Former Enterasys exec pleads guilty to fraud charge

A former executive at Enterasys Networks pleaded guilty Aug. 19 to conspiracy to commit securities fraud, saying she falsified information at the direction of both the company’s chief executive officer and chief financial officer.

In exchange for a lesser sentence, Gayle Spence Luacaw – a former vice president of insides sales and executive assistant to former chief executive officer Enrique P. Fiallo — agreed to fully cooperate with U.S. officials who are continuing their investigation into the largest spin-off of the former Cabletron Systems, a company co-founded by Gov. Craig Benson, and once the state’s largest employer.

Luacaw’s plea, which was entered in U.S. District Court in Concord, is a “significant development” that could lead to expansion of the charges against company officials or perhaps even more indictments, said Assistant U.S. Attorney William Morse.

The U.S. attorney’s office in Concord had already asked that the October trial date be pushed back to allow for a possibly broader indictment. The court declined the request, at least for the time being.

A grand jury investigation into the matter is continuing, Morse has said in previous pleadings before the court.

Luacaw is the third Enterasys official to plead guilty to conspiracy, following in the footsteps of assistant controller Anthony M. Hurley and Gary M. Workman, the executive in charge of Asia Pacific sales.

Chief Financial Officer Robert J. Gagalis and Bruce D. Kay, Enterasys’ vice president of finance, have pleaded not guilty to the charges.

Former CEO Fiallo has not been charged but is referred to by his former title in both the original indictment and the Luacaw plea agreement as part of the conspiracy.

Luacaw may be the most important person to plead guilty so far, both because she worked so closely with Fiallo and worked with former Cabletron CEO Piyush Patel – Benson’s hand-picked successor who engineered the breakup of Cabletron into a planned four companies in 2001.

Luacaw’s tenure at Cabletron began in 1992, when Cabletron was headed by Benson. Furthermore, her late husband, Harold “Luke” Luacaw, served as a bodyguard for both Benson and his Cabletron partner, Bob Levine. When Harold Luacaw died of heart failure in December 2002, a delegation from the state of New Hampshire, led by Governor Benson, attended the funeral.

While Benson was never employed by Enterasys, he was its largest shareholder and served on the board of directors’ audit committee during the time in question.

Repeated charges

The charges against company officials are not new. Both Enterasys and Cabletron, and Cabletron’s other spin-off, Riverstone Networks, have been repeatedly accused – in shareholder suits and SEC findings — of inflating revenue to increase its stock price.

Both spin-offs were once both headquartered in New Hampshire but have since moved out of the state. They each also have struggled and are a mere shadow of Cabletron, employing only hundreds of people nationwide. Cabletron once employed more than 6,000 people in New Hampshire alone.

Enterasys – the larger of the two — has settled its shareholder suits and SEC investigation by agreeing to a fraud finding.

The SEC is still investigating Riverstone, which has been delisted by the Nasdaq stock exchange and recently announced that it may never file audited statements for 2002, the year following the Cabletron break-up.

In the Enterasys criminal conspiracy case, most of the charges stem from dubious sales to a distributor in China named Ariel International Technology Company, made shortly after Enterasys was spun off from Cabletron.

The indictment accuses the accused conspirators of falsifying, altering and backdating documents to create the impression of a sale, while providing Ariel with a secret side letter that still left Enterasys with the prime responsibility for selling the merchandise.

Luacaw specifically agreed to plead guilty to one of the 15 counts lodged against her, admitting that she transferred instructions to Workman in Asia to alter documents so that some $3.5 million would be improperly recorded.

In her plea agreement, she says she did so on the instruction of Gagalis.

Furthermore, she admits that she – at the behest of Fiallo — drafted a secret side letter granting another customer, SAP America, liberal exchange rights, while the company reported to its auditors that it had made a solid $2 million sale.

By reducing the charges, the federal government lowered Luacaw’s maximum sentence to five years plus a fine that could amount to double the losses involved — more than $10 million. In the plea agreement, however, prosecutors said that they would ask for a much lower sentence if Luacaw fully cooperates in the case, although Judge Paul Barbadoro warned that he was not bound by the prosecution’s recommendation and repeatedly asked if Luacaw would want to give up her right to a trial in exchange for the agreement.

Luacaw softly said many times that she would, appearing to want to get the whole thing behind her. She told the judge that she was undergoing treatment for anxiety brought on by the combination of her husband’s death followed by the indictments and had not been able to sleep.

Barbadoro scheduled her sentencing on March 21.