CoSine Deal Challenged in Court

Just when it looked as if the future of troubled CoSine Communications Inc. (Nasdaq: COSN) had finally been resolved, a legal wrench may be thrown into the works.

Just over three weeks ago Tut Systems Inc. (Nasdaq: TUTS) ended months of speculation over the fate of CoSine when it stumped up $24.1 million for the struggling switch vendor (see Tut Takes On CoSine and Will CoSine Get Carved Up?).

But in a recent filing with the Securities and Exchange Commission (SEC) CoSine revealed that, on January 18, a complaint entitled Senior v CoSine Communications Inc., et al., was filed in San Mateo County Superior Court in California. The complaint requested that the acquisition be enjoined” due to alleged self-dealing and breach of fiduciary duties by CoSine’s officers and directors.

CoSine did not return NDCF’s calls, but the company stated in the SEC filing that it would fight the claims and proceed with the Tut transaction.

A spokesman for the Lake Oswego, Ore.-based Tut Systems declined to comment on the complaint, although he said that Tut is “still on track” to complete the acquisition by the end of March.The lawsuit against CoSine was filed by Paul Senior, and he's represented by Darren Robbins of Lerach Coughlin Stoia Geller Rudman & Robbins LLP. Mr. Senior's relationship to CoSine isn't known for sure, and a copy of his complaint was not available at press time. NDCF called Robbins, but he was not available to comment.

CoSine made its name as a switch vendor, but Tut manufactures a range of telecom equipment, including video trunking, digital TV, and broadband subscriber management devices. In addition to getting hold of CoSine’s customer base and core technology, the deal is also expected to net Tut Systems around $22.75 million of CoSine’s cash.

However, Tut faces some serious competition from CoSine’s rival, Quarry Technologies Inc., which at one time considered buying CoSine itself. Quarry has already offered to migrate CoSine’S IPSX customers onto its own iQSecure platform (see Quarry Touts CoSine Migration Program).

The last few months have been tricky for CoSine, to say the least. The first signs of trouble emerged back in July when the company announced it was examining "strategic alternatives" after a poor second quarter (see CoSine: The Big Sell-Off?).

Then, Ernst & Young stepped down as CoSine’s auditor and the company laid off most of its employees (see CoSine: E&Y Says Bye-Bye and CoSine Cuts to the Bone).In late October, CoSine announced that it had signed an agreement for the early termination of the lease on its Redwood City, Calif., headquarters. The company also released its third-quarter results, posting a net loss of $14.6 million, or $1.47 per share (see CoSine Posts Q3).

— James Rogers, Site Editor, Next-Gen Data Center Forum