John J. Rigas will enter a Manhattan courtroom today bearing a heavy burden. Rigas, two of his sons and two other former Adelphia executives together face more criminal charges than disgraced executives at Enron, Tyco, ImClone and WorldCom face combined.
The five former Adelphia Communications Corp. executives were scheduled to be arraigned in U.S. District Court late this afternoon, more than two months after their arrests and a week after prosecutors filed a 24-count indictment against them. They stand accused of concocting a massive fraud that allegedly deceived investors by hiding billions in loans that the Rigas family took out, but that Adelphia was responsible for paying back.
The Adelphia case is part of a wave of prosecutions against executives nationwide who have been accused of everything from insider trading to massive accounting fraud. In some ways, legal experts say, all those scandals are of a piece, all evidence of a corporate culture gone corrupt.
Yet in some ways, from the number of charges to the number of executives charged, the Adelphia case stands out. Legal experts say that by continuing to run Adelphia like a family business, the Rigases left themselves vulnerable to an unusually tough prosecution. Meanwhile, executives at other companies are suspected of violations that appear more serious, but may be tougher to prove in court.
“The obvious difference with Adelphia is that you’re looking at a formerly family-owned company, and from what we’ve seen, those can be very problematic cases,” said Linda Crompton, president of the Investor Responsibility Research Center, an investors’ rights group based in Washington. “It can be very hard for executives at such companies to let go of the idea that the company is theirs, that they can do whatever they want.”
The Adelphia case has led to charges against five individuals, while the Tyco and WorldCom scandals have ensnared only three executives each, and the massive Enron debacle has produced only one indictment.
Adelphia’s status as a family-run company may indeed explain why so many of its executives got indicted. For one thing, legal experts say, Adelphia was relatively small and relatively simple, making it easier for prosecutors to sift through the evidence and tie it more quickly to more individuals.
In addition, several top executives at other companies may be quietly cooperating with investigators in those cases, thereby sparing themselves from prosecution. That would be far less likely to happen at a company where virtually all the top executives were named Rigas.
Of the 13 major corporate executives indicted so far this year, only two – L. Dennis Kozlowski and Mark H. Swartz of Tyco face more charges than each of the Adelphia executives.
“Put the pressure on’
Rigas supporters wonder if prosecutors are throwing every conceivable charge at the Rigases and their associates in the hope that something sticks. But independent observers think the opposite is true: that prosecutors know they have a solid case and thus want to make sure that they make an example of Adelphia for the rest of corporate America.
Under federal sentencing guidelines, the more charges that individuals face, the harder it will be for them to get off with a light sentence, said Eugene O’Connor, an associate professor of law in the accounting program at Canisius College.
“The 24 charges are all for the sentencing guidelines, to put the pressure on,” O’Connor said.
The Rigases and their associates are charged with conspiracy, securities fraud, wire fraud and bank fraud. They are accused of failing to disclose billions in loans to the Rigas family, which funded a golf course and a lavish lifestyle for the Rigases. Since Adelphia was responsible for paying back those loans, prosecutors say, investors were grossly misled into thinking that Adelphia was a far stronger company than it really was.
The former Tyco executives are essentially accused of taking Adelphia’s alleged scheme a step further: Prosecutors say Kozlowski and Swartz not only granted themselves loans, but then forgave them, in effect stealing $170 million from the company. The executives are also suspected of acquiring more than $430 million in fraudulent securities transactions.
“This is a looting case,” the Securities and Exchange Commission said in its civil complaint against the former Tyco executives. “It involves egregious, self-serving and clandestine misconduct.”
Similar adjectives have been used to describe the scandals at WorldCom and Enron, but they are very different in nature. At WorldCom, executives are charged with simply misclassifying operating expenses as long-term capital expenses, thereby massively boosting earnings and defrauding investors about the company’s true financial state.
Enron is accused of hiding billions of dollars in debts in a web of arcane off-the-books transactions. The Houston-based energy concern is also suspected of manipulating energy markets, perhaps contributing to California’s 2000 energy crisis.
Corporate lawyers widely view Enron as the most serious scandal of them all, yet it has produced only one indictment so far. That is because Enron is so massively complex, said David A. Westbrook, an associate professor of law at the University at Buffalo. So many people were involved that it is difficult to pinpoint the rules that were broken, or whether they were broken with criminal intent.
Impact of corporate culture
Prosecutors “may never get to a position where they can explain Enron’s collapse in terms of criminal law,” Westbrook said. “Even convictions of individuals may be difficult to obtain.”
While prosecutors might face an easier time with Adelphia, one thing ties the two cases together and links them to Tyco and WorldCom as well, said Margaret M. Blair, a business ethicist at Georgetown University Law Center.
“The thing that ties them all together is this idea that during the boom years, a powerful culture developed saying that companies ought to make money as fast as they can, any way they can,” Blair said. “CEOs competed to see who would be most highly paid. In this kind of culture, bad things can happen.”