Infectious Greed: Restoring Confidence in Americas Companies

Some of these examples are suspicious, and they are disappointing to shareholders, but other instances are just plain criminal. One of the biggest examples of corporate grand theft may be the plunder of the TV cable company Adelphia Communications Corp.

Adelphia

John Rigas and his brother Gus founded Adelphia in 1952 ( adelphia is the Greek word for brothers). John bought out Gus in 1982, and by the mid-1980s, John Rigas was running the firm with his three sons, Michael, Tim, and James. The firm had some trouble competing with larger competitors in the cable market, like Comcast and AT&T, in the late 1990s. So Adelphia embarked in an ambitious acquisition program that effectively doubled the company by 2001. The larger Adelphia had reached 5 million customers, but it paid a high price to get there. The firm had gone from a debt of $3.5 billion to $12.6 billion. The interest payments on the loans quickly started to deplete Adelphia's cash. Credit-rating agencies and analysts pushed Adelphia to reduce this crushing debt load.

It now appears that the Rigas family was stealing from the firm and hiding even more debt. All the while, they were claiming to be helping the firm clean up its financial status. On Wednesday, July 24, 2002, company founder and former CEO John Rigas and two of his sons ”former CFO Tim Rigas and former director of internal reporting Michael Rigas ”were arrested for perpetrating massive financial fraud and looting the firm. ^[15] Investigations by the U.S. Justice Department, the SEC, and U.S. Postal Inspectors claim that the Rigas family was involved in rampant self-dealing in using the public company's money and assets. They are also accused of falsifying transactions and accounting reports to hide their misdeeds and the true financial condition of the firm.

The SEC accused the Rigas family of falsifying the public accounting records in many ways. For example, even though Adelphia significantly increased its debt in acquiring smaller, local cable firms, it really had even more debt that was hidden. The family had borrowed $2.3 billion in personal loans in which Adelphia guaranteed . Thus, these loans were a liability for Adelphia, but they were not approved by the board or disclosed to shareholders. The information was finally disclosed in March 2002 as a footnote in the firm's accounting statement. The complaint also alleges that the Rigases would create fictitious transactions between Adelphia and private firms they owned to boost earnings of the public company in order to meet both its own profit forecasts and those of Wall Street. ^[16] Some of these phony transactions were even backdated so as to occur in the targeted fiscal quarter.

Publicly, the Rigas family was trying to calm investor concerns by explaining how they were buying stock from Adelphia so that the firm could use the cash to lower its level of debt. Privately, the $400 million used to buy stock was actually borrowed from Adelphia. This was not disclosed and would, in fact, increase Adelphia's debt, not reduce it. Tim Rigas had Adelphia create sham receipts showing payment by the family for the stock to hide the truth.

In addition to the falsified accounting and reporting, the Rigases are accused of using Adelphia as their own "personal piggy bank." In a case like this one, you expect to see abuses such as cars , jets , and vacation homes bought with company assets. These abuses appear to have occurred here, too, but the fraud went much further. For example, while Adelphia reported that John Rigas' compensation was $1.9 million per year, he withdrew much more than this. In fact, his son, Tim, had to step in and limit his father's withdrawals of cash to only $1 million per month. For the year, John Rigas transferred $12 million from Adelphia into his personal bank account. Getting access to Adelphia's cash was easy because the Rigases co-mingled the money from their other businesses with Adelphia's money into one central account. ^[17] The Rigas family also used their other businesses to extract wealth from Adelphia. For example, John Rigas owned a car dealership that leased cars to Adelphia. His wife, Doris, owned a decorating shop that sold furniture and design services to the company. Adelphia also bought hundreds of tickets every year to the Rigases' hockey team, the Buffalo Sabres. Then, there is the golf course that Tim Rigas was building on 169 acres of land owned by Adelphia. He used $13 million of Adelphia's money for building it. The course remains only partially completed ”needing another $40 million to finish it. The board did not approve the project, and it was not disclosed to shareholders.

Apparently, the Rigases also borrowed money from their brokerage firm by using their stock in Adelphia as collateral . However, as these scandals started coming to light in the spring of 2002, Adelphia's stock price plummeted. The problems forced the outsiders on the firm's board to take over the company. The Rigas family members resigned, but not before they diverted $252 million from corporate accounts to their broker to cover 65 separate margin calls associated with the falling stock price. On June 25, 2002, Adelphia was forced to file for chapter 11 bankruptcy. The very public arrest of the three Rigas family members would occur one month later.

Enron

There are many ways that the executives at Enron bilked shareholders. While we describe many specific abuses throughout this book, we focus this section on how Enron CFO Andrew Fastow and his chief lieutenant Michael Kopper used offshore partnerships to enrich themselves . Enron used these partnerships to hide billions of dollars in debt and generate phony profits. In later chapters we describe how these partnerships were created and used for accounting fraud.

Fastow and Kopper set up many of the partnerships in such a way that one or the other of them was the general partner. As executives of Enron, they would negotiate deals and transactions with the partnership on behalf of Enron's interests. They negotiated with attorneys they had also hired to represent the partnerships. Obviously, that is an extreme conflict of interest. As Enron representatives, they "gave away the farm," in that the deals were very sweet for the partnerships. The deals paid the general partners millions of dollars in fees for structuring the deals. Of course, Fastow and Kopper were the general partners . Using these schemes, they were able to siphon tens of millions of dollars of Enron's money to themselves. ^[18] Kopper pleaded guilty to money laundering and fraud charges in August 2002 and agreed to forfeit $12 million in restitution. To minimize his sentence , Kopper cooperated with federal prosecutors in their attempt to bring charges against higher-level Enron executives.

Tyco

It also appears that Dennis Kozlowski used his position as CEO of Tyco to extract wealth from its shareholders. Kozlowski's condo in New York cost Tyco $18 million in 2000 and another $11 million to furnish it. The Wall Street Journal estimated that Kozlowski enriched himself with $135 million in Tyco money that was spent on real estate, charitable donations, personal expenses, and loan forgiveness . ^[19] Just the loan forgiveness amounts to $75 million. Indeed, the tax evasion charges that we mentioned at the beginning of this chapter are for the purchase of $13 million of art that Tyco partially paid for. Investigations by the SEC, Manhattan prosecutors, and Tyco itself accuse Kozlowski of working with CFO Mark Swartz and Tyco's former general counsel Mark Belnick to loot the firm of more than $600 million. ^[20] One of Kozlowski's schemes was to take money from the company's employee loan program and then forgive the loan. He took $270 million from this program and bought himself yachts, art, jewelry , and vacation estates. He also billed Tyco for extravagant personal expenses such as a $17,100 traveling toilette box, a $445 pin cushion, and a $15,000 umbrella in the shape of a dog. Prosecutors have indicted the three former executives. Tyco is also suing Kozlowski in an attempt to recover some of the money.