2 Guilty in Fraud at a Cable Giant
July 9, 2004
THE OVERVIEW
By BARRY MEIER
John J. Rigas, the son of Greek immigrants who took a $300 investment and grew it over five decades into the nation's sixth-largest cable company, was convicted yesterday on charges of conspiring to loot hundreds of millions of dollars from Adelphia Communications, the company he built.
His son and heir apparent, Timothy J. Rigas, was also convicted of conspiracy and fraud by a federal jury in Manhattan.
After the verdicts were read, John Rigas, 79, a small man with a shock of white hair, sat slumped in his seat for more than 30 minutes.
Jurors said they had failed to reach a verdict on most of the charges against another of Mr. Rigas's sons, Michael J. Rigas, and they were ordered by the judge to continue deliberations today. A fourth defendant, Michael C. Mulcahey, Adelphia's former director of internal reporting, was acquitted on all counts.
The convictions are a substantial victory for the government and follow other recent successful prosecutions by federal prosecutors in Manhattan, including high-profile cases against Frank P. Quattrone, the technology investment banker, and Martha Stewart.
The Adelphia case was one of the most prominent in a wave of corporate scandals that followed the collapse of Enron in 2001. At its heart, the Adelphia case was about the apparent inability of the Rigases to draw a line between their personal interests and those of the company, which John Rigas founded in 1952 and operated as a private company until 1986. Residents of the town where Adelphia was based for years reacted with disbelief.
Indeed, it was those issues peculiar to a family-controlled business - from nepotism to the inability of a founder to give up control - that made the Adelphia case a distinctive one among big corporate scandals.
What also set Adelphia apart was the small-town world of the company and the Rigas family. Both Michael, 50, and Timothy, 47, are unmarried and live in the same house as their father and mother in Coudersport, the north central Pennsylvania town that was Adelphia's headquarters until it sought bankruptcy protection.
John Rigas and Timothy Rigas, who was Adelphia's former chief financial officer, were found guilty of one count of conspiracy, 15 counts of securities fraud and 2 counts of bank fraud. In essence, prosecutors charged that the Rigases had used $2.3 billion in Adelphia funds for their own purposes and had lied to investors and banks about the company's financial condition.
While they were acquitted on wire fraud charges, both men could face substantial prison terms. What sentences may ultimately be meted out may be affected by the recent Supreme Court decision on the federal sentencing guidelines.
A spokesman for the United States attorney's office in Manhattan said prosecutors would not comment yesterday because the jury was still deliberating.
Mark Mahoney, the lawyer for Mr. Mulcahey, said that he was pleased that his client had been acquitted. "It is of course wonderful for my client but it is bittersweet because of the convictions of the others," he said.
The jury's partial verdict was not a complete surprise, as the evidence presented against John Rigas and Timothy Rigas was far more compelling than that offered against Michael Rigas or Mr. Mulcahey. Prosecutors presented no evidence that Michael Rigas had lived lavishly.
The jurors sent a note to the judge, Leonard B. Sand, yesterday announcing that they were having difficulty reaching a verdict on certain counts. Judge Sand instructed jurors that while he would prefer a unanimous verdict on all counts, he would be willing to accept a partial verdict.
Jurors then delivered their verdicts.
Michael Rigas was acquitted of conspiracy and wire fraud charges. But jurors said they were still undecided on the securities fraud and bank fraud charges against him.
Judge Sand said he planned to give the jurors additional instructions today to try to break the deadlock.
The jury's eight days of deliberation followed a trial that was scheduled to last 12 weeks but dragged on for 18. There were many witnesses and about 1,000 exhibits. The 23 charges against the four defendants were so numerous and complex that it took the judge a day to instruct jurors about them.
The Rigases were charged with a number of crimes in effectively two areas of misconduct. One was that the Rigases had used Adelphia assets for their personal benefit, or treated the company, as prosecutors put it, like their own personal piggybank.
For instance, Timothy Rigas was accused of ferrying both the actress Peta Wilson and a golf pro, Lisa Lynn Scally, on the Adelphia jet and he also used Adelphia money to buy expensive condominiums and golf courses, according to trial testimony. Adelphia money was also used to finance a motion picture made by John Rigas's daughter.
The other area of crime involved the Rigases' misrepresentation of Adelphia's true financial condition, which was sinking fast in 2001 just as the Rigases were trying to expand the company and upgrade its cable system. To do that, former company executives testified that they and the Rigases inflated or made up a number of financial measures like cable growth and the company's earnings before interest, taxes, depreciation and amortization, or Ebitda.
At the time, Adelphia's Ebitda was increasingly falling behind both the company's own projections and the expectations of Wall Street analysts, who use the measure to compare the results of cable operators.
Adelphia "reported numbers that we basically made up," the government's main witness, James R. Brown, the former vice president for finance, said during his testimony.
Adelphia, whose cable systems are largely in the Midwest, as well as in Los Angeles and Florida, is working to emerge from bankruptcy or sell the company this summer. The company, now based outside Denver, is engaged in setting up an auction that is likely to draw interest from suitors like Time Warner and Cox Communications.
While counts of misusing corporate funds echoed those of other former chief executives accused of living high off the company, the Rigases were cut from a different cloth.
Executives like Samuel D. Waksal of ImClone and L. Dennis Kozlowski of Tyco hobnobbed with Manhattan power brokers, rock stars and fashion models, while the Rigases' sphere of influence extended only to Buffalo, where they owned the Buffalo Sabres hockey team. Instead, the center of their world was the tiny town of Coudersport, where John Rigas took the first step to build the nation's sixth-biggest provider when he purchased the local cable system in 1952 for $300.
Both he and Adelphia would stay in Coudersport for the next five decades, with Mr. Rigas acting as the town's main benefactor and Adelphia serving as one of the area's main employers.
The Rigases were also an unusually tight-knit family.
According to witnesses at the trial, Timothy J. Rigas tried unsuccessfully at various times to control his father's borrowings from Adelphia, which often reached $1 million a month. After being told by an associate that his father was misleading investors, he reportedly said, "I can't control my father."
For years, the Rigas family borrowed large amounts through Adelphia to buy either company stock or purchase cable systems that the Rigases held privately. The loans were obtained under so-called co-borrowing agreements, or bank loans that both Adelphia and businesses owned by the Rigases were jointly liable for repayment.
As a result of the Enron debacle, the Securities and Exchange Commission passed new regulations that required public companies to disclose the amount and type of off-balance sheet debt. The co-borrowing agreements fell into this category and it was the manner in which the Rigases treated the new S.E.C. regulations that led both to the end of their long reign at the cable company and their subsequent indictment.
Investors in Adelphia were long aware that these co-borrowing arrangements existed. But before 2002, they had never been informed about how much the Rigases owed - some of the trial's most vivid testimony involved the family's efforts to keep those numbers under wraps.
Much of that testimony came from Mr. Brown, the former vice president for finance at Adelphia. According to Mr. Brown, who pleaded guilty to fraud in 2002, he and Timothy Rigas concocted a variety of schemes to mislead the auditors, Deloitte & Touche, as well as banks and investors about the amount of money owned by the Rigases.
In the spring of 2002, however, the secret that the Rigases owed $2.3 billion to Adelphia could no longer be contained. Both John and Timothy Rigas tried to assure worried investors that they had the means to repay the funds but Adelphia stock quickly plummeted and the cable company filed for bankruptcy in June 2002.
Throughout the trial, lawyers for the Rigases argued that the family members had done nothing wrong and that they intended to repay Adelphia all the money they had borrowed.
Still, one lawyer jokingly referred to the family's borrowings from Adelphia as "the largest and longest-running bar tab in history."
Mr. Mulcahey was the only defendant to take the stand in his own behalf.
In his closing arguments, Mr. Mulcahey's lawyer, Mr. Mahoney, compared the government's pursuit of John Rigas to regicide, or the killing of a king, and described Timothy and Michael Rigas as fallen princes.
"When the time came for blaming, all the fingers were pointed at them and they were overthrown," Mr. Mahoney said. "It wasn't regicide. It was Rigas-cide."
After the verdicts were read yesterday, John Rigas's daughter, Ellen, leaned over to him when he finally left the courtroom and made his way past a group of reporters.
"Keep your head up," she whispered to him. "Keep your head up." |
