Judge OKs some Riverstone legal fees

Shareholders of the bankrupt Riverstone Networks will pay advance legal fees for current and former officers being investigated by those very same shareholders, a federal bankruptcy court ordered on Monday.

The former officers to be covered include several holdovers from the former Cabletron Systems – the company from which Riverstone was spun off in 2001 – including Romulus Pereira and Robert Stanton, respectively the chief executive officer and chief financial officer of Riverstone when it was spun off.

Both have been – and still could be – targets of a Securities and Exchange Commission investigation into allegations of accounting fraud.

The list of eligible former officers did not include Piyush Patel, Cabletron’s CEO at the time of the spin-off and the company’s first board chairman. Patel also has received a letter indicating he was an SEC target, though the status of that investigation is not known.

The order, handed down by Delaware Bankruptcy Court Judge Christopher Sontchi, only pertains to costs relating to the investigation of the Committee of Equity Security Holders of RNI Wind Down Corp., the bankrupt shell that is holding more than $100 million in cash after selling off Riverstone’s assets to Lucent Technologies. It did not include legal costs relating to any SEC investigation, though former officers have put in more than $5 million in claims, which could include the SEC probe. Nor does it include possible legal costs for past and future shareholder law suits against the individuals.

The equity committee is conducting the investigation to estimate the largest possible amount of claims by the company’s current and former executives to allow RNI to set up a reserve account before it can begin to distribute what’s leftover to the shareholders. But the investigation and the defense is eating away at the distribution.

Sontchi’s order allowed for an initial advance of an aggregate amount of $500,000, though that number could increase over time. All legal costs would have to be approved by the bankruptcy court and would go directly to the attorneys. The Equity Committee had asked that the figure be capped at $100,000.

The SEC dropped its investigation into Riverstone in February, shortly after the company filed for Chapter 11 bankruptcy, and the SEC revoked its trading privileges. But it never said anything about continuing its investigation into individuals.

An SEC investigation into similar charges against Cabletron’s primary spin-off – Enterasys Networks Inc. – led to grand jury securities fraud indictments against nine former Enterasys’ officers. Four – including the company’s first CEO – have pleaded guilty to some of the charges. The other five – including the company’s first CFO – are awaiting trial in U.S. District Court in Concord. It is scheduled to start in November. – BOB SANDERS

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