1. The Adelphia Fraud
© 2003, 2005 by the AICPA

2. 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 classroom teaching purposes only. All other rights are reserved. Copyright © 2003, by the American Institute of Certified Public Accountants, Inc., New York, New York.

3. 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
© 2003, 2005 by the AICPA

4. 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
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5. John Rigas (Adelphia Founder)
Loves Limelight/Service
Board of Directors
National Cable Television
Citizens Trust Company
Charles Cole Memorial Hospital
President of several committees
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6. 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
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7. John Rigas (Adelphia Founder)
Characteristics of a fraud perpetrator
Egocentrism
Omniscience
Omnipotence
Invulnerability
Moved into Buffalo, NY and quickly became the regions most powerful and respected business leader.
Omniscience—always has to approve every contract. They would sit on his desk for days in Coudersport even to approve routine contracts.
Omnipotence—Showered United Way with $100,000 per year, and bought an elevator operator with bad teeth dentures.
Invulnerable—He didn’t try to hide his spending, but he flaunted it.
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8. Majority of Adelphia’s Majority on Adelphia’s
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
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9. 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
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10. 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
© 2003, 2005 by the AICPA

11. 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.
These loans were shifted to unconsolidated affiliates, and Adelphia used sham transactions and fictitious documents to show the loans had been repaid.
© 2003, 2005 by the AICPA

12. 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.
© 2003, 2005 by the AICPA

13. 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.
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14. How the Fraud took place (cont’d)
Transaction Account from Adelphia Communications
Money to the Rigases
Money to the Rigases
Money to the Rigases
Tickets to Adelphia
Money to the Rigases
Leased Vehicles to Adelphia
Landscaping, Maintenance to Adelphia
Furniture/Design Services to Adelphia
The Rigases used this account to pay off personal bills and to funnel money from the corporation to their personal accounts.
Buffalo Sabres
Hockey
Family-owned
Farm
Interior Design
Shop
Private Car
Dealership
Rigas’ Family Entities
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15. 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
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16. 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
© 2003, 2005 by the AICPA

17. The Aftermath
The company’s stock price plummeted after it was delisted from the NASDAQ for failure to file its K. Shortly after that, on June 25, 2002, it filed for bankruptcy.
© 2003, 2005 by the AICPA

18. 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
© 2003, 2005 by the AICPA

19. 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
© 2003, 2005 by the AICPA