Aldephia Corporate Collapse

ALDEPHIA CORPORATE COLLAPSE.

Introduction

The 21st century has already experienced main reforms in the major corporate structures. These reforms were made following the major corporate collapses like Adelphia, Enron, WorldCom, Global Crossing, and so on. Among these corporate collapses Adelphia is a major collapse because according to Security Exchange Commission (SEC), it is an extensive and elaborate fraud and such has not been seen in US before (2005).

Various entities launched investigations into Adelphia's criminal and financial misconduct, which alleged a massive cover-up to hide the company's increasing, exorbitant debt and rampant personal spending of company funds.(reference.com)

Adelphia Communications Corporation named after the Greek word αδελφοί adelphoi "brothers", it was a cable television company headquartered in Coudersport, Pennsylvania (Wikipedia). Adelphia was the fifth largest cable company in the United States before filing for bankruptcy in 2002 as a result of internal corruption. Adelphia was founded in 1952 by John Rigas in the town of Coudersport (Wikipedia).

The company was highly respected until an infamous scandal ensued following claims of bankrupt in 2002, at which time its headquarters relocated to greenwood Village, Colorado. According to Jefferson (2007), after the ensuing controversial legal proceedings ended, the company’s assets were liquefied.

John Rigas purchased the cable company in 1952 for $300 in Coudersport, Pennsylvania. He purchased it to hedge against lost sales for his movie theater. In 1972, he and his brother Gus, created Adelphia Communications Corporation Board of Directors. They used majority of their Family Members as Management team, which include: John Rigas, Founder and Chairman (Father), Tim Rigas, CFO and Board member (Son) , Michael Rigas, EVP and Board member (Son), James Rigas, EVP and Board member (Son) , Peter Venetis, Board member (Son-in-law).

THE SCANDAL OF ADELPHIA

The 2002 fraud case of Adelphia Communications Corporation involves both fraudulent financial reporting and misappropriation of assets. This case involves almost exclusively the founding family of the company perpetrating the fraud. The scandal is about carefully concealed fraudulent activities involving the company and the Rigas family, the founder. There Adelphia company agreed with the Rigas family to have two members of their family as guarantors.

The fraud all started when transactions account from Adelphia communications was used for Buffalo Sabres Hockey, Family owned farm, Interior Design Shop and Private Car Dealership. They lived an extravagant life, lavishing company’s resources feverously.

Revenues from Adelphia subsidiaries and other businesses were dumped into one central account. They used this account to pay their personal bills. During this period, they equated the company’s money to be the same as their personal money. The financial affairs of Rigas Family Entities were intermingled with Adelphia, but not consolidated. (Off-the-balance sheet debt)

Furthermore, the hid all their debt incurred in unconsolidated subsidiaries. Where the company entered into co- borrowing credit facilities with various Rigas family, which they are jointly liable for the entire amount borrowed. Adelphia management kept these liabilities off the books by allocating the co borrowing loans among its unconsolidated subsidiaries.

The Rigase’s used Adelphia’s line of credit for personal purchases and they doctored financial records at Adelphia and created sham transactions and phony companies to inflate the firm's earnings and to conceal its mounting debts. Upon realizing the extent of funds taken, Tim Rigas “limited” the amount of Adelphia’s funds his father could take to $1,000,000/Month

The discovery of the fraud happened in March 2002 when Tim Rigas, the chief financial and accounting officer revealed in a conference call that the company had cosigned $2.3 billion loans that had been taken out by partnership run by Rigas family members (Nuzum, 2004). There was over $3.4 billion in debt that was hidden. The scandal fell apart and was discovered when the company filed for bankruptcy and the Rigas were expelled from the company.

Before the Riga’s was expelled from the company, it was discovered that they manipulated the books of the company to meet the analytic expectations and inflate stock price. There by misleading investors that the company exceeds their expectations for growth.

During the court proceedings, Aldephia communication corporation was charged with the following Fraud charges:

• Violation of RICO act

• Breach of fiduciary duties

• Waste of corporate assets

• Abuse of control

• Breach of contract

• Unjust enrichment

• Fraudulent conveyance

• Conversion of corporate assets.

To what extent is it suggested that Adelphia collapses were the result of defective accounting practices.

Based on the forgone summary of Adelphia scandal, it is evidence that they had a serious ethical issue. They should not use company profits for personal use and should at all-time report every financial situation, whether debt or not.

According to the fundamental principles of professional ethics, Adelphia failed in the following areas:

1. Integrity: - integrity is measured by what an individual does when no one is looking-

• The Rigas was not honest and sincere in their business activity. The hid their debts for investors in order to deceive them and make them feel that the company exceed their expectation for growth.

• Corporate reports, filings, and stakeholder communications state a different record from what the organistion