Riverstone grand jury probe revealed

The U.S. Attorney’s office in northern California has launched an ongoing grand jury investigation pertaining to Cabletron Systems spinoff Riverstone Networks, according to court papers filed Wednesday in bankruptcy court.

According to an Oct. 20 bankruptcy court filing, a criminal investigation dates at least as far back April, when federal investigators informed lawyers for Romulus Pereira, former chief executive officer, and former Robert Stanton, former chief financial officer, about it.

The revelation comes amid a fight over legal bills, given new urgency by an Oct. 12 civil complaint lodged by the Securities and Exchange Commission that charges the two executives and four others with securities fraud.

The legal question revolves around how much money Riverstone’s bankrupt estate, RNI Wind Down Corp., should reserve from the shareholders to defend executives accused of defrauding them. While two executives have settled, three – Pereira, Stanton and Andrew D. Feldman – are asking for a $12 million reserve.

The executives say that the civil charges simplify the matter. Since their agreement with their former company says that they should be indemnified against legal actions concerning their former position, here is an actual legal action that would require a vigorous defense. The question isn’t whether RNI should set aside money to pay them, but how much should be set aside, they argue.

Attorneys representing RNI, however, are demanding to question the defendants under oath on the civil charges, to see if they should be required to hold back any money at all. If there are 5th Amendment concerns, bankruptcy law allows the use of that information in determining the executives’ claims.

The executive’s attorneys argue that their clients shouldn’t even have to answer questions.

“We do not believe that you have the right to depose Mr. Stanton and Mr. Pereira at this point. They have no relevant information to furnish,” wrote one attorney in an e-mail.

RNI lawyers disagreed.

“To establish a recovery without requiring the claimants to appear for depositions would be a travesty of justice,” they wrote.

The criminal revelations came come lawyers for both sides try to hammer out an agreed-upon list of facts, known as stipulations, in preparation for a Nov. 8 hearing on the fee dispute.

An earlier version of the list, prepared by the defendants’ attorneys, said that the U.S. attorney was investigating a possible criminal action relating to the Riverstone. The later version, agreed to by RNI attorneys, simply states that there is an ongoing grand jury investigation.

Cabletron – once New Hampshire’s largest employer – spun off Riverstone, along with Enterasys Networks, in 2001. Both spinoffs have been plagued by similar charges of inflating revenue during and immediately after the spinoff. – BOB SANDERS

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