John Rigas was born in Wellsville, New York, in 1924. He served in the second world war and graduated with a degree in engineering, later buying a cinema in a town in Pennsylvania. In 1952 he bought the local cable television station for $300, naming the new company Adelphia Communications Corporation. By borrowing large sums of money to fund takeovers, Adelphia was able to expand beyond the local area, eventually becoming one of the largest providers in the US of cable television, long distance telephone calls and then later broadband internet.
What was the scam?
Rigas took Adelphia public in 1986, but he retained ownership of his own private family ventures. Rigas and his family persuaded a group of bankers to lend these family ventures money on condition that the loans were jointly backed by Adelphia as well as the family's own assets. Rigas treated the overdraft as a personal slush fund, using the money to speculate on Adelphia stock and injecting money into his personal companies, including $150m in the Buffalo Sabres, a professional hockey team. These loans were hidden from both shareholders and creditors, who were unaware that Adelphia was liable for an additional $2.3bn in debt.
What happened next?
In early 2002, Adelphia finally disclosed that it was potentially liable for that $2.3bn in extra loans. When analysts demanded that the company disclose the destination of these funds, the stock plunged, prompting auditors Deloitte to refuse to sign off on the accounts, which caused the stock to fall further. The Securities and Exchange Commission, the US regulator, opened its own investigation, prompting John Rigas and his son Tim to resign. Meanwhile, creditors called in their loans, pushing Adelphia into bankruptcy. In 2004 John Rigas and his son were convicted of fraud and sentenced to jail.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Lessons for investors
It's estimated that the Rigas family embezzled at least $1bn from Adelphia. Shareholders were wiped out. With appropriate controls, family firms can be good investments as the family has the incentive to make sure the firm is properly run and the ability to hold management to account. In this case, however, poor corporate governance (including a share structure that gave the family 60% of the voting rights while holding only 20% of the company) and a general attitude that it was their firm provided fertile ground for fraud.
-
Why now is the right time to invest in biotechThe biotech sector holds huge potential for investors, with strong growth and attractive valuations. Here's the best way to play it.
-
Zoopla: Busiest home buying May since 2021, but property asking prices slideBuyers return to the market after the end of higher stamp duty thresholds and post-Easter lulls, but average sales are £16,000 below asking price
-
Christopher Columbus Wilson: the spiv who cashed in on new-fangled radiosProfiles Christopher Columbus Wilson gave radios away to drum up business in his United Wireless Telegraph Company. The company went bankrupt and Wilson was convicted of fraud.
-
Great frauds in history: Philip Arnold’s big diamond hoaxProfiles Philip Arnold and his cousin John Slack lured investors into their mining company by claiming to have discovered large deposit of diamonds. There were no diamonds.
-
Great frauds in history: John MacGregor’s dodgy loans
Profiles When the Royal British Bank fell on hard times, founder John MacGregor started falsifying the accounts and paying dividends out of capital. The bank finally collapsed with liabilities of £539,131
-
Great frauds in history: the Independent West Middlesex Fire and Life Assurance Company's early Ponzi scheme
Profiles The Independent West Middlesex Fire and Life Assurance Company (IWM) offered annuities and life insurance policies at rates that proved too good to be true – thousands of policyholders who had handed over large sums were left with nothing.
-
Great frauds in history: Alan Bond’s debt-fuelled empireProfiles Alan Bond built an empire that encompassed brewing, mining, television on unsustainable amounts of debt, which led to his downfall and imprisonment.
-
Great frauds in history: Martin Grass’s debt bingeProfiles AS CEO of pharmacy chain Rite Aid. Martin Grass borrowed heavily to fund a string of acquisitions, then cooked the books to manage the debt, inflating profits by $1.6bn.
-
Great frauds in history: Tino De Angelis’ salad-oil scamProfiles Anthony “Tino” De Angelis decided to corner the market in soybean oil and borrowed large amounts of money secured against the salad oil in his company’s storage tanks. Salad oil that turned out to be water.
-
Great frauds in history: Gerard Lee Bevan’s dangerous debtsProfiles Gerard Lee Bevan bankrupted a stockbroker and an insurer, wiping out shareholders and partners alike.
