ADELPHIA COMMUNICATIONS

Background

Adelphia Communications Corporation was an American cable television company with

headquarters in Coudersport, Pennsylvania. It was founded in 1952 by brothers John and Gus
Rigas after purchasing a small cable television franchise for $300.

In the early 1980s, John’s three sons joined the firm: Michael was vice president of operations,
Tim was chief financial officer, and James was head of strategic planning and also chief
executive officer of a small business subsidiary

The members of family management and their relationships are shown as below:

After 20 years in the business, in 1972 Rigas incorporated the company under the name
"Adelphia" which in the Greek language means "brothers". In the upcoming years, the Rigas
family combined various cable properties under the company name and made initial public
offering in 1986.

 In 1989, the company established Adelphia Media Services which would allow commercial
opportunities on local, regional and national levels.
In 1990 it launched Empire Sports Network. This was a regional sports network, serving central
and western New York.

In 1991, the company created Adelphia Business Solutions subsidiary which provided different
types of products to businesses such as, high-speed Internet, phone services, and voice
messaging.

Adelphia sales grew to over $300 million during the early1990s

Furthermore, the company bought the NHL’s Buffalo Sabres in 1997 and this was followed by
the purchase of a sports talk station, WNSA Radio, in August 2000. One of the previous
successes of Adelphia portfolio included its purchase of the naming rights to a football stadium
in 1999, Adelphia Coliseum in Nashville, Tennessee

By 1999, the company stock was traded as high as $87 per share

In late 1990s, Adelphia purchase Century Communication for $5.2 Million and become the 6th
largest cable company with 5.6 million subscribers.

The company remained in its headquarters in Coudersport until it moved to Greenwood Village,
Colorado, shortly after the scandal. Adelphia Communication bankrupted in June 2002 and
defunct in July 2006. At that time, the number of the company employees working for Adelphia
was 275.

Scandal

On March 27, 2002, Adelphia officials announced that $2.3 billion unrecorded debt was
collected via co-borrowings between Adelphia and other Rigas family entities under the family's
private trust, Highland Holdings. Legally, the Rigas entities should have paid the debt. However,
if they were not able to, the company would be held accountable. An investigation was launched
and later revealed that the Rigas family used the funds to illegitimately purchase personal
luxuries. The alleged purchases included Christmas trees, 17 company cars and 3600 acres of
timberland purchased for $26 million for their home yard. Rigas resigned from his position as
CEO in May 2002 after being indicted for bank fraud, wire fraud and securities fraud. 
Washington, D.C., July 24, 2002 -- The Securities and Exchange Commission filed
charges against Adelphia Communications Corp.; its founder John J. Rigas; his three sons,
Timothy J. Rigas, Michael J. Rigas, and James P. Rigas; and two senior executives at Adelphia,
James R. Brown, and Michael C. Mulcahey, in one of the most extensive financial frauds ever to
take place at a public company.

In its complaint, the Commission charges that Adelphia, at the direction of the individual
defendants:

1. Fraudulently excluded billions of dollars in liabilities from its consolidated financial

statements by hiding them on the books of off-balance sheet affiliates

2. Falsified operations statistics and inflated earnings to meet Wall Street's expectations

3. Concealed rampant self-dealing by the Rigas Family, including the undisclosed use of
corporate funds for Rigas Family stock purchases and the acquisition of luxury
condominiums in New York and elsewhere. Also, today, the United States Attorney's
Office for the Southern District of New York filed related criminal charges against
several of the same defendants.

In its lawsuit, filed in federal court in Manhattan, the Commission alleges that the defendants
violated the antifraud, periodic reporting, record keeping, and internal controls provisions of the
federal securities laws. Adelphia is the sixth largest cable television provider in the United States
and, through various subsidiaries, provides cable television and local telephone service to
customers in 32 states and Puerto Rico.

The Commission seeks a judgment ordering the defendants to account for and disgorge all ill-
gotten gains, including all compensation received by the individual defendants during the fraud,
all property unlawfully taken from Adelphia by the individual defendants through undisclosed
related-party transactions, and any severance payments related to the individual defendants'
resignations from the company. The Commission also seeks civil penalties from each defendant,
and permanent injunctions against violating the securities laws. The Commission further seeks
an order barring each of the individual defendants from acting as an officer or director of a
public company.

The Director of the SEC's Northeast Regional Office Wayne M. Carlin said: "In this case,
Adelphia not only failed early on to cooperate with the Commission's investigation, but actually
allowed the fraud to continue until the Rigas family lost control over the company's conduct. The
Commission's request for civil penalties against Adelphia - an unusual step against a public
company - is all the more appropriate in light of that fact."

Specifically, the Commission's complaint alleges as follows:

 Between mid-1999 and the end of 2001, John J. Rigas, Timothy J. Rigas, Michael J.
Rigas, James P. Rigas, and James R. Brown, with the assistance of Michael C. Mulcahey,
caused Adelphia to fraudulently exclude from the Company's annual and quarterly
consolidated financial statements over $2.3 billion in bank debt by deliberately shifting
those liabilities onto the books of Adelphia's off-balance sheet, unconsolidated affiliates.
Failure to record this debt violated GAAP requirements and laid the foundation for a
series of misrepresentations about those liabilities by Adelphia and the defendants,
including the creation of: (1) sham transactions backed by fictitious documents to give
the false appearance that Adelphia had actually repaid debts when, in truth, it had simply
shifted them to unconsolidated Rigas-controlled entities, and (2) misleading financial
statements by giving the false impression through the use of footnotes that liabilities
listed in the Company's financials included all outstanding bank debt.
 
 Timothy J. Rigas, Michael J. Rigas, and James R. Brown made repeated misstatements in
press releases, earnings reports, and Commission filings about Adelphia's performance in
the cable industry, by inflating: (1) Adelphia's basic cable subscriber numbers; (2) the
extent of Adelphia's cable plant "rebuild" or upgrade; and (3) Adelphia's earnings,
including its net income and quarterly EBITDA.
  Since at least 1998, Adelphia, through the Rigas Family and Brown, made fraudulent
misrepresentations and omissions of material fact to conceal extensive self-dealing by the
Rigas Family. Such self-dealing included the use of Adelphia funds to finance
undisclosed open market stock purchases by the Rigas Family, purchase timber rights to
land in Pennsylvania, construct a golf club for $12.8 million, pay off personal margin
loans and other Rigas Family debts, and purchase luxury condominiums in Colorado,
Mexico, and New York City for the Rigas Family.

The Commission alleges that the defendants continued their fraud even after Adelphia
acknowledged, on March 27, 2002, that it had excluded several billion dollars in liabilities from
its balance sheet. The defendants allegedly covered-up their conduct and secretly diverted $174
million in Adelphia funds to pay personal margin loans of Rigas Family members. When
Adelphia failed to file its 2001 Form 10-K through the Spring, the price of Adelphia's stock
collapsed from a closing price of $20.39 per share on March 26, 2002 to a closing price of $0.79
on June 3, 2002, when the NASDAQ delisted the stock. Adelphia filed for bankruptcy protection
under Chapter 11 of the U.S. Bankruptcy Code on June 25, 2002.

Trial

A trial for the case was launched. Federal prosecutors proved that the Rigases used complicated
cash-management systems to spread money around to various family-owned entities and as a
cover for stealing $100 million for themselves. In June 2005, John and Timothy Rigas were
found guilty for "looting and debt-hiding". John Rigas was sentenced to 15 years in prison, while
Timothy received a sentence of 20 years. On December 14, 2015, Rigas' lawyers announced that
he was terminally ill with bladder cancer and had between one and six months to live. Rigas was
diagnosed with cancer prior to his conviction and, under his sentencing, could seek
compassionate release if he had less than three months to live. Judge Kimba Wood issued an
order allowing for Rigas's release on February 19, 2016. As of June 2016, Rigas is well enough
to make public appearances.

The New York Times  noted that this differed considerably from other accounting
scandals like Enron and WorldCom, saying "For the one trait that distinguishes the Rigas from
virtually every other culprit on Wall Street is that they didn't sell their stock. The evidence
suggests less that they intended to defraud than that they intended to hide inconvenient facts until
they could be righted. This is also, of course, against the law; it's just a more tragic crime than
ordinary looting."

Further Development

After struggling to find an alternative, Adelphia Corporation filed for bankruptcy on June 26,
2002. Subsequently, the company asked for a $1.5 billion loan to restructure under bankruptcy
protection. According to BankruptcyData.com, the company's bankruptcy ranks 12th by assets in
the United States history of bankruptcies. A plan for its restructuring was approved on February
25, 2004. According to William Schleyer, then-CEO of the company, "Adelphia’s proposed plan
of reorganization is the product of relentless effort and reflects the dedication of Adelphia’s
management and bankruptcy teams, and our almost 15,000 employees in 30 states and Puerto
Rico who are helping to make Adelphia a better company." Amongst other things, the plan
included a full cash payment to possession lenders, bank lenders, joint venture partners and, no
payments to claims and equities of the Rigas family.

In July 2006, Adelphia sold its cable operations to Comcast and Time Warner for $17.6 billion in
cash and shares in Time Warner's cable unit. Out of that amount, Time Warner shares and $15
billion were planned to be administered to creditors. Following that, Adelphia ceased to do
business. The effective date of the Adelphia Plan of Reorganization occurred on February 13,
2007. Time Warner Cable was allowed to distribute approximately $6 billion in shares to
Adelphia stakeholders and succeed Adelphia as a publicly traded corporation. The Rigas family
established a successor company, Zito Media, to continue to provide cable service in some areas
not sold to Time Warner, including most cable systems in Potter County, Pennsylvania.

Reasons

Jhon Rigas and his sons Tim and Michael Rigas were the main characters of this scandal.
The fraud case itself was first reported in June 2002, and the founder and CEO of Adelphia, John
Rigas, and two other company executives (his sons, Timothy and Michael Rigas) were charged
with looting the company “on a massive scale” (Tobak, 2008).

To be confirmed, the Rigases privately took approximately $2.3 billion worth of personal loans,
while the financial performance of the company had been misrepresented and manipulated by the
Rigas management to make it appear more natural and have the disguise of a normal occurrence
from the auditors’ perspectives. Also, the stock price was deliberately inflated under control of
the Rigases. It was suggested that private partnerships were created to cover the crimes, and
Adelphia was regarded as a tool for the self-dealing schemes. Technically, changing the journal
entries to provide flaws for the Rigases to receive more debt at no cost would be the main
measure, which was definitely illegal.

Furthermore, it has been suggested that the Rigases were engaged in “Brazen thefts”, including
$252m, as reported by BBC “to pay margin calls, or demands for cash payments on loans for
which the family had put up Adelphia stock as collateral” (BBC, 2002).

“In less than four years… they stole hundreds of millions of dollars through their
fraud and caused losses to investors of more than $60bn.” commented by Larry
Thompson, assistant attorney general (BBC, 2002).

Regarding the personal crimes committed by the family members, John Rigas, the chairman, was
revealed to have a personal debt of $66 million from company, which he then used to fund his
extravagant lifestyle (Tobak, 2008).

The following are several indicators of the extravagant lifestyle the Rigases had led:

 Several Vacation Homes and luxury apartments in Manhattan

 Several private jets

 Construction of a world-class 18-hole golf course

  Majority ownership of the Buffalo Sabres

 $700,000 membership in an exclusive golf club (Tobak, 2008)

Based on all the information aforementioned, the amount of Adelphia’s funds that John Rigas
could have stolen could be calculated to be up to $1,000,000 per month!

As noted by the New York Times, the Rigases did not sell their stock, which was considered to
be the major difference between the Adelphia fraud case and other accounting scandals, such as
Enron, Worldcom and every other normal culprit to be found on Wall Street. It has been
suggested by evidence that the Rigases intended to hide inconvenient facts until they could be
righted, meaning that the family more than intended the fraud. Nevertheless, it also seems to be a
more tragic crime than ordinary looting, but certainly, still against the law.

Effects:

The Sarbanes–Oxley Act of 2002 also known as the "Public Company Accounting Reform and
Investor Protection Act" (in the Senate) and "Corporate and Auditing Accountability,
Responsibility, and Transparency Act" (in the House) and more commonly called Sarbanes–
Oxley or SOX, is a United States federal law that set new or expanded requirements for all
U.S. public company boards, management and public accounting firms. A number of provisions
of the Act also apply to privately held companies, such as the willful destruction of evidence to
impede a federal investigation.

The bill, which contains eleven sections, was enacted as a reaction to a number of
major corporate and accounting scandals, including Adelphia Communications. The sections of
the bill cover responsibilities of a public corporation's board of directors, add criminal penalties
for certain misconduct, and require the Securities and Exchange Commission to create
regulations to define how public corporations are to comply with the law.

In 2002, Sarbanes-Oxley was named after bill sponsors U.S. Senator Paul Sarbanes (D-MD) and
U.S. Representative Michael G. Oxley (R-OH). As a result of SOX, top management must
individually certify the accuracy of financial information. In addition, penalties for fraudulent
financial activity are much more severe. Also, SOX increased the oversight role of boards of
directors and the independence of the outside auditors who review the accuracy of corporate
financial statements.

The bill was enacted as a reaction to a number of major corporate and accounting scandals,
including those affecting  Enron, Tyco International, Adelphia, and WorldCom. These scandals
cost investors billions of dollars when the share prices of affected companies collapsed, and
shook public confidence in the US securities markets.

The act contains eleven titles, or sections, ranging from additional corporate board
responsibilities to criminal penalties, and requires the Securities and Exchange
Commission (SEC) to implement rulings on requirements to comply with the law. Harvey Pitt,
the 26th chairman of the SEC, led the SEC in the adoption of dozens of rules to implement the
Sarbanes–Oxley Act. It created a new, quasi-public agency, the Public Company Accounting
Oversight Board, or PCAOB, charged with overseeing, regulating, inspecting, and disciplining
accounting firms in their roles as auditors of public companies. The act also covers issues such
as auditor independence, corporate governance, internal control assessment, and enhanced
financial disclosure. The nonprofit arm of Financial Executives International (FEI), Financial
Executives Research Foundation (FERF), completed extensive research studies to help support
the foundations of the act.
 Conclusions by Muhammad Usman Roll # 14

1. Two May be the cause of this scandal

a. Deloitte Audit: Deloitte served as Adelphia’s independent auditor during the

course of the misconduct and each year issued audit reports containing
unqualified opinions on Adelphia’s annual financial statements

b. Greedy: Greediness of J.Rigas

c. Lack of Transparency: Complex financial transactions that are difficult to

understand are an ideal method to hide a fraud.

d. Non independent internal audit department

2. Requirements to avoid this happening

a. Strong Internal Department

b. Strong Regularity (SECP, FBR) exercise

3. Yes, in my opinions
 Conclusions by Ammar Asad Roll # 42

 Why do you think it happened in that circumstance?

 As the company became a public company, the added pressure of Wall Street
expectations was a possible incentive to show false numbers in their accounting.
However, it was the Rigases greed that caused the fraud. When the company was private,
they could take money out for whatever they wanted. Supporting the community also
meant supporting themselves, and they were used to the personal enrichment and
notoriety that came with having the biggest company in the town. They needed to
continue to have funds to support their personal lifestyle, even when the company went
public. There were several major issues at Adelphia that allowed the fraud to take place
and go relatively unnoticed: (a) it was a family-controlled business, which allowed the
fraud to be contained at the top level; (b) it was highly centralized in its operational
decision making, providing very low levels of empowerment to the staff, again allowing
fraud to be undetected at lower levels; and (c) the family ignored the principles of
running a publicly traded company by financially comingling their personal businesses.
Moral disengagement seems likely to have played a role at Adelphia. Certainly the Rigas
family loved success, power and control, and they apparently felt they were entitled to all
proceeds of the public company they had originally built as a private firm. The financial
 department was controlled by Tim Rigas, who, with two key executives, masterminded
the manipulation of the financial reporting. While they continued to state their innocence
after being arrested, it is clear that there was a team in Tim’s group who knew what was
going on and decided to participate.

 What could have done to avoid this nefarious plot?

1. Proper and Strict Oversight by the Regulators

2. Proper Scrutiny by Auditors

3. Strict Scrutiny Laws

4. Proper Oversight by the Board of the Company

5. Ethical Training

6. Operationalizing corporate values in day today decision making

 In Pakistan context can we expect this to happen?

 In my opinion, Yes it is possible.

 Conclusions by Mazhar ul Haq – Roll # 28

Why do you think it happened in that circumstance?

Adelphia Communications Corporation involves in both fraudulent financial reporting and

misappropriation of assets. The leadership of Adelphia Communications make massive unethical
financial decisions that led to corporate collapse because following
 One family ruled the Company
Adelphia Communications started as a family-owned private company and was managed
as such for many years. The transition to public company made little difference in the
actual operations. After the initial public offering of stock, the Rigas family still held the
top decision-making positions in the company with the employees used as a means to the
family’s ends. The family bond was something that was not questioned, both within the
family and by the executives.

 High control - Low empowerment culture

Adelphia Communications was an extremely centralized, controlled operation. All decisions
made and controlled centrally by the family. Employees often not allowed making
operational, financial, or hiring/firing decisions without approval of family member. The
Rigas family maintained complete control of most decisions, processes, and procedures of
the company because the family wanted to retain control.

 Comingling of family and public businesses

Adelphia public and Rigas personal businesses were not run separately. The Rigases owned
multiple businesses besides the cable business. When Adelphia Communications went
public, the Rigases continued to run many things privately. As it turned out, the businesses
were often illegally comingled and managed from the one centralized CMS (Cash
Management System) that had been established as they wished it to operate.

 Community Care and Reputation to maintain

The Rigas family was seen as a caring family who brought new life to the town of
Coudersport. They offered jobs, upgraded the community and knew many of the population
by name. They were like the royal family of the town so they have to spend huge sums on
charity and reputation.

What could have done to avoid this nefarious plot?

In order for fraud to occur, three conditions must

exist: rationalization by the person committing the
fraud, incentives or pressures to commit fraud and
the opportunity to do so.

The “One Family Show” culture of Adelphia

provided the opportunity and “God Father”
character of John Rigs for the Coudersport rationalize this fraud. The culture of Adelphia was
one in which fraud could and did thrive.

 Decentralization / Employee Empowerment

The high control of Rigs Family and lack of empowerment given to the non-family
executives provided the greatest opportunity for fraud. Executives did not know the reasons
behind major decision that is why fraud goes relatively unnoticed and contained at higher
level only.
A de-centralized culture in which executives/managers are more powerful and can make
decisions independently could have avoided this nefarious plot.

 Implementing Entity Concept

Adelphia Communications never considered that business and owner are separate entities.
They ignored the principles of running a publicly traded company by financially comingling
their personal businesses.
Implementation of Business Entity Concept i.e., treating and recording Rigas family personal
businesses and interests from Rigs Public could have avoided this fraud.

 Strict Government Legislation

Strict regulations and law that enforce sweeping auditing and financial regulations for public
companies should be implemented to avoid such nefarious plot.

 Good Accounting Practices

Adelphia Communications scandal involves both fraudulent financial reporting and
misappropriation of assets. Good accounting practices could have avoided this fraud.

In Pakistan context, Can we expect this to happen?

In Pakistan, where Tax evasion, unethical financial practices and “Seth Culture” is
very common a fraud like Adelphia Communications is very likely to happen.
Most of the companies have authoritarian rules; every decision is made by the owner
and diverging company funds for personal interest or luxury is so common that it
mostly goes unnoticed. Good Accounting practices are rare. Industrialists and
company owners have political support and they use bribe or political support to hide
financial irregularities from Government officials and departments.
In my point of view, an accounting scandal as Adelphia Communications is
extremely likely to happen or to some extent is already happening and going
unnoticed in Pakistan.