Six former executives of Adelphia Communications Corp., which last month filed the fifth largest bankruptcy in the nation’s history, were accused of massive fraud Wednesday after allegedly costing investors more than $60 billion in losses.
The Securities and Exchange Commission called the alleged activities of the executives “one of the most extensive financial frauds ever to take place at a public company.”
The White House called the action against the businessmen an example of the administration’s determination to crack down on shady corporate dealings that roil the nation’s stock markets and defraud investors.
“Today especially is a day of accomplishment and results here in Washington. Today is not a day of division,” said White House spokesman Ari Fleischer. “Today is a day where the Securities and Exchange Commission, in their part of the president’s Corporate Fraud Task Force, has led to the arrest of five individuals charged with securities fraud, charged with wire fraud, charged with bank fraud.
“The SEC is on the job and doing it well.
“The American people want new laws to make certain that there is certainty about the rules that corporations have to live by. The American people also want the laws to be enforced, and enforced strenuously and vigorously and aggressively, and that’s what the SEC is doing,” he added.
Conviction on all the charges could bring up to 100 years in prison and huge financial forfeitures, officials said.
On Wednesday, Senate and House negotiators reached agreement on a corporate responsibility bill, which includes stiffer penalties for instances of fraud. The White House said the president was looking forward to it landing on his desk for signing into law.
Adelphia is the sixth largest cable television provider in the United States and provides cable television and local telephone service through subsidiaries to customers in 32 states and Puerto Rico.
Deputy Attorney General Larry Thompson, who heads President Bush’s Corporate Fraud Task Force, said five of the six have been arrested in New York and Pennsylvania on a complaint filed by the U.S. attorney’s office in Manhattan.
The former executives are John J. Rigas, the founder and formerly chairman of the board of directors and chief executive officer of Adelphia; his son, Timothy J. Rigas, formerly executive vice president, chief financial officer, chief accounting officer and treasurer; a second son, Michael J. Rigas; James R. Brown, formerly vice president for finance, with responsibility for preparing Adelphia’s financial statements and public disclosures regarding its performance; and Michael Mulcahey, former director of internal reporting for Adelphia, “who supervised all of the money flowing into and out of the company and reporting its financial condition to lenders and keeping records of expenditures by the Rigas family and the entities they owned and controlled,” Thompson said.
In New York, the SEC also named a third son of John Rigas, James P. Rigas, in its separate civil lawsuit filed in U.S. District Court, though he was not mentioned by Thompson in his Washington news conference or the department criminal complaint.
Thompson said the Justice Department’s complaint alleges that “members of the Rigas family (who) controlled Adelphia systematically looted the corporation. In less than four years, the complaint alleges, they stole hundreds of millions of dollars and through their fraud caused losses to investors of more than $60 billion.”
The department’s complaint alleges “the defendants intentionally submitted false information to lenders and made false statements to the public in order to maintain their failing company’s stock price,” Thompson said.
He said Adelphia “had grown enormous through an aggressive acquisition strategy during the late 1990s. Beginning in 1999, the complaint alleges that the defendants caused the company to borrow more than $2.28 billion that it concealed from the public by intentionally omitting it from its required SEC filings.”
The complaint also charges that the defendants fraudulently reported the company’s operating results by creating millions of dollars in fake management fees, “entering into sham transactions with other … companies … and outright falsifying the numbers of cable television and Internet subscribers,” Thompson said.
The complaint also alleges that the defendants “repeatedly lied to the banks that were lending money to the company by submitting false information about Adelphia’s financial performance,” he added.
The defendants also “victimized Adelphia shareholders through a wide variety of, quite frankly, brazen thefts,” Thompson said. They allegedly “caused the company to pay out over $252 million to satisfy margin calls against the Rigas family brokerage accounts.”
The five former executives named in the department complaint also “used fraudulent documents and misleading accounting tricks to obtain more than $420 million in Adelphia stock for the Rigas family without paying a dime, and lied to the company’s independent directors that they were paying cash for the stock,” Thompson said.
Company founder and then-CEO John Rigas “lent himself more than $66 million out of company funds without making required disclosures,” Thompson said. The five defendants then allegedly “caused the company to spend $13 million on building a golf course on defendant CEO John Rigas’s land,” and allegedly forced the company to pay for airplanes and luxury apartments for the personal use of the Rigas family members.
In its separate civil lawsuit against all six defendants, the SEC charges that the former executives caused the company to fraudulently exclude billions of dollars in liabilities from its consolidated financial statements by hiding them on the books of off-balance sheet affiliates; falsifying operations statistics and inflated earnings to meet Wall Street’s expectations; and concealing rampant self-dealing by the Rigas family, “including the undisclosed use of corporate funds for Rigas family stock purchases and the acquisition of luxury condominiums in New York and elsewhere.”
Wednesday’s allegations were just the latest in a series of corporate scandals that have rocked the U.S. financial community.
Thompson told reporters gathered for the Justice Department news conference that the latest charges shows the seriousness of the Bush administration in pursuing them.
“This investigation is one of the many significant corporate fraud matters on which the Corporate Fraud Task Force has focused its attention since its creation less than two weeks ago,” Thompson said.
“Make no mistake, we are committed to bringing the collective resources and expertise of federal law enforcement, including the many dedicated career law-enforcement agents and prosecutors we’re committed to bringing this expertise to bear against corporate frauds wherever they occur,” he added.
Thompson himself became part of the headlines last week when The Washington Post ran a story pointing out that the deputy attorney general had been a director of a credit card company that paid more than $400 million to settle allegations of consumer and securities fraud.
Thompson “was a Providian Financial Corp. board member and chairman of its audit and compliance committee from June 1997 until his unanimous confirmation by the Senate on May 10, 2001,” the Post said. “Thompson sold all his stock, worth nearly $5 million in Providian after his confirmation to comply with ethics rules. The sale came a few months before Providian began to disclose looming problems with defaults in its credit card portfolio, problems that led to a collapse of its stock price and the layoffs of thousands of employees.”
Though the Post article did not accuse Thompson of any wrongdoing, he was asked during an unrelated news conference Tuesday whether his background hurt the credibility of the task force he headed for the president.
Thompson said he had been an attorney for 30 years, much of it spent as a defense attorney or a government prosecutor going after corporate corruption. “I think my record of public integrity speaks for itself,” he said.
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