Riverstone criminal probe continues in Calif.

A grand jury is continuing its investigation into possible criminal securities fraud by former executives of Cabletron Systems spinoff Riverstone Networks, according to testimony released by the attorneys of those being investigated.

The U.S. attorney in northern California is considering bringing charges against Andrew Feldman, Riverstone’s former vice president of marketing, as well as an undisclosed number of other former executives, Feldman’s attorney David Schindler disclosed Feb. 8 in bankruptcy court in Northern California.

The Securities and Exchange Commission is suing Feldman and five other officers – including the former chief executive officer, Romulus Pereira, and chief financial officer, Robert Stanton – for allegedly inflating review when the company was spun off in 2001 from the Rochester-based Cabletron.

The defendants have moved to dismiss the civil case, which is not expected to go to trial until sometime in 2008.

Schindler was being questioned over whether Riverstone Wind Down Corp. (Riverstone’s bankrupt estate) should advance him legal fees or indemnify him in his effort to represent Feldman in both cases. Feldman is the only former officer who has not reached an agreement with the estate. Schindler is asking that some $4.5 million be set aside, while the estate would like to cut those fees by more than half.

Schindler said that it would actually cost closer to $9.3 million to defend against both a civil and criminal complaint, according to a transcript of the testimony, which was released Feb. 23. The civil trial alone could require deposing as many as 50 witness, he said, including as many as 10 expert witness, as well as reviewing some 2 million pages of documents.

Schindler said he tried to negotiate a deal with the U.S. attorney’s office, but the office instead sent him a tolling agreement detailing possible charges of wire and mail fraud, conspiracy, aiding and abetting securities fraud and possible tax offenses. The tolling agreement – designed to calculate how much time to deduct from speedy trial requirements – expires April 1.

Schindler said that Feldman was the subject of the investigation, as opposed to a target — the latter term meaning that he would be in the grand jury’s “crosshairs” — but he added that Feldman is one of the individuals “who is clearly the focus of their investigation.”

Schindler was not asked about the other individuals.

Riverstone was sold last spring in a bankruptcy sale to Lucent Technologies for more than $200 million, but the final amount to be distributed to shareholders partly depends on how much it will cost to fulfill contractual obligations to defend former officers against securities charges. Feldman’s bankruptcy attorney argues that this amounts to more than a few cents a share.

Either way, shareholders will wind up receiving about a tenth of the amount a share could fetch at the time of the 2001 Cabletron spinoff.

The SEC recently filed civil securities fraud charges against 10 former executives at Cabletron – and its primary spinoff, Enterasys Networks – in U.S. District court in Concord. Those charges also allege revenue inflation during the 2001 spinoff.

The Cabletron-Enterasys civil defendants include Piyush Patel, former Cabletron CEO, who engineered the spinoff and then left to chair the Riverstone board of directors for a year. Patel was not indicted in the Enterasys case, and has not been charged civilly in the Riverstone case. – BOB SANDERS

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