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The Adelphia Fraud

The Adelphia Fraud. Adelphia’s Background. John 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. Adelphia’s Background.

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The Adelphia Fraud

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  1. The Adelphia Fraud

  2. Adelphia’s Background • John 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

  3. Adelphia’s Background • Adelphia is Greek for “Brothers” • Signifies the Greek heritage • Corporation 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

  4. John Rigas (Adelphia Founder) • Loves Limelight/Service • Board of Directors • National Cable Television • Citizens Trust Company • Charles Cole Memorial Hospital • President of several committees

  5. John Rigas (Adelphia Founder) • Ordered network to show him “at least once” during Sabres’ games • Bought homes for people • Flew people on private planes for medical treatment • Gave huge amounts to charities • Had to approve every business transaction

  6. John Rigas (Adelphia Founder) • Characteristics of a fraud perpetrator • Egocentrism • Omniscience • Omnipotence • Invulnerability

  7. 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 Adelphia’s Voting Stock Majority on Adelphia’s Board of Directors

  8. Extravagant Lifestyle symptoms • Several Vacation Homes and luxury apartments in Manhattan • Several private jets • Construction of a world-class 18-hole golf course • Majority ownership of the Buffalo Sabres • $700,000 membership in an exclusive golf club

  9. The Fraud Charges • Violation of RICO act • Breach of fiduciary duties • Waste of corporate assets • Abuse of control • Breach of contract • Unjust enrichment • Fraudulent conveyance • Conversion of corporate assets

  10. How the Fraud took place • Adelphia 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.

  11. How the Fraud took place (cont’d) • Rigas Management commingled Adelphia funds with family funds causing Adelphia to fund non-corporate projects, such as: • Personal loans • Real estate transactions • Purchase of Manhattan apartments for private use • Purchase 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.

  12. How the Fraud took place (cont’d) • 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 Adelphia’s line of credit for personal purchases.

  13. Leased Vehicles to Adelphia Tickets to Adelphia Money tothe Rigases Money tothe Rigases Money tothe Rigases Money tothe Rigases How the Fraud took place (cont’d) Transaction Account from Adelphia Communications Furniture/Design Services to Adelphia Landscaping, Maintenance to Adelphia Private Car Dealership Interior Design Shop Family-owned Farm Buffalo Sabres Hockey Rigas’ Family Entities

  14. How the Fraud took place (cont’d) • 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 Adelphia’s funds his father could take to $1,000,000/Month

  15. How the Fraud Evolved • It is commonplace for owners of family businesses to think of the company’s money as their own. • Adelphia’s management and board was controlled by the Rigas family • The suit against the Rigas family details the ways in which the family used Adelphia in a rampant self-dealing scheme

  16. The Aftermath The company’s stock price plummetedafter 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.

  17. Litigation • John 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 fraud • Rigas family facing suit by Adelphia

  18. Litigation (cont’d) • James R. Brown, VP of Finance pleaded guilty in SEC case against him • Michael C. Mulcahey, VP and Assistant Treasurer acquitted of criminal charges • Adelphia sues auditor Deloitte & Touche for professional negligence, breach of contract, fraud and other wrongful conduct. • Adelphia’s reorganization plan in emerging from bankruptcy gives the Rigases nothing for their holdings

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