Enterasys prosecutors seek up to 33 years for ex-execs

Prosecutors have asked US District Court Judge Paul Barbadoro to sentence four convicted Enterasys Networks executives to as many as 33 years in prison, while their defense attorneys are arguing that they should be sentenced to less then a tenth as much.

The toughest sentence, if Assistant U.S. Attorney William Morse has his way, would be meted out to Robert Gagalis, the former CFO of Enterasys and the highest-ranking defendant charged. Morse called for a sentence ranging from 30 years and two months to 33 years and nine months. Gagalis’ lawyer said he should serve three years.

As for the other defendants, prosecutors recommended that David Boey, the sales director in the company’s Asian Pacific division – should face the same sentencing range, though Morse recommended that he be on the low end of that range — just over 30 years. Boey’s attorney – who argued that his client was not a “player” but a “pawn” — urged that the mandatory sentencing guidelines be dropped altogether.

Prosecutors recommended that Bob Barber – a participant as a member of the company’s investment committee – also serve 30 years in jail, as opposed to his attorneys, who recommend 27 months.

Morse also suggested that Bruce Kay, the former vice president of finance – receive a sentence of 24 years and three months in jail. Kay’s attorney proposes 27 to 33 months.

All of the defendants also should have to pay restitution, say prosecutors, though how much each would pay was not specified.

A federal jury in Concord – after a month-long trial in December — found the executives guilty of conspiring to inflate revenue while the Rochester-based Cabletron Systems was spinning off Enterasys in 2001.

The jury couldn’t reach a verdict in the case against the former chief operating officer, Jerry Shanahan. On Monday, Barbadoro pushed back his retrial date back to Sept. 5.

Barbadoro will sentence all of those convicted, save Boey, on Thursday, according to the court docket. Boey is scheduled to be sentenced on Friday.

Before applying the sentencing guidelines, Barbadoro first has to decide on two key factors that could heavily influence the sentencing. The first is which sentencing guidelines to apply: the more lenient federal guidelines that were in place before November 2001 or the current strict guidelines that were established in response to many of the corporate scandals that rocked the country before and after that.

While most of the actions used to inflate revenue took place in the quarter following the spin-off, which ended in September 2001, prosecutors argue that the actual conspiracy lasted until February 2002.

Attorneys maintain that their clients had very little to do with the conspiracy, if it indeed continued after that date.

The other key factor is how much investors lost due to the conspiracy. Prosecutors contend that investors lost $144 million – and that’s a conservative estimate. After all, the company – which as Cabletron was once the largest employer in the state – dropped $1.3 billion in value once it was announced that the Securities and Exchange Commission was investigating Enterasys. The company never recovered and was purchased by private investors for $300 million, a fraction of its former value.

The defense counters that the fraud didn’t result in any loss at all. The stock was in a “tailspin,” attorneys argue, and the SEC investigation and subsequent revenue restatement were not triggered by actions that the defendants were convicted of, defense attorneys contend.

In fact, they say, the company’s internal investigation uncovered these actions later. Besides, the government report on losses ignored other factors, like the failure of spinning off another subsidiary, Aprisma Technologies, as a public company.

The loss question is particularly crucial. For instance, under the new guidelines it would bump up Gagalis’ sentence from a possible 18 to 24 months to 324 to 405 months, said his attorney.

A hearing on the conflicting loss analysis is scheduled for Wednesday.

Other factors could affect Gagalis’ sentencing. One was whether Gagalis was giving orders or taking them.

Prosecutors note that as the highest convicted member of the conspiracy, he was giving them. His attorney, however, points out that Enrique “Henry” Fiallo – Enterasys’ former CEO – also was involved in the conspiracy, though he pleaded guilty to lesser charges in exchange for his testimony.

(Fiallo is scheduled to be sentenced in October, while three other cooperating conspirators are scheduled for July.)

In addition, Gagalis’ attorneys point out, the SEC filed a civil action against all of the defendants, and five others, including Piyush Patel, the CEO of Cabletron during the spin-off.

Prosecutors allude to Gagalis’ wealth, noting that he resided in a “luxurious home” in Rye, currently on the market for $2.5 million, and has $1.5 million in equity, financial accounts of $140,000 and antiques and jewelry valued at more than $100,000, along with a $50,000 inheritance.

Gagalis is pleading special circumstances. His wife was recently diagnosed with Parkinson’s Disease, so he needs the money and to get out of jail as soon as possible to take care of her.

And letters of support for Gagalis – touting his concern for his family – read like a “Who’s Who” of the Seacoast business establishment. Among those writing were Paul Montrone, the former chairman of Fisher Scientific, David Della Penta and Thomas Rea, also formerly of Fisher, Steven Shapiro, of Wheelabrator, where Gagalis used to work, Christopher Brown, of Pax World Funds, John Tinios, of Galley Hatch restaurant fame, Kevin Callahan, CEO of Exeter Hospital, Renee Riedel, head of Two International Group, and finally Kevin O’Brien, the CEO who followed Fiallo at Enterasys. (Absent was Cabletron co-founder Craig Benson, who was the company’s largest stockholder at the time of the spin-off.)

Kay also received letters of support, but they were from less prominent neighbors and community members, aside from Hugh Farrington, CEO of Hannaford Bros., where Kay used to work. – BOB SANDERS

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