U.S. v. Rigas

• Decision Date: 11 July 2008
• Docket Number: No. 4:05-CR-402.,4:05-CR-402.
• Citation: 565 F.Supp.2d 620
• Parties: UNITED STATES of America v. John J. RIGAS and Timothy J. Rigas.
• Court: U.S. District Court — Middle District of Pennsylvania

565 F.Supp.2d 620

UNITED STATES of America v. John J. RIGAS and Timothy J. Rigas.

No. 4:05-CR-402.

United States District Court, M.D. Pennsylvania.

July 11, 2008.

COPYRIGHT MATERIAL OMITTED

Benard V. Preziosi, Jr., Curtis Mallet Prevost, Jeremy H. Temkin, Morvillo Abramowitz, New York, NY, for Defendants.

George J. Rocktashel, U.S. Attorney's Office, Williamsport, PA, for Plaintiff.

MEMORANDUM AND ORDER

JOHN E. JONES III, District Judge.

This matter is before the Court on the defendants' Motion to Dismiss the Indictment on Double Jeopardy and Collateral Estoppel Grounds. (Doc. 57.) Defendants John J. Rigas and Timothy J. Rigas (collectively "the Rigases"), argue that the conspiracy with which they are charged in this action is the same offense as the conspiracy charge prosecuted in a prior action in the United States District Court for the Southern District of New York, and therefore, the current prosecution is barred by the Fifth Amendment's protection against double jeopardy. The defendants also argue that, in the prior New York action, they were acquitted of the conduct which underlies the tax evasion counts charged in this action, and therefore, that these charges are barred by the principle of collateral estoppel. For the reasons set forth below, the defendants' motion will be denied.

I. BACKGROUND

A. The New York Action

On September 23, 2002, a grand jury sitting in the Southern District of New York returned a twenty-four count indictment against the Rigases, along with Michael Rigas, Michael Mulcahey, and James Brown. See United States v. Rigas, et al, No. S1 02 CR 1236 (S.D.N.Y.) (the "New York action"). A superceding indictment was returned on July 30, 2003, charging the Rigases, Michael Rigas, and Michael Mulcahey with: (i) one count of conspiracy to commit securities fraud, wire fraud, and bank fraud, to make false statements in SEC filings, and to make false books and records in violation of 18 U.S.C. § 371; (ii) fifteen counts of securities fraud in violation of 15 U.S.C. §§ 78j(b) and 78ff, 17 C.F.R. § 240.10b-5, and 18 U.S.C. § 2; (hi) five counts of wire fraud in violation of 18 U.S.C. §§ 2, 1343, and 1346; and (iv) two counts of bank fraud in violation of 18 U.S.C. §§ 2 and 1344.¹ (Doc. 58, Ex. B [the "New York Indictment"].) The indictment was supplemented by a bill of particulars on January 2, 2004. (Doc. 58, Ex. C.)

The New York charges arose from the precipitous decline of Adelphia Communications Corporation ("Adelphia").² From its humble beginnings in 1952 in the town of Coudersport, Pennsylvania, Adelphia grew to become, as of December 31, 2000, the sixth largest cable television provider in the United States. By June 25, 2002, however, Adelphia had filed for bankruptcy, and its impressive growth over many decades was eclipsed by a spectacular public flameout.

The Rigases are the central figures in the rise and fall of Adelphia. John Rigas built the company, and with his sons Michael and Timothy, took Adelphia public in 1986. The Rigas family, however, retained most of the voting shares and control of the company. Until their resignations in May 2002, John Rigas served as Chairman of the Board of Directors, President, and CEO; Timothy Rigas was a Board member, Executive Vice President, and CFO; and Michael Rigas was a Board member and Executive Vice President of Operations. Michael Mulcahey was Director of Internal Reporting, and reported to Timothy Rigas.

Adelphia was organized as a holding company, indirectly owning the assets of its subsidiaries. Separate from, but connected with, Adelphia and its subsidiaries were certain "Rigas family entities" or "RFEs." These cable companies and other businesses were privately owned by Rigas family members, but managed, in part, by Adelphia, and the operating revenues and expenses of the RFEs and Adelphia and its subsidiaries were organized through a centralized cash management system.

Beginning in the late 1990s, Adelphia embarked on an ambitious, costly, and ultimately disastrous plan to upgrade its cable systems and acquire other cable operators. To raise the billions of dollars needed to finance these rebuild and acquisition plans, Adelphia and its subsidiaries secured loans from banks and issued debt and equity securities to the public. Certain of the loans were obtained through "co-borrowing" arrangements, whereby the RFEs and Adelphia subsidiaries were jointly and severally liable for the loans. Adelphia suffered negative cash flow as its expenditures on the rebuild and acquisition plans rose, and the company became highly leveraged as the concomitant debt mounted.

The New York indictment charged that, from 1999 to May 2002, the defendants engaged in a scheme designed to defraud Adelphia's shareholders and creditors by concealing the company's increasingly precarious financial condition and the Rigas family's improper use of Adelphia funds for personal purposes. The indictment focused on five areas.

First, the government alleged that the defendants caused Adelphia to issue financial filings, press releases, and statements to investors and analysts which misrepresented that Adelphia was substantially reducing its debt, in large part through the Rigas family's purchase of Adelphia stock. See Rigas, 490 F.3d at 213-15; New York Indictment at ¶¶ 73-91. To maintain control over the company, the Rigases persuaded the Adelphia board to sell them stock each time the company issued new shares to generate capital. The stock purchase agreements required the Rigases to pay for the shares immediately in cash, and Adelphia's public filings and press releases suggested that they did so. The Rigases, however, did not have enough cash to deleverage Adelphia in this manner. Instead, the Rigases borrowed the funds to purchase the shares, but then caused Adelphia to use the borrowed funds to pay off other family debts. Later, in lieu of paying cash, the Rigases "assumed" Adelphia debt by causing Adelphia to "reclassify" some of the debt it owed under the co-borrowing agreements by "moving" it from Adelphia's books to one of the RFEs'. The Rigases's "assumption" of this debt was illusory: under the co-borrowing agreements, Adelphia was still jointly and severally liable for the debt. Had the Rigases paid for the shares in cash, as they represented to analysts and investors, Adelphia would have been able to pay down its debt. Instead, the Rigases retained control of the company by obtaining more stock with more borrowed money while Adelphia received no new cash and remained liable for the debt under the co-borrowing agreements.

Second, the government alleged that the defendants concealed Adelphia's liability under the co-borrowing agreements. See Rigas, 490 F.3d at 215; New York Indictment at ¶¶ 64-72. The defendants caused Adelphia to issue financial statements which masked the amount that the RFEs owed to Adelphia by reporting all liabilities of the RFEs as one "netted" related party receivable. When even this number became too large, the amount was further concealed by moving debt from Adelphia's books to the books of an RFE. The amount the RFE owed Adelphia would then be credited by this "assumption." This arrangement provided no benefit to Adelphia, but allowed the defendants to avoid disclosing the high net receivable balance from the RFEs.

Third, the government alleged that the defendants misrepresented Adelphia's operating performance in three major ways. See Rigas, 490 F.3d at 215-17; New York Indictment at ¶¶ 92-158. First, Adelphia, primarily at the direction of Timothy Rigas, distributed quarterly earnings press releases and other information which fraudulently reported growth in Adelphia's cable subscribers by including subscribers of other companies, home security subscribers, and highspeed internet subscribers who had not yet begun receiving or paying for Adelphia service. Second, at "road shows" and conference with investors, shareholders' meetings, and in information provided to Adelphia lenders, Timothy Rigas fraudulently overstated the percentage of Adelphia's cable systems that had been upgraded to provide digital cable and high speed internet access. These technology upgrades were critical to Adelphia's long-term outlook, and cost the company between $1.5 and $2 billion annually. Finally, at the direction of Timothy Rigas and with the knowledge and acquiescence of John Rigas, Adelphia manipulated its earnings before interest, taxes, depreciation, and amortization ("EBITDA"), a measure commonly used by investors to assess a company's earnings from operations. Adelphia fraudulently inflated the management fees that the RFEs owed the company and then recorded a corresponding interest expense that Adelphia owed to the RFE. The RFE thus did not actually pay Adelphia a larger net fee, but because the amount Adelphia owed the RFE was classified as interest, it was not included in EBITDA. Adelphia also engaged in "wash transactions" with equipment suppliers whereby it would pay an increased price for equipment, and the suppliers would pay Adelphia an amount equal to the increase purportedly in exchange for advertising and market support. Because the increased payments to suppliers were capital expenses and the amounts received from the suppliers were classified as revenue, Adelphia's EBITDA increased. Adelphia never provided any advertising or market support for the suppliers. As a result of its fraudulently increased EBITDA, Adelphia was able to appease investors, remain in compliance with bond covenants, and obtain lower interest rates on loans from banks.

Fourth, the government alleged that the defendants caused Adelphia to misrepresent its compliance with the terms of its bank loans. See Rigas, 490 F.3d at 217-18; New York Indictment at ¶¶ 159-166. The co-borrowing agreements required minimum ratios of cash flow to indebtedness, and tied lower interest rates to this ratio. By manipulating its EBITDA, Adelphia was able to...