George Mannes

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Adelphia Charges Up the Ante

George Mannes

Ugly stories of corporate misbehavior have poured out of Adelphia Communications (ADELQ) in recent months. But the feds have managed to dredge up some more.

In civil and criminal complaints filed Wednesday, federal prosecutors and the Securities and Exchange Commission piled on new allegations of financial fraud and self-dealing at the cable operator once controlled by founder John J. Rigas and his family.

These allegations, atop earlier reports issued by Adelphia's new management, flesh out a picture of what SEC official Wayne Carlin calls "a stunning level of looting" of Adelphia, as well as billion-dollar misrepresentations of the company's finances.

Named as both civil and criminal defendants are Rigas, former chairman and CEO; his son, Timothy Rigas, former chief financial officer; a second son, Michael Rigas, executive vice president for operations; James Brown, vice president of finance; and Michael Mulcahey, director of internal reporting. James Rigas, Adelphia's former executive vice president for strategic planning and another son of John Rigas, is named in the SEC complaint but not in the criminal charges.

The Rigas family, which for decades had constituted a majority of Adelphia's board and owned majority voting power at the firm, ceded control of the company in May, two months after surprising Wall Street with $2.3 billion in previously undisclosed potential liabilities. Adelphia filed for bankruptcy protection in June.

Among the new allegations from federal prosecutors and the SEC:

• The Rigases used at least $252 million in Adelphia money to pay margin calls against personal loans taken out by members of the Rigas family.
• Starting in October 2000, when company executives realized that operating results wouldn't meet Wall Street's expectations, CFO Tim Rigas and James Brown ran a scheme to artificially improve Adelphia's results by creating "backdated, sham transactions" that misrepresented revenue that Adelphia reaped from managing systems owned by the Rigases.
• Adelphia violated generally accepted accounting principles by not disclosing the amount for which it was potentially liable in its co-borrowing arrangements it had with separate entities controlled by the Rigas family. Those liabilities -- which grew to the $2.3 billion revealed in March -- should have appeared on Adelphia's balance sheet starting in 1999.
• The Rigas family, which had agreed to inject $422.4 million of cash into Adelphia through the purchase of securities by Oct. 22 of last year, never did. Rather, in January 2002, CFO Tim Rigas and Michael Mulcahey concocted documents backdated to October falsely indicating a payment in the form of what prosecutors call "immediately available funds."

  In addition, company executives engaged in other transactions designed to understate Adelphia's indebtedness, chiefly by transferring debt from Adelphia's books to that of entities controlled by the Rigases.

• In January, Tim Rigas and Brown lied about the sham October 2001 transaction to Moody's Investors Service, which, based in part on the misrepresentation, gaved Adelphia a stable credit outlook.
• Starting in early 2000, Adelphia inflated basic cable subscriber growth numbers through creative, undisclosed redefinitions of basic cable subscribers. At different times, the company created the illusion of growth by adding to its subscriber count 43,000 subscribers in Brazilian and Venezuelan systems in which Adelphia held only a minority stake; 33,000 households that subscribed to high-speed Internet service but not cable, and 60,000 customers who received Adelphia's home security service, but not cable.
• Starting in 1999, executives overstated, by as much as 15 percentage points, the amount of Adelphia's systems that had been upgraded to permit advanced, interactive services such as high-speed Internet connections.
• Concerned that Adelphia's capital expenditures were running higher than expected, executives artificially cut reported expenditures by $101 million in the third quarter of 2001 by transferring 525,000 cable set-top boxes to the books of a Rigas-controlled entity with no cable operations.
• Patriarch John Rigas had $67 million in undisclosed borrowing from Adelphia as of the end of 2001. Throughout 2001, he received at least $12 million in wire transfers from Adelphia; in early 2001, Tim Rigas complained that his father was spending "unacceptably large amounts of Adelphia funds," according to the criminal complaint.
• Rigas family members used three Adelphia-owned airplanes for personal travel without reimbursing the company. For example, in August 2000, Tim Rigas used one plane for a safari vacation in Africa.

The assignment of blame for alleged corporate misdeeds doesn't appear to be spread equally among the different members of the Rigas family. The SEC's complaint, for example, emphasizes the role of CFO Tim Rigas in reporting allegedly false financial statements. As previously mentioned, however, the criminal complaint doesn't even name James Rigas as a defendant.

Wayne Carlin, the SEC's regional director for the Northeast regional office, declined to comment Wednesday on prosecutors' and the SEC's different treatment of James Rigas, other than to say, "Our respective investigations are continuing."