At sentencing hearings yesterday, U.S. District Judge Paul J. Barbadoro in federal court in Concord, N.H., sentenced Gary M. Workman, the former head of Enterasys's Singapore sales office, to three years and five months in prison and a fine of $17,500. The court also sentenced Gayle Spence Lucauw, a former senior executive at Enterasys involved in sales and special projects, to two years and three months in prison and a $15,000 fine, and Anthony Hurley, Enterasys's Assistant Controller, to 12 months and one day in prison. Each defendant also was sentenced to terms of supervised release after their release from prison. The three former executives each had each previously pleaded guilty to conspiracy or fraud charges.
The court granted leniency to the individuals sentenced yesterday in recognition of the substantial assistance they provided to the government in prosecuting other former Enterasys executives. Each of the three former executives sentenced yesterday cooperated with the government by, among other things, testifying in a six-week trial against five other former Enterasys executives in November and December of 2006. The jury convicted four of those five former executives, including Enterasys's former Chief Financial Officer, Robert J. Gagalis, and last month the court sentenced each to prison terms from three years to eleven and a half years. The jury was unable to reach a unanimous verdict on the major charges against the fifth defendant in that trial, Enterasys's former Chief Operating Officer Jerry Shanahan.
The evidence at trial demonstrated that starting in the summer of 2001, the three defendants sentenced yesterday and the four defendants convicted at trial inflated Enterasys's revenue figures in order to satisfy the publicly reported expectations of Wall Street analysts and to increase, or at least maintain, the price of Enterasys stock. The conspirators backdated and falsified documents and concealed material terms of business transactions from Enterasys's auditors in order to inflate revenue. They also fraudulently created revenue by secretly investing company funds in other companies and causing those companies to use the investment proceeds in turn to buy Enterasys products. The court found that, as a result of the fraudulent scheme, public investors lost at least $97 million.
In addition to the three individuals sentenced yesterday, Former Enterasys Chairman, Chief Executive Officer and President Enrique (Henry) Fiallo, also pleaded guilty to felony charges in connection with the scheme. He is scheduled for sentencing in October 2007. All nine of the individuals who have been criminally prosecuted and others have also been named as defendants in a related civil enforcement brought by the Securities and Exchange Commission, seeking disgorgement of ill-gotten gains and the imposition of civil penalties.
The case was prosecuted by Assistant U.S. Attorney Bill Morse for the U.S. Attorney's Office in Concord, and Senior Litigation Counsel Colleen A. Conry from the Fraud Section of the Criminal Division. The investigation was conducted by the Federal Bureau of Investigation and the U.S. Postal Inspection Service. The criminal investigation was coordinated with the civil investigation conducted by the SEC's Central Regional Office in Denver. The case was brought as part of the President's Corporate Fraud Task Force.