Legal actions continue despite Enterasys sentencing

The stiff sentences handed down to four former Enterasys Networks executives over the past week in US District Court in Concord will probably not be the last word on the securities fraud involving the 2001 break-up of Rochester-based Cabletron Systems.

Some 16 executives from Cabletron spin-off companies face either criminal or civil charges, or sentencing, relating to accounting schemes to inflate revenue during the time of the break-up of what was once New Hampshire’s largest employer.

For the four former Enterasys executives, however, the criminal portion of the case appears to over, apart from the time spent in federal prison.

Over the last week, Robert Gagalis, the firm’s former chief financial officer, was sentenced to 11-1/2 years in prison. Bruce Kay, vice president of finance, was sentenced to 9-1/2 years. Bob Barber, a business development executive received 8-1/2 years. And David Boey, former comptroller of the Asia Pacific Division, was sentenced to three years.

The first three executives waived their right of appeal. While Boey could appeal, it is unlikely he will have the resources to do so.

One reason behind the tough sentences was Judge Paul Barbardoro’s ruling that the executives were responsible for $97 million of the $1.3 billion drop in value following revelations of possible fraud. Enterasys’ stock price never recovered, and the company was sold to private investors at a fraction of its former value.

However, by forgoing appeals, the executives avoided the possibility of even tougher sentences under new advisory guidelines, which went into effect Nov. 1 of 2001. Barbadoro ruled that the conspiracy ended before that day, even though the executives filed inflated revenue figures to U.S. Securities and Exchange Commission afterward. Barbadoro said that the defendants conspired to inflate revenue in 2002 as well, but that was a separate conspiracy.

But Barbadoro – thinking that there was a chance his decision would be overturned on appeal — was prepared to sentence the executives under both guidelines. The sentencing agreements made such dual sentencing unnecessary, except in the case of Boey, who would have received an 11-year sentence under the new guidelines, instead of the three-year term under the old guidelines.

On June 29, the jury convicted Boey of altering documents so a $3.5 million deal would be recognized for revenue in order for Enterasys to meet its revenue goals, but his attorney argued, and the judge agreed, that Boey was primarily an order-taker, not an order-giver, and he took two years off the low end of both guidelines.

That same day, Barber struck a deal for an eight-year term – the lowest possible sentence under the old guidelines, because he was concerned about the possibility of a sentence imposed under the newer, more stringent guidelines.

“I weighed the benefits and the risks,” said Barber, “and I think this is a satisfactory arrangement.”

Barber was convicted of setting up “three-corner” deals, in which Enterasys used “investments” in shaky companies as a way to buy its own products through a distributor. Barbadoro would have sentenced him to a “somewhat higher sentence”

The following Tuesday, July 3, Gagalis and Kay, who were convicted of their involvement in deals involving altered documents, three-corner deals and reporting the bogus revenue the federal authorities, decided to follow Barber’s example.

While Gagalis was the highest-ranking executive to be tried, the “most culpable of those indicted” was the former chief executive officer, Enrique “Henry” Fiallo, Barbadoro said. Fiallo pleaded guilty before the trial and testified at it in exchange for a five-year cap on his sentence.

The judge said he was “disturbed” that Fiallo would receive a lesser sentence then his subordinates, especially since “personally I don’t think you needed him to secure the convictions of the other defendants.” But

Assistant U.S. Attorney William Morse said that any mistake in cutting a deal with Fiallo shouldn’t affect the sentencing of the others.

Fiallo’s sentencing – originally scheduled for Monday — was moved to October. On Thursday, Morse asked that the sentencing of three other conspirators will be moved from July to October as well.

The rescheduling is to accommodate the retrial of Enterasys’ former chief operating officer, Jerry Shanahan, who was tried along with the four convicted executives in December. The jury could not reach a decision on Shanahan, an Irish national who is scheduled to return to the United States for the retrial in September.

Gagalis and his four co-defendants also face civil charges, along with five other executives — including former Cabletron Chief Executive Officer Piyush Patel. Patel went on to chair Riverstone Networks, another Cabletron spin-off that which faced its own investigation of accounting fraud. (Riverstone – which has since moved to California – sold its assets at a bankruptcy sale to Lucent Technologies).

The Securities and Exchange Commission filed civil charges against six former Riverstone executives who are currently trying to negotiate a settlement. The civil suit is not against Patel, but it does name former Riverstone CEO Romulus Pereira. At one point, both Patel and Pereira were targets of a criminal investigation, according to papers filed in U.S. Bankruptcy Court. That criminal investigation is continuing, according to a bankruptcy filing at the end of June, but it is not clear whether the two executives are still targets. – BOB SANDERS