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Presenters: Colin Brothers Jim Byrne Joshua Cavett Jerome Halpern Kristian Skibenes. Family Business. Background. Founded by John Rigas in 1952 in Coudersport, PA Incorporated in 1972 under the name Adelphia, Greek for “brothers” Went public in 1998 and traded on NASDAQ. Background.

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background
Background
  • Founded by John Rigas in 1952 in Coudersport, PA
  • Incorporated in 1972 under the name Adelphia, Greek for “brothers”
  • Went public in 1998 and traded on NASDAQ
background4
Background
  • Nation’s 6th largest cable TV provider
  • 5.8 million subscribers in 32 states
  • Services include:
    • Cable entertainment
    • Long distance phone
    • Digital cable
    • High-speed internet
    • Home security
  • Owns Adelphia Business Solutions, Inc./TelCove
background5
Background
  • Top competitors are DIRECTV and Echostar Communications
  • Rigas family held 5 of 9 spots on the board of directors, 4 of which were also executives
  • Delisted from NASDAQ on June 3, 2002 due to bankruptcy
  • Now traded on Pink Sheets as ADELQ
who the rigas
Who? The Rigas
  • John Rigas- 77, Founder and former CEO, Chairman of the Board
  • Thomas Rigas- 46, CFO, CAO, Treasurer, Director, Chairman of Audit Committee
  • Michael Rigas- 48, VP of Operations, Secretary, licensed attorney.
  • J.P. Rigas- 44, VP of Strategic Planning, Director, held a law degree.
who else
Who else?
  • James Brown- 40, VP of Finance, oversaw SEC filings and press releases.
  • Michael Mulcahey- 45, Vice President and Assistant Treasurer, oversaw stock and debt transactions.
what happened
What Happened?
  • 1. Excluded over $2.3 billion in bank debt by hiding it in unconsolidated entities.
  • 2. Regularly misstated key performance metrics.
  • 3. Concealed evidence of self-dealings with the Rigas family.
how did they hide debt
How did they Hide Debt?

I. Between 1999 and 2001, Adelphia:

1. Systematically recorded liabilities on the books of unconsolidated entities.

-Highland Holdings

-Highland 2000

2. Created “sham transactions” backed by fake documentation to make it appear that Adelphia had repaid their debt.

why did they hide debt
Why did they Hide Debt?

Obtained from SEC documentation

how did they misstate performance metrics
How did they misstate Performance Metrics?
  • Performance Metrics misstated from 1999-2002
    • Number of “basic cable” subscribers by including non-cable customers (high speed internet) and even adding fake customers.
    • Percentage of cable plant that had been upgraded/built overstated by 15%.
    • Net Income and EBITDA
why did they misstate performance metrics
Why did they Misstate Performance Metrics?

Create impression that Adelphia was:

1. Expanding its customer base

2. Modernizing its networks

3. Increasing profitability

why did they misstate performance metrics14
Why did they Misstate Performance Metrics
  • EBITDA
    • Included nearly $37 million in Management Revenues the Rigas entities paid to Adelphia.
    • Paid premium to suppliers ($26/box) and capitalized this amount. Supplies returned this amount immediately and Adelphia recorded revenue. $97 million overstatement.
    • Shifted expenses of $4 million to Rigas entities.
how did they conduct self dealings
How did they conduct Self-Dealings?
  • The Rigas family controlled nearly every aspect of the “publicly traded” company. This is an obvious conflict of interest.
  • Through stock “sham” transactions, equity transactions were hidden.
why did they conduct self dealings
Why did they conduct Self-Dealings?
  • “The Rigas were enriched by at least $300 million at the expense of Adelphia and its shareholders,” according to the SEC.
un disclosed self dealings
Un-disclosed Self-dealings:
  • Highland (Rigas entity) obtained funds from Adelphia for the purchase of $59 million of Adelphia stock..
  • Adelphia paid $26,535,070 for rights to Hardwood Cherry timber on the land which would revert to the owner in 20 years or if the Rigas’ Adelphia stock dropped.
  • Adelphia paid $12.8 million for the Rigas’ golf course.
  • Adelphia paid $241,167,006 of Rigas’ personal margin loans.
penalties
Penalties
  • Adelphia, J. Rigas, T. Rigas, M. Rigas, J.P. Rigas, Brown, and Mulcahey
        • had to surrender gains they received as a result of their violations of the federal securities laws, and pay interest on those gains
        • Permanently barred from serving as an officer or director of a publicly held company under Section 20(e) of the Securities Act, 15 U.S.C. § 77t(e)
  • All defendants had to pay civil penalties pursuant to Section 20(d) of the Securities Act, 15 U.S.C. § 77t(d)
slide19

Did Penalties Help to Prevent Future Scandals?

  • Investors become more aware of the composition of corporate directors and corporate control
  • Off balance sheet debt is still prevalent
  • Investors are now more aware of corporate compensation plans
summary
Summary
  • Nation’s 6th largest cable TV provider
  • Manipulated accounting figures
  • The Rigas family’s life of luxury.
  • March 2002 – Disclosure of the fraud.
conclusion effects on shareholders
Conclusion – Effects on shareholders
  • "In less than four years... they stole hundreds of millions of dollars and through their fraud and caused losses to investors of more than $60bn…“, Mr Thompson (Assistant Attorney General)
  • Between March and June 02 stock price lost 96% of its value and dropped from $22 to $0.75
  • Max price was $87 in 1999, 12-01-2003 the stock is traded at 0.36
conclusion the future
Conclusion – The Future…
  • Financing of continuing operations from J.P. Morgan Chase/Citigroup.
  • August turnaround, slower customer losses. Analysts tend to be less pessimistic.
  • New CEO W.T.Schleyer uses expanding strategy to regain market confidence.
  • There is still uncertainty awaiting the outcome of the bankruptcy.
conclusion
Conclusion
  • Most traded companies were under scrutiny after the Enron scandal
  • Accounting fraud
  • Skewed expectations of companies – market not to be trusted?
  • What can we expect in the future…?