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Business and Finance

Adelphia Communication Corporation

In the United States, observably, corporate fraud and scandals have pointed out the lack of fiscal accountability and ethics on Wall Street, yet only a few corporate managers have openly faced punishment for the collapse of firms as well as the economic market (Cohen, Ding, Lesage & Stolowy, 2010). In this paper, the main aim is to poke around the questions revolving around the bankruptcy of the fifth largest cable firm in the States in the late 90s, Adelphia Communications Corporation. The case of Adelphia Communications is another major recent corporate scandal, which attracted much public traction and notoriety.

Two Rigas brothers, John and Gus, incorporated Adelphia Communications Corporation in 1972 as a cable company in the Coudersport region in Pennsylvania. Later, in 1983, Gus Rigas sold his shares of the business to his brother John, which led to the reincorporation of the firm into a holding firm entailing five cable television firms. Moving on, the company went public in 1998, which led to a positive flux of its subscribership by two-fold, thereby expanding countrywide.

However, in 2001, the company suffered from the then inherently declining economy in the country and was subsequently forced to make approximately 8 percent of its workers redundant. The following year, in 2002, Adelphia Communications Corporations staked into the telecommunications industry with the hopes to revive their already declining cable business. Subsequently, the firm’s management made a decision to sell off a section of their cable subsidiaries to help in raising funds (Adelphia, 2006).

Notably, it was during this process of change and transition that the accounting practices of Adelphia Communications fell under inquiry for corporate misdeeds and fraud on the part family Rigas. This, later on, triggered a Securities Exchange Commission (SEC) investigation, which served as the corporate downfall of the firm and the Rigas family. The founder and the then current CEO of Adelphia Communications, John Rigas was indicted alongside Timothy Rigas, his son, and were both later convicted of a series of serious charges. The duo was judged for bank and securities fraud by the SEC as well as conspiracy and was as a result ordered to pay the entity some of what they had taken from the company for themselves.

These series of events triggered a complete overhaul of the board of directors at Adelphia. A special committee comprising of independent board directors replaced the former Adelphia’s board. The new board was charged with the responsibility of taking back the enterprise to the profitable and ethically run company it once was. The father and son duo was arrested for allegedly concealing the company’s debt worth $2 billion as well as stealing from the entity. An investigation into the company’s financial dealings showed that the money that the Rigas family borrowed was used to fund such expenses as putting up of a private golf course, private airlines, as well as maintaining personal staff, including a chef. Furthermore, there was an assertion that the family had overinflated subscriber count, the value of cash flows and sales figures to enhance the financial stability look of the firm (Mahony, 2005). Michael Mulcahey, the assistant treasurer at Adelphia Communications was also charged but later exonerated of all charges.

In July 2002, the Securities Exchange Commission, after a rigorous inquiry into the financial and ethical misdeeds of the Rigas family and the management of Adelphia lodged charges against the Adelphia Communications Corporation, its founder and CEO John Rigas, John’s three sons who includes Michael Rigas, James Rigas, and Timothy Rigas in addition to two senior executive administrators of the firm, Michael Mulcahey and James Brown. Among the fraud charges filed against the defendants included violation of the RICO act, abuse of management and control, intentional and backbreaking waste of corporate assets, infraction of fiduciary obligations, violation of contracts, unwarranted conversion of the corporation’s assets, and unjust enrichment, among other wrongdoings. In the aftermath, Adelphia’s stock price plumped after its delisting from the NASDAQ having failed to file its 2001 10-K. Briefly after that, the company registered a bankruptcy petition in June 2002.

In the heated litigation, John Rigas and his first son, Timothy Rigas were found guilty of the charges against them, awaiting possible sentencing more than three decades imprisonment. Michael J. Rigas, the Executive Vice President, and board member was acquitted of wire fraud and conspiracy. The company’s Finance VP, James Brown owned up his wrong deeds and pleaded guilty to the Securities Exchange Commission charges fronted against him. Subsequently, in a blatant blame game, Adelphia Communications Corporations filed a case against auditor Deloitte & Touche for breach of contract, professional negligence, and fraud among other wrongful conduct. Expectedly, the reorganization plan of Adelphia Communications from bankruptcy left the Rigas family with nothing for their holdings.

Perceptibly, the Rigas family boasted of five seats out of the nine board seats. In addition, the Rigas family had a full percentage possession and control of class B voting shares that unlimitedly presented with them an upper hand in majority voting. That is how the family was able to maintain grip and control of the board of directors. The board and the voting were thus intrinsically dysfunctional, which alone should have raised extensive red flags for institutional investors. Additionally, the family had carte blanche to rob the enterprise blind due to the absence of independent oversight. As such, whether public or private, the government and its relevant bodies, including the Securities Exchange Commission should continue imposing stringent oversight measures coupled with regular reporting and auditing of the financial statements of corporations. Inherently, corporate frauds and scandals affect shareholders directly but have innumerable indirect negative impacts on other stakeholders, including the government, society, families, and employees among others.

Works Cited

Cohen, Jeffrey et al. “Corporate Fraud And Managers’ Behavior: Evidence From The Press”. Journal Of Business Ethics, vol 95, no. S2, 2010, pp. 271-315. Springer Nature, doi:10.1007/s10551-011-0857-2.

Mahony, Phillip. IN RE ADELPHIA COMMUNICATIONS CORP. (Decided Dec. 5, 2003). New York Law School Law Review, 2003, http://www.nylslawreview.com/wp-content/uploads/sites/16/2013/11/49-3.Mahony.pdf. Accessed 19 Apr 2018.

“Adelphia Communications Corporation – Company Profile, Information, Business Description, History, Background Information On Adelphia Communications Corporation”. Referenceforbusiness.Com, 2018, http://www.referenceforbusiness.com/history2/86/Adelphia-Communications-Corporation.html. Accessed 19 Apr 2018.

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