The Adelphia Communications Corporation scandal was one of the largest and extensive frauds discovered in a public company (Abbey, 2003). From the years 1998 to 2002, Adelphi allegedly methodically and “fraudulently” failed to disclose company liabilities in its financial reports, amounting to roughly $2.6 billion, in loans availed of by entities controlled and owned by the Rigas family — the founders and majority shareholders of Adelphia (Abbey, 2003).
Unknown to their shareholders, the Rigas family used the proceeds of the unrecorded “loans” – about $1.9 billion — to acquire Adelphia’s securities (Abbey, 2003). The securities acquisition, financed by money Adelphia/Rigas was unable to pay, disguised the firm’s real capital structure. What was generally believed to be shareholder equity was actually debt owed by Adlpha/Rigas (Abbey, 2003).
The Rigas family operated Adelphia as their own piggy bank, commingling the company’s assets with the family’s to serve their own benefit. Adelphia was able to incur unrecorded liabilities with the use of contrived credit facilities, which authorized the Rigas family to withdraw funds from company coffers, with utter disregard for the shareholders (Abbey, 2003).
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The Rigas family did not act alone, and was assisted by its accountants to conceal the debt by classifying it as securities (Abbey, 2003). The fraud didn’t end there. Adelphia’s accountants overstated the company’s equity capital, misrepresented Adelphia’s capital structure, and concealed the company’s flow and source of funds (Parrett, 2005). Because of consistent misrepresentations in its financial reports, the NASDAQ banned trading on Adelphia shares.
Adelphia Communications shareholders by concealing Adelphia’s SEC misrepresentations (Shemano, 2007). What the officers did that was criminally wrong was in misleading its shareholders by submitting false financial reports (Shemano, 2007). Moreover, there were conflicts in interest by the Rigas family’s operation of Adelphia, because they used the company as their own piggy banks (Dahlberg, 2008). Several lawsuits were filed, including breach of duties against its directors and officers, class action filings against Adelphia made by the company shareholders (Abbey, 2003).
The Rigas family members who connived in the fraud was subsequently arrested and sentenced. Adelphia filed for bankruptcy beforehand, and all the company’s top officers either stepped down or were replaced after being accused of gross negligence (Abbey, 2003). After emerging from Chapter 11 protection (bankruptcy proceedings), Time Warner and Comsat was reported aiming to close its purchase of the emerged company.
Abbey, Arthur N. (2003), Consolidated Class Action Complaint. Retrieved on July 18,2008, from< http://securities.stanford.edu/1023/ADLAC02- 01/20031222_r01c_0301529.pdf>
Parret, N., Lafollette, G. and Kahn, M. 2005. Sarbanes-Oxley Act of 2002. Retrieved on July 18, 2008, from <http://business.edgewood.edu/roberts/Sarbanes- Oxley%20Act%20for%20web.pdf
Shemano, D. and Leland, J. W. (2007). The War on Corporate Fiduciaries: Have the Fiduciaries Won? Retrieved on July 19, 2008, from <http://www.abiworld.org/committees/newsletters/busreorg/vol6num1/BusReorg3.pdf