Friday, May 25, 2007
The U.S. Court of Appeals for the Second Circuit upheld convictions on twenty-two counts of conspiracy, securities fraud, and bank fraud of the former CEO and CFO of Adelphia Communications, John Rigas and his son, Timothy. The court reversed one bank fraud conviction for insufficient evidence. The Rigas family controlled Adelphia, a cable company that eventually entered bankruptcy after the revelation of accounting fraud. The underlying transactions involved "co-borrowing arrangements" under which the Rigas family was supposed to provide funds to Adelphia in connection with transactions that aided cable systems the family controlled through private entities, but in fact the funds were taken from Adelphia. At its core, the case involved misstated financials that hid Adelphia's real debt while, according to the government, the family used the publicly-traded company as it personal piggy-bank.
In its opinion (available on the Second Circuit's website here), the court dealt with four issues, and the primary one was whether the government had to prove a violation of GAAP. The panel rejected the argument that the government had to establish through expert testimony a violation of accounting principles, stating:
[The defendants] contend that because FAS 5 applies to their situation, the district court should have required the prosecution to prove non-compliance, or, at the very least, offer expert testimony on the subject. Defendants are wrong. The government was not required to present expert testimony about GAAP’s requirements because these requirements are not essential to the securities fraud alleged here. A single reference to GAAP in the Superseding Indictment does not change that conclusion, and the district court properly instructed the jury on the elements of securities fraud and conspiracy to commit securities fraud.
Among the cases cited in support of its position was the recent decision in U.S. v. Ebbers, 458 F.3d 110 (2d Cir. 2006), upholding the conviction of former WorldCom CEO Bernie Ebbers for securities fraud based on accounting violations.
The Second Circuit did reverse one of the two bank fraud convictions of the defendants, finding that the government could not prove the materialilty of any misstatements made in connection with loans secured by Adelphia stock. That decision means the case has to be remanded to the District Court for resentencing, although I doubt the judge will change the sentences of fifteen years for John Rigas and twenty years for Timothy Rigas. The bank fraud charges had little effect on the calculation under the Sentencing Guidelines, and the prison terms were beneath the applicable Guidelines level anyway.
Both Rigases have been out on bail pending appeal, but the affirmance of the convictions (save one) means that they will likely be sent to prison as soon as the judge resentences them. John Rigas is now 82 and has been diagnosed with cancer, so his medical condition could affect whether (and when) he will have to report to begin his prison sentence. The issues addressed by the Second Circuit are narrow and largely non-controversial, so the odds of the Supreme Court granting certiorari are probably nil. (ph)