Testimony details alleged Enterasys deals

Jerry Shanahan, Enterasys Networks’ former chief operating officer, asked Robert Barber, the former senior vice president of business development at Cabletron Systems to close a deal before the quarter ended in order to inflate Enterasys’ revenue, according to Barber’s testimony to the Securities and Exchange Commission that was revealed in court documents filed in January.

Both executives are fighting federal fraud securities charges in a trial that is expected to begin next month in U.S. District Court in Concord.

Shanahan was asking the court to quash Barber’s SEC testimony or sever their trials, and to do so he included a partial transcript in the record.

According to the federal indictment, Enterasys invested in several third-party companies in exchange for agreements by those companies to buy Enterasys products. It then allegedly hid those transactions from shareholders in order to boost sales for the first quarter after being spun off of Cabletron.

Cabletron — once the state’s largest employer — split up in 2001, with Enterasys as its main successor. Enterasys has since left the state, and is being sold to some private investors.

One of the alleged deals involved Worldlink Technologies Inc., an Internet service company. Enterasys invested $6.3 million in Worldlink, with the promise of $6.8 million more, to allow Enterasys to improperly record $4.6 million of revenue for its products, according to the indictment.

Barber testified that he accelerated the Worldlink deal at Shanahan’s request. Barber said Shanahan didn’t know why he wanted it to close earlier, but he assumed it was because “he needed the revenue.”

Barber later said about such investment deals: “It was obvious that they were generating revenue out of them.”

Another time, Barber was asked about a memo written by Shanahan a week after Enterasys broke off from Cabletron that concerned a proposed consulting contract at Enterasys.

Barber was supposed to focus on “investments,” and the term “investments” was put in quotations. Under the deal, Barber would be paid only for investments that achieved revenue. However, Barber said, that particular remuneration deal was never consummated, and said he did not know why the word investments was put in quotation marks.

Going private

Meanwhile, Enterasys shareholders will get to vote whether to sell their company to private investors on Feb. 14.

If approved, shareholders will receive a total of $13.92 a share, higher than the $10.27 price offered in November when the merger was first announced as well as the $13.44 per-share price offered on Jan. 13, before the shareholder meeting date was announced.

All regulatory hurdles have been cleared, so it will be up to slightly less than 5,000 shareholders of record as of Jan. 13 — holding more than 27 million shares — to approve the $386 million sale to The Gores Group LLC and Tennenbaum Capital Partners LLC.

Gores previously bought Aprisma Technologies — which, like Enterasys was one of four spin-off companies of the former Cabletron Systems.

Some Enterasys stockholders are insisting that the company should hold out for a better deal, especially given the company’s recent projections for fourth-quarter revenue and gross profit were $91 million and $48 million, respectively.

A class action lawsuit contesting the deal has been filed in Delaware Chancery Court against the company. But with the board members united behind the proposal, and most institutional investors expected to be on board, most observers think Enterasys will become a privately held company.

If confirmed, shareholders should be receiving their checks about two weeks after completion of the merger, which should take place sometime before the end of this quarter, according to the filing.