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 are some high-profile examples of wash trading schemes?

    In 2012, the Royal Bank of Canada (RBC) was accused of a complex wash trading scheme to profit from a Canadian tax provision, ... Read Full Answer >>
  2. What are examples of inherent risk?

    Inherent risk is the risk imposed by complex transactions that require significant estimation in assessing the impact on ... Read Full Answer >>
  3. What is the difference between wash trading and insider trading?

    Wash trading is an illegal trading activity that artificially pumps up trading volume in a stock without the stock ever changing ... Read Full Answer >>
  4. How did Enron use off-balance-sheet items to hide huge debts and toxic assets?

    Prior to its infamous accounting scandals and collapse, Enron used off-balance-sheet special purpose vehicles (SPVs) to hide ... Read Full Answer >>
  5. What impact did the Sarbanes-Oxley Act have on corporate governance in the United ...

    After a prolonged period of corporate scandals involving large public companies from 2000 to 2002, the Sarbanes-Oxley Act ... Read Full Answer >>
  6. When is a bond's coupon rate and yield to maturity the same?

    The collapse of Enron – and its subsequent fallout – is perhaps the most infamous event in modern American corporate history. ... Read Full Answer >>
Related Articles
  1. Investing Basics

    Toshiba's Accounting Scandal: How It Happened

    Learn how Toshiba's corporate culture and lax internal controls led to an accounting scandal that ended with the resignation of the company's CEO.
  2. Professionals

    Is Your Financial Advisor Looking Out for You?

    Financial advisors sometimes aren't looking out for clients' best interests. Regulators are scrutinizing their practices; investors should too.
  3. Professionals

    Are You Sure You Aren't Ponzi Scheme-Susceptible?

    Anyone can be a victim of a Ponzi scheme — even the most financially literate. Here's how to avoid the next Madoff.
  4. Professionals

    7 Cybersecurity Tips for Advisors

    The digital age has created a new breed of thief who can break into client files at any time, but there are ways to minimize risk exposure.
  5. Professionals

    Tips for Protecting Clients from Scammers

    Predators now have more access to vulnerable clients than ever before; advisors should communicate with clients to better spot potential scams.
  6. Investing News

    Why FIFA Can't Give the 2022 World Cup to Qatar

    Learn about the high price tag for the 2022 World Cup in Qatar, along with allegations of human rights abuses and bribery scandals in the bidding process.
  7. Investing Basics

    Explaining Insider Trading

    While often associated with illegal activity, insider trading actually encompasses both illegal and legal trading of securities.
  8. Economics

    Understanding Money Laundering

    The process of creating the appearance that large amounts of money obtained from serious crimes actually originated from a legitimate source.
  9. Investing

    What's an Agency Problem?

    An agency problem occurs when a conflict of interest arises for an agent -- a person acting on behalf of another person. The conflict of interest arises when the agent’s own interests are different ...
  10. Investing Basics

    The Dodd-Frank Wall Street Reform Act

    The Dodd-Frank Wall Street Reform and Consumer Protection Act, commonly called Dodd-Frank, was passed in 2010. The goal of the act is to prevent another great recession like that of 2008, which ...
RELATED TERMS
  1. Black Money

    Money earned through any illegal activity controlled by country ...
  2. Financial Action Task Force (FATF)

    An intergovernmental organization that designs and promotes policies ...
  3. Banker Trojan

    A malicious computer program designed to gain access to confidential ...
  4. Black Market

    Economic activity that takes place outside government-sanctioned ...
  5. Bear Raid

    The illegal practice of ganging up to push a stock's price lower ...
  6. Cookie Jar Accounting

    A disingenuous accounting practice in which periods of good financial ...

You May Also Like

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!