Corporate Governance: Adelphia Communications fraud case - Essay Example

? Corporate Governance [Supervisor Adelphia Communications fraud case Adelphia Communications fraud case is supposed to be one of the most renowned financial frauds ever incurred to a public company. Adelphia communications was the sixth largest television cable company during the period between 1998 and March 2002. In March 2002, Adelphia communications went through a collapse due to systematic and fraudulent exclusion of billions of dollars in liabilities of the company management. The exclusion of such huge amount from the financial statements of the company was kept hidden on the books of balance sheet affiliates. During that period, earnings were inflated in order to meet Wall Street expectations. The operational statistics were falsified and self dealing was concealed by the family which founded and controlled Adelphia communications, the Rigas family. The Adelphia communications top management entirely belonged to the Rigas family and the family as a whole was involved in the widespread and multifaceted scheme to launch a financial fraud against the company’s assets and treasury (Markham 2006). The fraud was categorized into three principal components: First: The fraud began in mid 1999 to the end of 2001; over $2.3 billion were fraudulently excluded from the company’s annual and quarterly consolidated financial statements and recorded those liabilities in the books of unconsolidated affiliates. The exclusion violated the Generally Accepted Accounting Principles, but the Rigas family misled the public in filings of the commission and other financial statements. The Rigas family created sham transactions and backed them up by making fictitious documents by presenting false appearance that the company actually paid the debts (sec.gov 2002). Second: During that period, the Rigas family continued to misstate in the press releases about the company earnings and commission filings. Adelphia communication reported company’s performance crucial to the metrics formed by the Wall Street to evaluate Cable Company’s performance. The number of cable subscribers Extent of plant up gradation and renovation Earnings including net income and earnings before interests, taxes and depreciation. Third: Adelphia management continued mispresentation in the company fillings. The Rigas family misled the company financial statements so as to hide their self dealing. The defendants of the Rigas family intentionally forced the public company to pay for vacation properties and apartments in New York City which were used by the Rigas family and to build a golf course on the land mostly in ownership of the Rigas family. For their own interest, the Rigas family secretly sanctioned a huge capital from the company assets and drew two consecutive financial frauds breaching company economic policies. An amount of $ 772 million and over $ 563 million of Adelphia assets were issued just for the benefit of the Rigas family (sec.gov 2002). Even after the acknowledgement of the existence of the liabilities in the company balance sheets on March 27, 2002 the fraud continued to take place by the Rigas family. The defendants kept covering their misconduct and secretly diverted $ 174 million to personal margin loans of the Rigas family members. The company failed to maintain a stable position in the stock exchange and the price of Adelphia’s stock collapsed to $ 20.39 closing price on March 26, 2002. The situation became more severe when the closing price of Adelphia’s share collapsed to $ 0.79 per share on June 3, 2002. The company stocks were delisted from the National Association of Securities Dealers Automated Quotation System. The defendants of the Rigas family resigned from their offices and director position in mid to late May 2002 (sec.gov 2002). The Securities and Exchange Commission alleged the Adelphia communication management and filed charges against the founding member of the Adelphia Communication Corporation John J. Rigas and his sons Timothy J.Rigas, Michael J.Rigas, and James P.Rigas; and two senior executives of the company for the extensive financial fraud. The Rigas family was charged for the fraudulent exclusion of millions of dollars from the public company assets, falsifying the operational statistics of the company and the earnings of the company and indulging in the self dealing in the company benefits and interests. The case was filed in the federal court in Manhattan and the investigating commission alleged the defendants that they had been involved and hence found guilty in the violation the antifraud, reporting and keeping the company performance record and provision of internal federal security laws (sec.gov 2002). The commission ordered the defendants to account for the ill-gotten gains which they tried to achieve for their own interests. The investigation commission alleged the defendants for all compensation they got during the fraud and all property unlawfully taken by personal dealing through undisclosed related-party transactions and the severance payment related to the certain individual’s resignation from the company. Civil penalties for the individual defendants were sought by the court from each defendant and permanent injunctions for violating the company security laws. The commission further sought an order barring the defendants to serve as an officer or director of a public company. The Adelphia Company did not cooperate with the investigating commission and allowed the defendants to continue breaches to the company financial security laws. The request for civil penalties to the company and the defendants put forward by the commission hence proved to be appropriate in the light of the fact (sec.gov 2002). Before the evolution of the scandal, Adelphia subscriber base exceeded one million mark for the first time in 1996 which improved further with the late 1990’s. During that era internet traffic was exploding and the demand for bandwidth was increasing more than the dial-up connections over regular telephone networks. The increase in demand of cables stabilized the Adelphia communication standings to meet the Wall Street expectations for the cable manufacturing companies. During the era, Adelphia captured a huge market for high speed data communication which diverted the company to a newer progress pattern. The favorable business conditions enabled the Adelphia communication to make few acquisitions and expanding its business to capture the market and to increase the number of subscribers all over the world. Due to healthy business environment, the company performance was able to grip the attention of the shareholders as they were content with a high share value due to company performance in that era (Gilson 2010). List of References Gilson, S.C., 2010. Creating Value Through Corporate Reconstructring:Case Studies in Bankruptcies. New Jersy: John Wiley and Sons Inc. Markham, J.W., 2006. A Financial History of Modern US Corporate Scandals from Enron to Reform. New York: M.E Sharpe Inc. Sec.gov, 2002. SEC Charges Adelphia And Rigas Family With Massive Financial Fraud. [Online] Available at: [Accessed 22 January 2012]. sec.gov, 2002. U.S Securities And Exchange Commission. [Online] Available at: [Accessed 22 January 2012]. Read More