Ex-Riverstone execs face criminal charges

Prosecutors are charging two executives of Cabletron Systems spinoff Riverstone Networks with criminally violating securities regulations by circumventing accounting controls, according to an informational filing in US District Court for Northern California.

Prosecutors have charged Leroy John Kern, former vice president of sales, and Andrew Feldman, former vice president of finance, with one violation apiece, which would seem to be the result of some kind of plea bargain, according to attorneys familiar with the process. The criminal charges are related to civil charges that the U.S. Securities and Exchange Commission filed against both executives along with four others, including Romulus Pereira, the former chief executive, and Robert Stanton, former chief financial officer, according to the filing.

In that civil filing, the SEC accused Riverstone of cleaning up “dirty” deals by hiding verbal side agreements and e-mails that would have prevented them from being recognized as revenue.

The civil complaint extensively quotes e-mails that are particularly damaging to Kern, who reported to Pereira. At one point, he allegedly said that a transaction “had nothing to do with sales, just throwing money to waste to get revenues.”

Feldman was allegedly involved in a deal that was originally recommended by Piyush Patel, chief executive of Cabletron at the time of the spinoff who then became chairman of Riverstone. It was Patel – successor to Cabletron co-founder Craig Benson – who engineered the split-up.

Both Kern and Feldman also worked for Cabletron in New Hampshire before it spun off Riverstone in February 2001. Patel is not a defendant in the SEC complaint involving Riverstone, but he is one of the defendants in a SEC civil complaint against 10 former executives of Cabletron’s larger spinoff, Enterasys Networks, which contains similar allegations during the same time period.

Four of those executives, but not Patel, were convicted of criminal charges of securities fraud last December in New Hampshire federal court and were eventually sentenced to terms ranging from three to 11-1/2 years.

Last week a federal judge in Concord sentenced former Enterasys CEO Enrique “Henry” Fiallo, who pleaded guilty in exchange for his testimony at the criminal trial, to four years.

On Monday, the Concord court rescheduled the retrial of Jerry Shanahan, Enterasys’ former chief operating officer to March 4. It had originally been scheduled to begin Dec. 4 but was postponed so his attorney could file a motion claiming double jeopardy.

The same jury that convicted Shanahan’s fellow executives last December would have acquitted Shanahan had it not been for jury holding out for a guilty verdict. In the end, they could not reach a decision in his case, so a grand jury indicted him again on the same charges.

Cabletron, based in Rochester, was once the state’s largest employer, but it was on decline at the time of the split up. Both Enterasys and Riverstone have since moved out of the state and have been sold at a fraction of their value at the time of the spinoff.

Lucent Technologies bought Riverstone’s assets through bankruptcy court in California. – BOB SANDERS/NEW HAMPSHIRE BUSINESS REVIEW