Adelphia Communications: A Family’s Power

It started as a striving business dedicated to providing cable service to the public. What became of Adelphia Communications would be just another example of the vicious act known as fraud. Fraud is the intentional act of misleading others about financial information for profit, personal gain, or other dishonest advantage. As the new millennium dawned 14 years ago, we saw an unraveling of numerous fraudulent activities by organizations large and small. One of these organizations that became perpetrators of fraud was Adelphia Communications. During its existence, Adelphia Communications quickly became one of the largest cable companies in the U.S. Adelphia was unique and differed from several other successful corporations at the time, for one special reason: it was family generated. In fact, it became a quintessential example of how a family owned business can grow into a successful publicly traded business. However, the firm family which gave Adelphia Communications its tremendous success, quickly became the cause for its torrential downfall.

John and his brother Gus Rigas founded Adelphia Communications in 1972 through the purchase of their first cable company Adelphia Cablevision Inc. in 1952 for $300. In Greek terms, “Adelphia” means brothers; clearly, John and Gus had long-term visions of their company being a family generated organization. Being the founders, the brothers seemed convinced to conduct the business how they wished, no matter what changes were brought to the organization in the future. Adelphia Communications was head quartered in Coudersport, Pennsylvania. It conducted business through the cable television industry with a focus on reaching areas where non-cable reception was weak. For this reason, Adelphia directed its attention to mid-size markets and suburban areas. In the late 80’s the Rigases would purchase several cable companies like: Clear Cablevision Inc., Indiana Cablevision Inc., Western Reserve Cablevision Inc., and International Cablevision Inc. When Adelphia Communications went public in August of 1986, these companies would be consolidated along with Adelphia Cablevision Inc. into the main company. These purchases made Adelphia’s profitability decrease. On the upside however, their revenue abilities shot through the roof. The new Adelphia Communications would begin business gaining around $30 million in annual sales, and proved to be a force to be reckon with in the cable-television industry.

When the 90’s came around, Adelphia Communications was easily a household name. It had increased its first year’s sales from $30 million to roughly $130 million in 1988, expanded to over 30 states, and achieved the status of the tenth biggest cable-television company in the U.S. More interesting, Adelphia had made a tremendous cash flow especially compared to other cable-television providers. In fact, Adelphia had the highest cable industry operating margin at 57% of revenues; the industry average was 35%. It wasn’t just Adelphia’s operating margin that contributed to its success, however. They really knew how to conduct business. For example, the company’s cable systems were one-of-a-kind. One analyst even reported Adelphia’s package as having the best channel capacities and addressability in the industry. Adelphia was truly deserving of the positive criticism. They had dedicated a five year project in 1990 to create cables that went 2,000 miles, double the number of stations they had, give better television visuals, and decrease the chances of interruptions. Another thing Adelphia did well was target the most beneficial consumers. Ever since its creation, Adelphia had targeted mid-sized, suburbs; which in inevitably, were boosting both in income and size over the decades. For instance, most of the areas Adelphia had operations in were regions where household growth rates were well above the national average. Acquisitions of small companies were definitely a significant factor in bringing Adelphia up the ranks. However, more so than other industry competitors, the company knew how to drive business. Around the late 90’s, the cable industry began to change. Customer wants and needs began to alter towards a more elaborate and diverse package. In response, the cable industry began to look differently. Larger companies were buying up smaller ones, companies were merging together, and some would even exchange systems with one another. Adelphia began to purchase competitors who were of size and statue they had never bought before. They had 3 billion dollar acquisitions: Frontier Vision Partners L.P., Century Communications Corporation, and Harron Communications Corporation. These and other purchases helped Adelphia become the sixth largest cable company in the industry, and a server to more than 5 million customers. However, Adelphia’s 3 billion dollar purchases hurt the organization financially. Aside from the 4 billion it cost Adelphia to purchase these 3 organizations, they also acquired over 3 billion in debt, an amount that would soon come back to haunt them.

In the early 2000’s, Adelphia continued its normal habits of acquiring businesses, gaining around 5.5 million customers. Critics continued to praise and look favorably upon Adelphia even though they were consumed from debt by their acquisitions. The beginning of 2002 took a turn for the worse for Adelphi and marked the key moment for their destruction.

When Adelphia released their quarterly earnings in March of 2002, someone noticed a strange phenomenon. Oren Cohen, a Wall Street analyst for Merrill Lynch, asked a single question that would bring the cable empire crashing down. “What about the $2.3 billion dollar off-balance- sheet debt listed in your footnote?” Cohen asked. Adelphia Communications had disclosed this fact as a footnote in their annual earnings release. This $2.3 billion dollar off-balance-sheet debt represented loans the Rigas family had taken out and inscribed Adelphia as potentially being responsible. The loans that had been taken out were to be used for partnerships controlled by the Rigas family. Cohen initially asked the question to understand what assets the Rigas had to back up that amount. In other words, what did the Rigases have to make sure that Adelphia didn’t have to pay that amount?

The Rigases had managed to take out loans for their use, and potentially force Adelphia, a now investor owned company, liable for their debt. Interestingly, Cohen unintentionally, unleased a new scandal that had been going on for years. As Cohen awaited a response about the footnote, CFO of Adelphia, Tim Rigas (middle-son of John) and vice president Jim Brown were answerless. As weeks went by without a response, the stock price of Adelphia steadily shrunk. By the middle of May, the Rigas family had resigned from their once privately owned Adelphia Communications. It wasn’t until the middle of June when independent directors of the board were accusing the Rigas family of fraud and preparing to take Adelphia into bankruptcy.

John Rigas (founder and CEO), his two sons, Timothy (CFO) and Michael (Operations Vice President) Rigas, and James Brown (Vice President of Finance) were all involved in the fraud and would later face the consequences for their actions. The fraud they committed was pretty simple and straightforward. The Rigas family (including James Brown), once sole owners of Adelphia Communications, still viewed the business as theirs even after the company went public and became owned by the investors. Because of the Rigases mental belief of self-ownership, they took out loans of $2.3 billion from banks and other institutions. Then, they tried hiding it through the footnotes, deceiving investors and stealing money for their own. As mentioned earlier, the $2.3 billion represented loans the Rigases had taken out for use in their own private companies which were owned by Adelphia. Numerous banks had issued billions of dollars in loans which either Adelphia or the side businesses/Rigas family could draw upon. The Rigas family took full advantage of this underlying fact, until Cohen pondered about it and led the government to swoop in.

The federal government began investigating the issue in the middle of July. At the time of the fraud, the Enron scandal had been headlines for months, and overshadowed most of Rigases case. However, the government wasn’t going to make the case any less difficult for the Rigases. The investigation was a joint effort by the Postal Inspection Service, the SEC, and the U.S. attorney in New York. The investigation didn’t have to go into great detail since the evidence of the personal debt in the footnote was already present. This alone was enough to make a case against the Rigases. Nevertheless, the SEC continued to find hints of fraudulent acts through Adelphia’s financial statements, and came across important information by doing so. It was uncovered that the Rigas management had been manipulating the books to meet analysts’ expectations and increase the stock price ever since 1999. Investigations also revealed how some private partnerships of Adelphia’s had been created fraudulently by the Rigases for their self-dealing schemes. At a closer look at the books, it was known that fund transfers, through journal entries, gave Adelphia more debt and the Rigases million-dollar assets at no cost at all.

The Rigas family had secretly held a scheme under Adelphia that many employees would’ve never known about if the SEC didn’t investigate. For instance, Rigas’ management had intertwined Adelphia’s funds with their family funds resulting in Adelphia funding non-corporate projects like: personal loans, real estate transactions, and cash advances to the Buffalo Sabres. The SEC found out that the revenue generated from Adelphia and other subsidiaries were all dumped into a single account. The Rigas’ would use this account to pay personal bills. The Rigas’ would also use Adelphia’s line of credit for personal purchases and used some of the $2.3 billion in loans to buy back some of Adelphia’s stock. Most notably, was how the financial affairs of the Rigas Family Entities were intermingled with Adelphia’s, but not consolidated. One could say, that if the Rigas decided to consolidate their personal finances from Adelphia’s, their fraud may have not be discovered since Oren Cohen wouldn’t have a footnote to ask about.

Maybe most intriguing were the things found when the federal government decided to dig into the personal lives of some of the Rigas, particularly John. It was uncovered that John was the majority owner of the Buffalo Sabres, a major team in the National Hockey League. Supposedly, John had ordered the network to show himself at least once at every single home game. It was also discovered that John bought homes for people, flew people out on private plans for medical treatment, donated abundantly to charities, had several private jets, had vacation homes and luxury apartments in Manhattan, constructed a state-of-the-art 18-hole golf course, and had a $700,000 membership with a luxurious golf club. John had even ordered two Christmas trees to be shipped to New York for his daughter at $6,000. One of the biggest discoveries made inside the business was that John had to approve every single business transaction. This ultimately gave him the authority to make whatever decision he wanted with the company.

When the investigation was over and action began, the Rigases were in a world of hurt for their wrongdoings. This fraud ultimately effected the lives of many people who had affiliation with the company. On July 24th, 2002, John Rigas, Timothy Rigas, Michael Rigas, James Brown and Michael Mulcahey were arrested for conspiracy of fraud. When the trial came, John and his son Timothy were convicted of all 15 counts of conspiracy, bank fraud, and securities fraud charged against them. John Rigas, who was 77 years old at the time, was the first CEO to be walked in front of the cameras, charged with conspiracy and fraud. Michael Rigas was acquitted of conspiracy, as the court was unsure about the remaining accounts against him. James Brown (director of finance) was the only person to admit to creating much of the alleged fraud. Surprisingly, Brown remained free. His cooperation with the courts, SEC, and others may have been factored in. Michael Mulcahey (director of internal reporting) was acquitted of all charges; he wasn’t a board member and had only recently became an officer. Moreover, he didn’t benefit a single penny from the fraudulent activities conspired by the others. John and Tim are now serving 10 and 15 year sentences, respectively. Neither John nor Tim admit wrongdoing.

As mentioned earlier, this fraud effected more lives than just the perpetrators. Adelphia filed a suit against the entire Rigas family including Doris (John’s wife), Ellen (John’s daughter), and Peter Venetis (John’s son-in-law). Adelphia was accusing the family of violation of the Racketeer Influenced and Corrupt Organizations Act, breaching its fiduciary duties, wasting corporate assets, abusing control, breaching its contracts, and other violations. Adelphia’s auditors, Deloitte & Touche LP, also faced consequences. They were sued by Adelphia for professional negligence, breach of contract, fraud, and other wrongful conduct.

Historically, the ones effected the most from fraud are the investors and the organization; Adelphia’s fraud prove to follow the norm. After Cohen’s question was asked in April of 2002, Adelphia’s stock began to plummet. Standing roughly around $25 per share on March 27, 2002, the stock price was less than a dollar once June came around. It’s important to note that the stock price began decreasing because it was delisted from the NASDAQ for not filing its 2001 10-K. On June 25, 2002, Adelphia Communications, the once powerful sixth largest cable-company in America, filed for Chapter 11 bankruptcy protection with more than $18 billion in debt. Investors, loss everything.

Many of the employees of Adelphia were shocked and stunned by the fraudulent activities of the Rigases. This was the organization where many of them had worked for years, invested money, and developed retirement programs. All of them lost everything… except hope. Surprisingly, the employees of Adelphia decided to develop a reorganization plan in emerging from bankruptcy. Others continued forward with different alterations of the cable company. For instance, in the past 8 years, John’s sons James and Michael and former Adelphia employees have built a new cable-company serving 35,000 users in 12 states. The new name of the business is Zito Media meaning “new life”. Some of the profit however, goes to lawyers and others Adelphia owes. Thus, several former employees of Adelphia are now working to pay off what the Rigas family initially caused. It’s easy to see that the damage the fraud caused reached numerous parties, some of who are still feeling the effects today.

The Adelphia fraud teaches people many things. Just as all other frauds, you see the three elements of the fraud triangle in play. The Rigas family were consumed with greed for their own well-being, which is exemplified through their lavish spending. They also felt pressures to live up to analysts expectations so they fraudulently altered the financials to resemble exceptional performance. The Rigases may have had a bigger opportunity to commit this fraud more so than any of the other big financial scandals. Of the nine people on the board of directors, 5 of them were Rigases. More importantly, the Rigases had complete ownership of class B super-voting shares, which gave them the majority voting rights. This explains how they were able to control the board even after the company went public. Also, as mentioned earlier, John Rigas had to approve every single transaction; therefore, he was ultimately the one who would commit every action taken by the organization.

Maybe most intriguing in this case, is the Rigases rationalization. What makes this fraud different from the likes of Enron, WorldCom, HealthSouth, and others, is that management consisted of family (and close friends). More importantly, this family built the company from the ground up. Therefore, when the Rigas took money from the organization, they justified it by saying it was their company and they could do as they wished. They believed that since they created and managed Adelphia, they could use the money that Adelphia generated. However, as many already know, Adelphia, a publicly traded organization, is owned by the investors of the company, not primarily those who manage it. When John Rigas went public with Adelphia and began to lose some of the ownership of the company to investors, the organization became primarily theirs.

In the late 90’s and early 2000’s we saw many corporate frauds come to light. Through these, many parties were inflicted with damage: investors, employees of the company, auditors, government organizations and even perpetrators. One of the more promising actions taken was the establishment of the Sarbanes-Oxley Act of 2002. This was a direct response to the corporate frauds and financial scandals taking place. SOX, helped bring forth many frauds that may have went unknown for years. Also, the SEC, FASB, and other organizations created new standards and altered existing ones to address the issue. All of which bring a considerable amount of contribution to eliminating and stopping fraud. The fraud at Adelphia represents an avoidable tragedy that devastated the lives of many people and organizations. However, as we move forward in accounting and other business fields, we can rejoice that the government is addressing many of these issues, and taking necessary steps to ensure the safety and security of all who have affiliation with public companies.

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