When John Rigas was led into a Manhattan courtroom last Wednesday afternoon, the Adelphia Communications founder sat down on a chair still warm from a man arraigned just moments before: a Staten Island restaurant owner who prosecutors contend is a loan shark tied to the Mafia's Luchese family. Small-town boy Rigas has definitely hit the big time.
Earlier that day, federal agents had pounced on Rigas; his two sons, Michael and Tim; and two other ousted Adelphia executives, accusing them of orchestrating a complicated, multibillion-dollar fraud that enriched the family in big ways (using the cable operator to guarantee $3.1 billion in loans to family businesses) and small (using a company airplane to ferry guests to the wedding of only daughter Ellen Rigas Venetis.)
Panic over the Rigases' insider dealings—even isolating just the ones the Rigases have acknowledged—had wiped out the company's shareholders. What's more, Adelphia's financial excesses along with those of WorldCom and Enron, have cast doubt on the very foundations of the U.S. financial markets, a doubt that is blamed in large part for the recent stock-market plunge. That has robbed millions of widows and orphans and big institutional investors of many more billions of dollars than even the Rigases are accused of stuffing into family-controlled purses.
The tales of the Rigases' greed make them a rich target for public officials who have been blasted for letting corporate executives so dramatically abuse investors' trust. For example, prosecutors say that John Rigas was drawing so much cash out of the company that Chief Financial Officer Tim had to put him on an allowance in 2001. Father Rigas couldn't draw more than $1 million monthly for his personal use without Tim's approval.
That's why it was no surprise that federal agents weren't cutting the Rigas Three any slack last week. Their lawyers offered to have them simply show up wherever the U.S. Attorney's Office desired. Nope. The feds clearly wanted to send a message. They wanted to make white-collar crime look a lot like plain old crime.
Postal inspectors (they get wire-fraud cases) say they had been tailing the Rigases for two days and knew that they were staying in, of all places, an apartment owned by Adelphia on Manhattan's Upper East Side. (Ellen Venetis lives in the apartment and, these days, is actually paying rent to the company.)
All three had left New York Tuesday but returned when they realized they were being followed. "I suspect they saw us and contacted their lawyers," said assistant postal inspector Thomas Van de Merlen.
A doorman called up to Ellen's 23rd-floor apartment when the inspectors arrived Wednesday morning at 6 a.m. The three soon emerged—John and Michael in blue suits, Tim in a sport coat and khakis.
After being booked at the main postal facility, the Rigases were subjected to an old-fashioned New York City "perp walk," in which they were paraded, handcuffed, from cars past TV and newspaper cameramen tipped where to be for the right shots outside. Their ties, shoelaces and belts had been removed, presumably to prevent suicide. "I think it's pretty tough to arrest a 78-year-old man at 6 o'clock in the morning when he's volunteered to surrender," said John Rigas's attorney, Peter Fleming.
The government's message was as clear as the images that played over and over on TV. "This administration will hold acountable corporate executives who violate the public trust, and we will do so in a way where we can do everything possible to protect America's workers and investors," Bush spokesman Ari Fleischer said after the arrests.
John, Adelphia's former CFO Tim and former COO Michael stand accused of securities fraud, wire fraud, bank fraud and conspiracy. Two other ex-Adelphia executives, Vice President of Finance/Treasurer James Brown and Assistant Treasurer Michael Mulcahey, were arrested in their homes in Adelphia's hometown of Coudersport, Pa. No one has actually yet been indicted, although that is expected within two weeks. The Securities and Exchange Commission filed a separate civil suit against the five executives plus another Rigas son, James, and Adelphia itself.
Adelphia, in turn, sued the Rigases, plus John's wife, Doris, and several other ex-Adelphia executives seeking to freeze and capture their personal assets.
It's not clear what kind of assets the Rigases have left. Among the many ironies of the case is that the Rigases didn't simply borrow money with Adelphia's guarantee and stuff it in an offshore bank account. They used it to buy $1 billion worth of Adelphia securities. The securities are now practically worthless, and family companies have pledged most of their assets to Adelphia. The family and Adelphia are probably at least $1.5 billion in the hole.
The essence of the charges is that the Rigases used publicly traded Adelphia as a private piggybank and distorted the company's financial position in order to keep the stock price high. The Rigases have acknowledged that their private companies borrowed $2.3 billion with Adelphia guaranteeing the debt. It was disclosed that some of the loans went to finance cable-system deals. What was hidden until March is that some of the loans went to fund Rigas-family purchases of Adelphia stock and bonds, deals that investors believe were being independently financed.
According to the prosecutors, other tricks included creating a cash-management fund that co-mingled public and family money that the Rigas boys used for all sorts of financial needs (including John Rigas's $1 million monthly allowance). Assets and debts were shuffled between the public and private companies to make the Adelphia balance sheet look good for a moment. Prosecutors say Brown in particular brazenly lied to investors about how many of Adelphia's cable systems had been upgraded. They inflated basic-subscriber growth by including systems in Brazil and Venezuela.
But the criminal complaint also alleges massive insider dealing even beyond the many luxury perks common in other executive suites. Tim Rigas took an African safari vacation, allegedly on the company dime. The Rigases had Adelphia finance construction of a golf course on family land, property that they also tapped the company to help pay for by prompting the MSO to buy timber rights from the land. "The scheme charged in the complaint is one of the largest and most egregious frauds ever perpetrated on investors and creditors," said James Comey, the U.S. attorney in New York.
Brown and Mulcahey were released on their own recognizance, but the Rigases had to make complicated bail arrangements. To collateralize bail of $10 million each, the bonds had to be co-signed by three "financially responsible" individuals. Doris Rigas signed all three. The other two co-signers were their co-defendants: John and Michael signed for Tim; John and Tim signed for Michael; Tim and Michael signed for John. They pledged real estate that Adelphia alleges was bought with company money. One piece is an apartment in Beaver Creek, Colo., that's worth $2.4 million but is so heavily mortgaged that they have only $300,000 in equity in it. Another $3.3 million apartment in Hilton Head, S.C. (where Adelphia paid for Tim's $700,000 golf-club membership), has just $200,000 of equity.
Basically, their bail is structured pretty much the way the finances of the Rigas-run Adelphia were.