U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 19869 / October 16, 2006
SEC v. Romulus S. Pereira et al., Civil Action No. 3:06-CV-06384-MHP (N.D. Cal., filed October 12, 2006)
SEC Charges Former Officers of Riverstone Networks, Inc. with Financial Fraud
The Securities and Exchange Commission ("Commission") announced today that it has filed a complaint in the United States District Court for the Northern District of California against five former officers and one former employee of Riverstone Networks, Inc. ("Riverstone"), a California-based company that, until recently, was a worldwide provider of communications routers, as a result of their roles in a scheme to inflate Riverstone's net revenues.
The complaint alleges that, from June 2001 through June 2002, chief executive officer Romulus S. Pereira, chief financial officer Robert B. Stanton, executive vice president of sales L. John Kern, vice president of marketing Andrew D. Feldman, vice president of finance William F. McFarland, and director of sales operations Lori H. Cornmesser negotiated, reviewed, approved, or were otherwise aware of sales transactions for which Riverstone improperly recognized revenues in contravention of Generally Accepted Accounting Principles. Specifically, Riverstone improperly recognized revenues on sales transactions that involved side agreements with purchasers, under which the customer's payment for Riverstone product was contingent upon resale or the purchaser was granted full return, exchange, or cancellation rights. Due to the defendants' actions and omissions, the side agreements were concealed from Riverstone's outside auditors. Riverstone reported almost $30 million of fraudulent revenues as a result of these contingent sales, causing revenue overstatements in four fiscal quarters ranging between 14.3 and 23.1 percent. In furtherance of the fraudulent scheme, the defendants also circumvented Riverstone's internal accounting controls, falsified Riverstone's accounting records, and lied to Riverstone's outside auditors.
The Commission's complaint charges Pereira, Stanton, Kern, Feldman, and McFarland with violating the antifraud provisions of Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder. The complaint further charges various defendants with violating, or aiding and abetting violations of, Sections 13(a), 13(b)(2), and 13(b)(5) of the Exchange Act and Rules 12b-20, 13a-1, 13a-13, 13b2-1, and 13b2-2 thereunder.