Enterasys Settles SEC Investigation


Enterasys Networks said late Wednesday that it has reached an accord with the U.S. Securities and Exchange Commission, settling an investigation begun in January 2002.

Enterasys also said it has filed its quarterly report for the third fiscal quarter ended Sept. 28, 2002, bringing it current with its financial reporting.

The networking hardware vendor said it expects revenue of about $120 million for the fourth quarter ended Dec. 28.

The settlement with the SEC does not require any further adjustments to Enterasys' financial statements and does not impose any civil penalties or fines, the company said.

Without admitting or denying any allegations, under the settlement, Enterasys agreed to a cease and desist order requiring future compliance with the federal securities laws and regulations, and to appoint an internal auditor reporting directly to the audit committee of Enterasys' board of directors. Enterasys confirmed that a director of internal audit was appointed in October 2002.

"We are extremely pleased to have this matter behind us," William O'Brien, Enterasys CEO, said in a statement. "This settlement effectively resolves the company's outstanding issues with the SEC, bringing closure to historical reporting matters and marking the end of a long and difficult process."

Enterasys had delayed reporting financial results and had restated prior results amid the SEC investigation and an internal review of its revenue-recognition reporting practices. The vendor first delayed reporting results for the 10-month period ended Dec. 29, 2001, after launching an internal probe in February 2002 to examine accounting irregularities related to revenue recognition.

In late February 2002, Enterasys terminated three senior employees in its Asia-Pacific operations in response to its internal investigation of accounting irregularities. The employees had been on administrative leave since Feb. 1, when Enterasys discovered irregularities in at least one contract, valued at $4 million, in its Asia-Pacific unit. Enterasys said that while preparing its 2001 fourth-quarter earnings report, it discovered that its independent auditor, KPMG, was provided with a version of the $4 million contract with terms that supported revenue recognition, while the vendor's own version of the contract did not contain those terms.

In April 2002, Enterasys ousted Henry Fiallo, chairman, CEO and president; J.E. Riddle, vice chairman and executive vice president of worldwide marketing; and Jerry Shanahan, COO. At the same time, the company cut 30 percent of its staff to align its cost structure with its revenue base after warning of a significant revenue drop in its first quarter. The company said it lowered its first-quarter earnings estimate because of revenue-recognition issues in the Asia-Pacific region and a comprehensive analysis of revenue recognition in its other market regions. The prolonged market slowdown and SEC investigation also contributed to the revenue decline, the company said.