Accounting & Tax

Former Enterasys Exec Settles with SEC

He participated in the revenue-recognition scheme that led to four criminal convictions late last year.
Stephen TaubFebruary 2, 2007

Anthony L. Hurley, former assistant controller of Enterasys Networks, has agreed to settle civil fraud charges in connection with improper revenue recognition at the company, according to the Securities and Exchange Commission.

Hurley agreed to pay about $32,000, according to the SEC. The commission added that in a related criminal case, he pleaded guilty to one count of wire fraud and agreed to cooperate with the U.S. Attorney’s Office for the District of New Hampshire.

The commission alleged that from March 2000 to December 2001, Hurley participated in a companywide scheme to fraudulently inflate revenues at Enterasys, which makes computer network hardware, and at its former parent company, Cabletron Systems. Specifically, stated the SEC, Hurley directly participated in transactions that involved undisclosed side agreements.

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“Hurley played a role in Enterasys’s financial fraud by reviewing, approving, and otherwise participating in sales transactions that lacked one or more necessary elements for revenue recognition under generally accepted accounting principles,” the commission elaborated.

The scheme caused Enterasys to overstate its announced pro forma earnings per share, over five quarters, by 50 percent to 600 percent, alleged the commission. The SEC also maintained that Hurley and others caused Enterasys to understate its operating losses by 5 percent to 33 percent during that time, and to overstate net revenues by 8 percent and 25 percent for the final two quarters of the period.

In December, four former executives of Enterasys — chief financial officer Robert Gagalis; senior vice president of finance Bruce Kay; Robert Barber, an accountant; and David Boey, who headed the company’s Asia-Pacific sales force — were convicted by a federal jury on securities fraud and conspiracy charges stemming from the revenue-recognition scheme.

Former chief operating officer Jerry Shanahan was acquitted on one count of securities fraud, according to the Associated Press, which added that the jury could not reach a verdict on five other counts against Shanahan.

Enterasys went public when it merged with its former parent, Cabletron Systems, in 2000. In February 2003, the SEC settled related charges with Enterasys and a subsidiary, Aprisma Management Technologies, which agreed to cease and desist from future violations of securities laws. Last year Enterasys was acquired by The Gores Group and Tennenbaum Capital Partners for approximately $386 million. It subsequently went private.

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