Historical background and business profile of Adelphia:
In 1952 John and Gus Rigas acquired their first television cable franchise for $300
from a local hardware owner. This franchise was able to produce better television
reception from an antenna located on top of a local hill than any of its competitors.
This acquisition was a big investment for the town of Coudersport, Pennsylvania,
which had a population of less than three thousand. As the Rigas Company grew
through acquisitions, the Rigases decided that they needed to change the name
of the company to Adelphia, which is Greek for brothers. As Adelphia became
larger and the Rigases' children grew up, other family members, including three
sons, became involved in the strategic decision-making and planning process at
Adelphia.
Key players:
Timothy Rigas was a graduate of Wharton Business School with a bachelor's
degree in economics. He was the former CFO and chairman of the board of
directors audit committee from 1992 to 2001. He resigned from the board directors
in May 2002 after the accusations of accounting fraud became public. In July 2004
he was found guilty of conspiracy, bank fraud, and securities fraud.
Michael Rigas, a graduate of Harvard and Harvard Law School, resigned from the
Adelphia board in May 2002. He also resigned as the executive vice president of
operations. Michael Rigas was found guilty of fraud and sentenced to ten months
of home confinement in March 2006.
James Rigas attended Harvard and Stanford Law School. He was the executive
vice president of strategic planning. He resigned from his position and from the
board in May 2002 and did not face any criminal charges.
Corporate governance structure and Board of Directors:
Rigas family would make management decisions at the dinner table rather than in
the board room or an executive's office." The Rigas family controlled the company
by issuing to investors only as a shares that were worth one vote each while
retaining all the class B stock that had ten votes with each share. Of the nine board
members, five were immediate family members. The other four members were
friends and/or business associates of John Rigas. As a result, the decisions of the
board of directors were always stacked in favor of the Rigases.
Main tricks:
1. Obtained $2.3 billion in loans from Adelphia in the form of off-balance sheet
transactions (use of Adelphia's cash to pay for personal expenditures)
2. $167 million loan given to the family in the form of bonds that had not been paid
back.
3. The Rigas family set up a "cash-management system, which in- cluded money
obtained from revenue for the cable systems as well as from family-run businesses
and proceeds from company loans. This was the account used to pay for the
personal expenses of the Rigas family. As a result, the Rigas family now had
unlimited access to Adelphia's resources without any check and control system in
place
4. Adelphia's statement of cash flows was artificially inflated by recording service call
expenses as capital investments. Adelphia filed a lawsuit against its two major
suppliers of thgtart converter boxes, Scientific Atlanta and Motorola. Adelphia
claimed that these two suppliers willingly aided Adelphia in committing fraud by
helping Adelphia inflate earnings through a fraudulent marketing campaign.
Adelphia would pay the two suppliers an additional $26 per box beyond the original
price. The suppliers would then pay Adelphia $26 per box in marketing "support."
There was no action taken by Adelphia to warrant the $26 per box fee, yet Adelphia
would use the additional $26 paid by the suppliers to inflate earnings. Adelphia
would record the amount paid to the suppliers as a capital expense, which
could be spread out over a number of years, and the amount received by the
suppliers would be recorded as a contra-expense, which would ultimately
increase Adelphia's carnings for that current quarter
5. June 2004, former vice president and assistant treasurer Michael Mulcahey
admitted that Adelphia maintained two sets of books but that there was nothing
illegal with the practice. An external" set of books was used to present information
to banks and other investors. The internal sets of books showed the actual
performance of the company but contained more detait that required by outside
interests. Mulcahey claimed that Adelphia's external auditor, Deloitte & Touche,
could have access to the internal books if it requested it. Yet Jim Brown, former
vice president of finance at Adelphia, testified in court that at the end of every
quarter, there would be a meeting at the corporate office to compare the
subsidiaries' performance to the financial tests needed to evaluate the covenants
of the loans. If the loans were no longer in compli- ance with the covenants, the
numbers would be manipulated to ensure they were in compliance.
TIMELINE
February 2001: Cohen finds out that that based on their purchasing pattern of
Adelphia stock, the family was in debt by more than $1 billion.
March 2001: Cohen finds out about off-balance sheet transactions.
May 2001: John Rigas resignes as chairman of the board and chief executive
officer of Adelphia. Erland Kailbourne becomes CEO.
June 2002: Adelphia filed for Chapter 11 bankruptcy protection
July 2004: John and Tim Rigas were found guilty of eighteen counts of conspiracy
and fraud
June 2005: John Rigas was sentenced to fifteen years in prison. Tim Rigas was
sentenced to twenty years in prison.
The SEC also filed civil charges against Adelphia's external auditor, Deloitte &
Touche, for its negligence in identifying the fraud committed by the Rigas family.
The fines were estimated to cost Deloitte & Touche approximately $50 million and
a guarantee that corrections would be made within the firm to ensure that the
actions would not occur again
October 8, 2005: John and Timothy Rigas were indicted for tax evasion
November 2005: Adelphia's former executive vice president, Michael Rigas,
pleaded guilty to securities fraud by filing false financial information with the
Securities and Exchange Commission. B y accepting the plea bargain, Michael
Rigas avoided jail time of up to three years. In May 2006 Michael Rigas was
sentenced to two years' probation with the first ten months to be served as home
confinement, and he was ordered to pay a fine of $2,000 for his actions.
November 2006 former vice president and assistant treasurer Michael Mulcahey
was barred from ever serving again as an officer or as a director for a publicly
traded company.