Adelphia Investors Probe. Adelphia Communications shareholders want to know whether the firm’s banks knew about alleged fraud when they co-signed $3.1 billion in loans to the bankrupt company’s founding family.
“We believe this is one of the major fraud cases in U.S. history, and we’re looking into every possible way to recover the funds that people lost investing in Adelphia,” said Peter Morgenstern, an attorney representing the equity holders in bankruptcy court.
The creditors’ committee also is reportedly investigating similar allegations. Creditors tend to have a stronger voice in bankruptcy court than do shareholders.
Federal investigators charged Adelphia founder John Rigas and his two sons with fraud last year, accusing them of creating phony accounting schemes, sham transactions and massive self-enrichment gimmicks at the nation’s sixth-largest cable TV company.
The Rigases also took out company loans to buy Adelphia stock and to buy a hockey team, make a documentary, build a golf course, live rent-free in New York and spend time at a Colorado condo in Eagle.
The company last year buckled under that debt.
Shareholders now are fighting to recoup their losses as Adelphia makes its way through Chapter 11 bankruptcy. Morgenstern said his legal team is gathering documents and information to determine whether a string of banks knew what was going on at the time they made the loans.
Banks claim they are owed millions of dollars by Adelphia, but so do shareholders. Those with equity stakes in the cable company want to know if the banks have any liability for their losses, Morgenstern said.
The committees have until August to object to the banks’ claims.
Adelphia in February said it would move its headquarters to Denver from Coudersport, Pa., this summer.
Morgenstern now questions how much the banks knew, and why those co-signed loans were never disclosed to investors.
He said the committee is exploring other facets in the relationship among the banks, the company and the Rigas family. He declined to give details, citing nondisclosure agreements.
Two of the banks, CitiBank and Bank of America, are being questioned for their roles in underwriting several of the company’s securities offerings, while at the same time being co-signers on loans.
Bank of America declined to comment for this story, and CitiBank officials did not return phone calls Monday.
Investment banks that underwrite or sell stock typically are responsible for conducting due diligence on behalf of shareholders.
Depending on what the committees find, lawsuits could be filed questioning why the investment banking side of the banks did not ask their own lenders about Adelphia’s activities.
“It’s a pretty interesting legal question,” said Carr Conway, a forensic accountant with Dickerson Financial Investigations in Lakewood and a former investigator for the Securities and Exchange Commission. “They could say, ‘All you had to do was walk across the hall to the lenders. Why didn’t you do it?”‘
Adelphia also could be on the hook with federal regulators.
Conway said the SEC might be interested in investigating whether the company truly did fail to disclose to investors the co-signed agreements with the banks.
However, a source familiar with Adelphia’s legal issues said the company properly disclosed the sums it borrowed but not the amount the Rigas family borrowed. The source said this was because the company received false and incomplete information from the family.
Companies are required under generally accepted accounting principals to tell investors about “commitments,” or obligations the company may have to banks or other creditors.
Those shareholder notices typically don’t show up as a dollar amount in balance sheets, but the company is obligated to disclose the deals in written text.
“I bet a dollar to a donut that it was not disclosed early on,” said Carr. “What this really boils down to is the unauthorized removal of company assets.”
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