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The Adelphia Fraud © 2003, 2005 by the AICPA
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.
Adelphia’s BackgroundJohn 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
Adelphia’s BackgroundAdelphia 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 © 2003, 2005 by the AICPA
John Rigas (Adelphia Founder)Loves Limelight/Service Board of Directors National Cable Television Citizens Trust Company Charles Cole Memorial Hospital President of several committees © 2003, 2005 by the AICPA
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 © 2003, 2005 by the AICPA
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. © 2003, 2005 by the AICPA
Majority of Adelphia’s Majority on Adelphia’sThe 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 © 2003, 2005 by the AICPA
Extravagant Lifestyle symptomsSeveral 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 © 2003, 2005 by the AICPA
The Fraud Charges Violation of RICO act Breach of fiduciary dutiesWaste of corporate assets Abuse of control Breach of contract Unjust enrichment Fraudulent conveyance Conversion of corporate assets © 2003, 2005 by the AICPA
How the Fraud took placeAdelphia 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
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
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. © 2003, 2005 by the AICPA
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 © 2003, 2005 by the AICPA
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 © 2003, 2005 by the AICPA
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
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
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
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
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