Question

John Rigas (founder and CEO of Adelphia Communications Corporation) was an extraordinary man. Throughout his professional career, he was honored for his entrepreneurial achievements and his humanitarian service. Among other awards, he received three honorable doctorate degrees from distinguished universities, was named Entrepreneur of the Year by Rensselaer Polytechnic Institute (his college alma mater) and was inducted into the Cable Television Hall of Fame by Broadcasting and Cable magazine. He worked hard to acquire wealth and status. But a $2.3 billion financial fraud eventually cost Rigas everything. Rigas and his company, Adelphia Communications, started out small. With $72,000 of borrowed money, he began his business career in 1950 by purchasing a movie theater in Coudersport, Pennsylvania. Two years later, he overdrew his bank account to buy the town cable franchise with $300 of his own money. Through risky debt-financing, Rigas continued to acquire assets until, in 1972, he and his brother created Adelphia Communications Corporation. The company grew quickly, eventually becoming the sixth largest cable company in the world with over 5.6 million subscribers. From its inception, Adelphia had always been a family business, owned and operated by the Rigas clan. During the 1990s, the company was run by John Rigas, his three sons, and his son-in-law. Altogether, members of the Rigas family occupied a majority five of the nine seats on Adelphia’s board of directors and held the following positions: John Rigas, CEO and chairman of the board (father); Tim Rigas, CFO and board member (son); Michael Rigas, executive vice president and board member (son); James Rigas, executive vice president and board member (son); Peter Venetis, board member (son-in-law). This family dominance in the company was maintained through stock voting manipulation. The company issued two types of stock: Class A stock, which held one vote each, and Class B stock, which held 10 votes each. When shares of stock were issued, however, the Rigas family kept all Class B shares to themselves, giving them a majority ruling when company voting occurred. With a majority presence on the board of directors and an effectual influence among voting shareholders, the Rigas family was able to control virtually every financial decision made by the company. However, exclusive power led to corruption and fraud. The family established a cash management system, an enormous account of commingled revenues from Adelphia, other Rigas entities, and loan proceeds. Although funds from this account were used throughout all the separate entities, none of their financial statements were ever consolidated. The family members began to dip into the cash management account, using these funds to finance their extravagant lifestyle and to hide their crimes. The company paid $4 million to buy personal shares of Adelphia stock for the family. It paid for Tim Rigas’s $700,000 membership at the Golf Club at Briar’s Creek in South Carolina. With company funds, the family bought three private jets, maintained several vacation homes (in Cancun, Beaver Creek, Hilton Head, and Manhattan), and began construction of a private world-class golf course. In addition, Adelphia financed, with $3 million, the production of Ellen Rigas’s (John Rigas’s daughter) movie Song Catcher. John Rigas was honored for his large charitable contributions. But these contributions also likely came from company proceeds. In the end, the family had racked up approximately $2.3 billion in fraudulent off-balance-sheet loans. The company manipulated its financial statements to conceal the amount of debt it was accumulating. False transactions and phony companies were created to inflate Adelphia’s earnings and to hide its debt. When the family fraud was eventually caught, it resulted in an SEC investigation, a Chapter 11 bankruptcy filing, and multiple indictments and heavy sentences. The perpetrators (namely, John Rigas and his sons) were charged with the following counts: Violation of the RICO Act Breach of fiduciary duties Waste of corporate assets Abuse of control Breach of contract Unjust enrichment Fraudulent conveyance Conversion of corporate assets Until he was convicted of serious fraud, everybody loved John Rigas. He was trusted and respected in the small town of Coudersport and famous for his charitable contributions and ability to make friends. He had become a role model for others to follow. With a movie theater and a $300 cable tower, he had built one of the biggest empires in the history of cable television. From small beginnings, he became a multimillion-dollar family man who stressed good American values. But his goodness only masked the real John Rigas, and in the end, it was his greed and deceit that ultimately cost him and his family everything.

Questions

1. The fraud triangle consists of perceived pressure,and rationalization. How do you think John Rigas rationalized his dishonest use of company assets?

2. What are other ways people rationalize fraudulent behavior?

3. How would owning and operating a family business create temptations and opportunities to commit fraud?

4. Based on the facts of the case, do you think this case has led to civil litigation, criminal prosecution, or both? Explain your answer.

5. Suppose you were an expert witness in this case. What would be some of the facts to which you would pay special attention?

Answer 1

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1. The fraud triangle consists of perceived pressure, perceived opportunity, and rationalization. How do you think John Rigas rationalized his dishonest use of company assets?

SOLUTION:

I think that some people, like John Rigas, are risk takers-they like to bet. John Rigas, was set on growing an empire-not just a small up-start company.

First, Rigas gave a lot of service to the community. He used his (or his company’s) money to help those in need. Rigas gave millions in charitable contributions, bought homes for those who could not afford them, and flew people on his private planes to receive medical treatment.

John Rigas was greedy, in addition to being a better. To add to John Rigas greed, and his like to play the odds, and bet, John Rigas, was also very dishonest. I think that John Rigas reasoned, that he would break even eventually.

Adelphia was a family-owned business. Rigas was its founder and nursed it as it grew to become a publicly traded communications giant. No doubt he felt that the company’s revenue was a product of his own hard work and sacrifice and that he was entitled to its use. To him and his family, their efforts deserved greater compensation.

2. What are other ways people rationalize fraudulent behaviour?

SOLUTION:

a. The organization owes it to me.”

b. “I am only borrowing the money—I will pay it back.”

c. “Nobody will get hurt.”

d. “I deserve more.”

e. “It’s for a good purpose.”

f. “We’ll fix the books as soon as we get over this financial difficulty.”

g. “My reputation is more important than my integrity

3. How would owning and operating a family business create temptations and opportunities to commit fraud?

SOLUTION:

When owning and operating, a family business, one might rationalize, that the entire company, and all of the assets, are available for use, because, the business is family owned, and not a separate, more formal business ownership relationship.

or

In family businesses there is a tendency to consider company money as a personal asset. Also, employees (family members) are so familiar with and trusting of each other that fraudulent activity can often go unsuspected.

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