In its complaint, the Commission charges that Adelphia, at the direction of the individual defendants: (1) fraudulently excluded billions of dollars in liabilities from its consolidated financial statements by hiding them on the books of off-balance sheet affiliates; (2) falsified operations statistics and inflated earnings to meet Wall Street's expectations; and (3) 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. Also today, the United States Attorney's Office for the Southern District of New York filed related criminal charges against several of the same defendants.
In its lawsuit, filed in federal court in Manhattan, the Commission alleges that the defendants violated the antifraud, periodic reporting, record keeping, and internal controls provisions of the federal securities laws. Adelphia is the sixth largest cable television provider in the United States and, through various subsidiaries, provides cable television and local telephone service to customers in 32 states and Puerto Rico.
The Commission seeks a judgment ordering the defendants to account for and disgorge all ill-gotten gains, including all compensation received by the individual defendants during the fraud, all property unlawfully taken from Adelphia by the individual defendants through undisclosed related-party transactions, and any severance payments related to the individual defendants' resignations from the company. The Commission also seeks civil penalties from each defendant, and permanent injunctions against violating the securities laws. The Commission further seeks an order barring each of the individual defendants from acting as an officer or director of a public company.
"This case presents a deeply troubling picture of greed and deception at a large, publicly-held company," said SEC Director of Enforcement Stephen M. Cutler. "The Commission and the criminal authorities have responded to this egregious conduct with swift, strong and coordinated enforcement action and prosecutions." The Director of the SEC's Northeast Regional Office Wayne M. Carlin said: "In this case, Adelphia not only failed early on to cooperate with the Commission's investigation, but actually allowed the fraud to continue until the Rigas family lost control over the company's conduct. The Commission's request for civil penalties against Adelphia - an unusual step against a public company - is all the more appropriate in light of that fact."
Specifically, the Commission's complaint alleges as follows:
- Between mid-1999 and the end of 2001, John J. Rigas, Timothy J. Rigas, Michael J. Rigas, James P. Rigas, and James R. Brown, with the assistance of Michael C. Mulcahey, 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. Failure to record this debt violated GAAP requirements and laid the foundation for a series of misrepresentations about those liabilities by Adelphia and the defendants, including the creation of: (1) sham transactions backed by fictitious documents to give the false appearance that Adelphia had actually repaid debts when, in truth, it had simply shifted them to unconsolidated Rigas-controlled entities, and (2) misleading financial statements by giving the false impression through the use of footnotes that liabilities listed in the Company's financials included all outstanding bank debt.
- Timothy J. Rigas, Michael J. Rigas, and James R. Brown made repeated misstatements in press releases, earnings reports, and Commission filings about Adelphia's performance in the cable industry, by inflating: (1) Adelphia's basic cable subscriber numbers; (2) the extent of Adelphia's cable plant "rebuild" or upgrade; and (3) Adelphia's earnings, including its net income and quarterly EBITDA. Each of these represent key "metrics" by which Wall Street evaluates cable companies.
- Since at least 1998, Adelphia, through the Rigas Family and Brown, made fraudulent misrepresentations and omissions of material fact 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 Rigas 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 Rigas Family.
The Commission alleges that the defendants continued their fraud even after Adelphia acknowledged, on March 27, 2002, 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. When Adelphia failed to file its 2001 Form 10-K through the Spring, the price of Adelphia's stock collapsed from a closing price of $20.39 per share on March 26, 2002 to a closing price of $.79 on June 3, 2002, when the NASDAQ delisted the stock. Adelphia filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code on June 25, 2002. The Commission's investigation is continuing. The Commission acknowledges the assistance and cooperation by the U.S. Attorney's Office for the Southern District of New York and the U.S. Postal Inspection Service in this matter.
