490 F.3d 208 (2nd Cir. 2007), 05-3577, United States v. Rigas

Docket Nº:05-3577-cr(L), 05-3589-cr(CON).
Citation:490 F.3d 208
Party Name:UNITED STATES of America, Appellee, v. Timothy J. RIGAS and John J. Rigas, Defendants-Appellants.
Case Date:May 24, 2007
Court:United States Courts of Appeals, Court of Appeals for the Second Circuit

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490 F.3d 208 (2nd Cir. 2007)

UNITED STATES of America, Appellee,


Timothy J. RIGAS and John J. Rigas, Defendants-Appellants.

Nos. 05-3577-cr(L), 05-3589-cr(CON).

United States Court of Appeals, Second Circuit

May 24, 2007

Argued: June 14, 2006.

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John W. Nields, Jr., Howery LLP, Washington, DC (Laura S. Shores, Jason C. Raofield, John F. Stanton, on brief), for Defendant-Appellant Timothy J. Rigas.

Paul Shechtman, Stillman, Friedman & Shechtman, P.C., New York, N.Y. (Peter Fleming, Jr., Benard V. Preziosi, Jr., Jonathan Harris, and Julie V. Withers, Curtis Mallet-Prevost Colt & Mosle LLP, New York, NY), for Defendant-Appellant John J. Rigas.

Richard D. Owens, Assistant United States Attorney for the Southern District of New York, New York, N.Y. (Michael J. Garcia, United States Attorney for the Southern District of New York, New York, NY, Celeste L. Koeleveld, Assistant United States Attorney for the Southern District of New York, New York, NY, of counsel, on brief), for Appellee United States.

Before: MESKILL, JOSÉ A. CABRANES, and WESLEY, Circuit Judges.

WESLEY, Circuit Judge.

Defendants Timothy J. Rigas and John J. Rigas ("Defendants") appeal from a judgment of conviction following a jury trial in the United States District Court for the Southern District of New York (Sand, J.). Defendants were convicted of conspiracy to commit securities fraud, conspiracy to make and cause to be made false statements in filings with the SEC, and conspiracy to commit bank fraud under 18 U.S.C. § 371 (Count One); 1 securities fraud under 15 U.S.C. §§ 78j(b) and 78ff, and 18 U.S.C. § 2 (Counts Two through Sixteen); and bank fraud under 18 U.S.C. § 1344 (Counts Twenty-Two and Twenty-Three).

Defendants make four claims on appeal: (1) the government should have been required to present evidence that Defendants violated Generally Accepted Accounting Principles ("GAAP") and to call an accounting expert; (2) government witness Robert DiBella improperly gave expert accounting testimony; (3) the bank fraud convictions should be vacated because the indictment was constructively amended or they should be reversed because there was insufficient evidence for the jury to find that any misrepresentations to the bank were "material"; and (4) Defendants were prejudiced by the improper admission of uncharged crime evidence, which also constituted a constructive amendment of the indictment.

For the reasons set forth below, we affirm the judgments of conviction on all Counts except Count Twenty-Three. We reverse Defendants' conviction on Count

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Twenty-Three, and we remand for an entry of a judgment of acquittal on this Count and for resentencing.


Adelphia Communications Company ("Adelphia") announced its 2001 Fourth Quarter and Full-Year results in a March 27, 2002 press release. In a footnote on the final page of that press release, Adelphia, at the recommendation of its accounting firm, Deloitte & Touche, first disclosed publicly that it had approximately $2.2 billion in liabilities not previously reported on its balance sheet.2 On the day of disclosure, Adelphia's stock price plummeted by about twenty- five percent to $20.39; by the time the stock was delisted in May 2002, the price per share was $1.16. The company filed for bankruptcy in June 2002, wiping out all shareholder value. A month later, John Rigas, his sons Michael and Timothy, and two other Adelphia employees were arrested and charged with looting the company.

The Story of Adelphia

Adelphia, one of the largest cable television providers in the country before its bankruptcy, had modest beginnings. In the early 1950s, John Rigas, the son of Greek immigrants, borrowed money from his family to buy a movie theater in Coudersport, a small town about twenty miles south of the New York-Pennsylvania state line. In 1952, he purchased the rights to wire the town for cable television. By the time John Rigas's sons Michael and Timothy joined Adelphia in the mid-1980s, the privately owned company boasted hundreds of thousands of cable subscribers.

In 1986, John Rigas took Adelphia public. Adelphia issued two classes of common stock: Class A, with one vote per share, and Class B, with 10 votes per share. The Rigas family owned almost all of the Class B shares, and, as a result, was able to maintain control of the company and the Board of Directors. Indeed, Rigas family members filled many of the top positions in Adelphia. John Rigas was Adelphia's President, Chairman of the Board, and Chief Executive Officer until he resigned in May 2002. Timothy Rigas served as Board member, Executive Vice President, and Chief Financial Officer. Michael Rigas was also on Adelphia's Board and was Executive Vice President for Operations. Another son, James, filled out the Rigases' majority control of the seven-member Board of Directors. Peter Venetis, John Rigas's son-in-law, was added to the Board when it expanded to nine members.

Not all of the companies controlled by the Rigas family went public when Adelphia

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did. Rather, Adelphia managed some of the cable companies--the Rigas Managed Entities ("RMEs") 3--that the family continued to own privately. Adelphia's management of the RMEs was disclosed in public filings; however, Adelphia did not disclose the amount of the fees charged to, or paid by, the RMEs, or that cash generated from the RMEs was commingled with that generated by Adelphia. Certain transactions between Adelphia and the RMEs were at issue during the trial; the government argued that Defendants utilized the Adelphia-RMEs business arrangement to effect and conceal aspects of their frauds.

Adelphia's business during the time relevant to this case was "cash flow negative." That is, it did not generate enough cash revenue from subscriber fees to pay for its capital expenditures, interest payments, and cost of operations. Adelphia's capital expenditures included $1.5 to $2 billion per year to update its cable systems to higher bandwidth and two-way communication capabilities (the "Rebuild Plan"). Between 1998 and 2002, Adelphia paid approximately $5.2 billion in cash and issued more than 72 million new shares of Class A common stock to acquire other cable entities in an effort to lower costs as a result of operating efficiencies (the "Acquisition Plan"). Banks and holders of Adelphia stocks and bonds watched as Adelphia's leverage ratios climbed. Indeed, as Moody's Investors Service noted in August 2001, Adelphia was "one of the most highly leveraged companies in the cable sector."

Adelphia set about raising sufficient capital to offset its annual operating losses, to fund the Rebuild and Acquisition Plans, and to pay down increasing interest expenses. This new cash mainly came from $4.9 billion in public sales of newly issued common and preferred stock, $4.4 billion in public sales of notes and convertible debentures, and bank loans.

Adelphia's disclosed bank borrowings were $5.4 billion in September 2001, more than a six-fold increase from March 1998. Generally, each separate bank loan was entered into by a group of Adelphia subsidiaries that pledged their assets as collateral; the group was referred to as a "borrowing group." Certain bank loans were set up through a "co-borrowing" arrangement (the "Co-Borrowing Arrangement") between the RMEs and Adelphia subsidiaries. Timothy Rigas proposed the Co-Borrowing Arrangement to the Adelphia Board in 1999, and argued it would lower borrowing costs and prevent competition for bank financing between the RMEs and Adelphia entities. Under this Co-Borrowing Arrangement and at the Rigases' direction, Adelphia entered into three separate "Co-Borrowing Agreements"--loans for which the RMEs and Adelphia subsidiaries were jointly and severally liable. These Co-Borrowing Agreements totaled about $5.5 billion. Adelphia's accounting firm, Deloitte & Touche, reviewed and approved the manner in which Adelphia disclosed and accounted for the co-borrowed debt on its public financial statements.

The Rigas family wished not only to expand Adelphia, but also to maintain control over the company, in part because Adelphia's loan agreements provided that the Rigases' loss of voting control would constitute default. To maintain family control, every sale of stock to the public required a concurrent sale of stock to the Rigases. Arguing that their stock purchases represented the family's "public

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vote of confidence" in Adelphia "because in addition to selling shares to the public, they were buying new shares, that is, they were investing fresh money of their own into the company," Timothy Rigas persuaded the Adelphia board to sell Class B shares to the Rigas family with each new offering to the public.4 During the relevant time, family members purchased $1.6 billion in new shares.

The Charged Conduct

Timothy Rigas and John Rigas were charged with conspiracy to commit securities fraud, to commit wire fraud, to make and cause to be made false statements in filings with the SEC, to falsify the books and records of a public corporation, and to commit bank fraud under 18 U.S.C. § 371 (Count One); securities fraud under 15 U.S.C. §§ 78j(b) and 78ff, and 18 U.S.C. § 2 (Counts Two through Sixteen); wire fraud under 18 U.S.C. § 1341 (Counts Seventeen through Twenty-One); and bank fraud under 18 U.S.C. § 1344 (Counts Twenty-Two and Twenty-Three). The conduct underlying these charges, as set forth in the Superseding Indictment and the government's case at trial, is summarized below.

I. The Rigas Family's Fraudulent Stock Purchases

The Rigases did not have enough cash to provide the promised "fresh...

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