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Irish executive faces charges of securities fraud

February 17, 2011

By Staff Reporter

The assistant U.S. attorney in New Hampshire, Bill Morse, who is prosecuting the case, told the Echo that the affair could be characterized as one “in which the defendants are charged with cooking the books.”
“The accusations are, to put it simply, that they were involved in falsifying accounts and enabling the company to put down more revenue than it actually had,” Morse said.
Specifically, the indictments allege that Shanahan, former chief financial officer Robert Gagalis, former finance executive Bruce D. Kay and Robert G. Barber ran a scheme under which Enterasys invested money with customers on the understanding that those same customers would purchase more Enterasys products.
According to the indictment, almost $7 million of revenue was wrongfully booked.
The four are also charges with making false and misleading statements, with conspiracy, and with securities fraud.
Shanahan alone is charged with working out a scheme with one of the company’s clients that allowed the firm to claim about $3 million in revenue.
In a brief phone interview, Shanahan’s lawyer, Andrew Good of the Boston firm Sliverglate & Good, said that his client would plead not guilty to all the charges. The attorney, who came to wide public attention when he led the appeal of British nanny Louise Woodward against a murder conviction in the late 1990s, declined to give further details of Shanahan’s defense strategy.
Shanahan joined Cabletron, the company from which Enterasys emerged, in 1994. He served as vice president of international operations. Enterasys was spun off from Cabletron in 2000, and Shanahan became executive vice president for operations and quality. He was appointed chief operating officer on April 2, 2001. He resigned almost exactly one year later, on the same day as two other senior executives, including CEO Enrique “Henry” Fiallo.
In February 2002, the Securities and Exchange Commission had announced it was investigating the company, and Enterasys’ share price dropped precipitously. When the resignations were made public, Enterasys shares fell to $1.34 on the New York Stock Exchange. At their highest point, they had been worth $54.
Shanahan is understood to have returned to Ireland shortly after resigning. Bill Morse said that he expects Shanahan to return to the U.S. to face the charges imminently. Morse pointed out that prosecutors could seek Shanahan’s extradition if the Irishman refused to cross the Atlantic voluntarily. However, Morse did not believe this would be necessary.
Shanahan holds a degree in electrical engineering from University College, Cork and a business masters from the University of Limerick. Before he joined Cabletron, he had worked for Intel and Digital Equipment.
When Shanahan was appointed as chief operating officer of Enterasys, Enrique Fiallo sang his praises extravagantly. “Jerry brings a wealth of operational experience to his new position,” Fiallo said. “As the company grows on a worldwide basis, his international experience will be a great help to us.”
Those halcyon days seem far away now. Last September, Fiallo pleaded guilty in a federal court to a charge of conspiracy to commit securities, mail and wire fraud. Fiallo was due to be sentenced on Dec. 17, but the sentencing was postponed. The Echo has learned that the delay came at the behest of prosecutors, and that Fiallo is now expected to cooperate with the prosecution in the cases against the other former executives.
In all, nine former Enterasys executives have now been charged in relation to the alleged fraud. Three others, as well as Fiallo, have pleaded guilty.
Shanahan’s lawyer was unequivocal about the fact that the Irishman will fight the charges. But Morse expressed confidence in the prosecution’s case, and seemed to hold out the possibility that there could yet be a guilty plea from Shanahan or his co-defendants.
“We are confident we will prevail — if this case goes to trial,” Morse told the Echo.

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