Ex-Riverstone execs respond to charges

While the jury in US District Court in Concord on Wednesday was still deliberating the fate of five former Enterasys Networks executives charged with securities fraud, six other executives from its sister Cabletron Systems spinoff company, Riverstone Networks, were responding to the first time to civil securities fraud on the other side of the country.

Both groups of executives are accused of engaging in a scheme to inflate revenue at the time in 2001 when the Rochester-based Cabletron Systems spun both of them off. Indeed, the Securities and Exchange Commission has accused Riverstone Networks officials of using one of the very same methods – putting terms that might prevent revenue recognition in a secret side letter – that government prosecutors allege Enterasys officials used.

But on Monday — the first day the Enterasys jury started their deliberations in earnest in New Hampshire – attorneys for former Riverstone Chief Executive Officer Romulus Pereira and former Chief Financial Officer Robert Stanton urged that the U.S. District Court in San Jose, Calif., dismiss the charges because they weren’t specific enough in regards to their clients.

In addition, attorneys for John Kern, Riverstone’s former vice president of sales, William McFarland, former vice president of finance, and Lori Cornmesser, former director of sales operations, denied all of the substantial allegations against them.

Andrew Feldman, Riverstone’s former vice president of marketing, was granted an extension to file his answer.

The charges say that the defendants recorded phony sales on its books involving some 17 companies – four of which are detailed — and then lied on reports filed with regulators.

As a result of these deals, the company inflated revenue by nearly $30 million, the complaints say. When Riverstone announced its investigation by the SEC in 2002, its stock price was cut in half to $7.70 a share — a change of value of nearly $1 billion. When Riverstone eventually reinstated its earnings in August 2003, the company’s stock price plummeted again.

But before it did, the officials allegedly enjoyed the benefits of the artificially inflated price.

Pereira, according to the complaint, profited the most, with $1.2 million in gains from stock sales.

But Pereira and Stanton, in a joint response, said that there wasn’t enough detail about their roles in these specific deals to know exactly what they are charged against.

“With respect to 14 of these 17 transactions, there are no specific factual allegations whatever concerning Pereira and Stanton,” the attorneys wrote.

The two are named in the $2.8 million transaction with World Wide Technology, a Missouri-based reseller, which took place Aug. 28, 2001 — several weeks after the spinoff and days before the close of the first quarter, concealing a side agreement that would have prevented that revenue from being recognized.

The officials, despite being informed that the company wasn’t paying up, reported the sale as revenue, the complaint alleges. The single sale counted for more than 5 percent of the company’s revenue that quarter.

According to the complaint, Pereira and Stanton knew about the problematic terms and knew that they might not get paid, but caused the sale to be recognized as revenue anyway.

Their attorneys argued that even in that sale, which was not large enough to be considered material fraud, there were no details about how and when the executives found out about these facts, and what was in the text of an alleged e-mail that they received.

The two top executives also knew of similar contingencies in a $2 million purchase order to Vnetek Communications Inc., a Londonderry-based reseller.

Again, the agreement allegedly included a secret side agreement with full return rights that prohibited revenue recognition under accounting rules, but it went through because the officials wanted to get a “clean” purchase, which was needed to “get through the audit,” according to the complaint.

Specifics again were lacking, said the former executives’ attorneys.

Kern was allegedly more involved in the $2 million deal with Technica Corp., a Virginia-based reseller, approving a side agreement so that the main agreement did not refer to various sales contingencies that would have prevented revenue recognition. Cornmesser allegedly received an e-mail about the side agreement and forwarded it to McFarland, who took no action on the deal. Kern then allegedly approved another side agreement for an additional $2.8 million deal with the company for the following quarter.

All three deny the allegations, but did not elaborate.

Kern also denied charges that he was involved in a $1 million sale to TM Telecom, even though the Florida-based reseller “had no need for the Riverstone product and did not have the independent ability to pay for it,” according to the complaint.

Riverstone, which has long since moved from New Hampshire to California, never fully recovered from the plunge in the stock once the accounting investigation was revealed. The company filed for bankruptcy in February, and the SEC halted trading in its stock shortly afterward.

Although it was purchased by Lucent Technologies in May for more than $200 million, it initially was only able to return to the shareholders $1.06 a share, compared to the $14 that it sold for during the spinoff. – BOB SANDERS

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