SEC refiles charges against ex-Cabletron CEO

Former Cabletron Systems chief executive Piyush Patel led the conspiracy, along with the company’s chief financial officer and top corporate affairs executive, to inflate revenue at the former Rochester-based firm, the Securities and Exchange Commission charged in an Aug. 29 filing in U.S. District Court in Concord.

Judge Steven J. McAuliffe in March threw out similar civil charges against Patel and Eric Jaeger, the former executive vice president of corporate affairs for the now-defunct Cabletron — along with most of those against David Kirkpatrick, the former CFO.

At the time, McAuliffe ruled that the allegations were not specific enough and the amount of money involved not large enough. But he dismissed the charges without prejudice, giving the SEC the opportunity to amend its complaint.

The SEC responded Aug. 29 with a 105-page filing that goes into painstaking detail on each and every alleged fraudulent transaction, including revealing incriminating e-mails and placing the blame squarely on Patel, Kirkpatrick and Jaeger.

The agency charges that the Cabletron executives were still involved in the securities fraud at Enterasys Networks and Aprisma Management Technologies after Cabletron spun off the two companies in 2001.

While the new complaint still details Patel’s direct involvement in only two fraudulent deals, it charges that he kept close tabs on almost all of them. According to the SEC, he had to approve all investment deals over $500,000.

The amended complaint also again names Michael Skubisz, who headed Aprisma Technologies, which was later sold to private investors; and Larry Collins, an Enterasys controller against whom charges were also dismissed earlier.

The complaint also names as defendants five people tried with criminal conspiracy to inflate revenue at Enterasys, including four who were convicted — former Enterasys CFO Robert Gagalis; Bruce Kay, senior vice president of finance; Bob Barber, executive vice president of corporate affairs at Enterasys; and David Boey, vice president of finance at Enterasys’ Asia Pacific Division.

The fifth, former Enterasys chief operating officer Jerry Shanahan, is scheduled to be retried on criminal charges after the original jury could not reach a verdict on the charges he faced the first time.

All of those convicted of criminal charges have either settled or defaulted on SEC’s civil charges.

The complaint names four other executives as related parties. They include former Enterasys CEO Enrique “Henry” Fiallo, who pleaded guilty to criminal charges and was given a lesser sentence in exchange for cooperating with prosecutors.

The amended complaint did not mention, or allude to in any way, Patel’s predecessor as CEO, Cabletron co-founder Craig Benson, who later went to serve a term as New Hampshire’s governor.

Last month, Gagalis — in seeking to get his conviction and 11-1/2-year sentence overturned — charged that Benson was part of the conspiracy. Benson’s attorney denied those charges.

Three-corner deals

According to the SEC complaint, the conspiracy to inflate revenue started at Cabletron — once the state’s largest employer — in March 2000, more than a year and a half before it spun off Enterasys (which has since moved to Massachusetts and been bought out by private investors.).

The conspiracy was driven, the complaint alleges, by a February 2000 announcement that Cabletron was planning to split the $5 billion company into separate parts, to enhance interest in the spinoffs as well as enrich the executives with bonuses and stock options.

“Cabletron’s stock would increase in value if they could perpetuate the myth of the subsidiaries’ shareholder value in the quarters leading to the announced spin-off,” says the complaint. “Patel, Kirkpatrick, and Jaeger created a corporate culture at Cabletron, Enterasys, and Aprisma that did not tolerate anything less than fully meeting both the internal revenue goals that they set for the companies as well as Wall Street’s expectations.”

The three lead defendants, says the complaint, “not only permitted and encouraged, but dictated and personally participated in, a fraudulent scheme to improperly inflate the companies’ revenues.”

According to the SEC, there were two major ways of inflating revenue: secret agreements that would allow customers to return product which — if known — would have precluded the company from counting them as revenue; and three-corner deals, in which Cabletron’s “investments” in shaky companies were used to buy product they didn’t need through distributor.

In filing the motion, the SEC anticipated objections that it contains new factual allegations, which procedurally is not allowed. The SEC argued that it was just using them to “explain” with more specific details, how the defendants were involved in securities fraud.

Bob Sanders can be reached at bsanders@nhbr.com.