Enterasys witness details ‘intense’ sales pressure
On Wednesday, prosecutors outlined their intention to build a sweeping conspiracy case against five former executives of Enterasys Networks, charging that they fraudulently inflated revenue in 2001, the quarter after the company was spun off from the former Rochester networking giant Cabletron Systems.
On Thursday, Deputy U.S. Attorney William Morse began to build that case, focusing on only a transaction in Singapore, that was the impetus for an investigation that would cause the stock to plummet and Enterasys to be engulfed in scandal.
The government’s first witness was Gary Workman, former president of Enterasys’ Asia Pacific division, who testified about a $3.5 million deal with Ariel International Technologies Ltd., a company that would resell Enterasys product to end-users.
Workman, who testified that he lied to federal investigators about the transaction, previously pleaded guilty to wire fraud and could face a five-year prison sentence. He said he agreed to testify truthfully in the hope of a reduced sentence.
Morse set the stage by asking Workman about the “enormous amount of pressure” that increased when defendant Jerry Shanahan took over the reigns as chief operating officer in March 2001 — and which became “very intense” during the quarter ending Sept. 1, 2001, the first quarter after Cabletron spun off Enterasys as a public company.
Workman said that Shanahan insisted on increasing his sales projections by 25 percent, even though the high-tech market was collapsing at the time.
Progress calls on meeting that target shifted from weekly to daily conference calls, Workman said. When he got off the phone “I felt beat up,” for not meeting the targets.
“His style was threatening, his tone was demeaning,” Workman said of Shanahan.
In the last days of the quarter, Workman was still $9 million short of the $31 million target that Shanahan had set.
Shanahan said Workman had to do “whatever it takes,” to meet the target and that “you don’t want to be the guy who made us miss our target in the first quarter as a public company,” according to Workman.
The deal with Ariel would make a “dent” in this shortfall, said Workman, and he personally became involved in the deal, despite language and cultural barriers. Also involved in the negotiations was defendant David Boey, Enterasys’ former executive in charge of sales and operations, who worked under Workman.
Eventually, Workman said, he approved a deal suggested by Boey with very liberal payback terms, in order to get it closed out in the quarter. While the purchase order said that Ariel would have 75 days to pay for the products, a side agreement referenced in the order actually gave it 150 days, and that it would be Enterasys’ responsibility, not Ariel’s, to sell the product. That’s the longest repayment term that he ever approved, Workman said, but without it, he thought the deal never would have closed.
Workman said he signed the deal and the side agreement less than two hours before the quarter closed.
But in less than two weeks, the deal began to raise eyebrows in the Rochester office, according to electronic correspondence that Morse introduced, over the vehement objections of defense attorneys.
On Sept. 19, 2001, in the first e-mail permitted into evidence by Judge Paul Barbadoro, defendant Bruce Kay, former vice president of finance, wrote that the contract language presented “major problems with auditors” and that the 150-day payment terms were “unacceptable” and that it “screams out” that the transaction would not qualify for revenue recognition.
Kay, according to the e-mail, wrote that “we need changes” and to “reverse the language” because “obviously we can’t afford to lose $3.9 million in revenue.”
Workman, who was traveling in Australia at the time, said he asked Boey to take care of it.
The next day, Workman received another e-mail, this time from Gayle Spence, executive assistant to CEO Henry Fiallo (both of whom have pleaded guilty to security fraud charges), to change the side agreement and take out the problematic terms and date it so it “coincides with the [purchase] order.” When Workman testified that he interpreted that request to mean that the new agreement be “back-dated,” Barbadoro, yielding to defense attorneys’ objections, ordered that the jury disregard the remark.
That same day, Boey told Workman, in an e-mail copied to Kay and defendant Robert Gagalis – chief financial officer at the time — that he took the “cumbersome language” out of the main agreement, and that he later followed up with an e-mail saying that he moved the two “troublesome clauses” to a side letter.
But the matter didn’t end there. On Feb. 1, 2002, Workman said he received a call from Shanahan ordering him to report immediately to the Rochester office, where he was shown the two contracts — the original document and the altered one — for “revenue recognition” purposes. It was then that his laptop and cell phone were confiscated, and he was put on administrative leave.
Because of defense attorneys’ objections, the jury didn’t hear what happened next. After Barbadoro ordered them out of the room to rule on whether to allow the testimony, Workman said that he met with Boey and another unindicted co-conspirator. When the latter testified that the company’s auditor got the “wrong” – meaning the unaltered — document – Boey allegedly asked if he should contact someone to start removing things from his office. Workman said he said no.
Morse said he wanted the jury to hear this, because it showed a guilty conscience, contrary to defense claims that Boey had allegedly altered the documents just to “clarify” the terms.
But Boey’s attorney, William Cintolo, argued that it could have been an innocent remark, similar to asking if one should clean out his desk after being fired. Barbadoro ruled in Boey’s favor.
The questioning of Workman should resume on Monday. – BOB SANDERS