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© 2003, 2005 by the AICPA© 2003, 2005 by the AICPA

The Adelphia FraudThe Adelphia Fraud

This presentation is intended for use in higher education for instructional purposes only, and is not for This presentation is intended for use in higher education for instructional purposes only, and is not for application in practice. Permission is granted to classroom instructors to photocopy this document for application in practice. Permission is granted to classroom instructors to photocopy this document for classroom teaching purposes only. All other rights are reserved. Copyright © 2003, 2005 by the classroom teaching purposes only. All other rights are reserved. Copyright © 2003, 2005 by the American Institute of Certified Public Accountants, Inc., New York, New York.American Institute of Certified Public Accountants, Inc., New York, New York.


Adelphia’s BackgroundAdelphia’s Background

John Rigas purchased cable company in John Rigas purchased cable company in 1952 for $300 in Coudersport, 1952 for $300 in Coudersport, PennsylvaniaPennsylvania

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

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


Adelphia’s BackgroundAdelphia’s Background

Adelphia is Greek for “Brothers”Adelphia is Greek for “Brothers”– Signifies the Greek heritageSignifies the Greek heritage– Corporation run by brothersCorporation run by brothers

Adelphia has always been a “family” businessAdelphia has always been a “family” business

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


John Rigas (Adelphia John Rigas (Adelphia Founder)Founder)

Loves Limelight/ServiceLoves Limelight/Service

– Board of DirectorsBoard of Directors National Cable TelevisionNational Cable Television Citizens Trust CompanyCitizens Trust Company Charles Cole Memorial HospitalCharles Cole Memorial Hospital

– President of several committeesPresident of several committees



Ordered network to show him “at least Ordered network to show him “at least once” during Sabres’ gamesonce” during Sabres’ games

Bought homes for peopleBought homes for people Flew people on private planes for Flew people on private planes for

medical treatmentmedical treatment Gave huge amounts to charitiesGave huge amounts to charities Had to approve every business Had to approve every business

transactiontransaction



Characteristics of a fraud perpetratorCharacteristics of a fraud perpetrator– EgocentrismEgocentrism– OmniscienceOmniscience– OmnipotenceOmnipotence– InvulnerabilityInvulnerability


The Family BusinessThe Family Business

Family Members in Management include:Family Members in Management include:– John Rigas, Founder and Chairman (Father)John Rigas, Founder and Chairman (Father)– Tim Rigas, CFO and Board member (Son)Tim Rigas, CFO and Board member (Son)– Michael Rigas, EVP and Board member (Son)Michael Rigas, EVP and Board member (Son)– James Rigas, EVP and Board member (Son)James Rigas, EVP and Board member (Son)– Peter Venetis, Board member (Son-in-law)Peter Venetis, Board member (Son-in-law)

Family Management =

Majority of Adelphia’s Voting Stock

Majority on Adelphia’s Board of Directors


Extravagant Lifestyle Extravagant Lifestyle symptomssymptoms

Several Vacation Homes and luxury Several Vacation Homes and luxury apartments in Manhattanapartments in Manhattan

Several private jetsSeveral private jets Construction of a world-class 18-hole Construction of a world-class 18-hole

golf coursegolf course Majority ownership of the Buffalo Majority ownership of the Buffalo

Sabres Sabres $700,000 membership in an exclusive $700,000 membership in an exclusive

golf clubgolf club


The Fraud ChargesThe Fraud Charges

Violation of RICO actViolation of RICO act Breach of fiduciary dutiesBreach of fiduciary duties Waste of corporate assetsWaste of corporate assets Abuse of controlAbuse of control Breach of contractBreach of contract Unjust enrichmentUnjust enrichment Fraudulent conveyanceFraudulent conveyance Conversion of corporate assetsConversion of corporate assets


How the Fraud took placeHow the Fraud took place Adelphia backed $2.3 billion worth of Adelphia backed $2.3 billion worth of

personal loans to the Rigasespersonal loans to the Rigases

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

Rigases created private partnerships Rigases created private partnerships w/Adelphia as a tool for the self-dealing w/Adelphia as a tool for the self-dealing schemes.schemes.– Fund transfers were made through journal Fund transfers were made through journal

entries that gave Adelphia more debt and the entries that gave Adelphia more debt and the Rigases multi-million dollar assets at no cost.Rigases multi-million dollar assets at no cost.


How the Fraud took place How the Fraud took place (cont’d)(cont’d)

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

– Personal loansPersonal loans

– Real estate transactionsReal estate transactions Purchase of Manhattan apartments for private usePurchase of Manhattan apartments for private use Purchase of land for a private golf coursePurchase of land for a private golf course

– Cash advances to the Buffalo SabresCash advances to the Buffalo Sabres

– $252 million to pay margin calls, or demands for cash $252 million to pay margin calls, or demands for cash payments on loans for which the family had put up payments on loans for which the family had put up

Adelphia stock as collateral.Adelphia stock as collateral.



Revenues from Adelphia subsidiaries and Revenues from Adelphia subsidiaries and other businesses were dumped into one other businesses were dumped into one central account. They used this account to central account. They used this account to pay bills.pay bills.

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

The Rigases used Adelphia’s line of credit The Rigases used Adelphia’s line of credit for personal purchases.for personal purchases.



Transaction Account from Adelphia Communications

Buffalo SabresHockey

Family-ownedFarm

Interior DesignShop

Private CarDealership

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The Rigases doctored financial The Rigases doctored financial records at Adelphia and created sham records at Adelphia and created sham transactions and phony companies to transactions and phony companies to inflate the firm's earnings and to inflate the firm's earnings and to conceal its mounting debts. conceal its mounting debts.

Upon realizing the extent of funds Upon realizing the extent of funds taken, Tim Rigas “limited” the taken, Tim Rigas “limited” the amount of Adelphia’s funds his father amount of Adelphia’s funds his father could take tocould take to$1,000,000/Month


How the Fraud EvolvedHow the Fraud Evolved

It is commonplace for owners of It is commonplace for owners of family businesses to think of the family businesses to think of the company’s money as their own.company’s money as their own.

Adelphia’s management and board Adelphia’s management and board was controlled by the Rigas familywas controlled by the Rigas family

The suit against the Rigas family The suit against the Rigas family details the ways in which the family details the ways in which the family used Adelphia in a rampant self-used Adelphia in a rampant self-dealing schemedealing scheme


The AftermathThe Aftermath

The company’s 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.


LitigationLitigation

John and Timothy Rigas found guilty John and Timothy Rigas found guilty of conspiracy, bank fraud and of conspiracy, bank fraud and securities fraud – await sentencing of securities fraud – await sentencing of possible 30 years in prison.possible 30 years in prison.

Michael Rigas acquitted of Michael Rigas acquitted of conspiracy and wire fraud. Awaiting a conspiracy and wire fraud. Awaiting a new trial on securities fraudnew trial on securities fraud

Rigas family facing suit by AdelphiaRigas family facing suit by Adelphia


Litigation (cont’d)Litigation (cont’d)

James R. Brown, VP of Finance pleaded James R. Brown, VP of Finance pleaded guilty in SEC case against himguilty in SEC case against him

Michael C. Mulcahey, VP and Assistant Michael C. Mulcahey, VP and Assistant Treasurer acquitted of criminal chargesTreasurer acquitted of criminal charges

Adelphia sues auditor Deloitte & Touche Adelphia sues auditor Deloitte & Touche for professional negligence, breach of for professional negligence, breach of contract, fraud and other wrongful contract, fraud and other wrongful conduct.conduct.

Adelphia’s reorganization plan in emerging Adelphia’s reorganization plan in emerging from bankruptcy gives the Rigases nothing from bankruptcy gives the Rigases nothing for their holdingsfor their holdings

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