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Adelphia Officials Are Arrested, Charged With 'Massive' Fraud

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Tax Probe of Adelphia Founders Follows Filing of Fraud Charges


The Wall Street Journal  

July 25, 2002

FROM THE ARCHIVES: July 25, 2002

Adelphia Officials Are Arrested, Charged With 'Massive' Fraud


Also on Telecom
• PanAmSat Expands in Video     8/7
• Rigases Face Fresh Tax Probe     8/7
• Grubman's Largess Draws Scrutiny     8/7

 Deloitte Says Adelphia Officials Attempted to Withhold Key Data27
 Judge Clears Way for Adelphia to Tap $1.5 Billion in New Loans28
 Adelphia Files for Chapter 11; Financing to Keep It Operable29

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Three members of the Rigas family that founded Adelphia Communications Corp., and two other company executives, were arrested early Wednesday morning and charged with looting the nation's sixth-largest cable-television company "on a massive scale."

In a related move, Adelphia itself was accused of fraud in a similar complaint filed by the Securities and Exchange Commission.

The charges marked the latest effort by the federal government to crack down on corporate malfeasance as public confidence and the financial markets have been battered by seemingly relentless disclosures of financial shenanigans.

"This government will investigate, will arrest and will prosecute corporate executives who break the law, and the Justice Department took action today," President Bush told reporters. "Today was a day of action and of accomplishment."

[John Rigas]
John Rigas, founder and former chairman and CEO of Adelphia, is led from New York's main Post Office building by U.S. postal-inspector police on his way to federal court in Manhattan.


Prosecutors are looking "very closely" at whether to file criminal charges against Adelphia itself, but are weighing the possible impact that would have on consumers, according to a person familiar with the matter. The investigation, led by U.S. Attorney James Comey in Manhattan, is continuing and other Rigas family members and company executives could face charges, this person said.

Federal prosecutors chose to arrest and handcuff 78-year-old John J. Rigas, Adelphia's founder and former chairman and chief executive, and two of his sons at a company-owned apartment on New York's Upper East Side, rather than seek indictments that would allow them a more dignified surrender. Their doorman announced the arrival of federal postal inspectors, and the Rigas family members came downstairs wearing sport coats, their palms upraised in front of them. The same dramatic flourish was used in the insider-trading arrest last month of Samuel Waksal, former CEO of ImClone Systems Inc.


• CNBC Dow Jones Business Video1: Deputy Attorney General Larry Thompson outlines the charges against Adelphia executives in Wednesday's news conference.
• CNBC Dow Jones Business Video2: Stephen Cutler, the SEC enforcement chief, explains the allegations in the case and goals of the investigation, including investor restitution.
• Read a summary3 of the SEC's complaint, and the full text4 of the complaint.
• View quick bios5 of the arrested Adelphia executives, and read a timeline5 of recent events in the investigation.

Mr. Rigas's lawyer, Peter Fleming, criticized the tactic, saying the Rigas family members had volunteered to surrender. "I think it's pretty tough to arrest a 78-year-old man at 6 a.m.," Mr. Fleming said. As for the charges themselves, Mr. Fleming said only, "a jury is going to decide who is right and who is wrong." Each of the Rigas family members was released on a $10 million personal recognizance bond.

Adelphia said in a statement that it supports the arrests and "believes that these actions will help Adelphia recover the assets improperly taken from the company by the Rigas family." But the company said it was "disappointed" that the federal government is also seeking damages from Adelphia itself. "This action will only have the effect of further penalizing the company's stakeholders who were the victims of the Rigas' improper conduct."

Adelphia also filed suit Wednesday seeking more than $1 billion against the entire Rigas family, including John's wife, Doris, and his daughter Ellen and son-in-law, Peter Venetis. The suit accuses the family of a violation of the Racketeer Influenced and Corrupt Organizations Act, breaching its fiduciary duties, wasting corporate assets, abusing control, breaching its contracts and other violations. The suit alleges that the Rigases "regularly conducted their business activities with the sole purpose of benefiting themselves at the expense of Adelphia" and borrowed company funds that "either directly or indirectly, unjustly enriched the Rigas family directors and other Rigas family members."

The criminal complaint, filed in federal court in New York, offers the clearest view yet of one of the biggest cases of alleged insider dealing ever. Long one of the cable world's most-fabled families, the Rigases engaged in a mass coverup that included fictitious receipts, falsified financial reports and lavish personal spending at the expense of shareholders, according to the 68-page complaint that charges them with securities fraud, wire fraud and bank fraud.

In addition to Mr. Rigas, the complaint names his sons, Timothy J. Rigas, the former chief financial officer, and Michael J. Rigas, the firm's former operations vice president. They had all resigned from the company in May. A lawyer for Timothy Rigas, Jeremy H. Temkin, said, "We intend to defend the charges vigorously." A lawyer for Michael Rigas didn't return calls seeking comment.

Criminal charges are filed against five former Adelphia executives.


The Defendants


John J. Rigas: former chairman, president and CEO


Timothy J. Rigas: former executive vice president, CFO, chief accounting officer and treasurer


Michael J. Rigas: former executive vice president for operations


James R. Brown: former vice president of finance


Michael C. Mulcahey: former director of internal reporting


The Charges


Count 1: Conspiracy to commit securities fraud, wire fraud and bank fraud


Count 2: Securities fraud


Counts 3 to 7: Wire fraud


Counts 8 and 9: Bank fraud


Also charged in the complaint were James R. Brown, former vice president of finance; and Michael C. Mulcahey, director of internal reporting, who has been suspended. Messrs. Brown and Mulcahey were arrested in Pennsylvania. Steven M. Cohen, an attorney for Mr. Mulcahey, called it "absurd" that his client would be lumped with the Rigases in the government's complaint. He noted that Mr. Mulcahey wasn't a board member and only recently had become an Adelphia officer. Mr. Mulcahey didn't "benefit one dime" from the alleged fraud, he said.

The Rigases used company jets for private jaunts -- including an African safari -- borrowed billions of dollars for their closely held companies and used $252 million of company funds to meet margin calls on their private stock, the complaint alleged. After John J. Rigas racked up a personal debt of more than $66 million by early 2001, he was withdrawing so much money from the company for personal use that his son Timothy had to limit him to $1 million a month -- which he duly withdrew for 12 months, even as public filings listed his annual compensation at less than $1.9 million, the complaint said.

The Rigases also spent $12.8 million of company funds to start construction of a golf course.

"The thing that makes this case stand out is the scope and magnitude of the looting of the company on the part of the Rigas family," said Wayne Carlin, regional director of the SEC's northeast regional office in New York. "In terms of the brazenness and the sheer amount of dollars yanked out of this public company and yanked out of the pockets of investors, it's really quite stunning. It's even stunning to someone like me who is in the business of unraveling these kinds of schemes."

The scandal came to light in March, when the Rigases disclosed that Adelphia was responsible for more than $2 billion in loans to family-owned entities. Outside board members took control in May and formed a special committee to investigate. The SEC launched a formal probe three and a half months ago and two grand juries -- one in New York and one in Pennsylvania -- also began investigating. The Coudersport, Pa., company filed for bankruptcy-court protection in June.

The scandal stemmed from Adelphia's mountains of debt. Anxious to keep up with increasingly large competitors such as Comcast Corp. and AT&T Corp., Adelphia went on an acquisition binge after 1999 that doubled its size to more than five million subscribers and increased its debt load to $12.6 billion from $3.5 billion.

As investors and ratings agencies demanded the company reduce its debt, the Rigases embarked on a series of escalating financial frauds to conceal the borrowings and inflate earnings -- even as the family withdrew increasingly vast sums for personal use, according to the complaint. Between 1999 and the end of 2001, the amount of debt that was omitted from Adelphia's public statements ballooned to $1.8 billion from $250 million, the complaint said.

In 2001 and 2002, the Rigases told public shareholders they were buying company stock to help ease the debt pressures. What they didn't disclose, the complaint said, was that the money -- more than $400 million -- was borrowed from Adelphia. To give the appearance that the family used private funds for the stock, Timothy Rigas and Mr. Mulcahey directed Adelphia employees to create false receipts showing payment by the family for the stock, according to the complaint.

The company also falsified its financial results, authorities said in the complaint. In October 2000, Timothy Rigas discovered that Adelphia's earnings before interest, taxes depreciation and amortization were below their public forecasts and instructed Adelphia employees to create fictitious transactions to boost Adelphia's revenue, according to the complaint.

The complaint goes on to allege that the Rigases "would determine a target number for Adelphia's publicly disclosed Ebitda and would attempt to justify that number by creating back-dated sham transactions" between Adelphia and family-owned companies. In one case, Adelphia orchestrated a deal with two suppliers of digital set-top boxes -- Scientific-Atlanta Inc. and Motorola Inc. -- to inflate Adelphia's Ebidta, the complaint said. The deal allowed Adelphia to pay $7 million more than the contract terms for the set-top boxes in exchange for an equal amount in "marketing support" paid by the two set-top box makers, according to the complaint.

Scientific-Atlanta declined to comment but had stated in a June 10 release that "We believe that our dealings with Adelphia over the years have been legal in all respects and were properly accounted for by us in the financial statements of Scientific Atlanta." A Motorola spokesman said the company is cooperating with officials on the investigation and that the transactions were all "properly recorded in Motorola's books in accordance with GAAP."

The Rigases also created a special accounting system to mask their personal transactions, the complaint alleged using the company's centralized cash-management system, which pooled cash from Adelphia and Rigas private businesses, for their personal use.

The complaint also alleges that the Rigases used the company's three corporate jets for personal use that was neither approved by the company's board nor paid for by the family. In one case listed in the complaint, in August of 2000, Timothy Rigas and his friends used an Adelphia jet to fly to Africa for a safari. Timothy Rigas prevented Adelphia employees from keeping records of family's air travel and the company's board never approved family used of the planes, the complaint said. The company also paid for two apartments in Manhattan -- one used rent-free by John's daughter and son-in-law, according to the complaint. (The son-in-law was a member of the board at the time).

When the company's stock started to plunge in April after Adelphia disclosed more than $2 billion in loans to family entities, the Rigases received margin calls on their Adelphia stock. In public statements, the Rigas family said they had had adequate funds to pay the margin calls to their three lenders -- Bank of America Corp., Deutsche Bank AG, Goldman Sachs Group Inc. and Citigroup Inc.'s Salomon Smith Barney unit.

Yet according to the complaint, the Rigases wired $252 million from the company's cash-management system to satisfy the margin calls. A margin call is a demand from lenders for cash or collateral.

Officials described the investigation as a joint effort by the Postal Inspection Service, the SEC and the U.S. attorney in New York. The separate SEC case names each of the defendants in the criminal case, as well as a third brother, James P. Rigas. His attorney did not return calls seeking comment. The SEC case also names the company itself in an alleged securities fraud to exclude billions of dollars in liabilities from its financial statements by hiding them in off-balance-sheet affiliates; falsify earnings to meet Wall Street's expectations; and conceal "rampant self-dealing by the Rigas family, including the undisclosed use of corporate funds" for stock purchases and to buy luxury New York condominiums.

The SEC is seeking disgorgement of potentially hundreds of millions of dollars, including "all ill-gotten gains including -- as to the individuals -- all compensation received during the fraud, all property unlawfully taken from Adelphia through undisclosed related-party transactions, and any severance payments related to their resignations." It also seeks civil penalties and permanent injunctions barring defendants from ever again acting as officers or directors of a public company.

-- Nicholas Kulish contributed to this article.

Write to Jerry Markon at jerry.markon@wsj.com6 and Robert Frank at robert.frank@wsj.com7

Cataloging Adelphia's Decline

Key events leading to Adelphia filing for bankruptcy Tuesday:

March 26, 2002 -- Adelphia stock trades at $20.39.

March 27, 20028 -- With 5.7 million subscribers in 32 states and Puerto Rico, Adelphia discloses that the Rigas family had borrowed $2.3 billion through various family-owned partnerships off of its balance sheet. Adelphia's stock drops 18%.

March 28, 20029 -- Adelphia acknowledges that it may be liable for as much as $500 million in debt it guaranteed for Adelphia Business Solutions Inc., which had filed for bankruptcy protection.

April 1, 200210 -- Adelphia says in an SEC filing that it needs more time to review its accounting and will not meet the deadline for filing its annual financial statement. Stock closes at $13.12.

April 2, 200211 -- The first in a flurry of shareholder lawsuits accuses Adelphia of misleading stockholders by failing to disclose the off-balance-sheet debt, and alleges that a drop in the stock price was "in response to these negative announcements."

April 3, 200212 -- Adelphia says the SEC is conducting an informal inquiry into the off-the-books debt.

April 4, 200213 -- Adelphia announces it has hired three investment banks as financial advisers to explore possible cable asset sales and other ways to reduce debt.

April 17, 200214 -- Adelphia reveals that the SEC had opened a formal investigation into its accounting practices.

May 2, 200215 -- Adelphia says it expects to restate 1999, 2000 and 2001 financial results to show the off-the-books debt as liabilities.

May 8, 200216 -- Adelphia announces it is soliciting bids for cable systems in the Los Angeles area, Florida, Virginia and elsewhere -- nearly half of its 5.7 million subscribers -- to reduce debt.

May 15, 200217 -- Founder John Rigas, 77, announces he is stepping down as chairman, president and chief executive officer. Erland E. Kailbourne is named chairman and interim chief executive officer. Nasdaq halts trading in Adelphia's stock.

May 16, 2002 -- Adelphia announces the resignation of its chief financial officer, Timothy J. Rigas.

May 17, 200218 -- Adelphia discloses that federal grand juries in New York and central Pennsylvania are probing the company's finances. Mr. Kailbourne says the company has missed $44.7 million in bond interest payments.

May 23, 200219 -- The Rigas family relinquishes control as John Rigas and sons Timothy, Michael and James resign as directors. The family agrees to turn over $1 billion in assets to help cover loans, to turn over $567 million in cash flow from other cable companies the family owns and to pledge all stock held by the family as collateral. Adelphia now estimates it is liable for $3.1 billion in family debts.

May 30, 200220 -- Nasdaq says it will delist Adelphia's stock June 3. Stock closes at 70 cents, down 39.7%.

June 3, 2002 -- Adelphia's stock is dropped from Nasdaq and trades at 75 cents on the over-the-counter market.

June 10, 200221 -- Adelphia says it would revise its subscriber count downward by more than 47,000 to 5.76 million. The company dismisses Deloitte & Touche as its accountant and is seeking a replacement.

June 14, 200222 -- Adelphia hires PricewaterhouseCoopers.

June 17, 200223 -- Adelphia misses $96 million in bond interest and preferred stock dividend payments.

June 21, 200224 -- Adelphia reaches agreement with two banks for $1.5 billion in financing to continue operating while it reorganizes under Chapter 11 bankruptcy protection.

June 25, 200225 -- Adelphia files for bankruptcy.

July 24, 200226 -- Five executives, including three members of the Rigas family, are arrested charged with looting the nation's sixth-largest cable-television company "on a massive scale." The SEC files a related fraud complaint.

Source: Associated Press

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