Imprisoned Enterasys exec wins new hearing
By Bob Sanders
Friday, June 19, 2009
Robert Gagalis, the former chief financial officer of Enterasys Networks who’s serving an 11-1/2 year prison sentence for securities fraud, will get his day in court to prove his claim that his former attorney had a conflict of interest and did not represent him adequately at trial.
There is a good chance that the former attorney – James Rehnquist, son of the late U.S. Supreme Court Chief Justice William Rehnquist – will end up on the stand at the evidentiary hearing, scheduled for July 20 in U.S. District Court in Concord. Gagalis might testify as well.
Gagalis, who never took the stand in his own two-week trial in December 2006, contends – in an affidavit filed with the district court earlier this month – that Rehnquist was conflicted because his firm Goodwin Proctor also represented Daniel Harding, who at the time was being investigated for securities fraud at Riverstone Networks in California.
Before that, Harding worked at Cabletron Systems, the Rochester-based firm that was once New Hampshire’s biggest employer and had spun off both Enterasys and Riverstone in 2001.
Gagalis contends that Harding was involved in the very type of dubious “three-corner” deals that led to Gagalis’ conviction with three other defendants.
Gagalis says he wanted Rehnquist to emphasize in his defense that such deals had been going on for years under Cabletron’s senior management – including Harding and Cabletron co-founder and chief executive Craig Benson – before he was hired in 2001.
Instead, Rehnquist joined with the other defendants in defending the deals as legal, while at the same time his law firm disparaged him to prevent prosecutors from charging Harding in California, Gagalis charges.
“I was never advised by Rehnquist or anybody at Goodwin that concurrent with their representation of me, they were also defending Harding by making arguments which sought to place his employment in a limited context while casting responsibility for improper acts on the broader management culture at Cabletron and its related companies, including specific naming of myself. Ultimately, the defense which I had from the outset wanted Goodwin to use on my behalf was instead used on behalf of their other client, Harding, against me,” says Gagalis in his affidavit.
He adds: “I could have provided information about: Riverstone’s accounting irregularities including Harding’s possible involvement; Benson being involved in the audit issues and revenue recognition problems ….”
Withheld information?The July 20 hearing will not delve into Gagalis’ other major contention, that former U.S. attorney Thomas Colantuono had his own conflict of interest — his political ties to Benson, a fellow Republican who served as governor while the Enterasys case was being investigated and prosecuted, although not when it was actually being tried in court.
Those conflicts, Gagalis alleges, caused Colantuono to steer the investigation away from Benson and his top associates to lesser executives.
Neither Benson nor Harding was charged with securities fraud. The U.S. Securities and Exchange Commission has filed civil charges against other Cabletron senior management, including Piyush Patel, who succeeded Benson as chairman and chief executive of Cabletron Eric Jaeger, executive vice president of Cabletron, David Kirkpatrick, chief financial officer of Cabletron, Gagalis and six other executives.
But U.S. District Court Judge Paul Barbadoro, who presided over Gagalis’ criminal trial, decided without explanation, to only focus on Rehnquist’s alleged conflict in the July hearing.
Nevertheless, that is a major victory for Gagalis, who waived all of his appeal rights in accepting a deal for the 11-1/2-year sentence, the harshest given to all of the five defendants at the 2006 trial.
Rehnquist advised him to waive appeals, Gagalis said, because an appeal might have resulted in even harsher sentencing guidelines being proposed.
However, Gagalis said Rehnquist never told him that Assistant U.S. Attorney William Morse – who prosecuted the Enterasys case — raised one avenue of appeal, that Gagalis might have cooperated against Harding.
“Mr. Gagalis’ potential cooperation is significant mainly because, if convicted at trial, Mr. Gagalis could claim that he did not receive the benefit of your firm’s unbiased advice concerning the respective benefits and risks of cooperating versus contesting the Grand Jury’s indictment,” Morse wrote Rehnquist.
While Rehnquist did mention that Morse had brought up the Harding conflict, he assured Gagalis there was no conflict, that in any case there will be a “Chinese wall” between the cases, and that if push came to shove the firm would withdraw from representing Harding.
“Morse could even attempt to disqualify me — the sincerest form of flattery — although such motions are frowned upon by judges and this one would surely be a loser. In any case, I am confident that this issue will not have any adverse effect on my representation of you,” Gagalis says Rehnquist told him.
But later correspondence about the conflict, including Morse’s letter, which Gagalis could have used in an appeal, was kept from him, Gagalis said.
“I did not receive a copy of Morse’s March 1, 2005, letter to him until about May 2008, which was nearly 17 months after my trial, and 9 months after I began my sentence; nor did Rehnquist ever discuss with me this letter,” Gagalis says in his affidavit.
Gagalis also denies seeing Rehnquist’s memo that “Dan Harding had involvement” in third-party transactions, even though Gagalis was copied on it.
If Gagalis had known and understood these conflict-of-interest issues, as well as others, “I would have never waived my rights to appeal.”
Gagalis’ affidavit also repeatedly mentions Benson, who was never employed by Enterasys, although he was the company’s largest shareholder and chaired the audit committee of the board of directors at the time.
It was Benson who helped convince Gagalis to quit his job at Fisher Scientific to join Enterasys, by assuring him that Enterasys was doing well, and that class action lawsuits alleging the company was using accounting tricks such as “channel stuffing” to inflate revenue were baseless.
“As I was becoming familiar with Enterasys’ operations, it was increasingly clear to me that Benson, Patel, Kirkpatrick and Jaeger actually held the power, and that I therefore effectively reported to them,” Gagalis said.
It was Benson, who disparaged Enterasys’ auditors, KPMG, Gagalis alleges. “Benson said that KPMG’s intrusiveness was an obstacle to the company’s ability to be competitive in the marketplace and he was set on finding new outside auditors,” Gagalis says.
Gagalis says he clashed with Benson in advocating a more conservative accounting method, but shared his skepticism of KPMG. So when Jaeger urged him to “crack the whip” and “not to talk with KPMG until they have a clean set of paperwork,” Gagalis assured him “no documentation of purchases through channel partners will be provided to KPMG.”
Those two e-mails were the “centerpiece” in the prosecution’s case against Gagalis, used to show he was in on a conspiracy to hide dubious deals from the company’s auditors in order to inflate revenue. Gagalis contends that is not true.
“First, I was on vacation and I wanted to let Jaeger know that I would look at the matter before anything occurred in terms of KPMG. In fact, I had not seen the information yet myself. Also, I had earlier been told by Benson and others that Enterasys should seek a new outside auditor, other than KPMG, so I was dubious of KPMG,” he said.
But Gagalis said nothing at the trial, though he says he wanted to testify. Indeed, Rehnquist and the other defendants’ counsel, while cross-examining prosecution witnesses, did not put on their own defense.
“At no time before or during trial did my defense do anything to explain my September 4, 2001, e-mail to Jaeger,” said Gagalis.
Bob Sanders can be reached at email@example.com.