Riverstone case takes another twist

Noah Mesel, president of the bankrupt shell of Riverstone Networks, resigned last Friday and agreed on Tuesday to give up more than $600,000 in compensation amid charges that he obstructed an investigation by shareholders.

The controversy prompted intervention by the U.S. Trustee’s Office. The trustee asked a Delaware federal bankruptcy judge to appoint someone from its office to take over the company in order to safeguard more than a quarter of a billion dollars that is to be distributed to creditors and trustees, and to make public a secret investigation of the company by the shareholders.

Both the shareholders committee and the company oppose the trustee motion, arguing that it already has arranged for independent management of the company, and that trustee involvement could possibly scuttle the bankruptcy court’s anticipated approval of a distribution plan on September 12, and further diminishing and delaying the payout to shareholders.

Mesel’s resignation is the latest twist in the five-year controversial history of Riverstone, which spun off from the Rochester-based Cabletron Networks in 2001.

The company faced a Securities and Exchange Commission accounting probe dating back to its very birth, never filed any accurate financial statements and had its trading privileges revoked shortly after going bankrupt in February. It sold most of its assets to Lucent Technologies in May, leaving behind RNI Wind Down Corp. to distribute the proceeds.

Lawyers representing a bankruptcy-appointed shareholder committee claim Mesel, RNI’s president and former counsel delayed and obstructed their investigation by deleting and disposing of computer files shortly after the bankruptcy filing, and then getting rid of a hard drive where the files might be retrieved.

They argue that Mesel should be considered a “non-complying person,” which would mean the company wouldn’t be financially responsible should he be sued.

Mesel said he only deleted e-mails from his laptop after the SEC investigation was dropped, and thought the company kept a back-up on its server, so he didn’t think they were needed. Once he realized that the shareholder committee was launching its own investigation, he copied the files from his failing hard drive to a new drive before misplacing the old one. He said that he has produced 4,000 e-mails and documents, which would total more than 10,000 pages.

Mesel could not be reached for comment, but both the trustee’s office in its filing and the equity committee’s attorney, Bill Baldiga, confirmed to NHBR Daily that the Riverstone board accepted Mesel’s resignation on Friday, appointing bankruptcy attorney Alan Miller.

If the plan wins approval Miller would be replaced by Craig Jalbert, the equity committee’s current financial adviser, as plan administrator on Sept. 22, Baldiga said. Both are independent and have no ties to either Riverstone or Cabletron.

The committee, said Baldiga, did not ask for Mesel’s resignation as president. Indeed, it asked that Mesel continue to remain as a paid employee to help during the transition, as part of the settlement agreement. But the agreement asked that Mesel give up $175,000 of his claims against the estate and various stock-related compensation. The restitution would be worth between $600,000 and $700,000 Baldiga said.

(In exchange the company would agree to defend Mesel in any litigation related to his RNI duties.)

The trustee’s office, however, said that it should be appointed and the equity’s committee report should be made public because “there are reasonable grounds to suspect that certain members of the governing body of the debtor, including the debtor’s chief financial or executive officer, participated in actual fraud, dishonesty or criminal conduct in the management of the debtor.”

But Baldiga said the committee will oppose the motion because “it is a waste.” Releasing the report, he said, “would only give rise to further expense and perhaps more litigation.”

There seems to already be enough litigation as it is. Indeed one of the reasons the equity committee wants Mesel to stay on is to help it with lawsuits relating to the company’s Cabletron roots.

On Monday, the court put off hearing a claim from Lloyd’s of London that RNI should pay back $12.5 million because Cabletron misrepresented its financial health back in 2001, when it was still a subsidiary.

Riverstone’s first financial statements were included with Cabletron’s during the insurance application process, and the Rochester firm’s former officials — include former Cabletron CEO and Riverstone Chairman Piyush Patel – were involved in the application, Lloyd’s claimed.

Lloyd’s paid out the claim to cover these officials while the company and the officials were targeted by the SEC. Both Cabletron and Riverstone restated their financial statements, proving that they were not accurate, argued Lloyd’s.

RNI claims that since the SEC never actually made a finding of fraud, Lloyd’s claims are baseless. – BOB SANDERS