Exhibit 2

Case 1:07-cv-00039-SM Document 338-3 Filed 11/19/12 Page 1 of 5
Criminal Trail Day 16 afternoon session 11/30/2006 1:40:00 PM

 1 IMPORTANT NOTICE

 2

 3 * PLEASE READ BEFORE USING REALTIME ROUGH DRAFT *

 4

 5 AGREEMENT OF PARTIES

 6

 7 WORKING WITH REALTIME ROUGH DRAFTS

 8

 9 We, the party working with realtime and rough

10 draft transcripts, understand that if we choose to use

11 the realtime rough draft, that we are doing so with the

12 understanding that the rough draft is an uncertified

13 copy.

14 We further agree not to share, give, copy,

15 scan, fax, or in any way distribute this realtime rough

16 draft in any form (written or computerized) to any party

17 outside of the realtimed trial.

18 However, our own experts, co-counsel and staff

19 may have limited internal use of same with the

20 understanding that we agree to destroy our realtime

21 rough draft and/or any computerized form, if any, and

22 replace it with the certified transcript upon its

23 completion.

24

25

Enterasys/Patel Page 1 - 4

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Criminal Trail Day 16 afternoon session 11/30/2006 1:40:00 PM

 1 CASE: USA v. Gagalis

 2

 3 Jury trial Day 16, afternoon session

 4

 5 DATE: 11/30/06

 6

 7

 8 REPORTER'S NOTE:

 9

10 Since this trial testimony has been realtimed

11 and is in rough draft form, please be aware that there

12 will be a discrepancy regarding page and line number

13 when comparing the rough draft, rough draft disk, and

14 the final transcript. Also, please be aware that the

15 realtime screen and uncertified rough draft transcript

16 may contain untranslated steno, misspelled proper names,

17 incorrect or missing Q/A symbols or punctuation, and/or

18 nonsensical English word combinations. All such entries

19 will be corrected on the final, certified transcript.

20

21

22 Diane M. Churas, CSR

23

24

25

Enterasys/Patel Page 1 - 4

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Criminal Trail Day 16 afternoon session 11/30/2006 1:40:00 PM

 1 November 30, 2006

 2 United States of America V Gagalis

 3 Jury trial day 16

 4 Afternoon session. Continuation of direct

 5 examination of Mr. Boyer (

 6 (UNCERTIFIED, UNEDITED ROUGH DRAFT.) 140 p.m.

 7 THE COURT: Go ahead counsel.

 8 MS. CONRY: Good afternoon Mr. Boyer. I want

 9 to pick up on one issue we were talking about right

10 before we broke. This Para-Protect we came to the

11 conclusion that 140,000 was the right number for revenue

12 and I want you to walk true the math for the jury if you

13 would.

14 A. Okay.

15 A. Based upon information the company had compiled

16 through their additional procedures we determined that

17 the value of the investment, the million dollars

18 investment that was over valued, and they had recognized

19 initially 628 thousand in revenue in Q3. They

20 calculated that that had to be reduced by 508,000. So

21 that the remaining amount, 140, was the maximum that

22 could be recognized. So I took a look at this and got

23 comfortable with that. There was a little difference

24 here in that some of the information that they had

25 suggested that the value perhaps shouldn't be more than

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Criminal Trail Day 16 afternoon session 11/30/2006 1:40:00 PM

 1 nine at this 5,000 for the investment. It was a little

 2 different than 140,000 but in my mind not significant

 3 enough for me to be concerned with that.

 4 Q. And you look at valuations prepared by others

 5 as part of your normal auditing practice at times is

 6 that right sir?

 7 A. Yes as part of my audit procedures I would

 8 review valuation work done by others.

 9 Q. And is that acceptable in the accounting

10 practice, reliance on specialists or other experts?

11 A. Oh, yes.

12 Q. What's the guidance on that if you remember?

13 A. Well basically in our professional standards

14 we are allowed to rely on the expertise of specialists.

15 If it's a valuation of the company there are valuation

16 specialists who we would rely on in assisting us in

17 forming a conclusion as to whether a valuation is

18 appropriate. We do the audit work and as part of that

19 audit work we would involve a specialist in some cases.

20 Q. I want to be clear. The only two instances

21 where you looked at a valuation or considered the

22 factors mathematically into an opinion for revenue is

23 GEMMS and Para-Protect is that right?

24 A. For these five transactions that's correct.

25 Q. And did you test the reasonableness of the

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Criminal Trail Day 16 afternoon session 11/30/2006 1:40:00 PM

 1 assumptions in the valuation or just take a look at them

 2 for reasonableness before you opined?

 3 A. Yes. As part of our audit work where they do

 4 valuations would be that we would look at all the

 5 underlying data that went into that valuation, and if

 6 there was a third party who had performed the valuation,

 7 we would look at the information of the company our

 8 audit client had given to the valuation specialist to

 9 make sure that that's reasonable information so that the

10 specialist could come to a reasonable conclusion.

11 Q. Okay. I want to shift gears for a second now.

12 If you see I put our chart backup there. I'd like you

13 to come out and explain to the jury, we've referred to

14 these as three-corner deals but in the two versions I

15 drew there is only two corners so I wonder if in your

16 analysis you will show them where the third corner came

17 in?

18 A. Sure. Okay. Let me start by two pieces to

19 this slide. One is at the top. He talked about just

20 the cash for stock with without the product sale. Now,

21 what we are talking about is here at the bottom. So

22 this is when these three separate elements have been

23 combined to show really the substance of the

24 transaction. Now in order to show you how the

25 transaction came about, let's do this. Let's add the

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Criminal Trail Day 16 afternoon session 11/30/2006 1:40:00 PM

 1 distributor. And what we really have is the Enterasys,

 2 the distributor and GEMMS. So what happens is, just to

 3 make this a little clearer, let's just reverse these.

 4 This is the product and this is the stock. Otherwise I

 5 can't fit it on the page.

 6 Enterasys sells the product to the distributor

 7 and then the distributor sells it to GEMMS, and we put

 8 that as a dotted line. And then GEMMS give us the stock

 9 back to Enterasys. Give us the stock, giving it back.

10 So what you have here is you have this transaction.

11 Enterasys sells to a distributor, normal transaction we

12 see lots of those as the auditor. That's a big part of

13 their business selling to distributors. Then we see

14 Enterasys receiving the stock from GEMMS. So we see

15 those two pieces. But what we originally didn't see in

16 these three-corner deals was the tie between the

17 distributor and GEMMS. That's why I put that in a

18 dotted line. We didn't see that connection. What we

19 were provided was the this transaction standing on its

20 own just like this, this transaction you would have seen

21 just as a normal distributor sale. What we didn't see

22 is this connection.

23 Q. Did you see the cash flows going from

24 Enterasys to GEMMS to the distributors and back to

25 Enterasys?

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Criminal Trail Day 16 afternoon session 11/30/2006 1:40:00 PM

 1 A. Yes. We would see the cash flow. Remember

 2 that the cash basically circles right around. So you

 3 know the cash and in some of these transactions the cash

 4 circled around almost immediately. Enterasys would be

 5 paying GEMMS a million dollars for the equity. GEMMS

 6 would then buy through the distributor. GEMMS would pay

 7 the distributor who would pay Enterasys. So the cash

 8 would cycle back very, very quickly. So when you really

 9 look at this the substance of the transaction really

10 isn't cash. It's this change of the products.

11 Q. I just want to be clear Mr. Boyer. You said

12 you saw the cash. During Q2 did you know GEMMS was

13 taking the money it got from Enterasys and sending it to

14 the distributor in the Enterasys proceedings?

15 A. No see we would not make that connection. We

16 would see the cash in the normal course of distributor

17 sales but we wouldn't see the connection here. We

18 wouldn't see the connection in cash and we wouldn't see

19 the connection in sales.

20 Q. When you found out about that connection what

21 opinion did you reach that all of those three legs of

22 that transaction were linked or not?

23 A. Well, the conclusion that I came to was these

24 transactions had to be linked.

25 Q. So that they were linked and once you came to

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Criminal Trail Day 16 afternoon session 11/30/2006 1:40:00 PM

 1 the opinion they were linked what conclusion did you

 2 come to about whether they needed to be collapsed?

 3 A. Well, I would use the terms linked and

 4 collapsed as one and the same. Once they are linked

 5 once they are collapsed however you want to say it then

 6 you look at it for one transaction for accounting

 7 purposes much not two or three independently. It's just

 8 one transaction, how do I account for it, non-monetary

 9 transaction and it would go back to that concept of fair

10 value of what you give up and what you receive.

11 Q. And what in the accounting literature do you

12 rely on for your opinion that the transaction should be

13 collapsed or linked?

14 A. Well you know I look to Staff Accounting

15 Bulletin 101 that we had been talking about earlier and

16 in there they talk about the evidence of an arrangement.

17 Remember that's the contract or sales order that we have

18 ( SAB 101 ( and in there they refer to side letters,

19 they refer to other agreements that could have an impact

20 on that sales agreement that you have. For instance if

21 that sales agreement isn't final until it's -- until

22 another agreement is entered into, then that's the

23 concept of linking is that you need to make sure that

24 you have properly included all the potential terms and

25 that final agreement includes everything that would be

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Case 1:07-cv-00039-SM Document 338-3 Filed 11/19/12 Page 3 of 5
Criminal Trail Day 16 afternoon session 11/30/2006 1:40:00 PM

 1 relevant to that exchange in this case exchange of stock

 2 for product.

 3 Q. And during the August September and October

 4 period when you were reviewing Q2 did you ever tell any

 5 of the defendants your opinion that these three-corner

 6 transactions or three leg transactions needed to be

 7 collapsed?

 8 A. I'm sorry during what period.

 9 Q. During the initial Q2 review, that is

10 September, October, August, that time period?

11 A. Yes.

12 Q. Who did you tell and when?

13 A.

14 THE COURT: Do you want him to sit back down.

15 MS. CONRY: You can go ahead and sit back

16 down.

17 A. Well those conversations occurred during our

18 meetings to discuss the investment transactions.

19 Q. Do you review things called open items list

20 when you were performing the procedures in August and

21 September?

22 A. Yes.

23 Q. And do you recall whether you asked about

24 sales in channel partners related to investments during

25 the change of those open items list?

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Criminal Trail Day 16 afternoon session 11/30/2006 1:40:00 PM

 1 A. Yes that was one of the questions that would

 2 be in the open items list.

 3 Q. And you were sending that to various people in

 4 the finance department including Mr. Kay and Mr.

 5 Gagalis?

 6 A. Yes.

 7 Q. I just want to follow up as a last area I want

 8 to touch on with you and that is materiality. I think

 9 you spoke to the jury about that yesterday and can you

10 remind them of what staff accounting bulletin applies to

11 materials?

12 A. Yes that's Staff accounting bulletin '99.

13 Q. And we talked about quantitative versus

14 qualitative materiality did we talk about that

15 yesterday?

16 A. Yes we did.

17 Q. And I want to ask you for our combined

18 transactions and let's take Para-Protect out because

19 that's Q3 so just Ariel TechData WorldLink and GEMMS.

20 What do those add to ballpark?

21 A. Those add up to a little less than twelve

22 million. Why don't we just round it and say eleven

23 million dollars. That's an easy number to use.

24 Q. Great. So in combination for the second

25 quarter can you tell the jury whether you think in sum

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Criminal Trail Day 16 afternoon session 11/30/2006 1:40:00 PM

 1 those overstatements of revenue were material

 2 quantitatively?

 3 A. Okay. My conclusion was that those

 4 adjustments were material and the reason for that is if

 5 we think about back to our discussion yesterday where

 6 there's this concept of quantitative materiality and

 7 qualitative materiality and we are talking about the

 8 significance to the users of the financial statements

 9 and for the second quarter of that year Enterasys had

10 recorded and reported their SEC filings approximately

11 240 million dollars in revenue and Enterasys regularly

12 provided guidance to the Wall Street analysts involved

13 with the company and they would tell them what they

14 expected the quarter results to be and one of the things

15 was that they disclosed their sales for the quarter

16 and/or their estimate of the sales. And for that

17 quarter they had in advance told the Wall Street

18 analysts that they thought that revenues would be

19 between 238 million and 242 million. Now they ended up

20 reporting 240 million right in the middle, and in their

21 press release they said that they had met the analysts

22 expectation because they were in that range. I believe

23 that was I think the 6th consecutive quarter where they

24 had met analysts expectations. Sales were up, and very

25 important, very important measure. You know the

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Criminal Trail Day 16 afternoon session 11/30/2006 1:40:00 PM

 1 companies want to continue to meet the analysts

 2 expectations. So it's a very important measure for

 3 everybody involved in the financial statements including

 4 the users.

 5 So if you look at these adjustments in total

 6 the eleven million dollars if the company had recorded

 7 these transactions properly, you know instead of 240

 8 million, they would have had 229 million in revenues.

 9 They would have been below the low end of the range of

10 238 million. So they would not have been able to say

11 that they met analysts expectations for the 6th

12 consecutive quarter. They would have missed

13 expectations. When we think back to our discussion

14 yesterday qualitative factors, one is does it change the

15 trends of the financial information and I would say yes,

16 it changes the trends because the company didn't meet

17 the expectations that they set in Wall Street.

18 Q. And I think I might have messed up because we

19 added to eleven million and I forgot to subtract out

20 what you thought was appropriate?

21 A. Right. And that's why I used eleven million.

22 If we do the whole thing we are probably close to eleven

23 million but the concept is what they recognize versus

24 what they should have.

25 Q. And that difference is eleven million?

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Case 1:07-cv-00039-SM Document 338-3 Filed 11/19/12 Page 4 of 5
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 1 A. That's correct.

 2 Q. And how about on an individual basis -- let me

 3 back up to be clear. In the aggregate are they material

 4 quantitative or actually let me stick with qualitative I

 5 apologize (?

 6 A. Sure.

 7 Q. Is the Ariel 3.9 million material

 8 qualitatively?

 9 A. Well if we do the same exercise. If the range

10 was 238 to 242 million, for total revenues and Ariel was

11 not recorded that would mean that sales would be below

12 the bottom of the estimate. I would say -- I would

13 expect that that would be material.

14 Q. Okay. How about TechData Canada at that. Was

15 that qualitatively material?

16 A. That's the same calculation. That's below the

17 238 million. So I put that in the same category.

18 Q. And how about WorldLink?

19 A. WorldLink the same thing, below 238 million.

20 Q. So those three at least are qualitatively

21 material is that right?

22 A. Yes. My conclusion would be those would be

23 qualitatively material.

24 Q. Your Honor I have no further questions at this

25 time?

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Criminal Trail Day 16 afternoon session 11/30/2006 1:40:00 PM

 1 THE COURT: Thank you. Cross-examination.

 2 CROSS-EXAMINATION

 3 BY ( by Mr. Cintolo (

 4 Q. Good afternoon Mr. Boyer?

 5 A. Good afternoon.

 6 Q. Mr. Boyer my name is Bill Cintolo and I

 7 represent David Boey?

 8 MS. CONRY: Are there any exhibits.

 9 MR. CINTOLO: Nothing that hasn't been

10 admitted.

11 MS. CONRY: Anybody else.

12 MS. CONRY: Mr. Rehnquist.

13 MR. REHNQUIST: I will give "em to you at the

14 break.

15 THE COURT: No you are supposed to turn them

16 over beforehand.

17 THE COURT: Go ahead.

18 Q. Mr. Boyer you had lunch this afternoon?

19 A. Yes, I did.

20 Q. Had lunch with David Wilson?

21 A. Yes, I did.

22 Q. David Wilson is another witness in this case?

23 A. That's my understanding.

24 Q. Did you discuss your testimony with him?

25 A. No.

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Criminal Trail Day 16 afternoon session 11/30/2006 1:40:00 PM

 1 Q. Mr. Boyer I have a tendency to talk a

 2 little fast. If I talk too fast for you please slow me

 3 down okay?

 4 A. I will.

 5 Q. Mr. Boyer in this particular situation you had

 6 a occasion to see a purchase order from a company called

 7 Ariel to Enterasys; correct?

 8 A. Yes.

 9 Q. And that purchase order was dated on August

10 31st 2001; correct?

11 A. I believe that it was yes.

12 Q. And you knew did you not that after the

13 purchase order was received within the time period of

14 the quarter, that delivery of the product was

15 effectuated pursuant to the purchase order; correct?

16 A. Yes, I believe that's correct.

17 Q. And you understand that normally if a purchase

18 order is received and delivery is effectuated, that

19 revenue is countable, recognizable for that quarter;

20 correct?

21 A. Well there are a number of criteria that have

22 to be met --

23 Q. Mr. Boyer I understand there are a number of

24 criteria. I'm asking normally if you see a purchase

25 order that is received within the time limit, a timely

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Criminal Trail Day 16 afternoon session 11/30/2006 1:40:00 PM

 1 purchase order and timely delivery normally that makes

 2 the revenue recognizable; correct?

 3 A. I'm sorry could you repeat the question.

 4 Q. Yes. Normally in normal circumstances and

 5 we'll get to the abnormal in awhile all right. Normally

 6 if the purchase order is received in a timely fashion

 7 meaning before the quarter is ended and delivery is

 8 effectuated pursuant to the purchase order in a timely

 9 fashion revenue is recognizable; correct?

10 A.

11 A. Assuming that all other provisions of GAAP

12 have been met.

13 Q. And we are always assuming that all the

14 provisions have been met; right?

15 A. Well.

16 Q. Mr. Boyer, Mr. Boyer, listen you are a

17 cautious man are you not?

18 A. Yes, I am.

19 Q. You like to be precise; correct?

20 A. I try.

21 Q. Okay. Let me see if I can get it another way.

22 Did you have an occasion to see a contract, a letter of

23 agreement relating to the Ariel transaction in this

24 particular case at some point in time after August 31st

25 but before September 26, 2001?

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