The following article on Aldelphia and the Rigas family appeared in the New York Times magazine a couple of weeks ago. It is somewhat sympathetic to the family, placing a lot of the blame on the "gatekeepers." I don't buy it. These guys lived in their own little insular world but they were by no means bumpkins.
contrarianreview.com
February 1, 2004
The Company They Kept
By ROGER LOWENSTEIN
IN the old days in Coudersport, a tiny Pennsylvania town at the northern edge of Appalachia, if you had trouble with your cable hookup, you simply called John Rigas to come over and fix it. If you needed a loan, or a few bucks for a local charity drive, you darn sure called him too. There didn't seem to be anyone in this town of 2,600 that Rigas wouldn't help, or didn't like, which is maybe why Rigas seemed cut from the same cloth as his idol, the pundit Will Rogers. Rigas's other hero was Sam Walton, and like the folksy Walton, Rigas built his company, Adelphia Communications, from scratch into a giant corporation.
This sort of story has become so familiar in recent years that you almost don't have to add the kicker. Yes, it all came tumbling down. Yes, Rigas's company failed, and Rigas himself, along with two of his sons, is sitting in the dock, accused of the worst case of looting of any C.E.O. of the Enron era.
The difference is that unlike other supposed villains, Rigas, a 79-year-old son of Greek immigrants, was a genuine business hero, a pioneer in cable television. Many of the current corporate miscreants -- think Dennis Kozlowski of Tyco -- appear to be calculating and utterly unrepentant. Rigas, who has spent much of the past two years in a state of shock, is nothing if not likable. And when he goes on trial this month in Manhattan's federal courthouse, the jurors will confront the improbable: a central figure in a white-collar scandal who is as ordinary as they are.
The mystery of how Rigas, a frail, white-haired man who seemingly had neither the motive nor the disposition to commit a fraud, came so undone, has riveted his hometown. Some say the answer lies with his sons, who directed the company's frantic growth in the late 90's; others cite the family's habit of blurring private interests and public ones, which was pretty easy to do in a remote company town like Coudersport. Mystery or not, Rigas's fall says a lot about America's wave of business scandals. The explanation put forth by people from Alan Greenspan on down is that executives got greedy (as if that were something new), but Rigas, who never sold a share of his company's stock, and didn't get stock options either, doesn't quite fit the mold. So what else was it? However badly the Rigases behaved, they were helped along the way by lenders and investment bankers, auditors, lawyers, analysts -- just about anyone whose job it should have been to protect the public. And this is what truly distinguishes the latter stages of the last bull market: not that a handful of executives got greedy but that the safeguards supposedly built into our financial culture stopped functioning.
EVEN to people familiar with Wall Street scandal, the central detail of this one remains astonishing. Somehow, the Rigases persuaded a network of commercial banks to lend to them more than $3 billion that not only the family, but also Adelphia, a public company with public shareholders, would be liable for repaying. The money was used, in large part, to buy Adelphia securities, which subsequently lost most of their value, as well as to make payments on stock the family had bought on margin. It was also used as a sort of A.T.M. to finance extravagances of the Rigases both small and not so small.
For instance, roughly $150 million was lent to John's money-losing hockey team, the Buffalo Sabres; $3 million was blown on ''Songcatcher,'' a movie produced by Rigas's daughter, Ellen. Then there was the $13 million plowed into an unfinished golf course, a pet project of his son Tim, who had memberships in some 12 other golf clubs courtesy of Adelphia as well. Millions more were squandered by the Rigases' use of the corporate Gulfstream III as a family taxi, particularly to shuttle John's wife, Doris, on shopping trips, and some $45 million was advanced to John, apparently to finance his private businesses. The Rigases never bothered to disclose that they had borrowed all this -- and with Adelphia's guarantee. So when the news broke, two years ago this March, the public stockholders discovered that they had bought into seriously misrepresented goods. The company collapsed and filed for bankruptcy, and the stockholders were wiped out. The Securities and Exchange Commission, which filed a civil complaint parallel to the criminal case, called it ''one of the most extensive financial frauds ever to take place at a public company.''
John Rigas; 47-year-old Tim, who made many of the major decisions in recent years; and 50-year-old Michael adamantly deny the charges. (A third son, 46-year-old James, also worked for the company but wasn't indicted.) John and Tim Rigas, who talked at length for this article, admit to mistakes but not to any criminal scheme. The hockey money, the margin payments, the jet expense and the rest wasn't looted, they say; it was borrowed. What's more, they argue that the bank loans were sanctioned by accountants, lawyers, outside directors and even regulators and that, had the family's former allies not turned against them, Adelphia would not have collapsed and their collateral would still be good.
Though that may be a stretch, it is undeniable that a lot of people in official capacities were in a position to prevent, or force the disclosure of, the curious coupling of family and company credit before it got out of hand. For one, Adelphia's independent directors approved the ''co-borrowing'' loans. Adelphia's outside auditor, Deloitte & Touche, did urge Adelphia to disclose them but acquiesced when Adelphia resisted. Adelphia's longtime securities counsel, the distinguished Pittsburgh firm Buchanan Ingersoll, knew about the co-borrowings as well. Finally, investment banks floated billions of dollars of securities to the public with detailed descriptions of Adelphia's finances that somehow neglected to mention the extra $3 billion of indebtedness. Even the S.E.C. was aware that Adelphia and the Rigas family each let the other borrow on its own credit, an unusual arrangement that, by its very nature, was vulnerable to abuse. But the S.E.C. apparently never investigated it.
Later, when the loans were disclosed and the stock began to fall, each of the above parties affected aggrieved shock. It is not surprising: the scandal has spawned dozens of civil lawsuits, and no one is eager to admit any responsibility. That's the downside of a country run by lawyers. And now that the stock market is back in the pink, a collective amnesia has settled over Wall Street, which takes comfort from the notion that the system essentially worked. The only problem is, it didn't.
The mere fact that outsiders knew about the co-borrowings may not get the Rigases off the hook, of course. The indictment charges them with numerous instances of securities fraud, including making false disclosures, inflating Adelphia's results, concocting phony deals with vendors to bolster appearances and manufacturing evidence. Half a dozen former employees are cooperating with the government, and Adelphia's former vice president for finance has pleaded guilty. Nonetheless, the larger truth is that plenty of people were in a position to have blown a whistle and didn't, for the simple reason that Wall Street during the 90's operated like a grander version of Coudersport, a place where big fish had license to do as they pleased. ''The failed gatekeeper is a lesson you take away from all of these cases,'' says Steve Thel, a Fordham University law professor who specializes in security fraud. ''Auditors who didn't want to lose a client, bankers who were doing a ton of deals -- there was a sense in our society that people who have a lot of money are supposed to have it.''
Coudersport is a six-hour drive from Manhattan, though you can fly to Buffalo and cut the drive to only two and a half hours. There are four motels in town, two stoplights and a newsstand that sells the Buffalo paper. As a lawyer who has had to travel frequently to Coudersport noted, ''The food is awful.''
The Rigases' presence here is conspicuous. Start along North Main Street with the movie theater, a prewar, vaguely Art Deco structure that John owns; two fronts down lies the elementary school where his kids got straight A's and that was later converted to Adelphia's headquarters. A bit farther sits the company's new corporate palace with its gaudy Italianate marble columns. Leaving town, you come across a welter of family properties in the shape of curved, stylized barns, as if belonging to a giant child's toy set, each sporting fresh coats of paint and identical split-rail fences. The family's main residence is graced by a pond and a weatherproof ''condo'' where swans stay warm in winter; down the road there is an unattached kitchen for John's chef, a building for Doris's antique furniture collection, a home used for parties, a storage barn for surplus automobiles, a barnlike home that has been given over to the family's lawyers and a working farm where John produces maple syrup, honey, Christmas trees and corn.
The Rigases dominated the town's finances; in fact, of Coudersport borough's $564,000 in tax receipts, they and Adelphia contributed close to 40 percent. Their presence in this perpetually depressed region was also felt in other ways, like the hockey tickets they distributed to school kids and the concerts they staged by out-of-town orchestras. When Gary Francis lost his linen service to a fire, a Rigas assistant drove by at 6 the next morning and offered to help. For the next seven months, Francis ran his business rent-free from a building owned by Adelphia. People in Coudersport didn't much know whether it was Adelphia or Rigas who was footing the bill for such charity, and they didn't care.
People bought Adelphia stock with a similar mind-set -- because it was ''Mr. Rigas's company.'' Some were upset when the scandal broke, but a few months later, when U.S. Postal Service inspectors handcuffed the Rigases at dawn in their New York apartment and paraded them in front of waiting TV cameras, the home folk rallied. Many people still see John Rigas as a town pillar. Incredibly, even those who have lost money on the stock show no sign of rancor toward him, though their feelings about Tim, who ran the financial side of the company, are not always so charitable.
Charles Updegraff Jr., the beefy president of the local Citizens Trust, a century-old bank, said he assumed that John simply could not have behaved as badly as the indictment makes it appear. ''People are concerned about John,'' the banker said. As a kid, Updegraff played baseball for John and worked for him at the movie theater. Then, when he was 28, John, a bank director, tapped Updegraff to be Citizen Trust's president. So Updegraff is hardly impartial. But around here, no one is impartial. Donald Gilliland, managing editor of The Potter Leader-Enterprise, who has written perceptively about the case, admitted, ''It's hard not to like John.''
I met Rigas, accompanied by his public relations consultant, in the family's two-story legal barn overlooking a hillside where some Rigas sheep were grazing. Rigas was friendly and talkative on two favorite subjects, Will Rogers and baseball. But he seemed confused on various aspects of his case -- for instance, when he noted defensively that he didn't own a private jet. (It's his personal use of the corporate jet that has been deemed improper.) He also insisted that he aims to recapture control of his company, despite the fact that his stock is worthless. The overriding impression is of a man still dazed by his fall. ''It's pretty frightening,'' he told me through tears. ''I am thankful my parents aren't here to witness this.''
Rigas was born above his father's restaurant in nearby Wellsville, N.Y. After serving in the infantry in World War II and then earning a degree at Rensselaer Polytechnic Institute courtesy of the G.I. Bill of Rights, he moved across the state border to Coudersport, at 28, to buy the movie theater. The price was $70,000, which he borrowed from his father -- the first of many business deals for which he would overpay and go into hock.
It was his friendship with a movie distributor named Sam Milberg that got Rigas thinking about cable. Milberg, a salesman for RKO Pictures, was likewise a child of immigrants, and the movie business was, for each of these men, a laboratory in becoming fully American. Milberg began to warn of the threat to movies posed by television. Hill towns like Coudersport did not get reception, but sooner or later, Milberg said, somebody was going to wire the town for cable.
Anyone could climb a hill and build an antenna, but to run a wire across city streets, you needed a license from the city. Operators in remote towns in Pennsylvania, Oregon and Arkansas began to offer rudimentary cable service in the late 1940's and early 50's. Some of the industry's first ''moguls'' were just TV-set dealers who figured that cable would drive demand. In Coudersport, a hardware dealer had gotten the license because he figured cable would be good for hardware sales, where the real money was. But he didn't act on it. So Milberg started bugging Rigas to see about buying the franchise. Rigas finally did, in 1952, for $300. He had to borrow that too.
With some local movers and shakers as partners, Rigas wired Coudersport. He started with two channels, both of them snowy. A few years later, Adelphia, as he dubbed the company (the name means ''brothers'' in Greek), began to acquire more cable systems and, with every one, went deeper into debt. The rub with expanding a cable business was that you had to invest upfront and then recoup your capital from advertisers and subscribers only later. By the time a system broke even, the operator was usually investing in a new system, or in an upgrade of the old one. ''It's a hard business for a small-town banker to understand,'' Updegraff said. ''Normally you borrow money and repay it. In cable the debt just grows.''
Not that there wasn't plenty of upside. In what other industry could you get a government monopoly to provide a service to which people became hopelessly addicted, using a product you could pull out of the air free? The model evolved over the years, as networks like ESPN began to charge operators for their programs, but cable companies raised their rates accordingly. In 1975, when HBO transmitted a Muhammad Ali-Joe Frazier fight via satellite, cable took off. Instead of a handful of snowy pictures, systems could begin to offer dozens of clear ones. Operators who had picked up franchises in the early years for the equivalent of $100 a customer became fabulously rich as the price per subscriber vaulted into the thousands. As Leonard Tow, a septuagenarian mogul who sold his cable concern to Adelphia in 1999, put it, ''A moron can make money in the cable-television business.''
But the persistent need for fresh capital put Rigas in an uncomfortable spot. His competitors were raising money on Wall Street, but Rigas felt strongly about keeping the company under family control. Had his sons not entered the business, Rigas would have kept the company small, he told me. ''I had no plans of being large or wealthy,'' Rigas said. ''The first time a banker called on me, I was shocked.'' The boys all went off to elite colleges and, in two cases, top law schools, but the transition to life outside Coudersport was hard. Michael had to be talked into going to Harvard. Tim, who went to the University of Pennsylvania, was uncomfortable in the big city. He made a point of telling me that the family had to move from one rented home to the next when the boys were young, which seems to have reinforced their need for roots.
James married a pediatrician, started a family and established something of a separate life. Tim and Michael remained weirdly attached to the homestead, where, in fact, they still reside with their parents. The shorthand in Coudersport is that Michael, who took charge of Adelphia's operations, is deferential and humble, like his father, though something of a recluse. Tim, who is more socially adept, even charming, takes after Doris, a competitive woman who would berate her husband for being a soft touch. Tim quickly became the finance guy. Tiny Adelphia had trouble getting municipalities to award it franchises over better-known companies, but Tim could persuade the banks to lend Adelphia money so it could purchase systems. The company paid high prices but generally made its purchases pay off. ''We were good operators,'' Tim said proudly.
In 1986, Tim and James persuaded their dad to take Adelphia public. Like other cable families, the Rigases created two classes of stock -- one with supervoting rights to ensure their control. However, the Rigases kept a few of their cable properties separate, in a private partnership, because some partners were reluctant to sell. And then the Rigases continued to buy properties for the family, privately, as well as for Adelphia. ''I wasn't exposed to all that high finance,'' John said, ''but I was always inclined to keep control.''
When I asked the purpose of such parallel operations, he said he figured that if something ever went wrong with Adelphia, he would always be able to count on the private businesses -- as if going public had been some newfangled experiment he hadn't quite bought into. Psychologically, he didn't make the transition to being public. Tellingly, the family paid real-estate taxes for Adelphia and for themselves with a single check.
In some ways, John's old-style management was endearing. The Rigases were liberal with employee medical benefits and tight with executive bonuses. They generally ignored Wall Street, and like the small-town operators they were, they kept cable prices lower than others.
John, however, was in over his head. By the early 90's, he was telling associates that he wasn't fit to run his own company. The line between public and private was hopelessly blurred as the two wings of the House of Rigas traded cash payments, real estate and personnel too. The Rigases would pay Adelphia for managing their properties, then turn around and insist that the company buy its furniture from Doris, who ran an upscale shop known as Eleni Interiors. The blurriest part of all was Adelphia's board, which supposedly represented the public: a majority of the directors were family members. All this fuzziness didn't seem to bother the increasingly imperious Tim, but it greatly bothered James. He refused free flights on the corporate jet, questioned Tim's plan for the golf course and even made a point of paying his taxes separately from the others. An employee recalls that James also observed that the family's responsibility was ''to create value for the shareholders.'' (James refused to be interviewed for this article.)
The Rigases were usually able to get past such differences and arrive at a consensus; that's how John wanted it. However, when the Internet arrived in full force, James increasingly diverged from the family and was eventually made head of a fiber-optic subsidiary. It would file for bankruptcy, too, but for reasons relating to economics rather than ethics.
The Internet turned the cable world on its head. Silicon Valley types began to toss around the term ''convergence,'' by which they meant that the telephone, the cable and the computer-based information highway would become one and the same. It was a repeat of the cable industry's beginnings: forecasts of great profits to come, but in the meantime huge capital outlays. In the latter part of the 90's, cable companies essentially rewired the country for digital TV and the Internet at a cost of $75 billion. This was paid for by the public in the form of stocks and bonds. In effect, the cable industry handed investors a gigantic promissory note.
The rush on Wall Street created a parallel rush to consolidate; for many cable operators, it was acquire or be acquired. The Rigases were adamantly opposed to selling out. Adelphia wasn't just their company; it was their life. The brothers, none of whom pulled down more than $250,000 a year, were in for the long haul. They weren't about to move to Chicago or Denver and work for a conglomerate.
But the need for capital just wouldn't let up. In 1996, when Adelphia acquired an interest in some cable systems in Florida, the Rigases arranged for the first co-borrowing loan -- one that either they or Adelphia could tap. It was only $200 million, and it arguably benefited Adelphia more than the Rigases. But the enabling agreement stated openly that the family would use some of the money to purchase stock, and any director who bothered to read it would have known that. The board also might have wondered about the family's strangely cloistered style. Virtually every expenditure had to be approved in Coudersport, usually by the Rigases themselves. When a field office in Colorado needed a truck, it had to be driven from Pennsylvania clear across the Rocky Mountains.
The outside world never seemed to quite get the Rigases, which reinforced their tribal ways. For instance, when a group of big cable companies banded together to form @Home, to manage the Internet side of cable, they refused to let Adelphia become their partner. ''People said we marched to our own drummer,'' Tim said, ''but they wouldn't let us join in their parade.'' Whichever, the Rigases closed themselves off to virtually everyone outside the family. The exception was James Brown, the young, cocky vice president for finance who had no formal training in finance but who became a confidant of Tim's.
Tim Rigas and Brown were convinced that in the newly wired world, Adelphia had to grow quickly to stay independent. In 1999, they struck. Three large acquisitions in a single month put Adelphia on the map in California, Colorado, Kentucky, Virginia, Michigan and parts of New England -- 30 states in all. The company was vaulted into sixth place among cable operators, its subscriber total jumping to more than five million from a little over two million. Adelphia was suddenly big time. In Coudersport, the family started to strut. Members would boast about jetting off to Los Angeles to see the mayor. Back home, they were demanding improvements to the borough's water facilities and working with architects on plans for a glitzy new headquarters, for which Doris was supervising the choice of fabrics, carpet colors, wall colors and wood stain. Meanwhile, Adelphia's debt shot up from $3.7 billion to $9.7 billion. It's not unusual in cable for a company to borrow five or six times its cash flow; Adelphia's debt had risen to a perilous eight or nine times.
Understand that when cable people speak of ''cash flow,'' they mean the money that is earned before companies pay interest and taxes and also, significantly, before capital projects like system upgrades. The money that is truly left over -- the money that the owners can put in their pockets -- is known as ''free cash flow.'' It can take years for cable companies to earn free cash flow. Adelphia never got there; as far as investors were concerned, it was always a story about tomorrow.
Wall Street has two opinions of such a story. It hates it or it loves it. In the late 90's, Wall Street loved it. Cable values soared past the $5,000-per-subscriber barrier. In 1998, Adelphia's stock more than doubled, and by May of '99, just after the last of the deals was announced, its stock had doubled again, to $86 a share.
MOST entrepreneurs accept as a matter of course that over time, as the business grows, their ownership will become diluted. But the elder Rigas was dead set against it. Tim was, too. ''US West didn't have control, and they were snatched up by AT&T,'' he pointed out. ''We all felt strongly about this.'' Given that the Rigases controlled 20 percent of Adelphia's stock and about 60 percent of the votes, they were hardly takeover bait. But every decision relating to the stock was a test of their loyalty; when their sister, Ellen, sold a few shares, the Rigas men snubbed her, as if she had broken with the faith. And they insisted on participating if Adelphia issued more stock. The problem was, they couldn't afford to.
Their solution was bold: borrow money from banks to invest. Normally banks don't like to lend for such purposes, because their collateral can go down the drain with the stock market. So Tim Rigas and Brown, his trusty Sancho Panza, proposed that the Rigases share a line of credit with Adelphia, to reassure the banks. Tim pitched the idea to the independent directors as a replay of the earlier loan. As then, Adelphia and the Rigases would be co-liable for borrowings by either.
Why would the directors let the Rigases borrow on the shareholders' credit? What they say now is that they figured the Rigases would use the money for their cable assets, which would provide ample collateral. However, it was clear then that the Rigases intended to buy securities -- to keep hold of their company -- as well as finance their private cable properties. After all, they had done it in 1996. And according to the minutes of a special board meeting on Aug. 23, 1999, at which additional co-borrowings were authorized, the Rigases not only made plain that they intended to keep buying stock, but, indeed, the directors also encouraged them.
On Wall Street, the conditions for a capital-raising binge were ripe. The repeal of the Glass-Steagall Act, a Depression-era banking law, had paved the way for commercial banks like Citibank and Bank of America to get into the more lucrative business of underwriting. Adelphia's Brown shrewdly exploited the banks' greed. In a memo to bankers early in 2000, which cordially began, ''I hope your New Year is off to a great start,'' Brown pitched the co-borrowing idea and pointedly observed, ''All of the lead managers and co-managers of each of these credit facilities are expected to have an opportunity to play a meaningful role in . . . public security offerings.''
In others words, if the banks lent the Rigases/Adelphia money, then Adelphia would spill some gravy onto their investment-banking divisions. When the bankers saw that, their mouths watered. This was exactly the sort of conflict that Glass-Steagall had been intended to prevent. The banks went for it. From 1999 to 2001, three banking syndicates, led by Bank of America, Bank of Montreal and Wachovia Bank, allowed the Rigases/Adelphia to borrow a total of $5.6 billion, a staggering sum. Citigroup, J.P. Morgan, Deutsche Bank and scores of other banks participated.
Adelphia, meanwhile, was true to its word. From 1998 to 2002, it went to Wall Street more than a dozen times to issue stock, bonds, notes, convertibles -- every flavor in Wall Street's pantry. It raised something like $10 billion, while shelling out $233 million in fees. And syndicate banks like Bank of America were rewarded with lucrative underwriting assignments for their investment-banking affiliates.
<to be continued> |
