Optical/IP Networks

Riverstone: Insider Sales Programmed

More than a month before Riverstone Networks Inc. (Nasdaq: RSTN) reported that it would miss its fiscal 2002 fourth-quarter revenue targets, insiders began selling off shares (see Riverstone Savaged on Warning).

On January 11, 2002, four of Riverstone’s top executives, along with two directors in the company, sold more than $3.3 million worth of company stock, according to Thomson Financial.

Coming just a month before the company announced a sales shortfall, the stock sales don't look particularly good. But Riverstone officials say that these particular sales coincided with the company’s new insider-selling program, which began in January.

As a part of this program, four of the company's officers -- Romulus Pereira, president and CEO; Suresh Gopalakrishnan executive vice president of engineering; Robert Stanton, CFO; and John L. Kern, executive vice president, worldwide sales -- all entered the stock selling plan. Chairman of the board Piyush Patel and another board director, Eric Jaeger, also entered the program in January.

Pereira and Patel sold the most shares. Pereira sold 45,200 shares worth $915,621, according to Thomson Financial. And Patel sold 57,300 shares worth $1.6 million.

“While it looks like a large dollar amount to you and me, it’s really a modest portion of what they actually hold,” says Andrew Feldman, vice president of corporate marketing for Riverstone.

Indeed, both Pereira and Patel started out with approximately 1.5 million shares in the company, according to an S-1 filing with the Securities and Exchange Commission (SEC) in June 2001. In January, Pereira sold roughly 3 percent of his holdings, while Patel sold almost 4 percent of his. Feldman says the program allows the officers and directors to sell as much as 15 percent of their offerings over the course of the program. The shares are sold on a monthly basis, and the amount to be sold is determined when the program is begun.

While these stock selling programs are common among top executives, it is still important to note who has begun selling and how much they’ve been selling.

According to Feldman, the lockup on the company’s stock options expired in November. But insiders could only officially begin selling Riverstone stock in December 2001, since they were prohibited from selling right before or immediately after the end of the third fiscal quarter of 2001.

Still, according to Thomson Financial, Patel, Pereira, Gopalakrishnan, and Jaeger were all selling shares as early as August 2001. In fact, Patel sold $1.3 million in Riverstone shares between August and October 2001. Jaeger sold about $1.1 million worth during the same time period. These shares were initially Cabletron Systems Inc. (NYSE: CS) shares, but were converted to Riverstone stock in August when the company officially spun out of Cabletron. These shares were set to expire 90 days after the spin out, says Feldman. Pereira owned 894,463 shares of Cabletron as of March 3, 2001, according to the SEC filing. Patel owned 929,083 shares of Cabletron, Jaeger owned 23,938, and Gopalakrishnan owned 8,750.

Riverstone shares closed up today $0.27 (7.07%) to $4.09.

— Marguerite Reardon, Senior Editor, Light Reading

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ritefiber 12/4/2012 | 10:51:39 PM
re: Riverstone: Insider Sales Programmed Too much of a coincidence that 4 execs happen to sell at the same time. While they say the share volumes are small, the question is how many more times they will sell?

A sign of troubled times ahead...
optical_man 12/4/2012 | 10:51:38 PM
re: Riverstone: Insider Sales Programmed I explained this on the other board but here it is again:
What happened in Jan was the ESPP purchase/sale by Riverstone employees.
What you saw was the top Execs report their sales. Guess what? EVERY single other employee did the same sale but wasn't required by the SEC to report it. Legal? Yes. Ethical, maybe.
Happen at GE? Yes.
Heres the difference; at GE the employees get stock purchase rights every 1/2 year or so and get the stock at a discount. Difference is that GE's stock is stablized so a sale by the GE employees doesn't amount to much. HOWEVER a YOUNG company like RSTN doesn't yet have a stable stock, so a mass dump by the employee base sends shock waves through the investor community, let alone you and me.
Should these things be outlawed? Yes and No. They should be banned for 3-5 years after an IPO so the young companies stock can stabilize and prove a track record.
That'll fix this issue.
Metadata123 12/4/2012 | 10:51:38 PM
re: Riverstone: Insider Sales Programmed Even after I left this message on Feb 6, the insiders at RSTN, have been bailing out. http://www.lightreading.com/bo...

Now we know that RSTN is coming up with convoluted justifications for the criminal acts of their most senior five executives. With Metro Ethernet on its last legs in the US (the RBOCs having abandoned even any pretense of wanting to deliver them any time soon), these individuals had access to information that very few others did.

They can also be faulted for bad market strategy. Without an Enterprise offering, RSTN has no fall back position unlike Cisco, Extreme, or Foundry. Most industry watchers knew this, but got too carried away with the ubiquitous broadband hype.

Regardless of the lengthy (but terribly weak) explanation that RSTN had to offer to justify the acts of these insiders, it is apparent to all that sales had dipped in January and these guys knew it. If there is clear evidence that any of these five clowns talked up RSTN during the month of January to either analysts or employees, then they need to be indicted. How different is this gang from the Lay-Skilling-Fastow crowd at Enron. Not much in their venality, albeit these guys at RSTN were small time crooks while the Enron guys were really in the big leagues.
dietaryfiber 12/4/2012 | 10:51:37 PM
re: Riverstone: Insider Sales Programmed
I hate to disappoint you all, but selling plans are a way of dealing with these insider trading potentials. When Reg FD was introduced, they also tightened up insider trading regulations. To compensate, they allowed people to file plans to allow them to sell stock for a defined period of time (typically one year). This plan is executed and the formula for selling can be simple, complicated, anything as long as its predefined. Basically, if one of these plans is in place then they are pretty much protected from insider trading charges.

dietary fiber
dietaryfiber 12/4/2012 | 10:51:36 PM
re: Riverstone: Insider Sales Programmed
Again, one of the things in these plans items like:

Sell 50,000 shares of stock on the 11th of each month as long as the stock is above $10.

That is a valid selling plan. As long as the formula is clear and pre-made you can put conditions on the sale.

dietary fiber
optical_man 12/4/2012 | 10:51:36 PM
re: Riverstone: Insider Sales Programmed dietaryfiber,
agree with you that the 'pre-programmed insider selling programs' are legal. They were set up to say 'we are not gouging the company. However, look at some examples: in May 2001 the Sonus Executives went on Pre-programmed selling and told the analysts that this would 'stabilize the stock'. Ok, sound reasonable? Well, they preprogrammed to sell 50,000 shares/month EACH. Then, when the stock tanked in the fall, they QUIT selling. I think to be fair, they should have had to keep selling their shares at $2.00 to show they weren't gouging and were only selling 'pre-programmed' shares. They get it both ways. Is this all legal? Yes. Is it right? If it's legal, then it's right. Should IPO companies have lock-outs of 3-5 years? YOU BET.
Will the 'pre-programmed' sellling of Riverstone stop until the stock goes back up? YES, you watch it stop, and they'll say they didn't want to 'hurt the stock' by selling more....FALSE, they get it both ways.
These are my thoughts only and subject to Congressional oversight if needed!
StartUpGuy1 12/4/2012 | 10:51:23 PM
re: Riverstone: Insider Sales Programmed If you would look at this company and where it came from, you would see that Entrasys DOES sell the Riverstone product to the Enterprise market. This was part of the deal when Cabletron spun off the RIverstone and Entrasys units. Entrasys was Cabletrons Enterprise sales/support unit.

Focus is what will get companies through this time. Riverstone does sell there products to Enterprise through Entrasys, but they are not focused on delivering products tailored for the Enterprise. If they did, their products would not be a fit for carriers.

Foundry and Extreme are trying to do both, but look at their numbers and you will see a similar struggle.
Metadata123 12/4/2012 | 10:51:21 PM
re: Riverstone: Insider Sales Programmed Opticaluser,

You are completely incorrect. Enterasys does not resell Riverstone equipment to anyone; and definitely not the Enterprise market. Check your facts before you spout nonsense.

Riverstone is spiraling into oblivion as its vision of a world full of edge routing gear supporting IP/MPLS is coming crashing down as none of the US carriers are willing to put any money down towards that vision. All they have is a bunch of suckers from Asia who really don't understand what they got into.

There will always be a market for edge routing. But nothing that would justify a company with a multi million dollar market cap. And by the time the US carriers even come around, everyone else would have all these features and edge IP/MPLS gear would be a commodity.

However, this article was about the small time crooks running the company and how they are conning the investing public and their own employees and cashing out when they knew the company was headed for a mammoth fall. Even with the fig leaf of a sell program, this is a wholesome mixture of unbridled avarice and outright theft. And all this, after they have managed to drive the company into the ground with a pointless strategy.
nobollox 12/4/2012 | 10:51:20 PM
re: Riverstone: Insider Sales Programmed The idea of creating a 3-5 year lockout for insider trading is okay, but what about the investor community locking out any private companies from going public without 3-5 years of good solid financials and operations. Maybe that would do the trick.

dietaryfiber 12/4/2012 | 10:51:19 PM
re: Riverstone: Insider Sales Programmed nobollox,

I think that would prevent VCs from investing in these types of firms. They want to have the freedom to get their money out and at least those with Board seats would be considered insiders. I hate to point this out, but many (if not all)employees during the private phase of the firm would be considered insiders as well.

dietary fiber
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