The Adelphia Fraud

Adelphias BackgroundJohn Rigas purchased cable company in 1952 for $300 in Coudersport, Pennsylvania

He purchased it to hedge against lost sales for his movie theater

In 1972, he and his brother, Gus, created Adelphia Communications Corporation

Adelphias BackgroundAdelphia is Greek for BrothersSignifies the Greek heritageCorporation run by brothers

Adelphia has always been a family business

In the late 1990s, it purchased Century Communications for $5.2 billion and became the 6th largest cable company with 5.6 million subscribers

John Rigas (Adelphia Founder)Loves Limelight/Service

Board of DirectorsNational Cable TelevisionCitizens Trust CompanyCharles Cole Memorial Hospital

President of several committees

John Rigas (Adelphia Founder)Ordered network to show him at least once during Sabres gamesBought homes for peopleFlew people on private planes for medical treatmentGave huge amounts to charitiesHad to approve every business transaction

John Rigas (Adelphia Founder)

Characteristics of a fraud perpetratorEgocentrismOmniscienceOmnipotenceInvulnerability

The Family Business

Family Members in Management include:John Rigas, Founder and Chairman (Father)Tim Rigas, CFO and Board member (Son)Michael Rigas, EVP and Board member (Son)James Rigas, EVP and Board member (Son)Peter Venetis, Board member (Son-in-law)Family Management =Majority of Adelphias Voting StockMajority on Adelphias Board of Directors

Extravagant Lifestyle symptomsSeveral Vacation Homes and luxury apartments in ManhattanSeveral private jetsConstruction of a world-class 18-hole golf courseMajority ownership of the Buffalo Sabres $700,000 membership in an exclusive golf club

The Fraud ChargesViolation of RICO actBreach of fiduciary dutiesWaste of corporate assetsAbuse of controlBreach of contractUnjust enrichmentFraudulent conveyanceConversion of corporate assets

How the Fraud took placeAdelphia backed $2.3 billion worth of personal loans to the Rigases

Rigas Management manipulated the books to meet analysts expectations and inflate the stock price

Rigases created private partnerships w/Adelphia as a tool for the self-dealing schemes.Fund transfers were made through journal entries that gave Adelphia more debt and the Rigases multi-million dollar assets at no cost.

How the Fraud took place (contd)

Rigas Management commingled Adelphia funds with family funds causing Adelphia to fund non-corporate projects, such as:

Personal loans

Real estate transactionsPurchase of Manhattan apartments for private usePurchase of land for a private golf course

Cash advances to the Buffalo Sabres

$252 million to pay margin calls, or demands for cash payments on loans for which the family had put up Adelphia stock as collateral.

How the Fraud took place (contd)Revenues from Adelphia subsidiaries and other businesses were dumped into one central account. They used this account to pay bills.

Financial affairs of Rigas Family Entities were intermingled with Adelphia, but not consolidated. (Off-the-balance sheet debt)

The Rigases used Adelphias line of credit for personal purchases.

How the Fraud took place (contd)Transaction Account from Adelphia CommunicationsBuffalo SabresHockeyFamily-ownedFarmInterior DesignShopPrivate CarDealershipLandscaping, Maintenance to AdelphiaRigas Family EntitiesFurniture/Design Services to Adelphia

How the Fraud took place (contd)The Rigases doctored financial records at Adelphia and created sham transactions and phony companies to inflate the firm's earnings and to conceal its mounting debts. Upon realizing the extent of funds taken, Tim Rigas limited the amount of Adelphias funds his father could take to$1,000,000/Month

How the Fraud EvolvedIt is commonplace for owners of family businesses to think of the companys money as their own.Adelphias management and board was controlled by the Rigas familyThe suit against the Rigas family details the ways in which the family used Adelphia in a rampant self-dealing scheme

The AftermathThe companys stock price plummeted after it was delisted from the NASDAQ for failure to file its 2001 10-K. Shortly after that, on June 25, 2002, it filed for bankruptcy.

LitigationJohn and Timothy Rigas found guilty of conspiracy, bank fraud and securities fraud await sentencing of possible 30 years in prison.Michael Rigas acquitted of conspiracy and wire fraud. Awaiting a new trial on securities fraudRigas family facing suit by Adelphia

Litigation (contd)James R. Brown, VP of Finance pleaded guilty in SEC case against himMichael C. Mulcahey, VP and Assistant Treasurer acquitted of criminal chargesAdelphia sues auditor Deloitte & Touche for professional negligence, breach of contract, fraud and other wrongful conduct.Adelphias reorganization plan in emerging from bankruptcy gives the Rigases nothing for their holdings

Moved into Buffalo, NY and quickly became the regions most powerful and respected business leader.Omnisciencealways has to approve every contract. They would sit on his desk for days in Coudersport even to approve routine contracts.OmnipotenceShowered United Way with $100,000 per year, and bought an elevator operator with bad teeth dentures.InvulnerableHe didnt try to hide his spending, but he flaunted it.These loans were shifted to unconsolidated affiliates, and Adelphia used sham transactions and fictitious documents to show the loans had been repaid.The Rigases used this account to pay off personal bills and to funnel money from the corporation to their personal accounts.