In: Accounting
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 abilityto 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.
Read this as a fraud examiner hired by the prosecution as an expert witness. What are some of the facts of the case that you would pay special attention to and advise the prosecutor to pursue for further investigation? Identify three (3) items and explain why they are significant to a fraud examiner. |
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.