Question

John Rigas (founder and CEO of Adelphia Communications Corporation) was an extraordinary man. Throughout his professional career, he was honored for his entrepreneurial achievements and his humanitarian service. Among other awards, he received three honorable doctorate degrees from distinguished universities, was named Entrepreneur of the Year by Rensselaer Polytechnic Institute (his college alma mater) and was inducted into the Cable Television Hall of Fame by Broadcasting and Cable magazine. He worked hard to acquire wealth and status. But a $2.3 billion financial fraud eventually cost Rigas everything. Rigas and his company, Adelphia Communications, started out small. With $72,000 of borrowed money, he began his business career in 1950 by purchasing a movie theater in Coudersport, Pennsylvania. Two years later, he overdrew his bank account to buy the town cable franchise with $300 of his own money. Through risky debt-financing, Rigas continued to acquire assets until, in 1972, he and his brother created Adelphia Communications Corporation. The company grew quickly, eventually becoming the sixth largest cable company in the world with over 5.6 million subscribers. From its inception, Adelphia had always been a family business, owned and operated by the Rigas clan. During the 1990s, the company was run by John Rigas, his three sons, and his son-in-law. Altogether, members of the Rigas family occupied a majority five of the nine seats on Adelphia’s board of directors and held the following positions: John Rigas, CEO and chairman of the board (father); Tim Rigas, CFO and board member (son); Michael Rigas, executive vice president and board member (son); James Rigas, executive vice president and board member (son); Peter Venetis, board member (son-in-law). This family dominance in the company was maintained through stock voting manipulation. The company issued two types of stock: Class A stock, which held one vote each, and Class B stock, which held 10 votes each. When shares of stock were issued, however, the Rigas family kept all Class B shares to themselves, giving them a majority ruling when company voting occurred. With a majority presence on the board of directors and an effectual influence among voting shareholders, the Rigas family was able to control virtually every financial decision made by the company. However, exclusive power led to corruption and fraud. The family established a cash management system, an enormous account of commingled revenues from Adelphia, other Rigas entities, and loan proceeds. Although funds from this account were used throughout all the separate entities, none of their financial statements were ever consolidated. The family members began to dip into the cash management account, using these funds to finance their extravagant lifestyle and to hide their crimes. The company paid $4 million to buy personal shares of Adelphia stock for the family. It paid for Tim Rigas’s $700,000 membership at the Golf Club at Briar’s Creek in South Carolina. With company funds, the family bought three private jets, maintained several vacation homes (in Cancun, Beaver Creek, Hilton Head, and Manhattan), and began construction of a private world-class golf course. In addition, Adelphia financed, with $3 million, the production of Ellen Rigas’s (John Rigas’s daughter) movie Song Catcher. John Rigas was honored for his large charitable contributions. But these contributions also likely came from company proceeds. In the end, the family had racked up approximately $2.3 billion in fraudulent off-balance-sheet loans. The company manipulated its financial statements to conceal the amount of debt it was accumulating. False transactions and phony companies were created to inflate Adelphia’s earnings and to hide its debt. When the family fraud was eventually caught, it resulted in an SEC investigation, a Chapter 11 bankruptcy filing, and multiple indictments and heavy sentences. The perpetrators (namely, John Rigas and his sons) were charged with the following counts: Violation of the RICO Act Breach of fiduciary duties Waste of corporate assets Abuse of control Breach of contract Unjust enrichment Fraudulent conveyance Conversion of corporate assets Until he was convicted of serious fraud, everybody loved John Rigas. He was trusted and respected in the small town of Coudersport and famous for his charitable contributions and ability to make friends. He had become a role model for others to follow. With a movie theater and a $300 cable tower, he had built one of the biggest empires in the history of cable television. From small beginnings, he became a multimillion-dollar family man who stressed good American values. But his goodness only masked the real John Rigas, and in the end, it was his greed and deceit that ultimately cost him and his family everything.

Questions

4.) Based on the facts of the case, do you think this case has led to civil litigation, criminal prosecution, or both? Explain your answer. 5.) Suppose you were an expert witness in this case. What would be some of the facts to which you would pay special attention?

Answer 1

4. This case was prosecuted criminally and in 2005, John Rigas and his son, Timothy Rigas, were sentenced to 15 and 20 years in prison, respectively. John was 80 at the time and Timothy was 49. The two were ordered to report to prison in August 2007. Given John’s ailing health (he had heart surgery in 1999 and was reported to have bladder cancer in 2007), this prison term is effectively a death sentence. John Rigas got a reduced sentence from 15 years down to 12 years in an earlier appeal, which means he’ll be able to get out in January 2018, or when he’s 94 years old. Additionally, Rigas’ lawyer(s) found out on October 4, 2010, that their request for a new trial and reduced sentence for Rigas was rejected by the Supreme Court. Over the last few years, the SEC has tried to set the standard that fraud will not be tolerated in public companies.

The Adelphia fraud has also led to numerous civil cases. For example, John Rigas claims he never intended to defraud Adelphia and the cash advances were loans he would repay. He said he relied on auditors at Deloitte & Touche and lawyers at the Pittsburgh firm Buchanan Ingersoll, now Buchanan Ingersoll & Rooney. Deloitte agreed to pay $50 million to settle a civil lawsuit by the U.S. Securities and Exchange Commission and $210 million to settle with Adelphia investors. Deloitte, Adelphia, and the Rigases sued each other in 2007 in state court in Philadelphia over who bears responsibility for the fraud. Investors are also suing Buchanan.

5. You would pay attention to the majority of presence on the board of directors, family dominance, the cash management system, that the company used $4 million of company funds to buy personal shares of Adelphia stock for the family, the standard of living of the Rigas, the Rigas entities, the off-sheet balance loans, as well as the violations of RICO act, fiduciary duties, etc.