Wall Street Crime And Punishment: The Rise And Fall Of Cable Television's Rigas Family

Does crime pay?

Wall Street Crime and Punishment is a weekly series by Benzinga's Phil Hall chronicling the bankers, brokers and financial ne’er-do-wells whose ambition and greed take them in the wrong direction.

On March 27, 2002, the executive team of the cable television giant Adelphia Communications Corporation hosted a quarterly earnings conference call with Wall Street analysts who were eager to seek insight on their latest financial performance. The call was not unlike any other earnings report conversation between a C-suite squad and the financial professionals tracking their highs and lows, but in the last few minutes of the call Oren Cohen, an analyst for Merrill Lynch, threw out a question that no one expected: “About that $2.3 billion in off-balance-sheet debt listed in your footnote?”

The Adelphia team hemmed and hawed and failed to offer a satisfactory explanation. When the answer was finally offered, it was catastrophic for Adelphia. Within three months, the nation's sixth-largest cable television company filed for bankruptcy while its leadership was targeted in a federal probe that ended with its chief executive officer going to prison.

How did that $2.3 billion in unrecorded debt come about? Well, it's a convoluted story that started 50 years earlier along the banks of the Allegheny River.

Changing Channels: In 1952, the brothers John and Gus Rigas were operating a small movie theater in the Coudersport, the small town that served as the county seat of Pennsylvania’s rural Potter County, when an opportunity arose to purchase a cable television franchise. Back in the day, cable television existed solely as a means of relaying programming to remote areas that were unable to pick up over-the-air television broadcasts. For the Rigas brothers, the nearest city with television stations was 110 miles away in Erie, Pennsylvania, which was too far for the Coudersport residents to receive over-the-air transmissions.

The Rigas brothers put forth the $300 needed to buy the franchise, which quickly became a more lucrative revenue stream than the movie theater, which they sold. The Rigases began to scout out other markets in rural Pennsylvania where cable television was needed to connect entertainment-starved residents with “I Love Lucy” and “The Ed Sullivan Show.”

Oddly, it wasn’t until 1972 that the Rigases decided to incorporate their operations under a single banner. They chose the name “Adelphia,” the Greek word for “brothers” and a tribute to their Hellenic heritage.

Also in 1972, cable television changed when the federal government deregulated the broadcasting industry and enabled the transmission of original programming across that medium. Pennsylvania was among the pioneering states to introduce cable television as an alternative to over-the-air broadcasting, with a start-up called Home Box Office among the first providers of new shows across this nascent media resource. The Rigases found themselves on the ground floor of an incredible opportunity.

By 1980, Adelphia had approximately 45,000 subscribers. Gus Rigas opted to leave the business and focus on the restaurant industry, while John Rigas brought his sons James, Michael and Timothy into the business.

Related Link: The complete Wall Street Crime and Punishment series on Benzinga

Boom Years: Into the 1980s, Adelphia began acquiring cable television operations across Pennsylvania and into neighboring states, expanding later into the Midwest, New England and Southeast markets. By the summer of 1986, Adelphia boasted 200,000 subscribers and Rigas’ ambitious sons successfully goaded him into taking the company public.

The 1990s brought Adelphia two greater opportunities: the federal deregulation of the telecommunications industry, which offered it a foothold in the telephone services sector, and the rise of the Internet environment, which created a new revenue stream with limitless possibilities. Adelphia was in the forefront of consolidating cable, telephone and Internet services under a single subscription package, and through the decade it went on a Pac Man-worthy spree of gobbling up smaller companies — in 1999, the company executed three separate acquisitions in a single month.

The Rigas family were also dedicated sports fans and the company funneled its funds into sports-related activities including the 1990 creation of Empire Sports Network, a regional network serving upstate New York, the 1997 purchase of the NHL’s Buffalo Sabres, the 1999 purchase rights of the Tennessee Titans’ football stadium, and the 2000 launch of the sports talk radio station WNSA-FM in Wethersfield, New York.

But Adelphia never truly adapted itself into being a typical publicly-traded company. Instead, Rigas ran it like an oversized family business by giving his family 100% ownership of class B super-voting shares and populating the nine-person board with a majority voting bloc consisting of himself, his three sons and a son-in-law.

He also resisted efforts to relocate from tiny Coudersport into a more cosmopolitan setting.

But worse than Rigas’ nepotism was his heavy dependency on using debt to expand business operations. Lenders were more than happy to offer the company financing when it was seeking companies to purchase, and this financial jollity caused the acquisition-happy Adelphia to arrive in the 21st century with nearly $13 billion in debt.

In retrospect, it is difficult to comprehend how Rigas could have been allowed to pursue this madcap approach to corporate leadership — after all, Adelphia employed lawyers and accountants who were supposed to raise the proverbial red flags when things looked sketchy, and the company was supposedly being monitored by federal regulators who were supposed to be alert to odd happenings.

Yet no one outside of the company saw any reason for concern until that fateful earnings call when the Merrill Lynch analyst noticed $2.3 billion in unrecorded debt that was tucked into the earnings report with nary an explanation.

A Family Affair: The source of that troublesome debt was incurred through co-borrowings between the company and other entities owned by the Rigases that were gathered together in a family-owned private trust called Highland Holdings. Under the terms of the loans, the Rigas entities were responsible for repaying the debt, but Adelphia assumed responsibility if the Rigases could not fulfill their obligations. Needless to say, they had a chronic habit of not being able to meet their responsibilities.

Adelphia sought to enact damage control by delaying the filing of its 2001 annual report while restating its financial results for the previous three years. But it was too little and too late when the Rigas family’s misuse of the company funds was disclosed.

The borrowing in question reeked of self-indulgence, with the Rigases using company funds to build a private golf course, acquire a fleet of private planes, pay the salaries for a chef and domestic staff, buy up timberland around their properties and purchase luxury condominiums in New York, Colorado and Mexico. Some funds were diverted to help finance a movie created by Rigas’ daughter, an aspiring filmmaker.

But much of the money in question went into the acquisition of Adelphia stock — between 1998 and 2002, the Rigas family used Adelphia funds to buy 29 million shares for $1.8 billion.

Ultimately, that proved to be the worst purchase of them all.

After the ill-fated earnings conference call, Adelphia’s stock went into a freefall from $20.39 per share to a low of 79 cents on June 3, 2002 — NASDAQ delisted the stock on that date while the company filed for bankruptcy on June 25, 2002, with $18.6 billion in debt.

The Rigas family was forced to give up their control of Adelphia with the bankruptcy filing. One month later, the U.S. Securities and Exchange Commission brought charges against Rigas, his three sons and two Adelphia executives in what the agency called the “most extensive financial frauds ever to take place at a public company.”

Besides highlighting the shenanigans with the off-balance-sheet debt and the extravagant spending affiliates, the SEC also noted how the company “falsified operations statistics and inflated earnings to meet Wall Street's expectations.” It seems that what Adelphia claimed as its cash flow and subscriber base was an exaggerated fantasy compared to the true numbers. The Rigas family was accused of causing its investors to lose $60 billion.

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Resolution Amid The Ruins: Adelphia’s bankruptcy plan was approved in February 2004, with then-CEO William Schleyer praising the effort as a reflection of “Adelphia’s management and bankruptcy teams, and our almost 15,000 employees in 30 states and Puerto Rico who are helping to make Adelphia a better company.”

But Adelphia never had the chance to become a better company. In July 2006, Adelphia sold its cable operations to Comcast Corporation CMCSA and Time Warner, now a division of AT&T T for $17.6 billion in cash and shares in Time Warner Cable, which distributed approximately $6 billion in shares to Adelphia stakeholders. Adelphia ceased to exist as Time Warner Cable inherited Adelphia’s position on NASDAQ.

Rigas and his son Timothy, who served as Adelphia’s chief financial officer, took the greatest punishment. In June 2005, they were sentenced to 15 years and 20 years in prison, respectively. After unsuccessful appeals, they were incarcerated in August 2007; Rigas’ sentence was reduced to 12 years in 2008 while his son saw his sentence reduced to 17 years.

Michael Rigas, who served as chief operating officer, was sentenced to 10 months of home confinement and two years of probation after pleading guilty to one count of making a false entry in a financial record, while his brother James was never indicted. Deloitte & Touche, the company’s accounting firm, agreed to a $50 million settlement with the SEC without admitting or denying guilt related to it recordkeeping for Adelphia.

In December 2015, Rigas’ attorneys appealed for a compassionate release by stating he was terminally ill with bladder cancer and only had one to six months to live. He was released from prison in February 2016 — as of this writing, the 96-year-old Rigas is still alive. Timothy Rigas was released in July 2019 after serving 12 years of his sentence.

The Rigas family lost nearly everything to either government forfeit or forced sales, although it was able to maintain two private cable systems serving Potter County, Pennsylvania, where the Adelphia story began. The family started over with a new company called cable television company Zito Media, and some of its profits have been used to defray the Rigas family’s legal bills.

But at no point in the scandal did any Rigas family member show a modicum of remorse over their actions.

“There was no fraud,” said Rigas in an ABC interview ahead of his reporting to prison in 2007. “It was a case of being in the wrong place at the wrong time. If this had happened a year before, there wouldn’t have been any headlines.”

And, by the way, remember that movie theater that the Rigas brothers sold to pursue the cable television business in 1952? Unlike Adelphia, the Coudersport Theatre is still operational after all of these years, with Walt Disney Co.’s DIS “Shang-Chi and the Legend of the Ten Rings” now playing on its screen.

Perhaps the Rigases would have spared themselves from a world of grief if they just stuck to showing movies?

Photo: schmilblick / Flickr Creative Commons.