Prosecution grilled at Enterasys hearing as trial is reset

On the day that was supposed to mark the start of the trial in U.S. District Court in Concord of five Enterasys Networks executives for securities fraud, it was the prosecution that took the stand.

A lawyer for the defense grilled U.S. Attorney William Morse at the March 7 hearing. Morse was on the stand in a pretrial attempt to dismiss the case on allegations of prosecutorial misconduct.

Instead of the court determining whether the executives misled shareholders of the Cabletron Systems spinoff by wildly inflating revenue, the question of the day was whether the U.S. attorney violated the defendant’s right to a lawyer by allegedly putting pressure on Enterasys not to pay their former employees’ attorneys, as required under law.

“I want to know what Mr. Morse said, when he said it and why he said it,” said Judge Paul Barbadoro, the federal judge trying the case.

In the end, Barbadoro never made a finding on that question. Enterasys instead decided to resume paying the attorneys’ fees. The judge did decide to continue the trial until June 6, but not before admonishing Morse that the prosecutor took the allegations of misconduct too lightly, and that they were the “most serious thing you can say about an attorney.” The judge even suggested that defense attorneys file a complaint on the matter.

This was not a good beginning for the prosecution, which has charged five former executives — including Enterasys’s former chief financial officer, Robert Gagalis, and its former chief operating officer, Jerry Shanahan, with using several tricks to inflate revenue in 2001, when Cabletron spun off Enterasys.

Four other former Enterasys executives — including former CEO Enrique “Henry” Fiallo – have pleaded guilty to similar charges.

The trial was scheduled to begin on March 7, but earlier in the month defense attorneys got hold of some testimony in a dispute between Enterasys and its attorneys over the payment of defendant’s legal costs, which – the defense claims – seems to indicate prosecutors were instructing Enterasys not to pay the defense legal fees.

Under Delaware law, corporations have the right to promise to advance legal fees to their employees, in even the “most extreme” cases — including defending themselves from criminal prosecution. And while it might be “silly” for a corporation to grant such a right, Barbadoro said, Enterasys apparently did so. Enterasys is incorporated in Delaware.

At question is how much Enterasys’s position was a result of government pressure.

According to a deposition of Enterasys attorney Harvey Wolkoff, referred to by defense attorneys, the government wanted Enterasys to be more aggressive in fighting defense lawyers.

Morse, under cross-examination by Shanahan’s attorney, Andrew Good, said that wasn’t accurate.

Instead, he just wanted to know “what options there are, rather than just laying down.”

Morse said the reason he wanted to know was because of a directive from the U.S. Justice Department to take into account the payment of legal fees in determining whether a company is cooperating with the prosecution. At that time, Morse said, he was trying to determine whether his office should criminally prosecute the company, even though he was personally against such prosecutions because it hurt the shareholders who were already victimized by the alleged deception.

But Good said the directive said paying legal fees can’t be taken into account in assessing cooperation if they were obligated by state law.

Second, Good pointed out that Morse had later sought an opinion from his office as to whether he was acting ethically in raising these questions. He noted that one defendant pleaded guilty days after learning that the company would not pay the legal fees.

Good also pointed to some notes following Morse’s phone conversation with Wolkoff, in which he used the phrase “gentle persuasion.” That was Wolkoff’s phrase, testified Morse, not his.

Barbadoro said he was skeptical of Morse’s “true motivation”. The judge asked if the defense was putting pressure on Enterasys to withhold legal fees in order to get the defendants to plead guilty and cooperate as government witnesses.

Morse denied this, but Barbadoro wasn’t entirely convinced, and said he was “trying to evaluate your truthfulness as to your motivation.”

Barbadoro urged that the sides work out an agreement, so that the attorneys get paid.

“I’ve got a trial I have to run,” he said. “It’s a little bit silly to be litigating this issue.”

After Enterasys agreed, the judge ruled that even if Morse’s actions were taken in the worst light, he still wouldn’t dismiss the trial for a mere delay in payment of legal fees. Good argued that had his client known of the prosecution’s interference he would have fought extradition from Ireland, but Barbadoro dismissed the argument as very creative but without merit. He also granted the three-month continuance. That would be enough time, he said, for the attorneys to use the money to prepare a proper defense.