Enterasys sale made official

Enterasys Networks is no longer a public company.

A group of private investors Wednesday afternoon completed the previously announced purchase of the firm for $13.92 a share, about an eighth of the stock’s value at the time of its spinoff from Cabletron Systems in 2001. The company’s shares closed at that price on their last day of trading.

Stockholders approved the sale of the company on Feb. 16 to Gores Group LLC and Tennenbaum Capital Partners.

Within five days, the company – though Computershare Trust Company — will send instructions to shareholders telling them how to surrender their stock. They should receive payment 10 business days after the stock is surrendered, the company said.

Cabletron, a former networking powerhouse was once the largest company in the state, with headquarters in Rochester. It was co-founded by Craig Benson, who later went on to serve a term as the state’s governor. But a four-way split engineered to increase shareholder value, proved to be a disaster for stockholders who held on to their shares, and workers who counted on their jobs.

Only two companies Enterasys and Riverstone Networks, survived. Both left the state, shed most of their workforce and became mired in accounting fraud scandals that are still ongoing.

Indeed, on March 1, the very day of the closing, Enterasys’ attorneys were trying to prevent their executive chairman from being forced to testify in a pretrial hearing for the criminal securities fraud trial of five of the company’s former executives, including former Chief Financial Officer Robert Gagalis and former Chief Operating Officer Jerry Shanahan,

The former executives — charged with conspiracy to fraudulently inflate revenues when Cabletron spun off Enterasys in 2001 – have claimed government prosecutors have inappropriately instructed the company not to adequately reimburse their legal costs and block the defenses access to key prosecution witnesses.

The lawyers have contended that Enterasys is required to advance legal fees to its former officers acting as company employees and the company has not kept current on its payments.

A judge agreed to hear the matter on March 7, delaying the trial that had been expected to start the same day. The defense then subpoenaed William K. O’Brien, the company current executive chairman, to testify on the matter.

In a motion filed Wednesday morning in U.S. District Court in Concord, attorneys argued that William K O’Brien was vacationing in Florida after working on the Enterasys deal, and said he planned to step down from his position shortly afterward.

O’Brien, in an accompanying affidavit, said he had no direct knowledge about the indemnification of the defendants’ legal fees, “except for such things that I am told from time to time by our general counsel.”

He added that “as far as I am aware, Enterasys has taken the position that certain of its former officers are not entitled to indemnification because we believe that they did not act in good faith, but instead acted contrary to the best interests of the company.”

Enterasys had previously said its chief objection was that the fees were unreasonably high.

Prosecutors maintained the government merely wanted Enterasys “to take a fair look at the legal obligations of the company and to test them in an appropriate forum,” and that Enterasys should “adhere to prevailing legal customs”

Defense attorneys also contend that cooperation agreements of those who pleaded guilty to lesser charges – including former Enterasys CEO Enrique “Henry” Fiallo – are preventing the defense from being able to question the prosecution’s major witnesses before the trial.

Prosecutors said they told defense witness that they are not prohibited from speaking to the defendants’ representatives.

Also subpoenaed was Gerald Haines, Enterasys’ chief legal officer, and two attorneys who work with the Boston firm of Ropes and Gray.

Meanwhile, the planned bankruptcy sale of Cabletron’s other spinoff — Riverstone Networks – to Lucent Technologies for $170 million is still going on as scheduled.

On Feb. 24, a Delaware bankruptcy judge overruled a motion by dissident stockholders to slow down the bidding process.

The judge has yet to decide on a motion to dismiss the bankruptcy process altogether, and the court previously approved a forced shareholder meeting on March 7 that could also overturn the sale. Riverstone shareholders have not met since 2002.

The SEC halted trading of Riverstone shares on Feb. 10, ending its accounting fraud investigation into the company, because the company had never filed accurate audited financial statements. – BOB SANDERS

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