SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 17837 / November 14, 2002
Accounting Auditing Enforcement Release No. 1664 / November 14, 2002
SECURITIES AND EXCHANGE COMMISSION V. ADELPHIA COMMUNICATIONS CORPORATION, JOHN J. RIGAS, TIMOTHY J. RIGAS, MICHAEL J. RIGAS, JAMES P. RIGAS, JAMES R. BROWN, AND MICHAEL C. MULCAHEY, 02 Civ. 5776 (S.D.N.Y.) (KMW)
NEW YORK, NEW YORK The Securities and Exchange Commission announced today that defendant James R. Brown, the former vice-president for Finance at Adelphia Communications Corporation, has consented to the entry of a Partial Judgment of Permanent Injunction and Other Relief against him in SEC v. Adelphia, et al., a fraudulent financial reporting case filed by the Commission against Adelphia and six of its senior executives. According to the Commission's complaint, filed on July 24, 2002, Adelphia, at the direction of the individual defendants, including Brown: (i) fraudulently excluded billions of dollars in liabilities from its consolidated financial statements; (ii) falsified operations statistics and inflated Adelphia's earnings to meet Wall Street's expectations; and (iii) concealed rampant self-dealing by the family that founded and controlled Adelphia, the Rigas Family.
The Commission's Complaint alleges that, based on this conduct, Brown violated Section 17(a) of the Securities Act of 1933 ("Securities Act"), Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 ("Exchange Act"), and Rules 10b-5, 13b2-1, and 13b2-2 under the Exchange Act, and, pursuant to Section 20(a) of the Exchange Act, acted as a controlling person of Adelphia's violations of Sections 13(a) and 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 under the Exchange Act.
Specifically, the Commission's complaint alleges as follows:
- Between mid-1999 and the last quarter of 2001, Adelphia fraudulently excluded from the Company's annual and quarterly consolidated financial statements portions of its bank debt, while including in those financial statements a footnote disclosure implicitly misrepresenting that such portions had been included on Adelphia's balance sheet. As a result of this misconduct, Adelphia had a total of approximately $2.3 billion in undisclosed, off-balance sheet bank debt as of December 31, 2001.
- During approximately the same period, Adelphia regularly misrepresented Adelphia's reported performance in three aspects that are crucial to the "metrics" used by Wall Street to evaluate cable companies: (i) the number of its "basic cable subscribers," (ii) the extent of its cable plant "rebuild," or upgrade, and (iii) its EBITDA, or earnings before interest, taxes, depreciation, and amortization.
- Since at least 1998, Adelphia used fraudulent misrepresentations and omissions of material fact to conceal rampant self-dealing by the Rigases, including the Rigases using Adelphia funds to: pay for vacation properties and New York City apartments; develop a golf course mostly owned by the Rigases; and purchase over $772 million of Adelphia shares of common stock and over $563 million of Adelphia notes for the Rigas' own benefit.
- The orchestrators of Adelphia's misconduct were, in addition to Brown, five of Adelphia's senior officers: its Chairman and CEO, John J. Rigas; Chief Financial Officer, Timothy J. Rigas; Executive Vice Presidents, Michael J. Rigas and James P. Rigas; and Vice President and Assistant Treasurer, Michael C. Mulcahey.
Without admitting or denying the allegations in the complaint, Brown has consented to the entry against him of a permanent injunction against violations of Section 17(a) of the Securities Act , Sections 10(b) and 13(b)(5) of the Exchange Act, and Rules 10b-5, 13b2-1, and 13b2-2, and, as a control person, of Sections 13(a) and 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13, and a permanent officer and director bar. Brown has also agreed to provide the Court with an accounting. The Commission has submitted Brown's Consent to the Court for approval. The Commission's claims against Brown for disgorgement of ill-gotten gains, plus prejudgment interest, and a civil penalty remain pending before the Court. (See prior Litigation Release No. 17627 for a further description of the allegations contained in the Commission's complaint.)