Adelphia Sues Auditor Over Rigases' Personal DealsNov 7, 2002 | USA Today Adelphia Communications sued Deloitte & Touche for billions of dollars in damages Wednesday, alleging that its former audit firm was ''asleep at the switch'' during ''one of the most egregious instances of corporate self-dealing and financial chicanery in United States corporate history.''
The No. 6 cable operator says that Deloitte should have told directors about the extensive personal deals by founder John Rigas and his family, including some that used Adelphia assets as collateral for more than $3 billion in loans to Rigas-owned partnerships.
When that was disclosed on March 27, it set off a chain of events and further disclosures that led Adelphia to file for bankruptcy protection in June. Rigas, two of his sons and two other former Adelphia executives were arrested in July and indicted in September.
In June, Adelphia hired PricewaterhouseCoopers to replace Deloitte.
Adelphia's lawsuit, in Philadelphia's Court of Common Pleas, charges Deloitte with ''negligence, breach of contract, fraud and other wrongful conduct.'' Among the specific allegations:
That, using auditing industry standards, Deloitte should have long considered Adelphia a ''high-risk'' audit and therefore been particularly skeptical about its data because of the Rigases' iron grip on the company and its board.
Yet in 2000, Deloitte allegedly backed down, and didn't inform the board, when the Rigases objected to its suggestion that Adelphia disclose the family's co-borrowing arrangements.
That Deloitte knew, but didn't tell the board, that the Rigases regularly took funds from Adelphia's cash management system. If the ''unorthodox cash system'' had been revealed, the Rigases' ''massive self-dealing could have been and would have been prevented, saving Adelphia hundreds of millions, if not billions, of dollars in damages.''
That despite reasons to be wary, Deloitte consistently gave Adelphia a clean bill of health. On March 26, Deloitte told the board that the 2001 audit ''was one of the best audits they had ever had,'' with only ''four minor issues.'' The report was scrapped the next day after Adelphia disclosed the co-borrowing deals, as lenders and investors challenged company debt figures.
Deloitte says it hasn't seen the lawsuit and therefore can't comment on it.