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

Piyush G. Patel; David J.

Kirkpatrick; Eric Jaeger;

Bruce D. Kay; Robert J. Gagalis;

Robert G. Barber, Jr.; Lawrence

Collins; Michael A. Skubisz;

Jerry A. Shanahan; and Hor Chong

(David) Boey,

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. § 240.13b2-1 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.

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§ 78m(a) and 17 C.F.R. §§ 240.12b-20, 240.13a-1, 240.13a-11 &

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. ¶ 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. ¶ 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. ¶ 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. ¶

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. ¶¶ 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

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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 ¶ 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) ¶

4.)

6

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.” FED. R. CIV.

P. 12(e). Shanahan’s entitlement to a more definite statement is

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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.’” Id. 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 JAMES WM. MOORE, MOORE’S FEDERAL PRACTICE § 12.36[1] (2007),

and “[c]ourts frown on a litigant’s use of the motion as a

‘shotgun tactic’ to substitute for discovery,” id.

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.

____________________________

Steven 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.

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