Litigation, probes continue after Enterasys deal

Enterasys Networks may have put most of its legal troubles behind it, but Gov. Craig Benson could still not be out of the legal hot seat, even though he may no longer be associated with the company.

Enterasys, the successor to Cabletron Systems, the firm co-founded by the governor, has agreed to pay shareholders more than $50 million to settle a lawsuit that alleges the company used fraud to inflate revenues. A judge is expected to approve the settlement by December.

It was the largest such class action settlement in New England’s history, according to Glen DeValerio, an attorney for the Los Angeles County Employees Retirement Association, lead plaintiff in the case.

The company also agreed to a number of corporate reforms that “clearly make the company more transparent to the investor,” DeValerio said. “This is significant because we want to make sure that these kinds of things won’t happen again.”

In the settlement, the firm doesn’t admit wrongdoing, but “these settlement never do,” said DeValerio. “The size of the settlement indicates we had a pretty good case.”

DeValerio said the plaintiff’s attorney had to extensively document its case as part of settlement negotiations.

Enterasys, however, appears to be able to pay out the settlement without major damage. The company will pay $17.4 million in cash — the rest will be in stock, and it said it will get at least $33 million of its payout from some of its insurers. The firm is currently suing other insurers for more.

In February, Enterasys settled a U.S. Securities and Exchange Commission investigation of security fraud. The SEC didn’t fine the company, but it did find fraud, a finding that some of the insurance companies are citing as a reason to withhold paying the company’s claims.

But, aside from the insurance disputes, Enterasys has finally put behind it legal woes that date back nearly to its creation as a spin-off of Cabletron.

“We want to get the litigation behind us and resolve all the issues of the past,” said Christine Sheppard, vice president of investor relations at Enterasys.

Cabletron suit continues

But the settlement doesn’t close the book on all of the litigation and investigations swirling around Cabletron and its various spin-offs — legal matters that still affect Governor Benson.

Cabletron, once the state’s largest employer, spun off Enterasys and Riverstone Networks into two public companies in 2000, with the goal of increasing shareholder value. (Another proposed spin-off, Aprisma, never went public. Instead it was sold off to a private company and remains in Portsmouth.) The public companies both moved out of state, but still maintain some workers here. Enterasys employs 450 at its Rochester facility out of a total 1,400.

Benson’s hand-picked successor, Piyush Patel, engineered the spin-offs, though he eventually left with Riverstone. Benson went on to serve on the Enterasys board of directors before stepping down when he became governor. At the time, he was Enterasys’ largest individual shareholder.

According to a Sept 30 update to his financial disclosure statement, Benson now retains less than 1 percent of Enterasys’ shares. However his trust, according to that update, still retains more than a 1 percent holding in Riverstone.

Things began to go sour after the company was split. Revenues were a lot lower than expected, stock prices plummeted, the SEC launched investigations into the spin-offs and the public companies became targets of class action lawsuits. The suits all echoed a previous lawsuit against Cabletron, charging that the companies inflated revenues to drive up the stock price, via channel stuffing (selling products knowing that they will probably be returned) and fraudulent shipping.

The Cabletron lawsuit, which covers the period when Benson was CEO and names him personally, is the furthest along in the legal process. An attempt to toss out the suit was reversed on appeal, and both sides are currently engaged in the discovery phase. The plaintiffs’ attorneys are now sifting through thousands of pages of documents and hope to start deposing former company officials, including Benson, as early as December.

“We are still going forward with our suit,” said Sanford P. Dumain, the lead attorney. “This (the Enterasys settlement) won’t affect discovery.”

Meanwhile, an SEC investigation continues into “related parties” of the company. One of those parties is Riverstone, which is now based in California. The SEC also is investigating charges related to inflated revenue.

Sources close to the investigation say that those “related parties” include any individuals responsible for the fraud it found at Enterasys. One such party could be Benson, who received a special waiver to serve on the Enterasys board’s audit committee during the period in question.

The SEC is expected to begin questioning company officials and former officials in New Hampshire over the next few months.