LA County Pension Fund Sues Enterasys

December 12, 2002 ( - Enterasys Networks Inc has been accused of generating phony deals to inflate revenue and profits in a lawsuit filed by the Los Angeles County Employees Retirement Association and others, according to the Wall Street Journal.

The lawsuit is seeking class-action status for alleged phony deals organized by Enterasys to generate revenue figures at the end of fiscal quarters from mid-2000 to early 2002.   The pension fund, the lead plaintiff in the case, says that several of the company’s top executives were members of a “special teams unit” that met on a regular basis to concoct these counterfeit deals.

Among the alleged schemes, the suit claims that Enterasys would ask distributors to buy more products than they needed at the end of fiscal quarters and then rewrite sales contracts to allow for more liberal return rights of the unsold goods.

Enterasys would then record the entire amount of the goods shipped as revenue, regardless if the product was later returned, in violation of accounting standards, the suit says.

Additionally, the end of each quarter would see the company generating phantom deals, allowing merchandise to be sent to a reseller under a spurious purchase order, the suit claims.   The reseller would then send the products to a distributor, who would sell the goods at a discount on a “gray market.”

Harvey Wolkoff, an attorney for Ropes & Gray, currently representing Enterasys, said, “the company intends to defend itself vigorously” against the lawsuit. “A number of allegations in the complaint are inaccurate and simply wrong and have absolutely no basis in the facts.”

Enterasys, the successor company to Cabletron Systems Inc, last month restated earnings for more than 19 months and since February has been under investigation by the Securities and Exchange Commission.