Networking execs sentenced for accounting fraud

Four former executives with computer networking and security vendor Enterasys Networks have been sentenced to prison terms for their roles in accounting fraud at the company that cost investors millions of dollars, the U.S. Department of Justice announced Tuesday.

The executives were convicted on conspiracy and fraud charges during a December 2006 trial. At sentencing hearings that began last week in U.S. District Court for the District of New Hampshire, Judge Paul Barbadoro sentenced former Enterasys CFO Robert J. Gagalis to 11 1/2 years in prison. 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.

Bruce D. Kay, a former Enterasys finance executive, was sentenced to 9 1/2 years in prison. 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.

Robert G. Barber, a former Enterasys business development executive, was sentenced to eight years in prison and fined $25,000. 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.

Hor Chong "David" Boey, former finance executive in Enterasys' Asia Pacific division, was sentenced to three years in prison. 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.

Starting in mid-2001, the four defendants and other Enterasys executives inflated the company's revenue figures as a way to meet expectations of financial analysts and to maintain or increase the price of the company's stock, the DOJ said.

The defendants backdated and falsified documents and concealed terms of business transactions from Enterasys' auditors in order to inflate revenue, the DOJ said. The conspirators also fraudulently created false revenue by secretly investing company funds in other companies and having those companies to use the investment proceeds to buy Enterasys products.

Because of the fraudulent scheme, public investors lost at least $97 million, the DOJ said.

The four "will spend years in prison for perpetrating a fraud that cost Enterasys shareholders millions of dollars," Alice Fisher, assistant attorney general in the DOJ's Criminal Division, said in a statement.

Several other former Enterasys executives, including former Chairman, President and CEO Henry Fiallo have previously pleaded guilty to felony charges in connection with the scheme. To date, eight former Enterasys executives have been convicted of felonies.

An Enterasys spokesman said the none of the four defendants have worked for the company recently. The company is under new management and ownership since the accounting fraud case was filed, and the convictions will not affect the company going forward, said Kevin Flanagan, company spokesman.

The accounting fraud case "is very much in the past" for the company, he added.

Reprinted with permission from NetworkWorld.com