Federal prosecution deepens bankrupt Adelphia’s woes

Bill Bergstrom

Thursday, July 25, 2002 | 10 a.m.

PHILADELPHIA -- Adelphia Communications, its stock devalued and delisted, a bankruptcy filing moving through the court, and now facing a Securities and Exchange lawsuit, struck out with a racketeering suit against its founding family.

The move came as former chief executive John Rigas, 78, and sons Timothy, 46, and Michael 48, were accused of stealing hundreds of millions of dollars from the nation's sixth-largest cable company, costing investors more than $60 billion. All three were arrested Wednesday in New York and charged with nine counts of conspiracy to commit securities fraud, wire fraud and bank fraud.

Two other former executives -- James Brown, 40, and Michael Mulcahey, 48 -- were arrested in Pennsylvania. Brown was arrested at his home in Coudersport, Pa., and Mulcahey was arrested at his home in Port Allegany, Pa.

The defendants could get up to 30 years in prison and millions in fines if convicted of the most serious charges. The Rigases were freed on $10 million bail apiece, secured by cash plus land and other property.

Besides the criminal charges, the Securities and Exchange Commission filed a lawsuit and called the case "one of the most extensive financial frauds ever to take place at a public company." The SEC is seeking restitution, fines and an order barring the defendants from ever heading a company.

The federal prosecution more likely will be just one more in a slew of legal entanglements that will ensnare the company, its founders and former executives and shareholders for years, bankruptcy attorney Richard Tilton predicted.

The Department of Justice and SEC actions came less than four months after Adelphia disclosed billions of dollars in off-the-books debt incurred by the Rigas family.

"These were brought quicker than, say, Enron or WorldCom, but this is going to be a simpler case," Columbia Law School Professor John Coffee said. "It's a matter of putting a hand in the till, instead of proving accounting irregularities."

Adelphia, attempting to rebuild its tattered finances under bankruptcy protection while continuing cable service to 3,500 communities around the country, portrayed the arrests as helping to put a sordid chapter of company history behind it.

Adelphia's civil complaint accuses the Rigases of violating the federal Racketeer Influenced and Corrupt Organizations Act, conspiring to use company funds for their own benefit and filing false financial statements and press releases not revealing the transactions, company spokesman Stuart Fischer said.

Tilton said even though bankruptcy law shields the corporation against lawsuits by shareholders and creditors, who must line up in Bankruptcy Court with other claimants, it doesn't bar legal reprisals by regulators such as the SEC, which said Wednesday it seeks penalties against the company as well as against the former executives.

Requesting civil penalties against a public company is unusual because "such a penalty is typically felt by the shareholders who have already been victimized," SEC enforcement director Stephen Cutler said. He said the agency did so "given not only the scope of the wrongdoing but also Adelphia's lack of cooperation during the investigation."

Coffee said federal authorities want to prove a point.

"I just think it's symbolic: they want to show that bankruptcy won't deter them," the professor of corporate law said.

And in Adelphia's case, he predicted that penalties may take the form of restrictions or unusual requirements imposed on the board rather than financial penalties that would be "just sort of bombing the rubble."

Tilton predicted additional complications as the company, while defending against the SEC lawsuit, joins in legal efforts to recover any possible damages from the Rigases.

The Adelphia complaint, filed in the U.S. Bankruptcy Court in New York, alleged off-the-books and self-dealing transactions by the Rigas family resulted in damages and loss in market capitalization of more than $1 billion, for which the company sought triple damages as a result of the alleged RICO Act violations. It requested that the defendants' assets be frozen to ensure satisfaction of any damage award.

Adelphia issued a statement accusing the Rigas family of "egregious self-dealing and financial chicanery," and saying the government action would help the company recover assets improperly taken.

Tilton questioned whether any substantial amounts are likely to be recovered.

"It looks like the individual wealth was sort of a house of cards in that it was built on the falsely inflated value of the stock," he said.

Adelphia shareholders have seen the value of their holdings evaporate as the stock slid from $38 a share a year ago to 15 cents in over-the-counter trading Wednesday.

The company may want to, or be urged to, name an independent committee to monitor the various legal proceedings, Tilton said. "If it's not properly handled, it can be a real distraction to current management," he said.

SEC officials said the Adelphia case stood out even among other recent accounting scandals.

"This case is a pretty striking combination of the kind of financial and accounting fraud that we've seen in other cases, certainly accomplished in fairly egregious fashion in this case, coupled with an extraordinary level of feeding at the trough of this company's assets by the people supposedly looking out for the shareholders' interests," said Wayne M. Carlin, director of the SEC's Northeast Regional Office in New York, on Wednesday afternoon.