Adelphia Scandal Essay

Adelphia was founded in 1952 by John Rigas and his brother Gus Rigas in Coudersport, Pennsylvania with the purchase of their first cable franchise for $300.

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After 20 years, the Rigas brothers incorporated their company under the name Adelphia which derived its name from a Greek word which means brothers, an apt corporate title for a business that would employ generations of the Rigas family.

Adelphia was a cable television company and built its success on a strong commitment to customer care; and because of this commitment, a glorious growth spree would follow.

By 1998, Adelphia passed the two million-customer milestone and served approximately 5.6 million cable television customers nationwide.

The company made significant strides in product development and the implementation of fiber optic technology and expanded their home and business offerings to include digital cable, local and long distance telephone services, messaging, enhanced data, high-speed Internet and video services .

John Rigas managed Adelphia from its corporate headquarters in Coudersport, PA. His brother Gus sold his interest in Adelphia in 1983.

And after some time, John’s sons Michael, Timothy and James, serve as executive vice presidents, directors and principal stockholders. John built Adelphia on a strong commitment to family, community, quality service and customer care which became the core values and culture of the company. The Evolution of Adelphia

In August of 1986, Adelphia Communications went public. Its first three years were focused on generating revenue by increasing its customer base through mergers and acquisitions. Although the company’s profitability had suffered as a result of the ambitious expansion, its revenue-generating capabilities had not.

From the $30 million generated in sales during its first year, annual sales shot up to $131 million in 1988. Adelphia continued to make its presence known by making several important acquisitions of other cable systems such as the Suburban Buffalo System from Comax Telcom Corp., the South Dade System from Americable Associates, Ltd.,

New Castle System from Cablentertainment, Inc., and Jones Intercable which was the third largest cable system operator in New York during that time.

Moreover, Adelphia entered into a partnership with unaffiliated parties to form Olympus Communications in southeast Florida which became a powerful money-making business as it served roughly 250,000 subscribers in West Palm Beach area.

Adelphia was performing admirably and continued to expand by making other acquisitions and consolidation maneuvers through 1999 and 2000, bringing its subscriber base up to an impressive 5.5 million.

Though the company was heavily indebted after the succession of major purchases of other cable companies, equipment, and infrastructures, analysts were looking favorably on Adelphia as late as January 2002, noting that the company was well positioned for acquisition or merger with another major cable company. The Discovery of the Fraud

Oren Cohen, a high-yield-bond analyst for Merrill Lynch had followed Adelphia for a decade and thought there was something about the family’s spending that didn’t add up. He’d noticed that the Rigases were buying their own stock aggressively, but he couldn’t figure out how they were paying for it. They didn’t appear to have the cash themselves. John Rigas made $1.4 million in 2000.

Michael, Tim, and James each took home $237,000. The Rigases didn’t have any sources of income outside Adelphia. They never sold their stock, and it didn’t pay a dividend. Cohen was pretty sure their private cable systems weren’t throwing off cash. But every time Cohen tried to get an explanation, Adelphia rebuffed him.

On March 27, 2002, however, Adelphia officials disclosed $2.3 billion in previously unrecorded debt incurred through co-borrowings between Adelphia and other Rigas family entities under the umbrella of the family’s private trust, Highland Holdings.

Under these loan agreements, the Rigas entities were responsible for repaying the debt, but if they were unable to do so, Adelphia would be liable.

Cohen was astounded to see the footnote disclosure and pressed Tim Rigas for details at the end of a conference call that day. Things in Coudersport quickly spun out of control as shareholders asked for clarity and transparency.

The revelations and the investigation that followed sent the company spiraling deeper and deeper into a scandal that the Securities and Exchange Commission (SEC) eventually called, “one of the most extensive financial frauds ever to take place at a public company” . The stock continued to fall and on May 15, 2002 John Rigas resigned as chairman and CEO.

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