Corporate Fraud
There are several examples of corporate fraud. Some of these are:
- Adelphia
- Global Crossing
- Qwest Communications
- Rite Aid
- Tyco
- WorldCom
- Xerox
- GlaxoSmithKline
Choose one of the given examples of corporate fraud and write a 4- to 5-page report in Microsoft Word, addressing the following questions:
- How was the fraud perpetrated? How much money was involved? Explain.
- How was the fraud uncovered? How did the law enforcement agency investigate and prosecute the crime?
- Which laws were violated?
- What was the outcome of the case?
- Was this the best possible outcome given the circumstances of the case?
Be careful in selecting your sources for research. Many people have strong opinions on these subjects and post inaccurate information. Be sure to only use reliable news sources to learn the details related to the example you choose. Support your responses with examples.
Corporate Fraud
Introduction
Adelphia in many ways was the true American story. A corporation built from the ground. The fantasy it perpetrated got tarnished when out of nowhere while riding on the huge success the company filed for bankruptcy. The reason for bankruptcy shocked people more when it was revealed that the founder and his family used company funds worth 2.3 billion for their own personal gains. This launched a legal inquiry that led to the imprisonment of both the founder John Rigas and his son. Thus, came the downfall of one of the most promising families in business due to utter corruption.
Adelphia was a corporation built by hard work and transformed from a mere cable television franchise purchased for 300 dollars. In 2002 the company’s fraudulent internal proceedings came to light when it was announced that the corporation had to its name 2.3 billion dollars of unrecorded debt. The unrecorded debt was accumulated due to co-borrowings midst Adelphia and other Rigas family entities, via the founder family’s trust named, Highland Holdings. In accordance with the agreement the debt was to be paid by the Rigas, but if they were unable to do so then the debt would have to be repaid by the company. Through inquiries, it was found that the funds were used to purchase things like Company cars, timberland, and Christmas trees.
Perpetration of the Fraud and the amount of money involved
The philosophy that threw a multi-billion dollar corporation like Adelphia to the wolves was ‘Family comes first’. The corporation was founded and headed by the Rigas family with little to no outside influence. Though the concept of loyalty is admiring the fact that the members inserted in high roles did not have any information about the way a corporation is to be functioned was a huge drawback. This drawback manifested itself in the company when the family began to treat the corporation as its personal piggy bank. In order to continue with their splurge, without any instructions, they hid the ‘off-balance-sheet loans’ (Anderson, 2020, p.50).
The loan was accumulated slowly when it brought three cable systems that it didn’t actually need for a price of 14 billion. They explained it by emphasizing that the action doubled its subscriber base. This action raised the suspicion of Wall Street which began to monitor Adelphia, analyzing whether they are taking necessary steps to fulfill the demands of their newly earned subscribers and repay their collected debt. Later it was found that the purchase of the companies and handling of the subscriber did not require 14 billion, and a huge part of the money was used for personal reasons by Rigas.
Thereafter the family began to feel pressure from various organizations as its subscriber base was lower than the expected standards. In order to deal with that, the Rigas began to fabricate subscribers. They showed the company had 43,000 subscribers in Venezuela and Brazil, they accounted for 60,000 subscribers from home security services that did not take the service of Cable Services and also included customers of internet service as subscribers in their documentation. After realizing that they might not be able to keep their dealings a secret from the shareholders, the family took a loan of 3.1 billion dollars from the company earnings to buy the entirety of Adelphia. This effort led to investigators figuring out that they have not been given a clear image of the happenings in the company. In the past to hide their misgivings they showed their earnings to be 160 million dollars in 2000 and 210 million dollars the year after that. Both of them were made up figures with earnings being much lower so that the family is given free reins to take out as much money as they want from the company, without the interference of investigators.
Thus through accumulated loans and falsification of figures, the Rigas family perpetrated fraud toward the shareholders and various organizations.
Uncovering Of Fraud and Methodology of Law Enforcement Agencies
As mentioned earlier Wall Street was monitoring the actions of the Adelphia enterprise, especially the Rigas Family to ensure that they were taking the necessary steps to repay the loan accumulated by them for their corporation. In order to continue their facade, the family took a loan of 3.1 billion dollars. This loan for all purposes can be regarded as the reason that got them caught. This loan raised red flags for the investors as well as the law enforcement agencies. The investigation was taken forward by the Securities and Exchange Commission.
Through uncovering the actual data regarding the subscriber base the agencies quickly got a clear picture of the actual happenings taking place in the company. They understood that the family had generated billions of dollars for their personal expenses with the help of their fake financial statements, and hiding the real details from their various affiliates (WARDANI, 2018, p.30). The probing also exposed that in order to avoid the wrath of Wall Street and fool stockholders they showed inflated earnings. The family as a whole also conducted various dealings from the corporate funds, like buying stocks and New York condominiums, which was found out through their bank statements of undisclosed accounts.
Thereafter on the basis of the investigation SEC filed a case citing it as a deeply distressing picture of greed and deception in a publicly held company.
Laws that were violated
After investigating the case, SEC decided to levy the charges of Bank Fraud, Securities Fraud, Conspiracy, Antifraud, Internal Controls Provisions, Periodic Reporting, and Record-Keeping charges on the Rigas family. Antifraud was committed by the family due to the use of false information to take out money for their personal benefit (Kiymaz, 2020, p.12). Internal Controls Provisions were violated by the family because of their use of their status in the company to facilitate this fraud. Periodic Reporting and Record-Keeping provisions were breached by fabricating important details, to fool the investors. Through the case the prosecution wanted the Rigas family to disclose all the wrongly accumulated funds. They also wanted the family to give back the properties that they had brought through the ill-gotten money of their operations so that it could be used to recompense the victims. The SEC also wanted each defendant to garner Civil Penalties. They also requested the judiciary to ban the defendants from ever taking up an executive position, in any public company, in their lifetime.
Outcome Of The Case
After the judicial proceedings, the court sentenced John Rigas to 15 years in prison and Timothy Rigas to 20 years in prison. At the time it was one of the harshest sentences to be delivered since the Enron Scandal. The judge while giving the sentence announced that ‘This is a tragedy lacking in heroes’. After the conviction of the founder’s family, the Adelphia Corporation filed for bankruptcy and sought a loan of 1.5 billion dollars in order to restructure themselves (Putra & Dwirandra, 2019, p.36). In 2 years a plan for its restructuring was formulated. The restructuring was essentially possible because of the efforts of the 15000 employees that stayed loyal to the company even after its fall. In accordance with the plan, full payment was reimbursed to joint venture lenders, position lenders, and bank lenders. 2006 saw Adelphia’s cable operations being sold to Time Warner and Comcast for 17.6 billion dollars of which 15 billion was provided to the creditors. After the sale, all business operations of Adelphia officially came to a close and thus the self-made legacy shattered.
Judgment Regarding the Best Possible Outcome
In such cases, the biggest sufferers are the people who invest in the stocks under the premise of wrong information. The fact that the money was returned to them as well as the banks makes this the best possible outcome (Zahari & Arshad, 2019, p.70). Though the timeline suggests that the dealings took almost four years to come to fruition which made it a long-drawn-out process. The investigators to this date have doubts about whether the Rigas actually revealed their entire properties. In the midst of these doubts, the fact that some of the money might still be hidden does sour the conclusion of the entire case (Crumbley & Ariail, 2020, p.250).
Conclusion
As the statements of the SEC and Judiciary suggested there were no good guys in this entire situation. There was a façade of niceties, but in actuality, it was all encapsulated with selfishness and greed. The greed led to the downfall of one of the biggest success stories in American Corporate History. Many people argue that the fraud was done unintentionally, but the harsh truth is there was actually no need to commit the fraud at all. The Rigas was one of the biggest names in the American landscape and had absolutely no need for the extravagant things they brought.
Reference List
Anderson, K. L. (2020). Accounting Principles and Corporate Fraud. In Corporate Fraud Exposed. Emerald Publishing Limited.
WARDANI, M. K. (2018). The Effects of Fraud Detection Through Financial and Forensic Auditing on the Corruption Prevention and Eradication (Doctoral dissertation, Universitas Jenderal Soedirman).
Kiymaz, H. (2020). Types of corporate fraud. In Corporate Fraud Exposed. Emerald Publishing Limited.
Putra, G. S. A., & Dwirandra, A. A. N. B. (2019). The effect of auditor experience, type of personality and fraud auditing training on auditors ability in fraud detecting with professional skepticism as a mediation variable. International Research Journal of Management, IT and Social Sciences, 6(2), 31-43.
Zahari, A. I., & Arshad, R. (2019). FRAUD DEVELOPMENT AND LINKAGES WITH CORRUPTION OCCURRENCES. Journal of Governance and Integrity, 2(2), 65-76.
Crumbley, D. L., & Ariail, D. L. (2020). A different approach to detecting fraud and corruption: A Venn diagram fraud model. Journal of Forensic and Investigative Accounting, 12(2), 241-260.
