Riverstone execs’ ‘tails’ are covered

Executives of Riverstone Networks will be fully insured against any shareholder lawsuits, at the expense of the shareholders, thanks to a May 9 ruling by a Delaware bankruptcy judge.

Judge Christopher Sontchi ruled that the Riverstone’s shell company – known as RNI Winddown — can spend up to $2.59 million on “tail insurance,” which would cover directors personally from any potential claims from any “alleged wrongful act” committed in their position dating back six years. That’s roughly $300,000 in premiums more than the amount Riverstone’s attorneys originally sought.

Almost all of the company’s assets were recently acquired by Lucent Technologies in Riverstone’s bankruptcy.

In addition to coverage against lawsuits, tail coverage also would pay for legal costs associated with any criminal prosecution or federal investigation.

Riverstone has been the target of several accounting investigations since it spun off from Cabletron – once New Hampshire largest employer — in 2001. The company – which has since moved to California — settled one suit with shareholders and the Securities and Exchange Commission dropped an investigation against the company when it revoked its trading certificate shortly after the company filed Chapter 11 bankruptcy in February.

But there is still the possibility that federal authorities or a shareholders group could go after executives of board members individually. That is what happened in the case of Enterasys Networks — like Riverstone, a spin-off of the former Cabletron Systems — which faced similar investigations into accounting policies immediately following the split up.

Riverstone executives threatened to quit during the transition period if they didn’t receive the coverage. A committee representing shareholders had objected to the insurance, arguing that executives had already done the “heavy lifting,” since the firm had sold most of its assets to Lucent on April 27 for $207 million.

Meanwhile, the wind-down is taking longer than expected because of the complexity of the asset sale. Lawyers asked for an additional time – until August 7 – to deal with various creditor civil suits.

Shareholders, meanwhile, have to wait until the bankruptcy debts and expenses (including the tail insurance) are paid off before they will find out how much they will get. They are hoping to get as much as $1.50 a share — a tenth of the stock’s value when the company was originally spun off from Cabletron in 2000. — BOB SANDERS

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