The Adelphia StoryJul 29, 2002 | Fortune Dale Cowburn was allergic to bee stings. He carried medication at all times in case he encountered an angry swarm. Last summer, however, while he was working in his barn, Cowburn was stung twice on the head. He had a heart attack and died on the spot.
The news traveled quickly through Coudersport, Pa., the town of 2,600 near the New York border where Cowburn had lived. One of the locals moved by his death was John Rigas, chairman and CEO of Adelphia Communications, the nation's sixth-largest cable television provider, a company with $3.6 billion in annual revenues and headquarters in--of all places--this rural town. Rigas knows about bees. He owns a farm outside town that sells Christmas trees, maple syrup, and honey. Soon after Cowburn's death, there was a knock on the door at his house. It was Rigas' beekeeper. He'd been sent to destroy the offending insects.
More than just the town's richest man, Rigas was a 76-year-old worth billions. He owned the Buffalo Sabres hockey team. He hobnobbed with Ted Turner. But the silver-haired cable mogul told people in a humble whisper that he was just a small-town guy who loved helping his neighbors. He sent busloads of children to Sabres games. He used Adelphia's corporate jet to fly ailing people to faith healers and cancer treatment centers.
Townspeople flocked to the Masonic temple every year for Adelphia's Christmas party. At last year's celebration there were two towering Christmas trees, each decorated with 16,000 lights at the direction of John's wife, Doris. The Buffalo Philharmonic Orchestra played the Nutcracker Suite and Vaughan Williams' "Fantasia on 'Greensleeves.' " That was really something for a town like Coudersport. "Each December the Rigas family brings their world to us, and I am grateful," wrote a columnist in the local paper. "How many would have the opportunity to hear a symphony orchestra, were it not for their generosity?"
John Rigas was also revered in the cable business. He was one of the pioneers who had started stringing wires and urging customers to throw away their rabbit ears in the early 1950s. He was inducted into the Cable Television Hall of Fame last year. Colleagues praised him not just for his business accomplishments but for his good works in Coudersport. In a celebratory video, Decker Anstrom, CEO of the Weather Channel, said, "If there's one person I'd like my son to grow up to be, it would be John Rigas."
Then, in the blink of an eye, John Rigas lost everything--his company, his reputation, even the affection of his beloved Coudersport. Last March, Adelphia disclosed it was on the hook for $2.3 billion in off-balance-sheet loans the Rigas family had used mostly to buy company stock. Rigas resigned, as did his three sons--Michael, Tim, and James--who held top executive positions and sat on the board with their father. The independent directors now running the company say they discovered that under the Rigases, nothing was as it seemed. They say Adelphia inflated subscriber numbers. Routine expenses like service calls had been booked as capital items, inflating Adelphia's reported cash flow. But what was perhaps most unsettling was the unabashed manner in which the Rigases had helped themselves to shareholder dollars.
Adelphia financed the family's $150 million purchase of the Sabres. It paid $12.8 million in 2001 for office furniture and design services provided by Doris Rigas. Even John Rigas' good works were tainted. Adelphia paid a Rigas family partnership that owns the Sabres $744,000 for "luxury-box rentals, hockey tickets, and other entertainment costs." That means shareholders probably picked up the tab for all those children who went to games. The same goes for the beekeeper's visit to Cowburn's house. It turns out the primary source of income at Rigas' farm wasn't honey sales; it was providing landscaping, snow removal, and other maintenance duties for Adelphia.
As Adelphia slid toward bankruptcy--it filed for Chapter 11 protection in June--the entire cable industry was affected. The stock of competitors like Comcast and Charter fell because Wall Street feared they might have similar secrets. Investors dumped shares of entertainment companies like Disney, afraid that Adelphia wouldn't pay its programming bills. Two federal grand juries are sorting through the wreckage, and indictments are expected soon. The Securities and Exchange Commission has set up an office in Coudersport and is preparing a civil suit.
The Rigases have spent the past several months sequestered in their family compound outside Coudersport. They refused to talk to FORTUNE, referring all questions to criminal attorney Paul Grand, who denies they did anything wrong.
Citizens of Coudersport no longer speak so worshipfully about John Rigas. But even now there are people who praise him as a principled man who refused, for instance, to allow porn channels on his cable systems. The John Rigas they describe believed in small-town values: strong families, hard work, church on Sunday. That's why, they say, he remained true to Coudersport all those years. But surely there was another reason. There were things John Rigas and his sons got away with in Coudersport that would never have been tolerated anywhere else.
John Rigas didn't impress anybody much when he first arrived in Coudersport in 1951. The son of a Greek immigrant who ran a hot dog restaurant in nearby Wellsville, N.Y., Rigas was a character. He was 5 feet 5 inches tall. He had a gap-toothed smile, a wandering left eye, and a lot of energy. His father had tried to entice him to work at the restaurant when he came home with an engineering degree from Rensselaer Polytechnic Institute in 1950. But after a few months at the grill, John thought better of it. He borrowed money from his dad and several other Greek businessmen and bought the Coudersport movie theater for $72,000. He sold tickets, made popcorn, and sometimes slept on a cot in the theater when he was too tired to drive home to Wellsville.
Back then Coudersport didn't seem like a place anybody would go to make a fortune. It was a one-stoplight town in the Allegheny Mountains, far from any major highway. Main Street was four blocks of low-slung brick buildings dominated by the Potter County courthouse. It wasn't quaint; there was a hard edge, even a sense of desperation in the air. Coudersport had missed nearly every economic boom in rural Pennsylvania. There was no coal to mine, no oil beneath the surface. The hills around town had been logged bare. By the 1950s the joke was that the town hadn't felt the Great Depression because it hadn't known prosperity. Each spring when diplomas were passed out, the locals muttered, "Say goodbye to another graduating class at Coudersport High."
People who stayed behind weren't sure what to think about a man like John Rigas, who wore his ambition on his sleeve. "It's the same plague you see in other small communities," says Bruce Cahilly, a local attorney who befriended Rigas early on. "People who have more talent and expertise are perceived as threats." So John was snubbed when he moved to town with Doris, a former high school English teacher from a poor family in the Finger Lakes area. John was wounded. "I've never been accepted in this town," he complained to a friend later on. "I couldn't even get elected to the school board."
But he seemed determined to win everybody over. He stayed until midnight talking to moviegoers after the lights went up. He stopped people on Main Street to ask about their children. He began attending the Episcopal church preferred by the town's business leaders, even though he'd been raised in the Greek Orthodox faith.
With Doris' prodding, John also pursued other business opportunities. In 1952 he overdrew his bank account to buy the town cable franchise for $300 from a local hardware store owner who'd erected an antenna on Dutch Hill. A doctor and a state senator agreed to put up $40,000, and John was in the cable business. He wired up Coudersport. Four years later he and his brother Gus did the same in Wellsville.
By the mid-1960s Rigas could afford to build a house just outside town with a pool for his four children. He was invited to sit on the board of the local bank. For a man who wanted to be accepted, the offer meant a great deal. Besides, he could always use a loan.
John Rigas and his sons would become famous in the cable industry for taking huge risks and leveraging Adelphia to the hilt. That would not have surprised anybody in Coudersport. After wiring the town John acquired more rural cable systems in New York and Pennsylvania, and he bragged to friends about how much debt he was taking on to finance the deals. "Hey, I just borrowed $10 million," John blithely told Henry Lush, a local furniture store owner. His secretary was forever going to the bank and moving funds from account to account so that her boss could stay ahead of creditors. People who tried to collect debts discovered it was no simple matter. Bruce Cahilly once drove out to John's house to seek payment for some legal work. When all else failed, he grabbed two five-gallon cans of blue pool paint from the garage. "That's just as well," John shrugged. "Doris doesn't like blue. She wanted green."
John wasn't always so sanguine. There were times when he lay awake worrying. "Well, Angie," he told his secretary, "I'm either going to become a millionaire or I'm going to go bankrupt."
A lot of people in Coudersport would have been satisfied with a house, a pool, and a seat on the bank board. But John kept pushing himself. He and Doris drove their children just as hard. They raised Michael, Tim, James, and Ellen, their youngest, to be model students. No smoking, no drinking, no hitchhiking across the country like their cousins in Wellsville. Doris, locals say, seemed to feel that the family was too good for Coudersport and drove her children to outshine their classmates. John didn't cut them any slack either. Says Bob Currin, a retired social studies teacher who taught the Rigas children: "John always let them know they had it and they could do it--and they'd better do it." Michael, James, and Ellen were class valedictorians. Tim was on track for the same honor when a boy with a better academic record moved to town senior year and edged him out.
One by one the Rigas children went off to elite colleges. Michael, the oldest, went to Harvard and then on to Harvard Law. Friends recall that he was smart and ambitious but monkish, usually spending Saturday nights studying.
Tim, the second child, was equally bright. He got a bachelor's degree in economics from Wharton, and he had a social life too. He played intramural volleyball and belonged to a singing group called the Penny Loafers.
James, the youngest of the boys, went to Harvard and then to Stanford Law School. He drank beer and played pinball, but he impressed everybody as a straight arrow. "He was the last person you would have thought would have gotten into trouble," says Steven Durlauf, a Harvard classmate.
For all their winning qualities, there was something odd about the Rigas boys. Unlike their father, they were awkward socially. When they attended their cousins' weddings in Wellsville, they stood in their tuxedos against the wall, arms crossed. "They didn't mingle," a Rigas family member says sadly. "They just stood there. Somebody said, 'They must be the bouncers.' "
The boys clearly preferred being with their immediate family in Coudersport. Not long after getting their degrees, Michael and Tim moved back in with their parents. Neither married. James spent a year and a half in San Francisco after Stanford, working at Bain & Co., but then he too returned to Coudersport, where he married and got a place of his own in town. "John just controlled everything with those boys," laments a relative. "He wouldn't give them any rope." (Ellen, the youngest child, went to Harvard and then pursued a career in music and film production in New York.)
All three sons went to work for their father. John couldn't have been happier. He now had three highly qualified young men to help run his cable company.
Adelphia was still a shoestring operation: John ran the company out of an office over a hardware store with three secretaries and a lineman. Once his sons joined the business, things changed rapidly. In 1981, Adelphia moved into an old church around the corner. People wondered what John was going to do with all that extra space. In 1985, Adelphia went from 53,538 subscribers to 122,500 after it acquired a cable system in Ocean County, N.J. When the Rigases took Adelphia public the next year, it had 370 full-time employees and deals on the table that would increase its subscribers to 253,767. By the mid-1990s Adelphia had moved into the old Coudersport High School building on Main Street, where the boys had gone to school. It was an odd place, perhaps, for what was now one of the nation's ten largest cable companies, managing 1.2 million subscribers. But the Rigas systems were the envy of their peers. They were clustered together in six areas--western New York, Virginia, Pennsylvania, New England, Ohio, and coastal New Jersey--making it easier for Adelphia to control costs. That allowed Adelphia to enjoy 56% operating cash margins, the highest in the cable industry.
John and the boys came to be considered savvy businessmen. John was the resident wiseman, but he was also obsessed with details. He knew every inch of his cable systems; he looked at every resume that came in. Michael was responsible for the daily operations of the cable systems. Tim was CFO. James supervised Adelphia's push into new technologies, including telephone service.
Yet as the cable industry grew up, the Rigases operated as if they were a million miles away from prying investors. Says Tom Cady, a former Adelphia sales and marketing executive: "Decisions were made at the dinner table rather than in a boardroom or somebody's office." John and his sons showed up late for meetings so often that people joked that the family operated "on Rigas time." They were famous for not returning calls from analysts. Occasionally, when they spotted a cable acquisition they really liked, they simply kept it for themselves.
What's more, the Rigases structured Adelphia so that there were no checks and balances at the top. Adelphia issued class A shares with one vote each to the public, but the Rigases retained all the class B stock with ten votes per share. Therefore they got to pick the board of directors. John, the three boys, and Ellen's husband, Peter Venetis, held five of the nine board seats. They filled the other four with John's friends and business associates. Who else would want to travel to Coudersport for meetings anyway?
By all accounts Tim Rigas ran the financial side of the business like a Saudi prince. He was CFO, and he was also the chairman of the board's audit committee, which oversaw the CFO's work. So how effective was the audit committee? That's hard to say. Sources say attorneys for the company haven't been able to find minutes of any meeting that Tim ran. (A Rigas family spokesman says minutes do exist and were kept by an outside law firm.)
To anybody who'd followed John Rigas' career, what happened with Adelphia's financing was predictable. The small-town businessman who had boasted about his stomach for leverage now saddled Adelphia with outlandish amounts of debt. In 1996, Adelphia's debt was 11 times its market capitalization, an off-the-chart number. (By contrast, Comcast's ratio was 1.28; Cox Communication's was 0.45.) Bond-rating agencies constantly subjected Adelphia to credit reviews. Shareholders paid a price. A Salomon Smith Barney analyst noted that Adelphia's debt "has caused the stock to trade at the steepest discount to estimated net asset value of any cable operator."
Stranger still, Adelphia began commingling revenues from its own cable operations, family-owned systems, and loan proceeds in an account referred to internally, according to documents filed recently with the SEC, as the "cash-management system." It was a lot of money. After Adelphia made a series of acquisitions in 1999, its annual revenues reached $3 billion. From time to time the Rigas family dipped into the account for personal business. The company says the Rigases tapped the account earlier this year to pay $63 million in margin loans. They used $4 million from the account to buy Adelphia stock. Another $700,000 went to pay for Tim's membership at the Golf Club at Briar's Creek on John's Island, S.C.
The independent directors now running the company say neither the unusual account nor the family's withdrawals were approved by the board. The Rigas family spokesman insists that none of it was hidden from the directors.
The Rigases didn't particularly care if investors shied away from Adelphia's stock or if bond-rating agencies called their debt junk. They cared about Coudersport. As Adelphia prospered, John Rigas became the town's biggest benefactor. He hired many locals and paid them well. Employees built suburban-style houses. The newspaper store started selling fancy coffee. A gym opened on Main Street. The Adelphia Christmas party became the "fancy-dress event in Coudersport, a chance to hobnob with the Rigases and socialize in suits over catered canapes," says Donald Gilliland, managing editor of the Potter Leader-Enterprise.
John combed the local papers and sent checks to down-on-their-luck families. "I'd always know when he did that because I'd get calls saying, 'Thanks for the article. I just got a check from John Rigas,' " says John Anderson, managing editor of the Wellsville Daily Reporter. People seeking favors camped out in Rigas' favorite restaurants, waiting for the CEO to arrive for lunch. He rarely turned anybody down.
Coudersport treated the Rigases like royalty, and they behaved accordingly. John now traveled in a Gulfstream jet, which Adelphia purchased from King Hussein of Jordan. At the Adelphia Christmas party one year, the orchestra played selections from the musical Camelot. It was John's favorite music, the conductor told the audience.
Doris rarely ventured into town, sending servants to do her shopping. When she was seen, she was in one of her Toyota minivans, an employee behind the wheel. But everyone felt her presence. The Rigases accumulated a dozen or so houses in Coudersport and the surrounding area. Doris had most of them painted brown and surrounded by split-rail fences. She also helped design Adelphia's buildings, including its brick-and-marble headquarters on Main Street, which locals call the "mausoleum."
No expense seemed to be spared. One day John asked Jimmie Bruzzi, the town dry cleaner, what he thought of Doris' work. "John," Bruzzi replied, "that woman is costing you millions."
"Well, sometimes it's worth it," Rigas replied. "Because when she's bothering [the contractors], she's not bothering me."
The boys, for their part, seemed to owe their allegiance more to the family empire than to the town. Michael was the only one who showed interest in community service. He worked 16-hour days and still attended Coudersport Rotary Club meetings. Tim, too, worked hard, jetting around the country negotiating acquisitions. He dressed well, had lots of girlfriends, and belonged to nearly 20 golf clubs. But when he was home, Tim would take John to church and Doris to her favorite restaurant, the Beef 'N Barrel.
James seemed more interested in having his own fiefdom. He spent most of his time running Adelphia Business Solutions, a telephone service company spun off from the parent. He flew coach and stayed in midrange hotels. (Sources tell FORTUNE that of all the sons, James was the least involved in Adelphia's financial weirdness.) Yet even James behaved like royalty at times. He built a baronial house on a hill above town that made the neighbors feel like serfs. "I didn't realize until now I lived in the cottage down the lane," one of them is said to have complained.
Even Ellen lived in high style--on the company tab, no less. The company says she and her venture capitalist husband lived rent-free in a Manhattan apartment owned by Adelphia. The corporation also put up $3 million in production money for SongCatcher, her critically acclaimed film about a musicologist. John reportedly walked out of the Coudersport premiere when two women kissed onscreen. (Ellen Rigas and her husband have paid the back rent on the apartment to Adelphia.)
It struck some of the locals that the Rigases were rather free with shareholder money. Teresa Kisiel, Coudersport's tax collector, couldn't help noticing that Adelphia paid its real estate taxes and those of the Rigas family with a single check. It was no secret that shareholders were footing the bills for a planned golf course. Tim and John told people it would have specially bred sheepdogs to chase away Canada geese.
Sometimes people in Coudersport even wondered whether all the spending was legitimate. But the thought would pass. It seemed as though everyone in town had benefited from John's largesse. "He's our Greek god," Shirlee Lette, a local newspaper columnist, told a visiting reporter.
Oren Cohen thought there was something about the family's spending that didn't add up. Then a high-yield-bond analyst for Merrill Lynch (and now a principal at Trilogy Capital), Cohen had followed Adelphia for a decade. He'd noticed that the Rigases were buying their own stock aggressively, but he couldn't figure out how they were paying for it. They didn't appear to have the cash themselves. John Rigas made $1.4 million in 2000. Michael, Tim, and James each took home $237,000.
The Rigases didn't have any sources of income outside Adelphia. They never sold their stock, and it didn't pay a dividend. Cohen was pretty sure their private cable systems weren't throwing off cash. John couldn't be selling that much honey at his farm. But every time Cohen tried to get an explanation, Adelphia rebuffed him. "If everything was on the up and up, the answer would have been, 'Oh, we bought it with family funds,' " recalls the analyst. "But that was never the answer. It was always 'We're not telling you.' "
Last February, Cohen noticed that the Rigases had bought or were committed to buying $1.8 billion of Adelphia stock and convertible bonds. At the time of the purchases the stock had been trading at about $40 a share. Now it was at $20. If John and his sons were using borrowed money, the Rigases were in trouble. It was time to call Adelphia again. "It seems to me the Rigases are $900 million or $1 billion in the hole," Cohen said to the head of investor relations. "How's this stuff being funded?" He got the brushoff.
On March 27, Cohen nearly shouted for joy when he spied a footnote on the last page of Adelphia's quarterly earnings press release. It said Adelphia was liable for $2.3 billion in off-balance-sheet loans to the Rigas family. Near the end of a conference call that day, Cohen pressed Tim Rigas for details. Tim muttered something about family stock purchases and said he would provide details later.
That might have sufficed in the past, but it was just months after the disclosure of off-balance-sheet debt at Enron had led to the largest corporate bankruptcy in history. Adelphia's stock tumbled 35% in three days. The SEC began an investigation.
Things in Coudersport quickly spun out of control. John issued a statement acknowledging that "shareholders are looking for greater clarity and transparency." The stock continued to fall as Adelphia announced it would be restating earnings for 1999, 2000, and 2001. The company delayed filing its 2001 annual report to sort out its books. On May 15, John resigned as chairman and CEO.
Rigas was succeeded by interim CEO Erland Kailbourne, a retired Fleet Bank executive and Adelphia "independent" director. Kailbourne was a consummate Rigas family insider, an old friend from Wellsville, and a lot of observers suspected that John might still pull strings.
But the truth is, the independent directors were livid. They'd signed off on the lending agreements, but they thought the Rigases were buying more cable systems, not taking out what were essentially margin loans to buy Adelphia stock. John had made them look like fools. Kailbourne and the three other independent directors hired David Boies, the attorney who led the case against Microsoft, to look into Adelphia's books.
John did not object. Neither did Michael, Tim, or James, who resigned soon after their father. Boies sent in forensic accountants, who discovered that a $167 million bond purchase by the family hadn't been paid for. They also unearthed what appeared to be evidence of fraud. "Certain employees of the company may have prepared documents, including wire transfer receipts and bank-paydown and draw-down notices, ... to support accounting treatment of this transaction as a cash transaction," Adelphia later explained in an SEC filling. FORTUNE has learned that five members of the accounting department who worked under Tim Rigas are now cooperating with federal prosecutors.
The independent directors also discovered that even after the disastrous March 27 conference call, someone in the family withdrew $175 million from Adelphia's cash-management system to cover margin loans.
Adelphia's stock was soon worth pennies. The company was delisted by the Nasdaq because it didn't file its 2001 annual report. That triggered the default of $1.4 billion in Adelphia convertible bonds. Bankruptcy was all but certain. The company desperately needed a loan to stay afloat. But Wall Street wasn't about to lend it any more money as long as the Rigases were around. The family still held 100% of the company's class B voting stock. Technically they still controlled Adelphia.
The problem was that John Rigas didn't think he'd done anything wrong. The day after he resigned as chairman and CEO, he startled the independent directors by showing up at a directors' meeting. Surely, he told them, this mess could be sorted out and things would get back to normal. No, John, said his old friends, you and the boys have to go. Lawyers from Boies' firm tried to negotiate a severance package with John but couldn't reach an agreement. Finally the independent directors gave the Rigas family an ultimatum: Turn over your voting shares to us, or we'll resign and go public with everything we've uncovered. After an all-night negotiating session on May 22 in Coudersport, the Rigases finally relinquished control at 5 a.m. Adelphia got a $1.5 billion bank loan. CEO Kailbourne says he hopes to take Adelphia through Chapter 11 and come out with a viable company.
The story, however, isn't over yet. There's a three-way wrestling match going on between between the Rigases, the independent directors, and Deloitte & Touche, the company's auditor, over what people knew about Adelphia's finances and when they knew it. Predictably, the directors say Deloitte should have blown the whistle years ago, while Deloitte says the directors should have had better oversight. The Rigases, through their spokesman, say that both the directors and the outside auditors knew what was going on and didn't object.
John Rigas apparently still believes that he did nothing wrong. After weeks of silence, he told the Buffalo News that he'd been "depressed" lately and regretted disappointing "ordinary people." But his spirits were lifted by the hundreds of cards and letters he'd received from supporters. "It has been very inspirational to me and my family," Rigas told the paper. "I must say that most of the cards end with a message that is most meaningful and that is that 'You are in our prayers.' It does bring a tear to my eye."
If John Rigas showed up on Main Street in Coudersport tomorrow, some people would avoid him. Others might curse him. But the vast majority would pat him on the back and tell him to keep his chin up. They remember the checks, the Christmas parties, all the nice things he's done. Rigas knows that. But he hasn't been seen in town since everything fell apart at Adelphia. His friends say his health isn't good, and that must be part of it. But maybe there's another reason: He'd have to look everybody in the eye.