U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 20001 / February 13, 2007
Accounting and Auditing Enforcement Release No. 2556 / February 13, 2007
SEC v. Patel et al., Civil Action No. 1:07-CV-39 (D.N.H.)
On February 9, 2007 the Securities and Exchange Commission filed a civil fraud action against ten former officers and employees of Enterasys Networks, Inc. According to the Commission's complaint, from March 2000 through December 2001, the former officers and employees directly participated in a company-wide scheme to fraudulently inflate revenues at Enterasys and its former parent company, Cabletron Systems, Inc. and thereby convince the market that Enterasys was a viable independent company with consistently strong revenue growth. The defendants named in the complaint are: Robert Barber, Hor Chong (David) Boey, Lawrence Collins, Robert Gagalis, Eric Jaeger, Bruce Kay, David Kirkpatrick, Piyush Patel, Jerry Shanahan, and Michael Skubisz.
According to the Commission's complaint, filed in the U.S. District of New Hampshire, the defendants participated in improperly recognizing revenue from numerous sales transactions, many of which involved undisclosed side agreements in which the purchaser was granted full return or exchange rights, or payment for the product was contingent upon the purchaser's resale of the product or a future investment by Enterasys. The Complaint further alleges that the defendants misrepresented information to, or concealed information from, the company's outside auditor.
Based on the foregoing, the Complaint alleges that the defendants violated or aided and abetted the violation of Section 17(a) of the Securities Act of 1933, Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(5) of the Securities Exchange Act of 1934 (Exchange Act) and Rules 10b-5, 12b-20, 13a-1, 13a-11, 13a-13, 13b2-1, and 13b2-2 thereunder. The Complaint also alleges that defendants Collins, Gagalis, Kay, Kirkpatrick, Patel, and Skubisz aided and abetted the violation of Section 13(b)(2)(B) of the Exchange Act. The Complaint seeks permanent injunctions, disgorgement and civil money penalties against each defendant, and officer and director bars against defendants Boey, Gagalis, Jaeger, Kay, Kirkpatrick, Patel, Shanahan, and Skubisz.
Related Actions In a related criminal case, U.S. v. Barber et al., Criminal No. 04-126 (D.N.H.), Barber, Boey, Gagalis and Kay were found guilty of multiple counts of securities fraud and other related charges. Shanahan was acquitted on one count, and a mistrial was declared on the remaining charges.