canada that – she said – would prevent Enterasys from recognizing some $3 million in revenue.
The clauses were eventually removed, but defendant Jerry Shanahan – Enterasys’ former chief operating officer – later added back two of them in a side e-mail.
Levenson said that defendant Bruce Kay – then vice president of finance — echoed her concern about a clause that gave Tech Data more than 90 days to pay Enterasys.
“Until everything was sold, we wouldn’t get paid,” Levenson said. “If that was the case the revenue would not be recognized.”
Kay, Levenson said, wasn’t concerned about two other clauses that explicitly had right-of-return language. One would allow Tech Data Canada to back out of the deal if the contract wasn’t signed, and the second would allow an old distributor to return its merchandise. The latter provision also was included in a side e-mail, but the government doesn’t allege that is a problem, since that revenue wasn’t recognized.
Shanahan was on the line when Kay raised the concerns about revenue recognition, Levenson testified, and said that the matter would be “taken care off.”
Levenson said that she didn’t remember whether the paperwork on the deal was provided to the auditors, but Shanahan’s lawyer – Andrew Good – challenged that, pointing to an e-mail saying that it was Levenson who wrote in a Sept. 2, 2001, e-mail that the deal “can’t go to auditors in current formant.”
Levenson explained that she wasn’t trying to hide anything from auditors, but that they weren’t getting the revised document related to the renegotiated contract.
But Levenson’s accompanying concerns about “right of return” seemed to be the reason she didn’t let auditors see it, Good said.
In the middle of this cross-examination it was revealed that one juror knew Levenson. The juror said that he held about six training sessions that included her, and while he didn’t recognize her name on the witness list, he did remember her face.
The juror told Barbadoro that he didn’t think his judgment would be affected, and Barbadoro was inclined to let him stay because he didn’t think Levenson’s credibility was at issue. But Good said that it was, because it may have been her, and not Shanahan, who was keeping information from the auditors. Barbadoro was skeptical, noting that the juror’s body language during the defense lawyers’ questioning might be the real reason they wanted him excused. Another defense lawyer agreed, but Good insisted that his objections were genuine, and the juror was removed, leaving a dozen jurors and four alternates.
The diminished jury then heard testimony from Joseph Regan, former CFO of Para Protect, whose $1.2 million deal also raised revenue recognition problems in the crucial quarter during the Cabletron spinoff.
Para Protect was a start-up living on the edge, with only $1.5 million in the bank, burning some $500,000 in cash every month. At first, the company sought a simple $1 million cash investment, but the “deal dramatically changed” when Enterasys instead said it wanted to give the company $700,000 in software and only invest $300,000 in cash, Regan said. The company then wanted Para Protect to take on another $150,000 of software in exchange for a service contract for $200,000.
Regan said that he knew this was all being set up in order to recognize revenue and told defendant Robert Gagalis – then Enterasys’ chief financial officer – that the accounting rules wouldn’t allow for it. But Gagalis said that all this was being reviewed through the auditors, KPMG.
Enterasys invested in the company and paid for the service contract, the day before the quarter ended, and the cash was immediately relayed to a distributor to purchase the product. But Enterasys didn’t seem interested in Para Protect providing the services, and the beleaguered company was never able to sell Enterasys product.
The prosecution then showed the jury – without comment – a couple of e-mails between Gagalis and Eric Jaeger, vice president of corporate affairs for Cabletron, entitled “Deal Clean-Up.”
On Sept. 4, four days after the quarter ended and almost a month after the spin-off, Jaeger said that Gagalis should “crack the whip” and get the deals cleaned up and to remind Bruce (Kay) and others “NOT to talk with KPMG until they have a clean set of paperwork.”
Gagalis replied that he was reviewing the deals and that “no documentation of purchases through channel partners will be provided to KPMG.”
Gagalis’ attorney, James C. Rehnquist, declined comment on the e-mail. – BOB SANDERS