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Adelphia Founder, 2 Sons Are Charged With Fraud

Jul 25, 2002 | The Los Angeles Times

Cable pioneer John Rigas and two of his sons were arrested Wednesday and accused of looting Adelphia Communications Corp. and treating it as their "personal piggy bank," the latest development in one of the largest accounting scandals to rock Wall Street.

Authorities arrested Rigas, the 77-year-old founder of Adelphia, and his sons Timothy, 46, and Michael, 48, in New York. They also arrested two other former executives in Pennsylvania and charged all five with several counts of securities, wire and bank fraud.

Among the allegations are that Rigas and his former Adelphia executives hid $2.3 billion in personal loans guaranteed by the company and inflated corporate earnings and the number of cable subscribers. The 68-page criminal complaint details rampant self-dealing by the Rigases, who allegedly used corporate funds to start construction of a $50-million golf course on family land, buy luxury condominiums in New York, Colorado and Mexico, and take an African safari vacation.

"The scheme charged in the complaint is one of the largest and most egregious frauds ever perpetrated on investors and creditors," said James Comey, the U.S. attorney in New York.

U.S. Postal Inspector Thomas F.X. Feeney said the Rigases took money from Adelphia "on a massive scale, using the company as the Rigas family's personal piggy bank at the expense of public investors and creditors."

Federal prosecutors said they declined the Rigases' offer to turn themselves in. Instead, U.S. postal inspectors, involved in the case because of the wire-fraud charges, arrested the three Rigases at 6 a.m. at the apartment of Ellen Rigas, John's daughter, on Manhattan's Upper East Side.

The luxury apartment is owned by the cable company and was used free by Ellen and her husband from 1998 until May, according to the criminal suit.

Adelphia, the nation's sixth-biggest cable company and the largest provider in Southern California, filed for bankruptcy protection last month amid a cash crisis. The accounting scandal came to light in late March.

The five defendants, who resigned from Adelphia under pressure in May, each could face millions of dollars in fines and up to 20 years in prison as a result of the criminal and civil fraud charges brought in separate lawsuits Wednesday by the Securities and Exchange Commission and the Justice Department.

Another of John Rigas' sons, James, 44, former head of strategic planning for Adelphia, was not named in the criminal case, but he was cited in the civil case brought by the SEC. Adelphia also was named in the civil suit for failing to cooperate with an SEC inquiry.

On Wednesday, Adelphia filed its own lawsuit against the five former executives and other Rigas family members, including Ellen and John's wife, Doris. The suit charges the defendants with violating the Racketeer Influenced and Corrupt Organizations Act.

Federal officials say the multitude of misdeeds makes the case unusual. The complaints detail how the Rigases allegedly manipulated the books to conceal the firm's growing debt using sham transactions, phony receipts and falsified documents provided to accounting firm Deloitte & Touche.

President Bush said the charges are evidence that the administration is not afraid to crack down on corporate wrongdoing. "This government will investigate, will arrest, and will prosecute corporate executives who break the law."

The arrests are the fourth prosecution in recent months stemming from corporate scandals that have shaken investor confidence and contributed to a plunge in stock values. Last month, Enron Corp.'s accounting firm, Arthur Andersen, was found guilty of obstructing justice in the government's investigation of the energy firm. Criminal charges have been brought against former executives at Tyco International Ltd. and ImClone Systems Inc. on tax evasion and insider trading, respectively.

Legal experts said the speed with which the charges were brought against Adelphia's top executives and their public arrests indicated the government's desire to make an example of the Rigases.

"Traditionally with white collar criminals, an arrangement is made for them to come in the back door so they are fingerprinted and photographed in a dignified manner," said Stephen M. Ryan, a former federal prosecutor who is a partner at law firm Manatt, Phelps & Phillips in Washington. "It's unusual to do a 'perp walk' with a white-collar crime," in which suspects are paraded in handcuffs in front of TV cameras.

At lunchtime Wednesday, Adelphia employees piled into Kaye's Hometown Restaurant down the street from the company's headquarters in Coudersport, Pa., to watch TV news footage showing members of the founding family being handcuffed that morning in Manhattan. "There was dead silence," said local journalist Don Gilliland. "It was a little like watching 9/11—people just couldn't believe what they were seeing."

Until the off-balance-sheet loans first were disclosed by Timothy Rigas in March, townspeople revered the Rigas family and John in particular, whom they considered a hero for decades of generosity. Gilliland said many of the town's 3,000 residents have turned against John Rigas. "They're now saying he did it and he deserves to be punished, without a lot of ifs."

John Rigas, Adelphia's former chairman and chief executive; Timothy Rigas, the former chief financial officer; and Michael Rigas, former executive vice president of operations, were arraigned Wednesday afternoon and each was released on a $10-million bond after a half-hour hearing before U.S. Magistrate Judge Gabriel Gorenstein in New York.

The Rigases also pledged four properties as collateral, including the family home in Coudersport, where two of the sons also live, and 5,000 acres of nearby land.

John Rigas appeared tired and gaunt as he was led into the courtroom. He wore a blue suit and white dress shirt, but his tie, belt and shoelaces had been removed by authorities.

Rigas did not speak during the hearing and refused to answer reporters' questions afterward. The three executives could face prison terms of 15½ to 19½ years if convicted, said Timothy Coleman, an assistant U.S. attorney.

Outside the courtroom, the Rigases' attorneys said their clients broke no laws. "Do they think they committed crimes? The answer is no," said Rigas attorney Peter Fleming, adding that John Rigas has never sold any of his Adelphia stock.

"We intend to defend the charges vigorously," said Jeremy Temkin, an attorney for Timothy Rigas.

The two other Adelphia executives, James Brown, 40, former vice president for finance, and Michael Mulcahey, 45, former assistant treasurer, were arrested at their homes in Coudersport on Wednesday. They were released on their own recognizance from a court in Williamsport, Pa.

When the cable industry was peaking in the late '90s, John Rigas was worth billions on paper. He'd had a humble start, overdrawing his bank account in 1952 to buy the Coudersport cable franchise for $300. He already owned the movie theater in town and saw his cable investment as a hedge against the threat of television.

Even as other cable pioneers were selling out in the mid-1990s, Rigas refused, eager to pass the company to his three sons, who were pushing him to expand aggressively. After a shopping spree in the late 1990s, Adelphia tripled its size, to 5.8 million subscribers nationwide. Its biggest acquisition was the $5.2-billion purchase of Century Communications Corp., the largest provider in Southern California.

With these acquisitions, however, came a towering debt load that made Adelphia vulnerable when news of the questionable off-balance-sheet loans emerged in March. Wall Street already was jittery because of the Enron accounting scandal, and within weeks Adelphia's stock collapsed.

With bankruptcy looming and the family loans backed by Adelphia climbing to $3.1 billion, John Rigas and his sons stepped down and put their controlling 60% stake in the company into a trust voted by outside Adelphia board members. Since then, Adelphia has been run by these directors, including Erland Kailbourne, the interim CEO. The directors have claimed that many of the Rigas transactions were not approved or disclosed to the board.

Kailbourne was in Southern California this week trying to calm city officials, regulators and employees who are nervous about the company's ability to serve its 1.2 million customers in the region.

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