Riverstone shareholders edge closer to receiving payouts
The shareholders of what remains of the bankrupt Riverstone Networks should get whatever is left of the company, but only after enough money is put aside in a reserve account to indemnify current and former officers against any legal claims, including shareholder lawsuits, Riverstone has announced.
The official Equity Holders’ Committee is investigating whether there is a legal basis for such claims in order to calculate how much money should be put aside. It is only after that investigation is completed – now estimated by September – that shareholders will actually see some money.
“We want the reserves to be as low as reasonably possible to maximize the initial distribution to investors, while simultaneously preserving legitimate expectations and legal entitlements of officers and directors who agreed to serve the company based in part on their indemnification agreements,” said interim President Noah D. Mesel of RNI Wind Down Corp., the new name of the bankrupt shell company.
Cabletron Systems, once the state’s largest employer, spun off Riverstone and another public company — Enterasys Networks Inc. – in 2001 with the goal of creating shareholder value.
Both companies – which have long since moved out of the Granite State — became targets of investigations and shareholder lawsuits tied to accusations of inflating revenue during and immediately after the Cabletron split-up. Both companies’ stock price plummeted. Four Enterasys officials – including its former CEO – pleaded guilty to securities fraud, and another five, including the former chief financial officer – are currently awaiting trial.
Enterasys was sold to some private investors in March.
Riverstone officials have not been charged with any criminal activity, but an ongoing investigation by the U.S. Securities and Exchange Commission plagued the company, which never produced any accurate financial statements. In February, the company declared bankruptcy and the SEC ended its investigation by revoking its trading privileges.
At the end of April, the company sold most of its assets and transferred its employees to Lucent Technologies for $207 million, but much of that money is being used to pay off debts and various fees associated with the bankruptcy, which would include the equity investigation. Shareholders were hoping to receive as much as $1.50 a share as a result of the transaction — about a tenth of the company’s value during the spinoff — but the actual share price is still unknown.
The bankruptcy court approved the equity committee investigation on May 28, but it is unclear what will be the extent of the investigation, and it may remain unclear because the order requires that the entire probe be conducted and its results held in secret. The equity committee may, however, share the results with the official creditors committee and to the debtors’ insurers.
In particular, it could not share the results with one law firm not part of the bankruptcy proceedings that appears to be involved in some other legal matter concerning the company’s officers.
Current company officers’ legal costs are already covered by an insurance policy. On May 9, bankruptcy court approved a request to spend up to $2.59 million on “tail insurance,” which should cover directors for some $40 million personally against shareholder lawsuits. The latest officials are “like the boy scouts” said Mesel, but “even unwarranted law suits are costly to defend against.”
Riverstone’s previous insurance policy didn’t completely cover former officers’ legal claims.
“Just because you bought an insurance policy doesn’t mean they will pay you 100 percent on the dollar,” Mesel said.
In addition the latest insurance policy only dates back to May 2003, and will not cover claims relating to investigations focusing on when the company first split off from Cabletron.
Already several former Cabletron holdovers have filed claims against the Riverstone estate. Riverstone’s first CEO, Romulus Pereira, has already filed a $3 million claim and former CFO Robert Stanton has asked for $2.5 million. Piyush Patel, the former Riverstone chairman and Cabletron CEO, also has a claim in for an unspecified amount. Mesel said that Riverstone has disputed such claims in the past, but a court will make the final determination.
While Mesel estimates that court-blessed equity investigation will be completed by the end of the summer, he cautioned that stockholders should not count on getting their money in the fall.
“You never know when you are dealing with the court,” he said. “Anybody can ask for an extension.” —BOB SANDERS