Prosecution grilled at Enterasys hearing; trial set for June 6

On the day that was supposed to mark the start of the federal trial in Concord of five Enterasys Networks executives on charges of securities fraud, it was the prosecution that was on trial.

A lawyer for the defense grilled U.S. Attorney William Morse on the stand in a pretrial attempt to dismiss the case on allegations of prosecution 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 U.S. District Court 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. But 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 yesterday, but last week 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 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.

But Enterasys attorney Harvey Wolkoff argued that obligation is not unconditional, especially if the attorneys were “not acting in good faith in the best interest of the company.”

By law, Enterasys should advance all the legal fees, “but it is a rebuttable presumption,” Wolkoff said.

At a later point, Barbadoro said that such an argument “bordered on the absurd.”

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

According to a deposition of 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.”

One of the options was whether to “test” Delaware law in arbitration.

“I didn’t want them to test them,” Morse testified. “I just wanted to take a hard look at their legal obligations.”

Later on, Morse said, “I wanted to know the reason they haven’t [contested the legal fees], not that they should…. Where is your obligation to pay? Show it to me.”

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 tried to poke a hole in that story. First, he 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 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.”

Whatever Morse said to Wolkoff, it didn’t influence Enterasys’s decisions Morse said. And he said that Enterasys has been paying its defendants – despite lawyers’ complaints that these were months overdue – “and it isn’t very secret that they (Enterasys) haven’t been charged.”

But Good also noted that as late as August 2005, Morse was asking Enterasys what the company’s legal fees were and whether it had enough money to pay expert witnesses. That was the same as “invading the defense’s camp,” added another defense attorney

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. – BOB SANDERS