The cable industry shuddered and President Bush strutted Wednesday as Adelphia Communications founder John Rigas, and sons Timothy and Michael were arrested and dragged from their Manhattan home in handcuffs to face charges for what officials call one of the most egregious cases of fraud to hit a public company.
James Brown, Adelphia’s former VP of finance, and Michael Mulcahey, former assistant treasurer, were arrested in Pennsylvania.
Saying the five men used Adelphia as their own “personal piggy bank,” the feds contend that the men bilked the company of millions of dollars and created the illusion that Adelphia was a healthy, viable conglom when, in truth, it was not.
The former cable execs were charged with multiple counts of securities, wire and bank fraud.
At an afternoon bail hearing in federal court for the Southern District of New York, officials unsealed the criminal complaint, and bail for the Rigases was set at $10 million each, secured by several properties owned by the family. John Rigas, 77, who founded and led Adelphia; Tim Rigas, chief financial officer; and Michael Rigas, exec veep of operations, were released upon signing the necessary papers.
Government prosecutors said they wanted to make sure that the Rigases didn’t flee, hence the steep bail.
“The arrest today of five former corporate executives is a clear sign of this administration’s commitment to enforce the laws so justice can be done,” said White House spokesman Ari Fleischer, just as Capitol Hill was putting the finishing touches on sweeping legislation for corporate reform.
Meanwhile, Brown and Mulcahey appeared in federal court in Williamsport, Pa., where U.S. Magistrate William Askey released them on their own recognizance.
The ayem Adelphia raid was authorized by U.S. Deputy Attorney General Larry Thompson, who chairs Bush’s new Corporate Fraud Task Force.
Adelphia released a statement late Wednesday saying it “supports the action taken by the federal government today against its former chairman, John Rigas, two of his sons and two others, and believes that these actions will help Adelphia recover the assets improperly taken from the Company by the Rigas family.”
Working in concert on the Adelphia case are the U.S. Dept. of Justice, the Securities & Exchange Commission and the U.S. Postal Service.
In addition to the criminal filing, the SEC filed a separate civil complaint.
In reaction to the arrests, several cable execs said Washington has always hated the industry because of rising subscriber fees. They said they feel the biz has been singled out for harsh treatment, questioning why the Rigases were dragged away in handcuffs, with TV cameras on hand.
“No one at Enron ever had to do a perp walk,” said one agitated cable insider.
Prosecutors said they recommended the arrests because they believed that the defendants posed a flight risk, Thompson told reporters at a press conference at Justice Dept. headquarters in Washington.
‘Case of betrayal’
“This case presents a deeply troubling picture of greed and deception,” said SEC director of enforcement Stephen Cutler. “It’s a case of betrayal.”
Specific allegations include the following:
n Between mid-1999 and the end of 2001, the five defendants allegedly conspired to commit fraud by excluding from the company’s financial statements more than $2.3 billion in bank debt. Investigators allege the defendants deliberately shifted those debts to Adelphia’s off-balance sheet.
n Brown, and Michael and Tim Rigas repeatedly misstated Adelphia’s standing by allegedly inflating cable subscriber numbers, the extent of equipment and cable upgrades and company earnings. All are key metrics used by Wall Street to evaluate the standing of a cabler.
n Since at least 1998, the Rigases and Brown allegedly made fraudulent misrepresentations of and omitted facts to conceal self-dealing by the Rigas father and sons. The family members are alleged to have used company funds to finance undisclosed stock purchases, to construct a golf course and to purchase luxury condos in Gotham, Colorado and Mexico.
n The Rigases continued the alleged fraud even after admitting in March that they had kept certain debts off the balance sheets. Specifically, they are alleged to have secretly diverted $174 million in company funds to pay off personal margin loans.
“They stuck their hands in the till of Adelphia, and not in their own pockets,” U.S. Attorney Timothy Coleman said.
News of the arrests sent shock waves through the already suffering media and cable biz. Adelphia is the country’s sixth-largest cabler and the largest operator in Southern California.
All told, the defendants could faceup to 20 years each in prison and could be forced to pay many millions of dollars in restitution.
Driven by public outcry over reckless corporate dealings and plunging investor confidence, the feds clearly decided to set an example with the execs’ dramatic arrests. Such arrests are unusual in corporate fraud cases. Generally, suspect execs are asked to show up in court to be formally arraigned.
Tyco chairman Dennis Kozlowski and ImClone topper Sam Waksal also were arrested.
Various federal agents have been aggressively investigating Adelphia for the past four months, the DOJ’s Thompson said. That investigation is continuing, and there will be no hesitation in arresting others.
“The full force of the federal government will be brought to bear.”
National Cable & Telecommunication Assn. prexy-CEO Robert Sachs said in a statement that the charges alleged “pertain to the conduct of a few individuals in one company,” to be resolved by the judicial system.
Capitol Hill lawmakers who have oversight of the cable biz will be keeping a close eye on developments in the Adelphia case.
“We have absolutely no tolerance for crooked CEOs and while it’s now up to our criminal justice system to pass judgment, chairman Tauzin believes that the more dishonest blue suits that wind up in prison blue denims, the better off America will be,” said Ken Johnson, top aide for Rep. W.J. “Billy” Tauzin (R-La.), chair of the House Commerce Committee.
(Justin Oppelaar in New York contributed to this report.)