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© 2003, 2005 by the AICPA The Adelphia Fraud This presentation is intended for use in higher education for instructional purposes only, and is not for.

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Presentation on theme: "© 2003, 2005 by the AICPA The Adelphia Fraud This presentation is intended for use in higher education for instructional purposes only, and is not for."— Presentation transcript:

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2 © 2003, 2005 by the AICPA The Adelphia Fraud

3 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, 2005 by the American Institute of Certified Public Accountants, Inc., New York, New York.

4 © 2003, 2005 by the AICPA Adelphias Background John Rigas purchased cable company in 1952 for $300 in Coudersport, Pennsylvania John Rigas purchased cable company in 1952 for $300 in Coudersport, Pennsylvania He purchased it to hedge against lost sales for his movie theater He purchased it to hedge against lost sales for his movie theater In 1972, he and his brother, Gus, created Adelphia Communications Corporation In 1972, he and his brother, Gus, created Adelphia Communications Corporation

5 © 2003, 2005 by the AICPA Adelphias Background Adelphia is Greek for Brothers Adelphia is Greek for Brothers –Signifies the Greek heritage –Corporation run by brothers Adelphia has always been a family business Adelphia has always been a family business In the late 1990s, it purchased Century Communications for $5.2 billion and became the 6 th largest cable company with 5.6 million subscribers In the late 1990s, it purchased Century Communications for $5.2 billion and became the 6 th largest cable company with 5.6 million subscribers

6 © 2003, 2005 by the AICPA John Rigas (Adelphia Founder) Loves Limelight/Service Loves Limelight/Service –Board of Directors National Cable Television National Cable Television Citizens Trust Company Citizens Trust Company Charles Cole Memorial Hospital Charles Cole Memorial Hospital –President of several committees

7 © 2003, 2005 by the AICPA John Rigas (Adelphia Founder) Ordered network to show him at least once during Sabres games Ordered network to show him at least once during Sabres games Bought homes for people Bought homes for people Flew people on private planes for medical treatment Flew people on private planes for medical treatment Gave huge amounts to charities Gave huge amounts to charities Had to approve every business transaction Had to approve every business transaction

8 © 2003, 2005 by the AICPA John Rigas (Adelphia Founder) Characteristics of a fraud perpetrator Characteristics of a fraud perpetrator –Egocentrism –Omniscience –Omnipotence –Invulnerability

9 © 2003, 2005 by the AICPA The Family Business Family Members in Management include: 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 Adelphias Voting Stock Majority on Adelphias Board of Directors

10 © 2003, 2005 by the AICPA Extravagant Lifestyle symptoms Several Vacation Homes and luxury apartments in Manhattan Several Vacation Homes and luxury apartments in Manhattan Several private jets Several private jets Construction of a world-class 18-hole golf course Construction of a world-class 18-hole golf course Majority ownership of the Buffalo Sabres Majority ownership of the Buffalo Sabres $700,000 membership in an exclusive golf club $700,000 membership in an exclusive golf club

11 © 2003, 2005 by the AICPA The Fraud Charges Violation of RICO act Violation of RICO act Breach of fiduciary duties Breach of fiduciary duties Waste of corporate assets Waste of corporate assets Abuse of control Abuse of control Breach of contract Breach of contract Unjust enrichment Unjust enrichment Fraudulent conveyance Fraudulent conveyance Conversion of corporate assets Conversion of corporate assets

12 © 2003, 2005 by the AICPA How the Fraud took place Adelphia backed $2.3 billion worth of personal loans to the Rigases 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 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. 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.

13 © 2003, 2005 by the AICPA How the Fraud took place (contd) Rigas Management commingled Adelphia funds with family funds causing Adelphia to fund non-corporate projects, such as: 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 Manhattan apartments for private use Purchase of land for a private golf course 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.

14 © 2003, 2005 by the AICPA How the Fraud took place (contd) Revenues from Adelphia subsidiaries and other businesses were dumped into one central account. They used this account to pay bills. 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) Financial affairs of Rigas Family Entities were intermingled with Adelphia, but not consolidated. (Off-the-balance sheet debt) The Rigases used Adelphias line of credit for personal purchases. The Rigases used Adelphias line of credit for personal purchases.

15 © 2003, 2005 by the AICPA How the Fraud took place (contd) Transaction Account from Adelphia Communications Buffalo Sabres Hockey Family-owned Farm Interior Design Shop Private Car Dealership Money to the Rigases Tickets to Adelphia Landscaping, Maintenance to Adelphia Rigas Family Entities Money to the Rigases Furniture/Design Services to Adelphia Leased Vehicles to Adelphia

16 © 2003, 2005 by the AICPA How the Fraud took place (contd) 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. 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 Adelphias funds his father could take to Upon realizing the extent of funds taken, Tim Rigas limited the amount of Adelphias funds his father could take to $1,000,000/Month

17 © 2003, 2005 by the AICPA How the Fraud Evolved It is commonplace for owners of family businesses to think of the companys money as their own. It is commonplace for owners of family businesses to think of the companys money as their own. Adelphias management and board was controlled by the Rigas family Adelphias 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 The suit against the Rigas family details the ways in which the family used Adelphia in a rampant self-dealing scheme

18 © 2003, 2005 by the AICPA The Aftermath The companys 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.

19 © 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. 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 Michael Rigas acquitted of conspiracy and wire fraud. Awaiting a new trial on securities fraud Rigas family facing suit by Adelphia Rigas family facing suit by Adelphia

20 © 2003, 2005 by the AICPA Litigation (contd) James R. Brown, VP of Finance pleaded guilty in SEC case against him James R. Brown, VP of Finance pleaded guilty in SEC case against him Michael C. Mulcahey, VP and Assistant Treasurer acquitted of criminal charges 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 sues auditor Deloitte & Touche for professional negligence, breach of contract, fraud and other wrongful conduct. Adelphias reorganization plan in emerging from bankruptcy gives the Rigases nothing for their holdings Adelphias reorganization plan in emerging from bankruptcy gives the Rigases nothing for their holdings


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