Feds Parade Rigas Scalps Before Investors

Updated from 10:13 a.m. EST

Three members of the Rigas family that once controlled Adelphia Communications (ADELQ) were arrested Wednesday morning, along with two other former executives at the operator of cable TV systems, on securities fraud charges.

Those same executives, along with a fourth member of the Rigas clan, were also the subject of a civil case filed Wednesday morning by the Securities and Exchange Commission, which alleged that the Adelphia execs participated in "one of the most extensive financial frauds ever to take place at a public company."

With CNBC carrying video Wednesday morning of Adelphia founder and former chairman John Rigas handcuffed and in police custody, Americans disenchanted with the stock market and inaccurate financial statements now have a new, highly visible scapegoat amid a rising call that executives involved in corporate scandals be brought to justice.

The day's events also give regulators and federal law enforcement authorities an opportunity to restore confidence in the market by showing investors that financial shenanigans will be vigorously pursued -- lest the public sense that bigwigs are enjoying ill-gotten gains while the little guy suffers pain inflicted by the bear market.

Early Morning

Rigas and his sons Timothy and Michael were arrested at 6 a.m. Wednesday morning in New York City, according to Buffalo, N.Y., TV station WKBW. Two other Adelphia executives, James Brown and Michael Mulcahey, were arrested in Pennsylvania, the station reported.

In a press conference Wednesday morning, deputy attorney general Larry Thompson said the defendants "systematically looted" Adelphia, causing investor losses of more than $60 billion. In addition to providing false information to lenders and the public, Thomson said the defendants participated in "brazen thefts" from Adelphia. Those include, said Thompson, $252 million in cash to meet margin calls, more than $420 million in company stock, and $13 million to build a golf course on land owned by the family.

At the same press conference, SEC director of enforcement Stephen Cutler said the defendants in the civil case -- the aforementioned executives plus James Rigas, brother of Timothy and Michael -- overstated the company's operating performance, understated its liabilities, and engaged in "rampant self-dealing."

The Rigas arrests come amid a summer of scandal on Wall Street, featuring congressional investigations of the collapses at WorldCom and Enron and a high-profile insider-trading case involving Imclone Systems, its CEO Sam Waksal and his friend Martha Stewart.

Road to Nowhere

Adelphia's troubles began March 27, when the company surprised Wall Street with the disclosure that the company had $2.3 billion in potential liabilities that the company hadn't disclosed on its balance sheet. In the intervening months, the Rigas family ceded control of Adelphia, and the company filed for bankruptcy protection.

Particularly egregious about the alleged fraud, said Cutler, was that it continued after the company had been notified of an SEC investigation into its finances. The defendants caused Adelphia to pay $174 million of the $252 million in margin-call money after March 27.

Both Thompson and Cutler characterized the actions against Adelphia as a testament to how "quickly and forcefully," in Cutler's words, the SEC and the government will pursue corporate wrongdoing. In its case, the SEC is demanding disgorgement of ill-gotten gains by the Rigases, which the agency specified would include "all compensation" received by the defendants during the alleged fraud.

That's a sign, said Cutler, that corporate officers defrauding the public "should not and will not profit from their behavior."

In an interview with TheStreet.com, Wayne Carlin, the SEC's regional director for the Northeast regional office, said the Adelphia case was remarkable due to what he called "the extent to which the Rigas family treated this company as a personal plaything and a personal piggy bank, to the tune of hundreds of millions of dollars."

Said Carlin, "When you have a company in which the people who are the architects of the wrongdoing are also in control of the corporate machinery -- if they're in that position and they're intent on committing a fraud, it makes it much more feasible to carry it off."

An Adelphia representative didn't return a call for comment on the day's events.

Carlin declined to comment on why James Rigas was named in the SEC's complaint Wednesday, but not in the criminal indictment. "Our respective investigations are continuing," he said.

Carlin also declined to speculate whether the public displays of vigorous market watchdog activity Wednesday had helped boost the markets; in early afternoon, the Dow and the S&P 500 were both up at least 2%.

"Trying to understand why the market does what it does is way beyond my expertise," said Carlin.

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