It's back: SEC's Cabletron case set for November

Eric Jaeger, the former top lawyer and vice president at Cabletron Systems, may call on former Cabletron CEO Piyush Patel, former Cabletron chief financial officer David Kirkpatrick and Michael A. Skubisz, former CEO of a Cabletron spinoff company, to testify in his defense in a civil securities trial scheduled for next month, according to Jaeger's pretrial statement.

The U.S. Securities and Exchange Commission has charged that Jaeger and former Cabletron chief operating officer Jerry Shanahan participated in a scheme to inflate revenue in order to drive up the former Rochester-based company's stock price back in 2001. At the time, Cabletron – once the state's largest employer — spun off Aprisma Management Technologies Inc. and Enterasys Networks Inc.

The SEC originally charged Patel, Kirkpatrick and Kubisz in the same conspiracy, but the three executives eventually settled. Those civil charges also included four Enterasys officials — including former Robert Gagalis — who were convicted of a similar criminal fraud scheme in 2006. None of the four contested the civil charges. Gagalis is serving an 11½-year federal prison sentence. That same jury failed to convict Shanahan, and criminal charges against him were eventually dropped.

The SEC estimates that the upcoming civil trial – scheduled to begin Nov. 14 — will last 10 days (Jaeger and Shanahan's attorneys predict a duration of five to eight days) – if it takes place at all. In addition to a possible additional delay, the SEC said it had recently restarted settlement negotiations with Jaeger, though it did not indicate any talks with Shanahan.

Jaeger, who was identified by the SEC as a leader of the conspiracy, along with Patel and Kirkpatrick, have said that the executives inflated revenues by using three-corner deals in which Cabletron and its spinoffs would invest in shaky companies and then use those investments to buy Cabletron's products through a third-party distributor, without telling auditors.

Cabletron would also count as revenue product sold with liberal return terms (which would prohibit those transactions from being counted as revenue) and without disclosing those terms. But in 2009, a federal judge threw out much of the SEC's case when it failed to identify how the individual conspirators were involved in a number of specific revenue-enhancing transaction.

The SEC is calling on many of the same witness who testified in the criminal trial, including former Enterasys CEO Enrique (Henry) Fiallo, and Gayle Spence, former director of worldwide sales at Cabletron. The SEC also may call Bruce Kay, former Enterasys controller, who was sentenced to 9½ years, and Larry Collins, another former civil defendant who settled with the SEC. Jaeger listed himself and one expert as witnesses, but listed 17 others that he may call, including Patel, Kirkpatrick and Skubisz. Shanahan listed himself and seven other witnesses, though he said he might call Fiallo.

Categories: Technology