Enterasys jury begins deliberations

As the jury in the securities fraud trial of five former Enterasys Networks executives started to discuss the fate of the defendants late Friday afternoon, they heard a final plea from the attorney for Bob Gagalis, the former chief financial officer.

Attorney James C. Rehnquist told the jurors in U.S. District Court in Concord that it wasn’t a case about “lying and cheating,” as the prosecution’s “loaded language” in its closing argument would have them believe. It was a case, instead, about “accounting rules — dry, complex accounting rules.

Rehnquist’s was the last of five closing arguments, as the attorneys for the defense, one by one, attempted to break apart the case the prosecution has spent a month trying to build: that the executives conspired to deceive the auditors and the stockholders and fraudulently inflate revenue in the quarter in 2001, when Enterasys was spun off from Cabletron Systems.

Without putting on the stand their clients, or any other witnesses, the defense team tried to show just with their cross-examination, a few bits of additional evidence, and their closing arguments that their clients weren’t a team, and that they were each innocent in his own way.

If anyone was guilty, it was the other conspirators, including the four other former executives who already pleaded guilty.

While some disputed facts, accused witnesses of lying or the government from hiding or twisting information, most of the defense attorneys also relied on the accounting-rule defense, hoping that the complex rules of revenue recognition would cause even the most sophisticated juror to have some reasonable doubt that the allegedly criminal behavior was simply an honest mistake.

For instance, Rehnquist – without disputing many of the facts – argued that his client was right and the auditors were wrong, and he did, under the accounting rules, have the right to such documentation from the auditors, as the prosecution charges. There is nothing wrong with using a loophole, he said, as long as it is legal.

Thus there was nothing criminal about Gagalis writing in an e-mail that no documentation on such deals should go to the auditors. He disputed the prosecution’s claim that the auditors need to know all and that the number one rule of a public company is: “They shall not lie to the auditors.”

“These are men, not gods,” said Rehnquist.

Even if his client were wrong, he made a good -faith mistake, and hoped that juror would understand and acquit him “if you have a reasonable doubt about how GAAP (generally accepted accounting principles) applies to investment transactions,” he said.

While Rehnquist plea might have been dry as accounting rules, Jerry Shanahan’s attorney — Andrew Good – voice broke several times as he gave an impassioned plea that his client, an Irish national, was caught up in something so far from his home and beyond his understanding.

Good lashed out at those who testified about Shanahan, the former chief operating officer, noting that many admittedly lied before the Securities and Exchange Commission in an earlier investigation into the matter and were “walking, talking reasonable doubts.”

In particular, he focused on one of the most damaging witnesses against his client — Jim Benard, a longtime Cabletron and Enterasys employee who testified that Shanahan ordered that two troublesome clauses be taken out of a contract with a Canadian distributor, but then slipped those terms back in a side e-mail, enabling the company to improperly recognize $3 million in revenue.
Good said that the prosecution produced no record of an uncorroborated phone call, and Benard — who knew the government could prosecute him for lying in front of the SEC — was just trying to curry favor with the prosecution.

But when it came to explaining the actual side e-mail – which Shanahan did write — Good resorted to the accounting-rules defense.

Unlike the other defendants, explained Good, Shanahan wasn’t a CPA, he was an engineer. He was concerned about manufacturing and inventory, not financial matters and was “clueless on revenue recognition.”

“This was an honest misunderstanding by someone who didn’t understand the revenue rules,” he said. Shanahan already had so many other things on his mind as the end of the quarter drew near. “When he wrote that e-mail and pressed the send button in seconds, did he have the mindset of a criminal?”

Defendant Bob Barber was a CPA but was not a practicing accountant either, emphasized his attorney, Richard McCarthy. He may have set up the questionable deals, but he dealt with the business side, not the financial reporting. Indeed, said McCarthy, by the time the revenue was being reported, he was already a consultant who worked from home.

“He was not part of the process,” McCarthy said.

Barber, he said, “had a total absence of any contact with the auditors,” he said.

But in her brief rebuttal, Assistant U.S. Attorney Colleen Ann Conry noted that less than two weeks after the closing of one of those questionable deals, Barber was asked in a survey being conducted for the auditors whether the sales went through a channel partner and whether the revenue passed through the investee. Barber gave non-responsive answers, even though he was telling the company how to wire the cash through the channel partner, she said.

“To say he is not involved, to say he is totally out of the loop, is not accurate,” she said.

Conry also dismissed the use of the accounting defense by the defendants, saying, “They were shoving product down the company’s throat and getting worthless stock in return. “This (accounting defense) is something made up to confuse you at trial.”

She also attacked the defenses of Shanahan, Kay, vice president of finance, and David Boey, head of the Asian Pacific division, whose attorneys presented their closing arguments on Thursday. Hiding themselves in the intricacies of accounting law is no excuse, she said.

“Everybody knew this was wrong and were told this was wrong,” she said. “And today is the day to hold them accountable.”

The jury didn’t have much time to deliberate on Friday. By the time Judge Paul Barbadoro finished his hour-long jury instructions, it was already after 5 p.m. Jurors have to go through some 16 counts, and as one defense attorney put it, “a blizzard of e-mails.” They are expected to resume deliberations today. – BOB SANDERS

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