FOR IMMEDIATE RELEASE|
WEDNESDAY, SEPTEMBER 15, 2004
TDD (202) 514-1888
FORMER CHIEF EXECUTIVE OFFICER OF ENTERASYS
NETWORK SYSTEMS, INC. PLEADS GUILTY IN FRAUD SCHEME
WASHINGTON, D.C. - Assistant Attorney General Christopher A. Wray of the Criminal Division and Acting United States Attorney Peter E. Papps for the District of New Hampshire announced today that the former chief executive officer of Enterasys Network Systems, Inc., a computer hardware and software corporation previously headquartered in Rochester, New Hampshire, has pleaded guilty to charges arising from a revenue recognition scheme.
Enrique “Henry” P. Fiallo, 52, of Hampton Falls, New Hampshire, entered his guilty plea this afternoon before Judge Steven J. McAuliffe at U.S. District Court in Concord, New Hampshire. Fiallo, the former CEO of Enterasys, pleaded guilty to a one-count criminal information charging him with conspiracy to commit mail, wire and securities fraud for his participation in a scheme to fraudulently inflate by over $20 million the amount of revenue Enterasys reported to its shareholders and the Securities and Exchange Commission for the quarter ended Sept. 1, 2001. Fiallo also entered into a cooperation agreement with the government.
The information alleges that Fiallo and his co-conspirators caused Enterasys to fraudulently and improperly recognize approximately $20 million in revenue on its books and records during the quarter ending Sept. 1, 2001. The co-conspirators allegedly caused Enterasys to mislead the investing public and the SEC by falsely claiming that it had met or exceeded previously announced revenue targets and the published expectations of Wall Street analysts.
Fiallo admits that he and his co-conspirators used Enterasys funds to secretly purchase revenue by “investing” those funds in “investee” companies in return for the purchase of Enterasys products with those same funds. When these “investee” companies did not have the financial ability to pay for the product without the money from Enterasys - which would have precluded Enterasys from recognizing revenue from those transactions - the conspirators directed the “investee” companies to use the money from Enterasys to purchase Enterasys products from Enterasys’ outside distributors and third-party resellers. The conspirators then directed the distributors and resellers to submit purchase orders to Enterasys for those products and to pay for them with the same money that Enterasys had supplied to the “investee” companies. Fiallo and his co-conspirators structured these “three corner” transactions so that Enterasys’ books and records would not reveal the connection between Enterasys’ “investment” funds and the use of those funds to purchase Enterasys products, thereby appearing to generate revenue and disguising the true nature of the transaction from Enterasys’ outside auditors and the investing public.
“The corporate fraud scam outlined by the defendant in his guilty plea today is a troubling breach of the law and of the trust placed in him,” said Assistant Attorney General Wray. “The marketplace, the investing public and the government demand better: they deserve financial records that have not been tainted by fraud and illegal accounting gimmicks.”
Fiallo faces a maximum sentence of five years in prison and a fine of $250,000 or twice the gain, whichever is greater. Sentencing is scheduled for Dec. 17, 2004.
An indictment returned by a federal grand jury in New Hampshire in May 2004 charged two former Enterasys executives - former Executive Vice President and Chief Financial Officer Robert J. Gagalis and former Senior Vice President of Finance Bruce D. Kay - with conspiracy, securities fraud, wire fraud and mail fraud for their participation in a fraudulent revenue transaction with a China-based company known as Ariel. All defendants are presumed innocent until and unless proven guilty in a court of law. Three other defendants - Gayle Spence Luacaw, a former vice-president and director of internal sales at Enterasys, Gary Workman, a former president of Enterasys’ APAC Division, and Anthony Hurley, a former assistant controller of Enterasys - have already pleaded guilty to conspiracy and/or wire fraud for their participation in the fraudulent transaction with Ariel.
Enterasys, now headquartered in Andover, Massachusetts, succeeded Cabletron Systems, Inc., when the two companies merged in August 2001.
The investigation is being conducted by the Federal Bureau of Investigation and the U.S. Postal Inspection Service, with assistance from the Securities and Exchange Commission. The case is being prosecuted by Fraud Section Trial Attorney Michael Koenig and Assistant Chief Thomas Hanusik of the Justice Department’s Criminal Division, and Assistant United States Attorney William Morse of the United States Attorney’s Office for the District of New Hampshire.