Three Enterasys execs want verdict overturned

The month-long securities fraud trial of five Enterasys Networks executives may be over, but the legal arguments continue.

Three of the four convicted defendants have filed motions urging the judge to overturn the jury’s Dec. 19 verdict and acquit them on at least some of the counts, each of which could result in a decade in prison.

The motions, filed Dec. 29, set the stage for a possible appeal by the defendants, who were convicted of conspiracy to defraud stockholders by fraudulently inflating revenue in the quarter in which Enterasys was spun off from the Rochester-based Cabletron Systems in 2001.

So far, motions have been filed by Robert Gagalis, former chief financial officer, Bruce Kay, once the vice president of finance, and Robert Barber, a former Cabletron official who was working on the Enterasys investment team.

David Boey, former head of the company’s Asia-Pacific division, asked for an extension in his filing deadline. He was the lowest ranking of the defendants and the one with the fewest resources to launch an appeal.

Most of the defendants’ arguments are technical in nature, and were put forth in previous dismissal motions or at trial. While the prosecution argued that all of the defendants were using a variety of accounting gimmicks to achieve their goal, Gagalis’ attorney argued that the gimmicks don’t add up to one grand conspiracy.

Gagalis’ attorney also argued that Enterasys’ stated revenue target at the time was not necessarily what analysts expected. Therefore, when the company said it had met analysts’ expectations, there was no misrepresentation. He asserts the Securities and Exchange Commission does not have the authority to promulgate the rule that officials can’t “omit” information from its auditors, and besides, the SEC filing in question was an unaudited quarterly statement, not an audited annual report. Therefore, misleading the auditors was not really a crime.

Gagalis also argues that Judge Paul Barbadoro should throw out wire fraud counts because Gagalis wasn’t at odds with company goals, but instead was striving to meet them, and that he did not intend to cause any loss to shareholders. The losses that resulted, after the accounting fraud fell apart, was “simply ‘an inadvertent consequence’ of the scheme rather than ‘a goal of the plot.’”

Kay seconded Gagalis’ arguments. He also argued that he didn’t “personally falsify” records, since the revenue figures were entered automatically once the revenue was shipped. He also argued that he didn’t actually backdate any documents and only “requested that the language in the agreement be negotiated” after the quarter ended. Finally he argued that no independent accounting expert testified at the trial to inform the lay jury of the complex accounting rules. The government’s experts were the auditors themselves, and therefore were not objective.

Barber’s attorney mainly reiterated his former arguments that his client was not involved in accounting or reporting decisions – he left the company once the quarter ended – and only negotiated investment deals. Barber, was “not a team player” and was out of the loop.

Meanwhile, the U.S. attorney’s office still has to decide whether to retry a fifth defendant – Enterasys’ former chief operating officer, Jerry Shanahan — after a mistrial in his case was declared after the jury could not reach a verdict in his case. – BOB SANDERS

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