The Father and Son Who Paid for Stock With Their Company's Own Debt

Coudersport, Pennsylvania

0:01This is Coudersport, Pennsylvania.

0:01A footnote, on the last page of a press release. In it, Adelphia Communications, headquartered here, disclosed approximately two point two billion dollars in liabilities not previously reported on its balance sheet.

0:14It was the twenty seventh of March, two thousand two. That day, its stock fell by about twenty five percent, to twenty dollars thirty nine.

0:23The company's founder, its chairman and chief executive, was John Rigas.

0:30His son Timothy was the chief financial officer.

0:30The company announced its results for two thousand one, and the footnote was there, at the recommendation of its accounting firm, Deloitte and Touche.

0:42The footnote described borrowing. Bank loans that Adelphia had taken out together with private companies the Rigas family owned.

0:46At trial, the government did not claim that the borrowing, in itself, was a crime.

0:50The fraudulent conduct, the appeals court later said, was the failure to properly disclose.

1:01By the time the stock was delisted, the appeals court records, a share was worth one dollar and sixteen cents.

1:05In June, the company filed for bankruptcy, in the court's words wiping out all shareholder value.

1:16A month after the bankruptcy, John Rigas was arrested. So was Timothy.

1:16In two thousand four, a jury convicted them both.

1:25Behind the footnote was a family whose private companies borrowed billions of dollars together with its public one. And a ledger whose entries moved that debt from one set of books to another.

1:32It began with a movie theater.

Act One: The Theater

1:49Coudersport is a small town about twenty miles south of the New York state line.

1:49In the early nineteen fifties, John Rigas, the son of Greek immigrants, borrowed money from his family to buy a movie theater there.

2:02In nineteen fifty two, he bought the rights to wire the town for cable television.

2:08The company grew out of that town, and stayed there.

2:08By the time John Rigas's son Timothy joined the business in the mid nineteen eighties, the privately owned company had hundreds of thousands of cable subscribers.

2:22In nineteen eighty six, John Rigas took Adelphia public.

2:22It issued two classes of stock. Class A carried one vote a share. Class B carried ten.

2:27The Rigas family owned almost all of the Class B shares.

2:37That gave the family control of the company, and many of its top positions.

2:41John Rigas was president, chairman of the board and chief executive. Timothy was a director, executive vice president and chief financial officer.

2:46Other members of the family sat on the board too, and together they held a majority of its seven seats.

2:57And one more seat. According to the Securities and Exchange Commission's later complaint, from December nineteen ninety two to June two thousand one, Timothy Rigas was also chairman of the board's audit committee.

3:10The company that grew from one theater became one of the largest cable television providers in the country.

3:14By the SEC's count in two thousand two, it was the sixth largest in the United States, with cable television and local telephone service in twenty nine states and Puerto Rico.

3:22Its headquarters were still in Coudersport.

3:29The family wanted to keep control, the appeals court wrote, in part because of the loans.

3:33Adelphia's loan agreements provided that if the Rigas family lost voting control, that would itself be a default.

3:42So every time Adelphia sold stock to the public, the family had to buy stock at the same time.

3:46And each of those purchases had to be paid for.

Act Two: The Credit Lines

4:00Adelphia's business, in the court's words, was cash flow negative.

4:06It did not take in enough from subscribers' fees to pay for its capital spending, its interest and its operations.

4:09It was spending one and a half to two billion dollars a year rebuilding its cable systems, to carry more bandwidth and two way communication. The company called it the Rebuild Plan.

4:18And it was buying other cable companies. Between nineteen ninety eight and two thousand two, it paid about five point two billion dollars in cash for them, and issued more than seventy two million new shares. That was the Acquisition Plan. The idea was that a bigger company would cost less to run.

4:39The money came from selling new stock to the public, four point nine billion dollars of it. From selling notes and convertible bonds, another four point four billion. And from banks.

4:52By September two thousand one, Adelphia's disclosed bank borrowings stood at five point four billion dollars. That was more than six times what they had been in March nineteen ninety eight.

5:04Banks, and the holders of Adelphia's stock and bonds, watched its leverage climb.

5:04In August two thousand one, Moody's Investors Service called it one of the most highly leveraged companies in the cable sector.

5:18Each bank loan, the court explains, went to a group of Adelphia subsidiaries, which pledged their assets as collateral. That group was called a borrowing group.

5:29In nineteen ninety nine, Timothy Rigas proposed something different to the Adelphia board.

5:32A co-borrowing arrangement. Adelphia subsidiaries would borrow together with the cable companies the family still owned privately.

5:41Those private companies were managed by Adelphia. The court calls them the Rigas Managed Entities.

5:46That Adelphia managed them was disclosed in its public filings. What it charged them in fees, what they paid it, and the fact that their cash was commingled with Adelphia's, were not.

5:59Timothy Rigas argued the arrangement would lower borrowing costs, and stop the family's companies and Adelphia's from competing with each other for bank financing.

6:10Adelphia entered into three co-borrowing agreements. Together they totalled about five and a half billion dollars.

6:18Under each one, the family's companies and Adelphia's subsidiaries were jointly and severally liable.

6:23Jointly and severally liable means each borrower is liable for all of it. Whatever the family's companies drew down, Adelphia's subsidiaries owed too.

6:32Adelphia's accounting firm, Deloitte and Touche, reviewed and approved the way Adelphia disclosed and accounted for the co-borrowed debt.

6:45At trial, the judge made one thing clear to the jury. The government did not contend that there was anything inherently wrong or unlawful with a cash management system, with co-borrowing, or with commingling.

6:59The trouble was the family's stock.

Act Three: Fresh Money

7:11Every time Adelphia sold new shares to the public, the family bought new Class B shares alongside.

7:19Timothy Rigas, the appeals court recounts, persuaded the board to sell the family those shares.

7:24The family's purchases, he argued, were its public vote of confidence in Adelphia.

7:28In addition to selling shares to the public, they were buying new shares. They were investing, in his words, fresh money of their own into the company.

7:39The purchase agreements required that on the closing date, the family deliver the purchase price in immediately available funds.

7:43Adelphia's public filings and press releases suggested to investors and analysts that the family had paid cash.

7:53During the period at issue, the family bought one point six billion dollars in new shares.

8:01In the government's case, as the appeals court summarises it, the family did not have enough cash to provide the fresh money it had promised.

8:10What it did instead came in two forms.

8:10For the earlier purchases, on the government's case, John and Timothy Rigas borrowed the money, paid it to Adelphia, and then caused Adelphia to use that same cash to pay off other family debts.

8:26The cash went in. Then it went back out.

8:30For the later purchases, instead of paying cash, they caused Adelphia to move debt that Adelphia owed under the co-borrowing agreements off its own books, and onto the books of one of the family's companies.

8:43The family company took on the debt. And that, on the ledger, counted as payment for the shares.

8:47Moving debt from Adelphia's financial statements to a family company's was called reclassification.

8:51In its own analysis, the appeals court wrote that they reclassified the debt, rather than paying for the shares in immediately available funds.

9:03On the government's evidence, these moves were recorded only in general ledger journal entries.

9:07Neither Adelphia nor the family companies, on that evidence, ever signed formal agreements to assume the debt.

9:16And here the co-borrowing mattered.

9:16The debt had moved off Adelphia's books. But under the co-borrowing agreements, Adelphia was still jointly and severally liable for every dollar of it.

9:25If the family's companies could not pay, Adelphia would still owe the full amount.

9:34At trial, the government explained it with a credit card.

9:34A brother and a sister share a credit card with a ten thousand dollar limit.

9:38The brother takes a five thousand dollar cash advance on it, and uses the money to buy his sister's car. He does not tell her where the money came from.

9:50She is not, the prosecutor said, any better off for having sold her car to her brother.

9:55She is still liable to the card company for the five thousand dollars. And her own credit limit has shrunk by five thousand dollars.

10:05That is the government's analogy, from its closing argument. The appeals court set it out in its opinion, and went on.

10:10The reclassified debt, the court wrote, also reduced how much Adelphia could borrow under the co-borrowing agreements.

10:19The jury could find, the court held, that investors were misled into believing Adelphia had been infused with more cash, when in reality debt for which it remained liable had simply been moved onto the family's companies' books.

10:35To the market, the family was buying in.

10:35On the ledger, the debt had been reclassified.

Act Four: The Net Figure

10:50The family's companies also owed Adelphia money.

10:55The government alleged that Adelphia did not report what each family company owed. It reported one figure, a related party receivable, with everything owed each way netted together into a single line.

11:08James Brown was Adelphia's vice president of finance. He pleaded guilty before trial, and testified for the government.

11:16The government's case was that once that net receivable reached two hundred million dollars, Brown and Timothy Rigas discussed masking its size by moving debt from Adelphia's books to the family companies' books.

11:24The court gives an example. Adelphia might move twenty million dollars of co-borrowed bank debt onto a family company's books, then credit that company twenty million dollars for taking it on. The family company would appear to owe Adelphia twenty million dollars less.

11:43Brown testified that this gave Adelphia's shareholders no benefit. It only avoided showing a high receivable balance from the family's companies.

11:48On the government's case, after the first reclassification of over two hundred million dollars, more debt was reclassified every quarter.

11:59In total, the government argued, it came to over two point eight billion dollars of debt, from the start of two thousand onward, counting the stock purchases.

12:03At trial, a government witness who had worked through Adelphia's books walked the jury through a summary chart, Government Exhibit one oh one.

12:11He spent nearly twenty months inside Adelphia's books.

12:15His chart added up the cash the family's companies had put into Adelphia's cash management system, and set against it the payments made on their behalf.

12:23And in the last column, with the reclassifications counted as the ledger showed them, three hundred and eighty six million dollars.

12:27Without the reclassifications, he testified, it would have been around three point two billion.

12:39There was also the money itself.

12:39The evidence at trial showed, the appeals court wrote, that Adelphia ran a cash management system, and that the cash of Adelphia and of the family's companies was commingled in it.

12:53Cash transfers for the family's benefit, the court went on, needed only the approval of a member of the Rigas family, or of James Brown.

12:57No promissory notes were ever signed in Adelphia's favour. In some instances, personal expenses were falsely recorded as Adelphia's own expenses.

13:10And that evidence showed, the court wrote, that John and Timothy Rigas took over two hundred million dollars from the cash management system for personal expenses.

13:19Two hundred million dollars to pay off Rigas family margin loans.

13:19Over three million dollars to produce a film made by a member of the family.

13:24And two hundred dollars, to buy one hundred pairs of bedroom slippers for Timothy Rigas.

13:39When Adelphia and the family's companies bought certain cable systems together, the board had approved how the price would be split.

13:43The same evidence, the court wrote, showed that Timothy Rigas changed that split on his own. He shifted an extra fifty million dollars of the price from the family's companies onto Adelphia, without telling Adelphia's independent directors.

14:00Among the other evidence the jury heard, the government presented evidence that Adelphia paid more than five hundred thousand dollars for antiques in John Rigas's possession.

14:07And John Rigas's private accountant testified that from nineteen ninety five or ninety six, John Rigas submitted false invoices to Adelphia for renting his condominiums in Cancun to Adelphia's employees and guests.

14:16They were false, the accountant testified, because Adelphia was charged for guests who were not staying there. He testified that it happened five or six times a year, into two thousand two.

14:33The Securities and Exchange Commission charged more. Its complaint charged that Adelphia's money had been used to buy timber rights in Pennsylvania, luxury condominiums in Colorado, Mexico and New York City, and to build a golf course for twelve point eight million dollars.

14:45Those are the SEC's charges. The golf course and the timber are not in the appeals court's account of the evidence.

14:56Two hundred million dollars of margin loans.

14:56And a hundred pairs of slippers.

Act Five: Accounting Magic

15:13Wall Street judged cable companies by a few numbers. How many subscribers they had. How much of their network they had rebuilt. And their earnings from operations.

15:21The government's case on each, as the appeals court summarises it, went like this.

15:28First, subscribers.

15:28In two thousand, the government argued, Timothy Rigas directed that subscribers of companies in Brazil and Venezuela, in which Adelphia owned an interest, be added to Adelphia's count.

15:42Adelphia's director of investor relations testified that Timothy Rigas and others directed her to add subscribers to the earnings releases.

15:46In the third quarter of two thousand one, the government's case was that, again at Timothy Rigas's instruction, the report included sixty thousand home security subscribers. On that case, home security customers were already counted separately, so those who also took cable would, in effect, be counted twice.

16:07And the government's case was that at the end of two thousand one, after he learned that projections to analysts had fallen short, Timothy Rigas had seven thousand pending installs counted as internet subscribers. They were customers who had signed up, but whose service had not been installed, and who were not yet paying.

16:25The court sets out the result the government described.

16:25For the end of two thousand, Adelphia reported subscriber growth of one point three percent. The real figure, on the government's case, was half a percent.

16:33For the end of two thousand one, it reported growth of half a percent. On the government's case, the real figure was a loss. Minus one point two percent.

16:48Second, the rebuild. Investors followed it closely. The government's case was that at road shows, investor conferences and shareholders' meetings, Timothy Rigas overstated how much of the system had been upgraded, and that Adelphia gave the same inflated numbers to its banks.

17:06Third, earnings. Cable investors watched a measure called EBITDA: earnings before interest, taxes, depreciation and amortisation. It is operating revenue minus operating expenses. Interest does not reduce it. Nor, at first, does capital spending.

17:25James Brown testified that he told John Rigas Adelphia's real EBITDA, and how it compared with its competitors.

17:30He testified he also told him what would happen if the real number were reported. Adelphia would default on some of its public debt. Its stock could fall. Its borrowing would cost more.

17:45Brown's name for how the numbers were manipulated was accounting magic.

17:45John Rigas told Brown, by Brown's account, that Adelphia needed to get away from using it. But he never told Brown to stop.

17:58There were two parts to it, Brown testified.

17:58In the first, he would arbitrarily inflate the management fee a family company owed Adelphia, then record a matching interest expense that Adelphia owed the family company back.

18:06The family company paid nothing extra. But the fee counted towards Adelphia's EBITDA, and the interest, being interest, did not count against it. Timothy Rigas, in Brown's words, went along with it.

18:24The second part, Brown testified, went through two equipment suppliers, Motorola and Scientific Atlanta, and Timothy Rigas discussed it and then put it in place.

18:28The court gives the arithmetic. Adelphia had agreed to pay Scientific Atlanta three hundred and thirty nine dollars for each cable converter box.

18:37The two companies then agreed the price would go up thirty one dollars a box, and Scientific Atlanta would pay Adelphia an identical thirty one dollars a box, for marketing support.

18:50The extra thirty one dollars paid out was booked as capital spending, which does not reduce EBITDA. The thirty one dollars coming back was booked as revenue, which raises it.

19:02The money went round in a circle. Brown's term for these was wash transactions: no net economic effect on the company at all.

19:12Across both suppliers, by Brown's evidence, the wash transactions raised Adelphia's EBITDA by eighty seven point one million dollars.

19:16According to Brown, Timothy Rigas told him to book nearly twenty million dollars in advertising revenue before the two suppliers had even agreed to the arrangement. Adelphia never provided any advertising services to either of them.

19:34The same earnings number mattered to the banks.

19:34The co-borrowing agreements set a leverage ratio, debt divided by annual operating cash flow, and tied the interest rate to it. The higher the ratio, the more interest.

19:43The government's argument to the jury was that the manipulated earnings were used to fool the banks about the real ratio. The lower the ratio, the less interest Adelphia paid.

19:51The government put in several pages of typed and handwritten notes on one of the three facilities.

19:55A page dated the first of October, two thousand one, gave the leverage ratio as five point oh one.

20:03The ratio reported to the banks for that period was four point nine eight.

20:11Above five point oh, the term loan carried a higher interest rate.

20:17In March two thousand two, the company announced its results for the year.

20:23Its accounting firm had recommended a footnote.

Act Six: The Footnote

20:35This is what the footnote said, as the appeals court quotes it.

20:35Certain subsidiaries of the company were co-borrowers with companies owned by the Rigas family and managed by the company, for up to five point six three billion dollars.

20:46Each co-borrower was liable for all borrowings, and could borrow up to the full amount.

20:50What the family's companies borrowed was not on the company's balance sheet.

20:57And then two sentences.

20:57The company expects the Managed Entities to repay their borrowings in the ordinary course. The company does not expect that it will need to repay the amounts borrowed by the Managed Entities.

21:11The balance, as of the end of two thousand one, was put at approximately two billion, two hundred and eighty four million dollars.

21:20The market answered the same day.

21:24In May, according to the SEC's complaint, a special committee of Adelphia's board asked John and Timothy Rigas to resign. John Rigas resigned as chairman and chief executive on the fifteenth of May. Timothy resigned the next day.

21:39That spring the stock left the exchange, and in June the company filed for bankruptcy. The records differ on the exact dates.

21:49A month later, John Rigas, his son Timothy and others were arrested and charged, in the appeals court's word, with looting the company.

21:58On the twenty fourth of July, the Securities and Exchange Commission sued. It called the case one of the most extensive financial frauds ever to take place at a public company.

22:06It charged three things. That billions of dollars in liabilities had been excluded from Adelphia's financial statements by hiding them in off balance sheet affiliates. That operating statistics had been falsified and earnings inflated to meet Wall Street's expectations. And that the family's self-dealing had been concealed.

22:22Those were its charges, not findings.

22:29In September, John and Timothy Rigas were indicted.

22:29Three others were charged with them.

22:34One was Michael Rigas, another of John's sons. One was Michael Mulcahey, Adelphia's assistant treasurer. And one was James Brown.

22:39Brown pleaded guilty before trial, and became a government witness.

22:49The trial was held in Manhattan federal court, before Judge Leonard B. Sand.

22:49The jury heard twenty witnesses, and saw hundreds of exhibits.

22:59The jury found John and Timothy Rigas guilty of conspiracy, securities fraud and bank fraud.

23:04It acquitted them of wire fraud.

23:09It acquitted Michael Mulcahey of all charges.

23:09It acquitted Michael Rigas of conspiracy and wire fraud, and could not decide the rest. He later pleaded guilty to a single count: making a false entry in the company's books.

23:24The probation office's reports added level upon level to the sentencing calculation. A loss of more than one hundred million dollars. More than fifty victims. Sophisticated means. Abuse of public trust. Leading a criminal activity of five or more people.

23:37The reports recommended ten years for John Rigas, and twenty for Timothy.

23:42The guidelines themselves, as the probation office calculated them, and the judge accepted, pointed to life in prison.

23:47Judge Sand imposed sentences well below that.

23:52John Rigas, fifteen years.

23:52Timothy Rigas, twenty.

Act Seven: Count Twenty-Three

24:09They appealed.

24:09On the twenty fourth of May, two thousand seven, the Court of Appeals for the Second Circuit ruled.

24:16It affirmed their convictions on every count but one.

24:16On one facility, the government's notes gave the leverage ratio as five point oh one, where the banks were told four point nine eight. The appeals court held that the evidence on that facility was enough for a jury to find the misstatement material.

24:32Count twenty three was bank fraud, charged on another of the three co-borrowing facilities. The government's evidence included a borrowing notice from October two thousand one, asking for a revolving loan of over four hundred and twenty three million dollars, and certifying that the representations in the loan documents were true and correct in all material respects.

24:54On that count, the court found, the evidence of manipulation appeared to come down to Brown's conclusory opinion. It could not support a finding that any misstatement was material.

25:02It reversed count twenty three, and ordered a judgment of acquittal.

25:09On the rest, the court rejected the defence arguments.

25:09The defence had argued the jury needed an accounting expert on generally accepted accounting principles. The court disagreed. Those principles, it said, neither establish nor shield guilt in a securities fraud case.

25:23Even if the defendants had complied with them, the court held, a jury could have found, as this jury did, that they intentionally misled investors.

25:36In July two thousand seven, the defence moved for a new trial. It argued that James Brown, the government's witness, had later given contradictory testimony in a civil case.

25:45In November, the trial court denied the motion. Brown, it found, had not committed perjury. And even if he had, it would not have changed the outcome of the trial.

25:57On the third of March, two thousand eight, the Supreme Court declined to hear the case.

26:01That June, with count twenty three gone, Judge Sand resentenced them, by written opinion. He called a reduction of three years a minimal adjustment.

26:05John Rigas, twelve years. Timothy Rigas, seventeen.

26:15The reversal, the judge wrote, in no meaningful way altered the seriousness of defendants' crimes, nor the suffering which their conduct inflicted on so many people.

26:26They appealed the new sentences as unreasonable. Their sentences for white collar crimes, they argued, were only slightly shorter than those of some terrorists.

26:34They argued that they had merely overseen employees who committed fraud, and were not themselves criminally responsible. The appeals court found no error in the trial court's rejection of that.

26:42They challenged the loss figure. The court answered by quoting its own earlier opinion. The over two hundred million dollars. The margin loans. And the one hundred pairs of bedroom slippers.

26:56They also argued that the loss should be reduced by seven hundred and fifteen million dollars, the value of family assets pledged as collateral. The court said that collateral was pledged only to the banks. It could not compensate shareholders for their substantial losses.

27:13In October two thousand nine, the Second Circuit affirmed. The sentences, it held, did not shock the conscience.

27:22In October two thousand ten, the Supreme Court again declined to hear the case.

27:29The money had been settled years before.

27:29In April two thousand five, under an agreement with the government and the SEC, members of the Rigas family agreed to forfeit more than one point five billion dollars in assets, including the family's interests in cable systems. The Justice Department put it at more than ninety five percent of the family's assets.

27:46Adelphia would take the cable systems, and pay into a fund for victims.

27:50The family members agreed to permanent injunctions under the securities laws, and to orders barring them from serving as officers or directors of a public company.

28:01In April two thousand twelve, the Justice Department announced the distribution: more than seven hundred and twenty eight million dollars. It called it the largest single distribution of forfeited assets to victims in its history.

28:10The fund was run by a former chairman of the Securities and Exchange Commission, appointed as special master. There had been more than thirteen thousand petitions. About eight thousand five hundred were granted.

28:27The company's common shareholders, according to the Justice Department's two thousand twelve release, lost the value of their shares, and could not recover it in the bankruptcy.

28:38The Bureau of Prisons records John Rigas's release from its facility at Canaan, in Pennsylvania.

28:43On the nineteenth of February, two thousand sixteen, a federal judge reduced his sentence to the time he had already served. He left federal custody three days later.

28:54A petition to set the convictions aside, filed in two thousand eleven, was dismissed in May two thousand twenty. The court allowed an appeal. Its outcome is not in the records this film draws on.

29:08Trade reports say John Rigas died in two thousand twenty one, in Coudersport. One says he maintained his innocence until the day he died.

29:19Timothy Rigas has been released. The Bureau of Prisons and press reports disagree about when.

29:27At trial, the government did not contend that borrowing together with the family's companies was, in itself, wrong.

29:31What it argued was that the ledger entries moving that debt were meant to mislead.

29:40The debt came to light in a footnote, on the last page of a press release.