Ex-Enterasys controller responds to SEC charges

A civil securities fraud complaint against Enterasys Networks’ former controller, Lawrence “Larry” Collins, should be dismissed because the charges didn’t specify how he was involved in four suspect transactions in which he allegedly participated, his lawyers say in a motion to the U.S. District Court in Concord.

The Securities and Exchange Commission is accusing Collins and nine other defendants of conspiring to use accounting gimmicks to fraudulently inflate revenue around 2001, when Enterasys was spinning off from the Rochester-based Cabletron Systems, once the state’s largest employer.

Federal prosecutors have already tried half of the nine defendants criminally on similar charges. Four were convicted and sentenced to terms ranging from 3 to 11-1/2 years. The fifth faces a retrial in September.

Collins, a 55-year-old accountant who lives in Cape Elizabeth, Maine, never faced criminal charges. The SEC mentioned him in four of the 29 alleged fraudulent transactions in its civil complaint, including one of the key transactions in the criminal trial: a $4 million deal with Ariel International Technology Co. Ltd, a company based in Hong Kong.

In that transaction, executives removed terms that would have precluded much of the deal as being recognized as revenue, and put those terms in a side letter.

An e-mail referring to the revenue recognition problem was circulated to several of the defendants, including Collins.

Collins, according to the complaint, decided with former chief financial officer Robert Gagalis and Bruce Kay, former vice president of finance, to withhold the terms of the letter from the auditors.

But the complaint did not specify how Collins made this decision or learned about the backdating, said his lawyers. “The complaint does not assert exactly what Mr. Collins knew at the time and when he knew it,” his lawyers write.

Collins allegedly participated in three other transactions, according to the complaint:

• He is charged with participating in improperly recognizing about $500,000 in revenue from sales of Accton Technology. He allegedly knew that Accton purchased product it didn’t need to help Enterasys meet revenue goals, and Enterasys purchased unneeded services from Accton to net out Action’s accounts receivable.

“The complaint offers absolutely no factual bases from which it can be concluded that Mr. Collins ‘knew’ that Accton did not need the product and intended to return the product,” write his attorneys.

• Collins allegedly participated in improperly recognizing $1.5 million connected to a company called JBS, contingent upon JBS receiving a purchase order from another company, without revealing the contingency to the auditors. Again, the complaint doesn’t explain how Collins participate, asserted Collins’ attorneys.

• Collins allegedly agreed to a plan, involving a $2 million deal with Societe General Cowen, an international investment bank, to conceal its eventual product return and avoid a revenue reversal by increasing the financial fees owed to Cowen and issuing a corresponding credit.

“The complaint does not describe the alleged ‘plan’ to conceal and does not state – because it cannot – what role Mr. Collins had in carrying out such a plan,” write Collins’ attorneys.

In addition, as the complaint notes, the plan was never executed. — BOB SANDERS