Adelphia Comes Clean

Can Vanessa Wittman help bring scandal-wracked Adelphia out of bankruptcy -- and back into investors' good graces?

The loans and other related-party transactions became the object of SEC scrutiny and grand-jury investigations in Pennsylvania and New York. Eventually, on September 22, 2002, a federal grand jury in Manhattan indicted the five former Adelphia executives—John, Timothy, and Michael Rigas, James Brown, and Michael Mulcahey—on 24 counts of securities fraud, wire fraud, and bank fraud. Their actions, charged U.S. Attorney James B. Comey, constituted “one of the most elaborate and extensive corporate frauds in history.” (Brown later pleaded guilty to fraud and conspiracy charges and agreed to cooperate with authorities.)

It was a shocking end to the ruling family’s hold on an empire that was built over 50 years. John Rigas founded the company in 1952 in Coudersport, Pennsylvania, with the purchase of a tiny cable franchise for $300 and a $40,000 loan from a local doctor and a state senator. Eventually, Adelphia grew—mainly through acquisitions—into the fifth-largest cable company in the country, with more than 5 million customers. But Rigas never wavered from his extremely centralized management style. “It was still being run as if it were a small family business,” says Michael Kramer, managing director of Greenhill & Co., an adviser to the creditors in the bankruptcy proceedings.

Rigas, chairman and CEO, and his sons controlled every move: Michael was executive vice president of operations, James was executive vice president of strategic planning, and Timothy was CFO. All held seats on a board of directors that also included John’s son-in-law, Peter Venetis. Their ownership of a special class of voting shares made it impossible for other shareholders to challenge their control.

The Rigases seemingly ran the company as if it were their own private cash machine. The family has been accused of commingling the accounts of Adelphia with their other businesses, borrowing—and at times allegedly stealing—to pay for lavish homes and other personal expenses, including a private jet and construction of a golf course.

The Rigases didn’t play by the rules on the accounting and control side, either; in fact, there were virtually no internal controls. CFO Timothy Rigas was chairman of the board’s audit committee, an outrageous conflict that the Wharton School graduate should certainly have known was wrong. According to reports and company insiders, Adelphia capitalized millions of dollars in costs that clearly should have been expensed. U.S. Attorney Comey charged that the Rigases “exploited Adelphia’s Byzantine corporate and financial structure to create a towering facade of false success, even as Adelphia was collapsing under the weight of its staggering debt burden.”

The alleged fraud made it impossible for the company to file its 10K for 2001, causing it to be delisted from Nasdaq in June 2002. The delisting put the company in default on $1.4 billion worth of convertible bonds, leaving bankruptcy, which it filed for later that month, the only option. In the filing, Adelphia reported $18.6 billion in debt and $24.4 billion in assets. “If what [the defendants] are accused of is true, the behavior is much more egregious than what happened at Enron and WorldCom,” argues Greenhill’s Kramer, “because they didn’t just manipulate the accounting—they stole from the company.”

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