Ex-Enterasys exec admits ‘moment of weakness’

Enterasys Networks’ former chief operating officer ordered that two troublesome clauses be taken out of a contract with a distributor, but then slipped those terms back in an e-mail, enabling the former Rochester-based company to improperly recognize $3 million in revenue the quarter it spun off from Cabletron Systems in August 2001, according to testimony Monday by the company’s former vice president of worldwide sales operations.

But James Benard — who took the stand Monday as an unindicted co-conspirator in the securities fraud trial involving five former Enterasys executives — did as he was told, even though he considered it to be wrong, because he had a “moment of weakness” and lacked the “courage to question” the former COO, Jerry Shanahan.

The deal with Tech Data Canada, was similar to another deal with another distributor, Ariel International, that reinstated troublesome clauses in a side agreement.

It was the Ariel deal that led the Securities and Exchange Commission to start an investigation, which plagued the company until it was finally sold to private investors last spring. While Enterasys finally settled with the SEC and has since moved out of the state, four former officials have pleaded guilty to securities charges, and five other executives – including Shanahan – are on trial in U.S. District Court in Concord for criminal conspiracy to commit securities fraud.

While the government alleges conspirators used another trick to inflate revenue in order to secure their prestige, their jobs and their stock options, this was the first one to echo the Ariel transaction.

Benard, who joined Cabletron in 1998 — when the firm was still the state’s largest employer — said he never negotiated an individual distributor deal before. He was sent to Canada after an official from Enterasys stepped out to provide moral support, he said. But while he was at the Manchester airport on the way to Canada days before the quarter closed, Shanahan reached him on his cell phone, and allegedly asked him to remove two terms from the original deal.

Under one clause, Tech Data would not have to pay for goods that were sold in less than 90 days, and it would allow it to return goods that originally went through the former distributor.

Those terms “limited the ability to recognize revenue that quarter,” Bernard said Shanahan told him.

Not surprisingly, Tech Data Canada officials balked at the new terms, so at Shanahan’s direction, Benard assured them that they would be reinstated. Benard e-mailed Shanahan that he should reference the agreement and assure in writing Tech Data that Enterasys planned to agree to those terms anyway. Shanahan, while not mentioning the original agreement, said that he would “confirm” both the 90-day option and the liberal rights of return.

When SEC officials question him about the deal nearly two years later, Benard said that he was “afraid,” and his answers were “evasive.”

Shanahan’s attorney, Andrew Good, suggested that Benard was still afraid, and he was “putting words in Mr. Shanahan’s mouth” to avoid prosecution. But Benard said he didn’t cut a deal with prosecutors, and that there was no guarantee he won’t be charged.

“My action on this transaction has been a blemish on my sterling career,” he shot back. He said he wanted to rectify the situation by telling the truth.

Good also noted that an earlier assessment of another Enterasys official indicated that the company was going to sell $3 million of Enterasys products anyway, so that removing it from the agreement didn’t really matter that much. Benard agreed that the chance “probably was small” that the goods wouldn’t be sold.

“Then it was academic,” Good said.

“Nothing in sales is academic,” Benard replied.

Benard did agree that there was no requirement to keep the e-mail secret, and that – unlike the Ariel deal – the changes occurred in the quarter. There was no backdating of documents.

Shanahan’s name came up earlier in the day in the testimony of Tom Eggemeier. Enterasys’ former vice president of corporate communications and business development, Eggemeier was part of the “investment team” that — he testified primarily invested in companies because of the short-term revenue they would create by purchasing Enterasys product in the same quarter. Shanahan, he said, said he wanted the team to produce some $20 million in revenue in the quarter when Enterasys was born as public company. Eggemeier replied that the company wasn’t “even close” to that target, and that it was unlikely that it would even be able to generate $10 million. – BOB SANDERS