Internal Corruption Forces Adelphia Communications to Declare Bankruptcy Summary

  • Last updated on November 11, 2022

At the time of its collapse, Adelphia Communications Corporation was one of the largest cable providers in the United States. In June of 2002, the company declared bankruptcy as a result of the multibillion-dollar defrauding of its own executives. John Rigas, Adelphia founder, and his son, Timothy Rigas, were convicted on charges of conspiracy, bank fraud, and securities violations and were sentenced to prison terms of fifteen and twenty years respectively. The bankruptcy was one of the largest in the history of the United States.

Summary of Event

One of the largest cable providers in the United States at the time of its collapse, Adelphia Communications Corporations filed for Chapter 11 bankruptcy protection on June 25, 2002, in the United States bankruptcy court in New York. The declaration of bankruptcy was a result of the mismanagement of the company by its owner and executives, primarily John Rigas and his sons Timothy, Michael, and James. It was alleged that they had hidden more than $2 billion from creditors and Adelphia stockholders for their own use. [kw]Adelphia Communications to Declare Bankruptcy, Internal Corruption Forces (June 25, 2002) Rigas, John Rigas, Timothy Rigas, Michael Rigas, James Adelphia Communications Bank fraud;and Adelphia Communications[Adelphia Communications] Rigas, John Rigas, Timothy Rigas, Michael Rigas, James Adelphia Communications Bank fraud;and Adelphia Communications[Adelphia Communications] [g]United States;June 25, 2002: Internal Corruption Forces Adelphia Communications to Declare Bankruptcy[03190] [c]Law and the courts;June 25, 2002: Internal Corruption Forces Adelphia Communications to Declare Bankruptcy[03190] [c]Corruption;June 25, 2002: Internal Corruption Forces Adelphia Communications to Declare Bankruptcy[03190] [c]Banking and finance;June 25, 2002: Internal Corruption Forces Adelphia Communications to Declare Bankruptcy[03190] [c]Communications and media;June 25, 2002: Internal Corruption Forces Adelphia Communications to Declare Bankruptcy[03190] Mulcahey, Michael

Adelphia came from modest origins. Its founder, John Rigas, and his brother Gus, were sons of Greek immigrants. The brothers began buying cable systems during the 1950’s in the small Pennsylvania town of Coudersport. They named their company Adelphia, a word derived from the Greek for “brothers.” During the 1980’s, John Rigas bought his brother’s interest in the company. By 2002, Adelphia operated cable systems in more than thirty states, notably in Pennsylvania, Ohio, Florida, and California, and had more than five million cable subscribers. Adelphia was a family-owned and family-operated company, with Rigas and his three sons holding executive positions. John Rigas, an inductee of the Cable Television Hall of Fame, was actively involved in the community and appeared to value family, charity, morals, and a solid work ethic, as evidenced by the exclusion of Pornography;and Adelphia Communications[Adelphia Communications] pornography channels on Adelphia’s cable systems. The Rigas family also owned a professional hockey team: the Buffalo Sabres.

Over a three-year period from January, 1999, through May, 2002, members of the Rigas family used $2.3 billion in Adelphia funds for their own personal expenditures. For example, it was reported that company money was used to pay family debt, to buy cable systems for the family’s privately owned cable company, to finance the construction of a golf course, to buy Adelphia stock, and to purchase luxuries such as an airplane, automobiles, and real estate. The Rigases used $150 million from Adelphia to buy their hockey team. To conceal the money “borrowed” from Adelphia, family members falsified financial statements and inflated profits and the number of Adelphia cable subscribers. The Rigas family made it appear that Adelphia was in better financial health than it was in truth. The fraud was not discovered until March 27, 2002, when a financial analyst from Merrill Lynch, Oren Cohen, noticed a footnote on the final page of a press release that reported the company’s quarterly earnings. The footnote indicated that Adelphia was responsible for the loan of $2.3 billion to the Rigas family.

After declaring bankruptcy, Adelphia lost its sponsorship of the Coliseum in Nashville, Tennessee. The corporate name was stripped from the stadium in August, 2003.

(AP/Wide World Photos)

In May, after the corruption came to light, John Rigas, followed soon thereafter by his sons, resigned from the company. The Rigases were arrested in July, along with two other Adelphia executives, arrested for the same offenses: James Brown, former vice president of finance, and Michael Mulcahey, who was in charge of internal reporting. In a plea bargaining arrangement, Brown pleaded guilty and later testified against the Rigases at their trial in federal court.

While awaiting their trial, the Rigas defendants were each freed on $10 million bail. All four defendants were tried together in a single trial. John Rigas disavowed any wrongdoing. On July 8, 2004, after almost five months in court, John and Timothy Rigas (James was not charged in the criminal case) were convicted on charges of conspiracy, securities fraud, and bank fraud. They were acquitted by the jury on charges of wire fraud. Mulcahey was acquitted on all charges. The jury was unable to reach a verdict on the culpability of Michael Rigas. After pleading guilty for his role in concealing debt by falsifying an entry in the company’s record, Michael Rigas later received a sentence of home confinement for ten months and probation for two years.

In July, 2005, John Rigas was sentenced to fifteen years in prison and Timothy Rigas was sentenced to twenty years in prison. The judge gave the elder Rigas a lighter sentence because of his ailing health. The octogenarian was suffering from bladder cancer and had cardiac problems. John and Michael Rigas, who appealed their convictions, were free on bail during the years their appeals were reviewed. All but one count of their convictions was upheld on appeal. After exhausting their appeals, John and Michael Rigas reported to federal prison in August, 2007. The two requested a resentencing hearing in May, 2008.

In addition to criminal penalties, the family forfeited more than $1 billion in assets to their former company. A substantial portion of the funds, more than $700 million, was used to reimburse investors who lost money when the company declared bankruptcy. Most creditors and investors were able to recoup their losses. In addition to criminal charges, the Rigas family also faced a racketeering lawsuit filed by Adelphia, a civil suit brought by the U.S. Securities and Exchange Commission, and further criminal allegations of Tax evasion;Adelphia Communications tax evasion.

Adelphia’s headquarters was relocated from Coudersport to Denver, Colorado. In 2007, the company was sold to Time Warner and Comcast for almost $18 billion and a percentage of Time Warner shares.

Impact

The Adelphia corruption scandal was one in a long line of similar scandals of corporate greed and unscrupulous business practices. Other white-collar scandals of the early twenty-first century include those involving Enron, WorldCom, Tyco International, subprime Mortgage industry mortgage lenders, and to a lesser extent, Martha Stewart.

Adelphia’s bankruptcy proved to be one of the largest in American history. Investors lost more than $60 billion when the company imploded. John and Michael Rigas received comparatively severe punishments for their offenses, likely because of the immense scale of their corruption and because of their adamant denials of any wrongdoing. Also a likely factor was the growing public awareness of and intolerance for white-collar crime, a view best reflected in the sanctions that have been handed down by judges and juries.

The Adelphia case underscores the complexity and depth of white-collar crime. It is possible that the Rigases’ crimes remained undetected for so long because family members held several key executive roles, which limited outside scrutiny of their business practices. It was only through the close reading of an Adelphia press release that the criminality of the Rigases was discovered. In addition, this case was multifaceted, involving criminal law, civil law, and violations of business regulations and ethics. Rigas, John Rigas, Timothy Rigas, Michael Rigas, James Adelphia Communications Bank fraud;and Adelphia Communications[Adelphia Communications]

Further Reading
  • citation-type="booksimple"

    xlink:type="simple">Brancato, Carolyn Kay, and Christian A. Plath. Corporate Governance Best Practices: A Blueprint for the Post-Enron Era. New York: Conference Board, 2003. A study that examines corporate leadership, ethics, and responsibility at a time of increased public awareness of corporate fraud and mismanagement.
  • citation-type="booksimple"

    xlink:type="simple">Cauley, Leslie. “Rigas Tells His Side of the Adelphia Story.” USA Today, August 6, 2006. Serving time in a federal prison, John Rigas offers his version of the events that led to his conviction and subsequent incarceration.
  • citation-type="booksimple"

    xlink:type="simple">Coenen, Tracy. Essentials of Corporate Fraud. Hoboken, N.J.: John Wiley & Sons, 2008. An introductory guide to the white-collar crime of corporate fraud, written by a forensic, or investigative, accountant.
  • citation-type="booksimple"

    xlink:type="simple">“Judge Approves Plan by Adelphia to Pay Creditors.” Los Angeles Times, January 4, 2007. Provides details regarding the sale of Adelphia and the plan to reimburse investors and creditors.
  • citation-type="booksimple"

    xlink:type="simple">Leonard, Devin, Ann Harrington, and Doris Burke. “The Adelphia Story: The Sixth-Largest Cable Company Might as Well Have Been Called John Rigas & Sons.” Fortune, August 12, 2002. Magazine article that provides a detailed history of the Rigas family and discussion of their criminal mismanagement of Adelphia.
  • citation-type="booksimple"

    xlink:type="simple">MacDonald, Scott B., and Jane E. Hughes. Separating Fools from Their Money: A History of American Financial Scandals. New Brunswick, N.J.: Rutgers University Press, 2007. This book provides readers with a detailed history of American financial scandals. Limited discussion of the Adelphia scandal, but still useful for its analysis of corporate fraud in general.

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