Leading the News: Five Adelphia Officials Arrested on Fraud Charges ---
Three in the Rigas Family, Two Other Executives Held, Accused of Massive
Looting
By Jerry Markon and Robert Frank

07/25/2002
The Wall Street Journal
A3
(Copyright (c) 2002, Dow Jones & Company, Inc.)

Three members of the Rigas family that founded Adelphia Communications
Corp., and two other company executives, were arrested early yesterday
morning and charged with looting the nation's sixth-largest cable-television
company "on a massive scale."

In a related move, Adelphia itself was accused of fraud in a similar
complaint filed by the Securities and Exchange Commission.

The charges marked the latest effort by the federal government to crack down
on corporate malfeasance as public confidence and the financial markets have
been battered by seemingly relentless disclosures of financial shenanigans.

"This government will investigate, will arrest and will prosecute corporate
executives who break the law, and the Justice Department took action today,"
President Bush told reporters. "Today was a day of action and of
accomplishment."

Prosecutors are looking "very closely" at whether to file criminal charges
against Adelphia itself, but are weighing the possible impact that would
have on consumers, according to a person familiar with the matter. The
investigation, led by U.S. Attorney James Comey in Manhattan, is continuing
and other Rigas family members and company executives could face charges,
this person said.

Federal prosecutors chose to arrest and handcuff 78-year-old John J. Rigas,
Adelphia's founder and former chairman and chief executive, and two of his
sons at a company-owned apartment on New York's Upper East Side, rather than
seek indictments that would allow them a more dignified surrender. Their
doorman announced the arrival of federal postal inspectors, and the Rigas
family members came downstairs wearing sport coats, their palms upraised in
front of them. The same dramatic flourish was used in the insider-trading
arrest last month of Samuel Waksal, former CEO of ImClone Systems Inc.

Mr. Rigas's lawyer, Peter Fleming, criticized the tactic, saying the Rigas
family members had volunteered to surrender. "I think it's pretty tough to
arrest a 78-year-old man at 6 a.m.," Mr. Fleming said. As for the charges
themselves, Mr. Fleming said only, "a jury is going to decide who is right
and who is wrong." Each of the Rigas family members was released on a $10
million personal recognizance bond.

Adelphia said in a statement that it supports the arrests and "believes that
these actions will help Adelphia recover the assets improperly taken from
the company by the Rigas family." But the company said it was "disappointed"
that the federal government is also seeking damages from Adelphia itself.
"This action will only have the effect of further penalizing the company's
stakeholders who were the victims of the Rigas' improper conduct."

Adelphia also filed suit yesterday seeking more than $1 billion against the
entire Rigas family, including John's wife, Doris, and his daughter Ellen
and son-in-law, Peter Venetis. The suit accuses the family of a violation of
the Racketeer Influenced and Corrupt Organizations Act, breaching its
fiduciary duties, wasting corporate assets, abusing control, breaching its
contracts and other violations.

The criminal complaint, filed in federal court in New York, offers the
clearest view yet of one of the biggest cases of alleged insider dealing
ever. Long one of the cable world's most-fabled families, the Rigases
engaged in a mass coverup that included fictitious receipts, falsified
financial reports and lavish personal spending at the expense of
shareholders, according to the 68-page complaint that charges them with
securities fraud, wire fraud and bank fraud.

In addition to Mr. Rigas, the complaint names his sons, Timothy J. Rigas,
the former chief financial officer, and Michael J. Rigas, the firm's former
operations vice president. They had all resigned from the company in May. A
lawyer for Timothy Rigas, Jeremy H. Temkin, said, "We intend to defend the
charges vigorously." A lawyer for Michael Rigas didn't return calls seeking
comment.

Also charged in the complaint were James R. Brown, former vice president of
finance; and Michael C. Mulcahey, director of internal reporting, who has
been suspended. Messrs. Brown and Mulcahey were arrested in Pennsylvania.
Steven M. Cohen, an attorney for Mr. Mulcahey, called it "absurd" that his
client would be lumped with the Rigases in the government's complaint. He
noted that Mr. Mulcahey wasn't a board member and only recently had become
an Adelphia officer. Mr. Mulcahey didn't "benefit one dime" from the alleged
fraud, he said.

The Rigases used company jets for private jaunts -- including an African
safari -- borrowed billions of dollars for their closely held companies and
used $252 million of company funds to meet margin calls on their private
stock, the complaint alleged. After John J. Rigas racked up a personal debt
of more than $66 million by early 2001, he was withdrawing so much money
from the company for personal use that his son Timothy had to limit him to
$1 million a month -- which he duly withdrew for 12 months, even as public
filings listed his annual compensation at less than $1.9 million, the
complaint said.

The Rigases also spent $12.8 million of company funds to start construction
of a golf course.

"The thing that makes this case stand out is the scope and magnitude of the
looting of the company on the part of the Rigas family," said Wayne Carlin,
regional director of the SEC's northeast regional office in New York. "In
terms of the brazenness and the sheer amount of dollars yanked out of this
public company and yanked out of the pockets of investors, it's really quite
stunning. It's even stunning to someone like me who is in the business of
unraveling these kinds of schemes."

The scandal came to light in March, when the Rigases disclosed that Adelphia
was responsible for more than $2 billion in loans to family-owned entities.
Outside board members took control in May and formed a special committee to
investigate. The SEC launched a formal probe 31/2 months ago and two grand
juries -- one in New York and one in Pennsylvania -- also began
investigating. The Coudersport, Pa., company filed for bankruptcy-court
protection in June.

The scandal stemmed from Adelphia's mountains of debt. Anxious to keep up
with increasingly large competitors such as Comcast Corp. and AT&T Corp.,
Adelphia went on an acquisition binge after 1999 that doubled its size to
more than five million subscribers and increased its debt load to $12.6
billion from $3.5 billion.

As investors and ratings agencies demanded the company reduce its debt, the
Rigases embarked on a series of escalating financial frauds to conceal the
borrowings and inflate earnings -- even as the family withdrew increasingly
vast sums for personal use, according to the complaint. Between 1999 and the
end of 2001, the amount of debt that was omitted from Adelphia's public
statements ballooned to $1.8 billion from $250 million, the complaint said.

In 2001 and 2002, the Rigases told public shareholders they were buying
company stock to help ease the debt pressures. What they didn't disclose,
the complaint said, was that the money -- more than $400 million -- was
borrowed from Adelphia. To give the appearance that the family used private
funds for the stock, Timothy Rigas and Mr. Mulcahey directed Adelphia
employees to create false receipts showing payment by the family for the
stock, according to the complaint.

The company also falsified its financial results, authorities said in the
complaint. In October 2000, Timothy Rigas discovered that Adelphia's
earnings before interest, taxes depreciation and amortization were below
their public forecasts and instructed Adelphia employees to create
fictitious transactions to boost Adelphia's revenue, according to the
complaint.

The complaint also alleges that the Rigases used the company's three
corporate jets for personal use that was neither approved by the company's
board nor paid for by the family. In one case listed in the complaint, in
August of 2000, Timothy Rigas and his friends used an Adelphia jet to fly to
Africa for a safari. Timothy Rigas prevented Adelphia employees from keeping
records of family's air travel and the company's board never approved family
used of the planes, the complaint said. The company also paid for two
apartments in Manhattan -- one used rent-free by John's daughter and
son-in-law, according to the complaint. (The son-in-law was a member of the
board at the time).

When the company's stock started to plunge in April after Adelphia disclosed
more than $2 billion in loans to family entities, the Rigases received
margin calls on their Adelphia stock. In public statements, the Rigas family
said they had had adequate funds to pay the margin calls to their three
lenders -- Bank of America Corp., Deutsche Bank AG, Goldman Sachs Group Inc.
and Citigroup Inc.'s Salomon Smith Barney unit.

Yet according to the complaint, the Rigases wired $252 million from the
company's cash-management system to satisfy the margin calls. A margin call
is a demand from lenders for cash or collateral.

In the separate SEC case, each of the defendants in the criminal case are
also named, along with a third brother, James P. Rigas. His attorney did not
return calls seeking comment. The SEC is seeking disgorgement of potentially
hundreds of millions of dollars, including all compensation the Rigases
received during the fraud and civil penalties, along with injunctions
barring the defendants from serving as officers or directors of a public
company.

---

Nicholas Kulish contributed to this article.

---

Journal Link: See a video report of Deputy Attorney General Larry Thompson
and the SEC's Stephen Cutler outlining charges against Adelphia executives
at WSJ.com/JournalLinks.

--- Tangled Up

Criminal charges are filed against five former Adelphia executives.

The Defendants
-- John J. Rigas: Former Chairman, President and CEO
-- Timothy J. Rigas: former Executive Vice President,
CFO, Chief Accounting Officer and Treasurer
-- Michael J. Rigas: Former Executive Vice President for
Operations
-- James R. Brown: Former Vice President of Finance
-- Michael C. Mulcahey: Former Director of Internal
Reporting

The Charges
-- Count 1: Conspiracy to commit securities fraud, wire
fraud and bank fraud
-- Count 2: Securities fraud
-- Counts 3 to 7: Wire fraud
-- Counts 8 and 9: Bank fraud
---
Adelphia: A Cable Dynasty Unravelss

1952: John J. Rigas, operating a small theater in Couder-sport in rural
northern Pennsylvania, buys a cable franchise on a friend's advice, at
a time when only 60 small cable systems exist in the country. Rigas
and his brother, Gus, build the community antenna association into a
larger cable operation, buying small suburban cable operations instead
of large city franchises. They name their company "Adelphia," Greek for
"brothers."

1982: John Rigas buys out Gus Rigas' interest, and later his sons,
Michael, Timothy and James become executive vice presidents, directors
and principal stockholders.

March 27 2002: With 5.7 million subscribers in 32 states, including
West Virginia, and Puerto Rico, Adelphia discloses that the Rigas
family had borrowed $2.3 billion through various family-owned
partnerships. The debt had been kept off the company's balance sheet;
the company says it may be liable for some of the debt. Stock drops
18%.

March 28: Adelphia acknowledges that it may be liable for as much as
$500 million in debt it guaranteed for Adelphia Business Solutions
Inc. subsidiary.

April 1: Adelphia says in a Securities and Exchange Commission filing
that it needs more time to review its accounting and will not meet the
deadline for filing its annual 10-K financial statement. Stock closes
at $13.12.

April 17: Adelphia reveals that the SEC had opened a formal
investigation into its accounting practices.

May 2: Adelphia says it expects to restate 1999, 2000 and 2001
financial results to show the off-the-books debt as liabilities.

May 15: Rigas, 78 , announces he is stepping down as chairman,
president and chief executive officer. Nasdaq halts trading in
Adelphia's stock.

May 16: Adelphia announces the resignation of its chief financial
officer, Timothy J. Rigas.

May 17: Adelphia discloses that federal grand juries are probing the
company's finances.

May 23: The Rigas family relinquishes control as John Rigas and sons
Timothy, Michael and James resign as directors. The family agrees to
turn over $1 billion in assets to help cover loans, to turn over $567
million in cash flow from other cable companies the family owns and to
pledge all stock held by the family as collateral.

June 3: Adelphia's stock is dropped from Nasdaq and moved to the
over-the-counter market.

June 10: Adelphia says it will revise its subscriber count downward by
more than 47,000 to 5.76 million. The company says it dismissed
Deloitte & Touche as its accountant and is seeking a replacement.

June 25: Adelphia files for bankruptcy.

July 24: Federal authorities arrest John Rigas and sons Timothy and
Michael, accusing them of using the company as their "personal piggy
bank." Also arrested are James R. Brown, former vice president of
finance, and Michael C. Mulcahey, former director of internal
reporting. Also, the SEC brings a civil lawsuit against the company
and executives, calling the case "one of the most extensive financial
frauds ever to take place at a public company."

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