Fraud Allegations Expanded In Enterasys Suit

Investors, lead by the Los Angeles County Employees Retirement Association, broadened their lawsuit this week to include a claim that several top Enterasys executives belonged to a 'special teams unit' that met regularly to plan deceptive maneuvers. The suit said the information came from former employees whom it did not identify.

The lawsuit, filed in U.S. District Court in Concord, has drawn attention to the role played at Enterasys by New Hampshire's Gov.-elect Craig Benson. Enterasys, based in Rochester, is the principal successor to Cabletron Systems Inc., co-founded by Benson.

Benson, who is not a defendant in the lawsuit, has said he plans to resign from Enterasys' board and audit committee when he is inaugurated Jan. 9. He has said he played no direct role in the company and is not responsible for its problems.

A lawyer for Enterasys denied the charges and said the company will vigorously defend itself in the case.

'A number of allegations in the complaint are inaccurate and simply wrong and have absolutely no basis in the facts,' the lawyer, Harvey Wolkoff, told The Wall Street Journal. Wolkoff said his firm, Ropes and Gray, conducted a 10-month investigation of Enterasys' finances and uncovered no evidence of phony sales, a special teams unit or discount sales recorded at full price.

He also said there is no evidence the board knew about any improper activity.

Three alleged members of the 'special teams unit,' Enrique Fiallo, Piyush Patel and David Kirkpatrick, are defendants in the lawsuit. Fiallo and Patel are former chief executives of Enterasys and Cabletron, and Kirkpatrick is a former chief financial officer.

Diana Lloyd, lawyer for Patel, called the allegations baseless. Lawyers for Fiallo and Kirkpatrick said they had not reviewed the revised lawsuit and could not comment.

The lawsuit says the company would pressure distributors to buy more toward the end of a quarter, but would give them liberal rights to return unsold products. Enterasys allegedly booked all the revenue, violating accounting principles.

Enterasys' stock dropped sharply in February, when it said it had discovered discrepancies in a sales contract in the Far East and would delay reporting its earnings pending an investigation. The company later expanded its internal investigation, and the Securities and Exchange Commission also began investigating.

Last month, the company restated its finances for the 19 months that ended in September 2001. It reduced revenue by $153 million, about 11 percent, and increased a previously reported loss by about $145 million, also about 11 percent.

Thursday afternoon, Enterasys stock was down 7 cents, or 5 percent, at $1.33 on the New York Stock Exchange.

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