USSEC v. Patel, et a l . 07-CV-039-SM 02/19/08
UNITED STATES DISTRICT COURT
DISTRICT OF NEW HAMPSHIRE
Securities and Exchange
Commission,
Plaintiff
v. Civil No. 07-cv-39-SM
Opinion No. 2008 DNH 039
Pivush G. Patel; David J.
Kirkpatrick; Eric Jaeger;
Bruce D. Kav; Robert J. Gagalis;
Robert G. Barber, Jr.; Lawrence
Collins; Michael A. Skubisz;
Jerry A. Shanahan; and Hor Chong
(David) Boev,
Defendants
O R D E R
The Securities and Exchange Commission ("SEC") has sued in
eight counts, seeking injunctive relief under 15 U.S.C. § 77t(b)
and 15 U.S.C. §§ 78u(d) & (e) for various alleged violations of
the Securities Act of 1933 and the Securities Exchange Act of
1934. Specifically, the SEC asserts violations of: 15 U.S.C.
§ 77q(a)(1) by all defendants (Count I, captioned "fraud"); 15
U.S.C. §§ 77q(a)(2) & (3) by all defendants (Count II, captioned
"fraud"); 15 U.S.C. § 78j(b) and 17 C.F.R. § 240.10b-5 by all
defendants (Count III, captioned "fraud"); 15 U.S.C. § 78m(b)(5)
and
17 C.F.R. § 240.13b2-l by all defendants (Count IV, captioned
"falsified books and records");
17 C.F.R. § 240.13b2-2 by all
defendants (Count V, captioned "deceit of auditors"); 15 U.S.C.
§ 78m(a) and
17 C.F.R. §§ 240.12b-20, 240.13a-l, 240.13a-ll &
240.13a-13 by all defendants (Count VI, captioned "false SEC
filings"); 15 U.S.C. § 78m(b)(2) by all defendants (Count VII,
captioned "false books and records"); and 15 U.S.C. § 78m(b)(2)
by some defendants (Count VIII, captioned "inadequate accounting
controls"). Before the court is Jerry A. Shanahan's motion for a
more definite statement. For the reasons given, Shanahan's
motion is denied.
The complaint alleges that from March 2000 through December
2001, various employees, officers, and directors of Cabletron
Systems, Inc. ("Cabletron") or its former subsidiaries, Enterasys
Networks, Inc. ("Enterasys") and Aprisma Management Technologies,
Inc. ("Aprisma") participated in a company-wide scheme to falsely
inflate the apparent revenues of Cabletron and Enterasys for the
purpose of convincing investors that Enterasys was a viable
independent company with consistently strong revenue growth.
Shanahan served as Cabletron's Vice President of International
Operations from February 2000 to September 2000, Cabletron's Vice
President of Operations and Quality from September 2000 to March
2001, and Enterasys's Chief Operating Officer from March 2001
until May 2002.
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More specifically, the SEC alleges that the defendants
improperly recognized revenue, reported that improperly
recognized revenue in SEC filings and press releases, and
misrepresented material information concerning improper revenue
recognition to outside auditors, or concealed material
information from them. According to the SEC, Enterasys
improperly recognized revenue of at least $48 million, and, in
turn, overstated its earnings and understated its operating
losses. Based upon that false financial picture, Enterasys
successfully launched itself as an independent public company on
August 6, 2001.
The SEC alleges that the improper revenue recognition took
several forms: (1) undisclosed side agreements with purchasers
that significantly qualified apparent sales transactions by, for
example, providing buyers with full return, exchange, or
cancellation rights; (2) investments in privately held companies
that agreed to use the invested funds to purchase Enterasys and
Aprisma products; and (3) so-called "three-corner deals" that
involved placing another company between Enterasys and an
investee company, to disguise purchases of Enterasys products
made with funds invested in the purchasing company by Enterasys.
The complaint discusses in greater detail twelve separate
contingent sales transactions or investment deals (Compl. 63-
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137) and describes in lesser detail seventeen additional sales
transactions (Compl. 138-55) from which the SEC claims
Enterasys improperly recognized revenue. Shanahan is included,
by name, in the factual allegations related to: (1) a side
agreement between Enterasys and Tech Data Canada, Inc., which
resulted in the improper recognition of $3 million in revenue in
the second quarter of Transition Year 2001 (Compl. 91-96); (2)
an improper side agreement between Enterasys and Societe General
Cowen (Compl. 97-103); (3) a side agreement with GovStreetUSA,
LLC, that resulted in the improper recognition of $2.6 million in
revenue, over the course of three quarters, that was reported in
one SEC form 10-K and three SEC 10-Q forms (Compl. 104-10);
and (4) improper recognition of $500,000 in revenue from sales to
Accton Technology Corp. during the first quarter of Transition
Year 2001 (Compl. 5 148).
The complaint further alleges that Shanahan and others
participated in numerous weekly conference calls in which "the
participants openly discussed the purpose of three corner deals:
to conceal from Enterasys's outside auditor the connection
between investments and purchases, given that the poor financial
condition of investee companies could lead the outside auditor to
conclude that the related revenue did not comport with GAAP"
(Compl. 5 158), and that Shanahan "and others worked together to
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close more than $20 million in investment-related sales during
the final week of the [second] quarter [of Transition Year 2001],
many of which were structured as three corner deals to conceal
the precarious financial condition of the investee company from
Enterasys's outside auditor" (Compl. 5 162).
The SEC asserts that any public statement of earnings that
included improperly recognized revenue was materially false and
that Enterasys made such statements in: (1) one SEC 10-K form;
(2) six SEC 10-Q forms; (3) 3 SEC 8-K forms; (4) fourteen
representation letters; and (5) seven press releases. (Compl. 5
36.) The complaint goes on to specify the alleged falsity of
each of the identified SEC filings, based upon its incorporation
of improperly recognized revenue. (Compl. 37-53.) The
complaint provides similar specifications for the press releases.
(Compl. M 171-87.)
Shanahan moves the court to order the SEC to provide a more
definite statement of the claims against him. According to
Shanahan, the complaint is deficient because: (1) its claims for
relief do not specifically identify the factual allegations that
support them; and (2) the factual allegations themselves are not
5
adequately specific.1 The SEC objects, arguing that its
complaint meets the applicable pleading standards of the Federal
Rules of Civil Procedure and that the information Shanahan seeks
should be sought through discovery, rather than through a motion
for a more definite statement. The court agrees.
The Federal Rules of Civil Procedure provide that "[i]f a
pleading to which a responsive pleading is permitted is so vague
or ambiguous that a party cannot reasonably be required to frame
a responsive pleading, the party may move for a more definite
statement before interposing a responsive pleading." F e d . R. C i v .
P. 12(e). Shanahan's entitlement to a more definite statement is
1 The following is a typical example of the arguments
Shanahan makes in his motion:
In connection with the Tech Data Canada
transaction, the Complaint alleges at 91-96 that
Shanahan entered into an "undisclosed side agreement"
with Tech Data Canada which contained terms that
precluded revenue recognition, and that Shanahan acted
"with the intent to conceal" the terms of the side
letter. Complaint at 5 96. The SEC does not allege
any facts to support its allegations that the side
letter was "undisclosed" or that Shanahan acted with
"intent to conceal" the side letter from anyone at
Enterasys or from Enterasys's auditor. The Court
should order the SEC to provide Shanahan with a more
definite statement of the factual underpinnings for its
allegation that the side letter was "undisclosed" and
that Shanahan acted with "intent to conceal" the side
letter from Enterasys's outside auditors.
(Def.'s Mot. for a More Definite Statement (document no. 71) 5
4. )
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governed by principles described in Lewis v. Textron Auto. Co.,
935 F. Supp. 68 (D.N.H. 1996). In that case, the court explained
that "[s]ince ■'Rule 12(e) motions are designed to strike at
unintelligibility, rather than at lack of detail in the complaint
. . . a rule 12(e) motion properly is granted only when a party
is unable to determine the issues he must meet.'’" I d . at 70
(quoting Cox v. Me. Maritime Acad..
122 F.R.D. 115, 116 (D. Me.
1988)). "The motion for a more definite statement is not
favored," 2 J a m e s W m . M o o r e , M o o r e 's F e d e r a l P r a c t i c e § 12.36 [1] (2007),
and "[cjourts frown on a litigant's use of the motion as a
'shotgun tactic' to substitute for discovery," i d .
The SEC's complaint does not leave Shanahan "unable to
determine the issues he must meet," Lewis. 935 F. Supp. at 70.
It identifies, with some detail, the unlawful acts the SEC
alleges Shanahan committed and the statutes that make those acts
unlawful. No more is needed. Requiring a more definite
statement in this case would result in significant costs in terms
of time, money, and paper, while, as a practical matter,
accomplishing little. The details Shanahan rightly seeks are
best obtained through the discovery processes designed to provide
that information.
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Conclusion
Shanahan's motion for a more definite statement (document
no. 71) is denied.
SO ORDERED.
Sreven j / McAuliffe
Chief Judge
February 19, 2008
cc: James A. Scoggins, II, Esq.
Jeffrey S. Lyons, Esq.
Leslie J. Hughes, Esq.
Nancy J. Gegenheimer, Esq.
Diana K. Lloyd, Esq.
John R. Baraniak, Jr., Esq.
Lucy J. Karl, Esq.
Peter B. Moores, Esq.
Steven M. Gordon, Esq.
Jeffrey B. Rudman, Esq.
Jonathan A. Shapiro, Esq.
Miranda Hooker, Esq.
Peter A. Spaeth, Esq.
Bruce A. Singal, Esq.
John C. Kissinger, Esq.
Michelle R. Peirce, Esq.
Mark B. Dubnoff, Esq.
Richard J. McCarthy, Esq.
Michael D. Ramsdell, Esq.
Jennifer M. Ryan, Esq.
Maria R. Durant, Esq.
William H. Kettlewell, Esq.
Kevin E. Sharkey, Esq.
Ann Pauly, Esq.
Victor W. Dahar, Esq.
Andrew Good, Esq.
Philip G. Cormier, Esq.
Peter D. Anderson, Esq.
William Cintolo, Esq.
