Adelphia Communications Corp. founder John Rigas, his two sons, and two other finance executives were arrested and charged with bank fraud, securities fraud, and conspiracy yesterday. Apparently, the Rigas family and friends used the company as a “personal piggy bank,” according to Bloomberg’s account of the court papers.
Besides John Rigas, the other former executives arrested were Timothy Rigas, who served as chief financial officer, Michael Rigas, and two non-family-members–James Brown, Adelphia’s former vice president for finance, and Michael Mulcahey, former director of internal reporting.
The Securities and Exchange Commission also filed charges against the five individuals, as well as another son, James Rigas, calling Adelphia “one of the most extensive financial frauds ever to take place at a public company.”
In its complaint, the SEC charged that the executives fraudulently excluded billions of dollars in liabilities from its consolidated financial statements by hiding them on the books of off-balance-sheet affiliates, falsified operations statistics, inflated earnings to meet Wall Street’s expectations, and concealed 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.
“This case presents a deeply troubling picture of greed and deception at a large, publicly-held company,” said Stephen M. Cutler, the SEC director of enforcement, in the complaint. “The Commission and the criminal authorities have responded to this egregious conduct with swift, strong and coordinated enforcement action and prosecutions.”
These are the first executives to be charged with a corporate crime since President Bush and members of Congress have called for tougher penalties for misconduct.
In its lawsuit, filed in federal court in Manhattan, the SEC alleges that the defendants violated the antifraud, periodic reporting, record keeping, and internal-controls provisions of the federal securities laws.
The commission wants the defendants to disgorge all illegally earned gains, including all compensation, property unlawfully taken from Adelphia through undisclosed related-party transactions, and any severance payments related to the individual defendants’ resignations from the company.
The SEC also seeks civil penalties from each defendant, and permanent injunctions against violating the securities laws. In addition, the Commission is hoping to secure an order barring each of the defendants from serving as an officer or director of a public company.
The SEC’s complaint alleges that:
- Between mid-1999 and the end of 2001, the six individuals caused Adelphia to fraudulently exclude from the company’s annual and quarterly consolidated financial statements over $2.3 billion in bank debt by deliberately shifting those liabilities onto the books of Adelphia’s off-balance-sheet, unconsolidated affiliates.
- Timothy J. Rigas, Michael J. Rigas, and James R. Brown made repeated misstatements in press releases, earnings reports, and SEC filings about Adelphia’s performance in the cable industry. They did this by inflating Adelphia’s basic-cable subscriber numbers; the extent of Adelphia’s cable plant “rebuild,” or upgrade; and Adelphia’s earnings, including its net income and quarterly EBITDA.
- Since at least 1998, Adelphia, through the Rigas family and Brown, made fraudulent misrepresentations and omissions of material facts to conceal extensive self-dealing by the Rigas family. Such self-dealing included the use of Adelphia funds to finance undisclosed open-market stock purchases by the family, purchase timber rights to land in Pennsylvania, construct a golf club for $12.8 million, pay off personal margin loans and other Rigas family debts, and purchase luxury condominiums in Colorado, Mexico, and New York City for the Rigases.
The commission alleges that the defendants continued their fraud even after Adelphia acknowledged on March 27 that it had excluded several billion dollars in liabilities from its balance sheet. “The defendants allegedly covered-up their conduct and secretly diverted $174 million in Adelphia funds to pay personal margin loans of Rigas family members,” the commission charges.
Senate, House Reach Compromise
Congress is one large step closer to passing historic corporate reform bill.
Key members of the Senate and House of Representatives hammered out compromise legislation that is expected to pass and be signed by President Bush with little resistance.
The bill will require stricter oversight of auditors and stiffer criminal penalties.
“The legislation that we crafted in the conference I think goes a long way in solving some of the egregious problems that have arisen as a result of corporate misconduct and accounting scandals,” said Rep. Mike Oxley, the Ohio Republican chairing the House and Senate negotiators, according to a Reuters report. “The White House has informed me this morning that they support the conference agreement, and we are ready to go forward.”
. The bill could be on the House floor as early as Thursday.
“I congratulate the congressional conference committee for reaching agreement on comprehensive reform legislation,” said Securities and Exchange Commission chairman Harvey Pitt, in a statement. “It is deeply gratifying to see members of both parties, under the leadership of Chairman Sarbanes and Chairman Oxley, working together to reach consensus to enact reforms designed to restore integrity to the nation’s financial markets and to serve the interests of US investors.”
In general, the compromise bill includes most of the tougher measures passed by the Senate, according to Bloomberg. It bars companies from providing nine specific services for audit clients, including management consulting. Additionally, the maximum jail time for wire and mail fraud would increase to 20 years, up from the current five years and 10 years mandated in the Senate bill.
AOL: SEC Probing Accounting
Now it’s AOL Time Warner’s turn.
Executives at the world’s largest media company said that the Securities and Exchange Commission is conducting a “fact-finding” investigation into a number of transactions made at AOL before it completed its merger with Time Warner.
Richard Parsons, the company’s chief executive, reportedly assured listeners during a conference call that its auditor, Ernst & Young, approved of the accounting.
Many of the accounting questions were raised in a comprehensive, two-part article last week in the Washington Post.
The Post report questioned $270 million in “unconventional” advertising deals from 2000 to 2002, an amount that is dwarfed by the $38 billion in annual sales that the company generates.
“We are comfortable with the accounting practices and policies in place at our company. Our accounting is appropriate for the businesses in which we operate,” CFO Wayne Pace reportedly said in the conference call.
“In the current environment, I wouldn’t expect the SEC to look the other way when anyone makes any allegations—if they have merit or not,” Paul Cappuccio, the company’s general counsel, told Reuters. “We are not only fine with [the inquiry] but we think it’s what they should be doing. We have been pro-active with the SEC.”
Option Assault Intensifies
The first tech/Internet company has agreed to expense stock options.
Top executives at Amazon.com said any options granted beginning in 2003 will be charged to earnings.
This is significant, folks, since skeptics said the movement to expense options wouldn’t be meaningful until the practice is adopted by a tech company, which relies heavily on options to compensate its employees. Speaking during a conference call on Tuesday , Jeff Bezos, the company’s chairman and chief executive said that expensing stock options “opens the door to more carefully crafted equity incentives.”
Amazon, however, wasn’t the only company to make this decision this week.
On Tuesday, Freddie Mac officials said the company began recognizing employee stock options as an expense during the second quarter. Agency executives confirm that the expense was less than $4 million in the second quarter.
Quest Diagnostics executives said that company would disclose on a quarterly basis the costs associated with issuing stock options to employees. However, it would not expense the cost against earnings.
And the top brass at Sovereign Bancorp said the bank will begin expensing stock options in the third quarter.
Short Takes
- Remember Dynegy Inc., the other Texas-based energy company that wanted to buy Enron Corp. when the questionable accounting hit the fan? Well, since then its stock has crumbled amid the widening probe into round-trip trades, closing Tuesday at $1.23. On Monday, rating agency Standard and Poor’s cut Dynegy’s credit rating to junk. So, on Tuesday, Illinois Power, Dynegy’s utility company, withdrew a planned $325 million mortgage bond sale. So much for picking up Enron’s broken pieces.
- About 60 percent of human resources professionals polled by HR consultants DBM said their firms were aware of the aging U.S. work force, but 55 percent said they were not actively implementing strategies to either attract or retain older workers (defined as age 50 or more). More than 55 percent of respondents said at least 10 percent of their workforce are 50 or older. That might mean that 50 is no longer considered “older” by HR standards. Good news for all those perpetual 49 year olds.
- Computer Associates Inc. and Sam Wyly have reached a peace agreement. The billionaire corporate raider said he will drop his bid for five seats on the software giant’s board, while CA officials said the company will add one independent director, who will be nominated by Computer Associates’ corporate governance committee. The two combatants said a board vote on the nomination will probably take place by the end of the year. However, the deal also calls for CA to pay Wyly $10 million in greenmail, according to a published report, calling it a five-year stand-still agreement. But, this part of the pact is not revealed in the CA press release. Hmm.