Enterasys Execs Sentenced in Securities Fraud Case

Four former executives of Rochester-based Enterasys Networks have been sentenced to federal prison in a fraud case.^[1] Enterasys Networks was formed in March 2000 as a spin-off of Cabletron Systems, and is still a networking company that caters to large enterprises. ^[2]

The executives were convicted of conspiracy and fraud during a December 2006 jury trial; evidence at trial showed that, starting in the summer of 2001, the four defendants and other Enterasys executives inflated Enterasys' revenue figures in order to satisfy the publicly reported expectations of Wall Street analysts and to increase, or at least maintain, the price of Enterasys stock.^[3] The defendants backdated and falsified documents and concealed material terms of business transactions from Enterasys' auditors in order to inflate revenues; the court found that public investors lost at least $97 million as a result of the fraudulent scheme.^[4]

At sentencing hearings Tuesday, U.S. District Court Judge Paul J. Barbadoro sentenced former Enterasys Chief Financial Officer Robert J. Gagalis to 11½ years in prison.^[5] Gagalis was convicted of one count of conspiracy, two counts of securities fraud, one count of making false statements to auditors of a public company, and four counts of wire fraud.^[6]

Bruce D. Kay, formerly Enterasys' senior vice president of finance, was sentenced to 9½ years in prison.^[7] The jury found Kay guilty of one count of conspiracy, two counts of securities fraud, one count of falsifying books and records of a public company, one count of making false statements to auditors of a public company, and three counts of wire fraud.^[8]

Robert G. Barber, a former Enterasys business development executive, was sentenced to eight years in prison and fined $25,000.^[9] The jury found Barber guilty of conspiracy, two counts of securities fraud, one count of falsifying books and records of a public company, and one count of making false statements to auditors of a public company.^[10]

Hor Chong "David" Boey, former finance executive in Enterasys' Asia Pacific division, was sentenced to three years in prison and three years of supervised release.^[11] Boey was convicted of conspiracy, two counts of securities fraud, one count of falsifying books and records of a public company, one count of making false statements to auditors of a public company, and two counts of wire fraud.^[12]

To prove a federal criminal securities fraud case, the government must prove beyond a reasonable doubt that: 1)the defendant used a device or scheme to defraud someone, made an untrue statement of a material fact, or failed to disclose a material fact which resulted in making the defendant's statements misleading; 2) the defendant's acts were, or failure to disclose was, in connection with the purchase or sale of securities; the defendant used the mail or telephone in connection with these acts or this failure to disclose; and the defendant acted for the purpose of defrauding buyers or sellers of securities.^[13] If the government successfully convicts the defendant on securities fraud charges, the defendant can be fined up to $1,000,000 (up to $5,000,000 if a corporation), imprisoned for up to 10 years, or both.^[14]

We have previously spoken about Wire Fraud here.

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^[1] Seacoast Staff, Jail for former Enterasys execs, Four guilty of securities, SeacostOnline, July 04, 2007, available at http://www.seacoastonline.com/apps/pbcs.dll/article?AID=/20070704/NEWS/707040395/-1/BIZ (last visited July 4, 2007).
^[2] Id.
^[3] Id.
^[4] Id.
^[5] Id.
^[6] Id.
^[7] Id.
^[8] Id.
[9] Id.
^[10] Id.
^[11] Id.
^[12] Id.
^[13] 15 U.S.C. §77a & 78a (2007).
^[14] Id.