Accounting & Tax

Ex-Enterasys VP Settles Rev-Rec Charges

Becomes the latest executive implicated in a revenue-recognition scheme at the maker of computer network hardware.
Stephen TaubMay 14, 2007

Another former executive of Enterasys Networks has agreed to settle civil fraud charges regarding improper revenue recognition with the Securities and Exchange Commission.

Gayle Spence Luacaw, once a vice president at the maker of computer network hardware, participated in a companywide scheme to fraudulently inflate revenues at Enterasys and its former parent, Cabletron Systems, making the company appear stronger than it was, according to the SEC.

The commission had previously alleged that Luacaw directly took part in transactions that involved undisclosed side agreements in which the purchaser of Enterasys products was granted full return or exchange rights, or payment was contingent upon the purchaser’s resale of the product, or payment was contingent upon an investment by Enterasys. In that third scenario, the SEC alleged, Enterasys would agree to take a debt or equity interest in a customer, which would use those funds to purchase products from Enterasys.

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Under the settlement with the SEC, Luacaw agreed to pay disgorgement plus prejudgment interest, and agreed to a permanent injunction against further violations of the relevant securities laws.

In August 2004, Luacaw pleaded guilty to one criminal count of conspiracy to commit securities fraud and wire fraud and agreed to cooperate with prosecutors. According to an announcement at the time by the U.S. Attorney’s Office for the District of New Hampshire, Luacaw participated in a fraudulent transaction with a China-based company known as Ariel, which allowed Enterasys to improperly report approximately $3.5 million in revenue for the quarter ended September 1, 2001.

The following month, former chief executive officer Enrique Fiallo pleaded guilty to a federal charge of conspiracy to commit securities, mail, and wire fraud. According to prosecutors, the fraud — designed to inflate the company’s revenues to meet Wall Street projections — eventually cost the company at least $20 million.

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

A fifth Enterasys executive, former chief operating officer Jerry Shanahan, was acquitted on one count of securities fraud, according to the Associated Press at the time. No verdict was returned against Shanahan on one count of wire fraud charge, three other counts of securities fraud, and one count of conspiracy.

This past February, Gary Workman, former president of the Asia-Pacific division of Enterasys, and former assistant controller Anthony Hurley, settled related civil fraud charges with the SEC. Both men have agreed to cooperate with the U.S. Attorney.

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