A:

John Rigas incorporated the cable company he'd grown from a $300 investment into Adelphia Communications. "Adelphia" is a Greek word meaning "brotherhood", an apt name for a company where almost all top positions were held by members of John Rigas's family. In addition to a majority of board seats, John was CEO, while his sons Timothy, Michael and James served as CFO, VP of Operations and VP of Strategic Planning, respectively.

Under the family's guidance, Adelphia grew to be the nation's sixth largest cable provider through aggressive acquisitions made entirely through debt financing. The family-managed parent company then shifted the debt back onto the books of its subsidiaries, while maintaining majority control. As a result, Adelphia's books looked better than they really were, which made it easier for the company to obtain more loans for more acquisitions. Even the company's stock structure was built to keep control in the family's hands, with the family-owned Class B shares carrying ten votes to the single votes of the Class A shares traded on the Nasdaq.

As Baron Acton put it, "Power tends to corrupt and absolute power corrupts absolutely." The situation was no different for the Rigas family. An ominous footnote in Adelphia's financials revealed that the company was on the hook for various debts racked up by the Rigas family that were not listed in the financials. In the post-Enron environment, off-balance-sheet liabilities received more scrutiny from investors and analysts. Bullied into clarifying, Adelphia reported that the family had taken out $2.3 billion in off-sheet loans - a staggering figure for a company already heavily indebted.

Upon further scrutiny, the company's financials fell apart. In addition to the loans, many of the company's purchases - from office furniture to car leases - were made from businesses owned by Riga's family members. Many of these purchases struck shareholders as overpriced, meaning the Rigas family had been milking wealth out of its own company for personal gain. This self-dealing was compacted by the fact that the company inflated the number of cable subscribers, essentially making the modest operating income a lie. Earnings had to be restated three years back and the controversy forced John Rigas to step down as CEO. The Nasdaq delisted Adelphia and the firm ran out of cash trying to meet its debt obligations, while still covering operating expenses.

Adelphia was allowed to refinance under a Chapter 11 arrangement called debtor in possession (DIP), but the SEC filed formal charges against John Rigas and the other family members involved in the scandal. A high percentage of corporate ownership usually is a good thing because it means the executives also have their skins in the game. In Adelphia, however, we have an example of corporate ownership almost ruining the company. In the eyes of the shareholders, Adelphia's brotherhood turned out to be one of thieves, rather than a founding family with their business's best interests at heart.

(For more on this topic, read An Overview of Corporate Bankruptcy and Pages from the Bad CEO Playbook.)

This question was answered by Andrew Beattie.

RELATED FAQS
  1. What is a family Limited Liability Company (LLC)?

    Learn about family limited liability (LLC) companies and why they are useful tools in the United States to protect family ... Read Answer >>
  2. What are some high profile cases of companies who failed to be socially responsible?

    Learn about corporate social responsibility. Explore how Enron's lack of corporate responsibility ultimately destroyed the ... Read Answer >>
Related Articles
  1. Insights

    Financial Villains: Where Are They Now?

    We check in with these news-making fraudsters to see whether they cleaned up their acts after a decade or more.
  2. Small Business

    Has Nepotism Ever Worked?

    It may very well be that hiring a relative is the right course of action for you. But before you do, carefully consider how hiring family could hurt your business.
  3. Insights

    Top 25 Richest American Families

    Find out who America's wealthiest clans are. Number 3 may give you a stomach ache.
  4. Managing Wealth

    The Most Important Component of True Family Wealth

    The most important component in family wealth comes from people, and it has to be nurtured.
  5. Personal Finance

    Run Your Family Finances Like a Business

    By using the techniques employed by thriving corporations, your family can be more successful.
  6. Personal Finance

    Family Philanthropy: Developing a Cohesive Strategy

    Devising a cohesive family philanthropy strategy requires proper goal alignment, planning, management, procedural rules and constant evaluation.
  7. Retirement

    Keep the Family Business Alive With a Succession Plan

    Having a succession plan ready is the key to a family business surviving the next generation.
  8. Managing Wealth

    Establishing Rules for Family Wealth

    To maintain family wealth it is important to establish rules that everyone agrees on.
  9. Managing Wealth

    Top 3 Trends Affecting Private Wealth Management

    Don't miss out on high-net-worth clients because you aren't prepared for their service demands.
  10. Managing Wealth

    The Four Components of True Family Wealth

    There is more to building family wealth than financial capital.
RELATED TERMS
  1. Family Offices

    Family offices are private wealth management advisory firms that ...
  2. Income Splitting

    A tax reduction strategy employed by families living in areas ...
  3. Securities Fraud

    A type of serious white-collar crime in which a person or company, ...
  4. Badwill

    The negative effect felt by a company when shareholders and the ...
  5. Friends and Family Shares

    A company's stock that is offered to preferred individuals, prior ...
  6. Family Of Funds

    A group of mutual funds offered by one investment or fund company. ...
Hot Definitions
  1. Current Assets

    A balance sheet account that represents the value of all assets that can reasonably expected to be converted into cash within ...
  2. Tax Liability

    The total amount of tax that an entity is legally obligated to pay to an authority as the result of the occurrence of a taxable ...
  3. Preferred Stock

    A class of ownership in a corporation that has a higher claim on its assets and earnings than common stock. Preferred shares ...
  4. Net Profit Margin

    Net Margin is the ratio of net profits to revenues for a company or business segment - typically expressed as a percentage ...
  5. Gross Margin

    A company's total sales revenue minus its cost of goods sold, divided by the total sales revenue, expressed as a percentage. ...
  6. Current Ratio

    The current ratio is a liquidity ratio measuring a company's ability to pay short-term and long-term obligations, also known ...
Trading Center