SEC Probes Links To Adelphia SuppliersAug 9, 2002 | FT.Com
US authorities are examining the roles of Motorola and Scientific- Atlanta as part of the probe into alleged fraud at Adelphia, the bankrupt cable operator.
The Securities and Exchange Commission is looking into whether the electronics manufacturers knew of a scheme by Adelphia allegedly designed to inflate its earnings when they agreed to revise supply contracts with the company. In particular, it is probing marketing support payments made by Motorola and Scientific- Atlanta as part of a deal to supply digital cable decoders.
The SEC says the payments allowed the cable group to overstate its earnings before interest, tax, depreciation and amortisation by almost $95m (Â£60m). The payments are also part of a federal case against five former Adelphia executives held on fraud charges last month.
Motorola and Scientific-Atlanta say they accounted for the payments properly. But they will have to satisfy investigators they did not know Adelphia planned to book the deals improperly.
Sales to Adelphia were particularly significant for Scientific-Atlanta, accounting for 18 per cent of its $2.5bn revenues in 2001, against just 2 per cent in 2000 and 1999. Motorola says its Adelphia sales were "very small" compared to overall revenues.
According to charges brought by the SEC and the Justice Department last month, two former Adelphia executives devised the marketing payments in November 2000 in an attempt to boost the company's ebitda.
The scheme involved Adelphia paying an additional $26 per decoder to the makers, who then returned the same amount to the company in the form of marketing support payments.
Although there was no economic benefit to any of the participants, the payments increased Adelphia's ebitda. Meanwhile the increased cost of the boxes was classed as capital expenditure and therefore not included in ebitda calculations.
The US government says the plan meant that Adelphia executives had to persuade Motorola and Scientific-Atlanta - who are not identified in the indictments - to renegotiate supply agreements signed earlier in the year.
Motorola said it does not comment on investigations involving current or former customers, but was "fully co-operating with the SEC and Justice Department". Scientific-Atlanta said it would not comment on investigations.