Ex-Cabletron exec reflects: 'Why didn't I speak up?'
A year out of federal prison, Gayle Spence maintains that the wrong people went to jail
"Is this the right thing to do?" Gayle Spence said she asked David Kirkpatrick, then chief financial officer of Cabletron Systems, at the time in 2001 when the Rochester company was spinning off Enterasys Networks.
Spence said she was referring to so-called "three-corner deals," some of which a federal jury later concluded violated securities law.
"Everybody does it," she said Kirkpatrick told her. "Now get out of here."
Spence, then Cabletron's director of worldwide sales, said she shook her head thinking, "Oh my God." But she said she kept her thoughts to herself – until it was too late.
"I should have just said, 'You know what? Get out of here. You don't have to play this game or drink this Kool-Aid anymore.'" And then she added, with angst still in her voice, "Why didn't I speak up?"
Spence went on to plead guilty to securities fraud and was sentenced to more than two years in federal prison. The officials she testified against and helped convict got even more time. Former Enterasys CFO Bob Gagalis is still serving an 11-1/2 year term.
Now, a year out of federal prison, Spence maintains that the wrong people went to jail. It was what she calls the "big three": Kirkpatrick, Cabletron chief executive Piyush Patel and vice president Eric Jaeger.
"They were present at the weekly meetings. They received the spreadsheets that were maintained. If they weren't physically there, they were on the conference calls. If someone would say, 'This deal is not going to work out,' they would say, 'Why don't you try harder? Push.'"
Not part of Spence's "big three" is Craig Benson, the co-founder of Cabletron and former one-term New Hampshire governor.
"Maybe he was doing the 'don't ask, don't tell,'" she said, laughing. "Maybe he didn't want to know. I really don't know."
Jaeger's attorney did not return phone calls, Patel's attorney declined comment, and Kirkpatrick's attorney, Lucy Karl, called Spence's statements "recycled poppycock" made in order to help her motion for an early termination of her supervised release, which Spence was granted two days before Christmas.
"On the eve of Thanksgiving, she regurgitates an old allegation, giving new meaning to the phrase an old stuffed bird," Karl said.
A lesson for students
Karl was contacted before Thanksgiving, but Spence talked to NHBR at the end of September in her backyard, agreeing to tell her story if she had a chance to review her transcript, which she did, with minor edits, in November.
In that wide-ranging interview on the deck overlooking her spacious backyard in Newfields – where she lives with her dog and her 91-year-old mother — Spence discussed how she went along with a corporate culture of greed, her "time away" at the prison in Danbury, Conn., and telling her whole story to a stunned class of business students at the University of New Hampshire who were expecting a boring lecture by a businesswoman in a suit.
"I started off by saying, 'For 20 days and 20 months, I had no first name and I was referred to as 03418049. I was a prisoner in a federal women's camp. Now that I have your attention…'"
The daughter of a lobsterman who later went on to work at the Rochester General Electric plant, Spence was a high school cheerleader pursuing a degree at UNH.
But while she was at college, her dad died unexpectedly, and she got in a serious car accident. She never finished school and went to work, ending up working for a Rochester travel agency that managed the Cabletron account.
Back then, Cabletron was not only the biggest thing in town, it was the biggest employer in the state. Started in a Massachusetts garage by Craig Benson and Bob Levine in 1983, the company moved to Rochester, and became one of the biggest players in the emerging networking industry.
In 1993, Spence went to Levine's office, expecting to make travel arrangements when she was told she was there for a job interview.
"I don't think so. I'm not working here," she said.
Two weeks later, she was in a training class as an inside sales rep.
Spence worked her way up to become head of worldwide sales, with 635 people under her. She met her husband Luke Luacaw, the head of security for Levine. Things were hectic, she said, but they also were exciting.
"It grew fast. It was wild and wooly. It was like nothing could go wrong for so long, and then all of a sudden we hit that bump."
The bump came in 2001. Levine was long gone, and Benson had stepped down as chief executive, though still the company's largest shareholder, and the head of the audit committee of the board of directors. In his place was his handpicked successor, Patel, who joined Cabletron when it bought his California networking company.
Patel, with Benson's approval, engineered the breakup of Cabletron into four companies, the largest being Enterasys.
The split was designed to increase shareholder value, and many of the shareholders were company executives.
In charge of this transition were Patel, Kirkpatrick and Jaeger, who came from Ropes & Gray, Cabletron's law firm.
"With those three people, the culture changed," said Spence. "People kept talking about how much money people were going to make when this all happened. How so and so had so much shares, stocks options and this and that. It was just like the movie 'Wall Street.' I should have watched that over and over again because it was corporate greed it at its best."
This was most apparent in those three-corner deals, she said.
Cabletron, and then Enterasys, would "lend" money to small companies that used it to buy Cabletron or Enterasys equipment through a third-party distributor. Cabletron and Enterasys would then report those as sales, increasing company revenue.
The problem, said prosecutors – and a jury agreed – was that the deals were primarily done to increase the company's sales before the quarter, and that auditors were not told about the connection between the loans and the revenue.
"Basically buying people's business," Spence said. "Using the company's money to buy product in someone else's name."
When it all began, she said, "it was a noble thing to do. … It was a way to invest in companies and give them a leg up."
But, soon it appeared that "it was like we were force-feeding people. People would say, 'I don't want to do that,' and they would say, 'You find a way to make them do it.'"
The Ariel deal
Three-corner deals became a big deal up to and during the launch of Enterasys. That was why a shortened quarter (because Enterasys was changing its fiscal year) of one month in September was so crucial. It also happened to be when terrorists flew jumbo jets into the World Trade Center and Pentagon, not only killing thousands of people, but also disrupting the nation's economy and information system.
"All I could think of was the thousands of people that lost their lives, our customer base that was so incredibly impacted, the state of the country and all they were worried about how we were going to look to Wall Street," said Spence.
Spence said she remembers it even more today, because on Sept. 13, 2001, two days after the attack, she sent an e-mail to Gary Workman, former president of Enterasys' Asia Pacific Division, saying, "I didn't care if he was on the moon, he needed to get this paper signed. The Ariel deal."
It was the $3.5 million Ariel deal that sent Spence to federal prison.
The deal with the China-based company closed on Aug. 31 to make the quarter, but two weeks later the Rochester office contained problematic terms that prevented it from going through.
Spence sent Workman an e-mail to take out the problematic terms and date the papers to "coincide with the [purchase] order," in order to count it as revenue.
Workman backdated it. As for the terms, they were taken out, but then included in a side letter. Prosecutors said the side letter was created to hide the changes from auditors.
To this day, Spence maintains that she knew nothing about the side letter, and she was simply passing on information from Gagalis.
"I never had anything to do with Asia. This is the one time I'm asked to bird-dog something. I got stung. God, how stupid could I have been?"
Despite Spence's misgivings about the morality of the three-corners deals, she said didn't think they were illegal because "the finance people were all over it. The lawyers wrote all the agreements. They'll figure it out, right?"
And she thought her role in them was relatively minor.
She found out how wrong she was when the Federal Bureau of Investigation showed up at her door in 2003. Then, in 2004, shortly after her husband died, an agent called her on her cell phone to tell her she was the subject of a grand jury investigation.
"My husband just died," she told the agent. "I'm going to bury him on Saturday. Could I get some time? 'Oh yeah, take all the time you need.' Tuesday, I received my indictment papers."
She said she doesn't necessarily think her specific action in sending the e-mail about Ariel "was wrong" ("I was pushing it through based on a request from Bob Gagalis," she said.) But "my actions, by pushing this paperwork through, allowed the company to make the quarter. So yes, I am guilty for that. I didn't have some nefarious intent."
However, in a larger sense, she said, "I knew what I did, and it was wrong. I was not going to act like I did not do anything wrong."
Serving time in Danbury
Spence said she spent up to 300 days in preparation for testifying at her trial in December 2006, giving prosecutors a detailed map of the three-corner deals. Spence helped turn in former Enterasys chief executive Enrique Fiallo, and they both helped convict Gagalis who, like Spence, maintained that he took the fall for people who were higher up.
Spence said her heart goes out to Gagalis, but he could have cooperated like she did.
"By the time he realized there was something wrong, he had already signed his name too many darn times … That guy came in the door and had weeks before we went public. He must have felt like he was drinking from a fire hose," she said. "He should have run, but he also didn't speak up."
Spence herself was sentenced to 27 months in Danbury, though she also served four months in Strafford County Jail in case her testimony was needed again.
At Danbury, most of the women were drug offenders, but Spence taught English and got to know the inmates. She still remembers a woman named "New York," initially hostile, but ended up crying to her when it was time for Spence to leave prison, sobbing, "No one ever told me I was smart before."
"New York" went on to pass her GED.
The few white-collar criminals were primarily there for embezzlement.
Nobody who Spence knew was there for securities fraud — a crime that she said confused some of the inmates.
"What they could never figure out was that I never got anything for it," she said. "I wasn't a good criminal."
But aside from that, there was more commonality than differences.
"They made a mistake and wanted to go back home — and get a second chance."
Spence's second chance started in June 2009. While she was in a halfway house in Manchester, she already had a consulting job, and she was interviewed there for a technology-related job at a Massachusetts firm, where she is now vice president of sales and director of technology services. She moved back home in July 2009.
She's also going for a business management degree through the University of Phoenix in Burlington, Mass., but she plans to switch to online classes, so she can spend more time taking care of her 91-year-old mother.
"The class that I am taking now is about business ethics," she said. "Sure could have used this a few years ago."
And she doesn't think businesses would be reluctant to hire a convicted felon.
"I think I am an asset to any company who has the desire to go public or who is currently publicly traded. If I even have a sniff that something is wrong, my hand is going up."
But it's also a lesson learned. As she told that business class at UNH: "You need to trust your judgment, to follow your gut. If it doesn't feel right, don't do it. Walk away."
Read Gayle Spence's full interview with NHBR