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Suit Attacks Banks' Rigas Loans

Adelphia Communications Corp.'s unsecured creditors sued more than 450 banks that loaned money to the Denver-based MSO's former ruling Rigas family, claiming they knew the Rigases would use the money for their own personal gains and yet made the loans anyway.

In a 252-page document filed with the U.S. Bankruptcy Court for the Southern District of New York a week ago Sunday, the unsecured creditors claimed the banks made $3.4 billion in loans — so-called co-borrowing agreements — with the Rigas family for which Adelphia was liable.

The Rigases essentially used those loans to purchase Adelphia stock in order to keep their majority voting control of the company.

Adelphia agrees

Adelphia's committee of equity security holders and the Denver-based MSO itself supported the suit.

Co-borrowing loans were the catalyst for Adelphia's Chapter 11 bankruptcy filing last June. In September, former Adelphia chairman John Rigas, his sons — former chief financial officer Timothy and former executive vice president of operations Michael — and former chief accounting officer Michael Mulcahey were indicted on federal fraud charges.

The Rigases and Mulcahey have denied the charges against them. A trial date is scheduled for Jan. 5.

The unsecured creditors have asked for $5 billion in damages and want $5.2 billion of Adelphia debt frozen until creditors are paid.

The suit claims several banks — including Bank of Montreal, Wachovia, Bank of America, Citigroup and Deutsche Bank AG — made loans to obtain investment-banking business from Adelphia.

The creditors sued so many banks because the loans were syndicated, or sold and resold piecemeal to a number of lenders.

The suit claims these banks and others knew the Rigases would use the loans in part to enrich themselves at the expense of Adelphia, which was already relatively highly leveraged compared with peers.

"Aware of obvious red flags, many of the co-borrowing lenders merely rubber-stamped the co-borrowing facilities so that their affiliated investment banks could earn hundreds of millions of dollars in fees," the suit stated.

Memo from Brown

The suit cited letters from then-Adelphia executives that spelled out that the proceeds from one of the co-borrowing agreements — involving one partnership called Century Cable Holdings (CCH) — would be mainly for the Rigases' personal use.

One letter was from former vice president of finance James Brown, who pleaded guilty to three counts of fraud in September and is awaiting sentencing. It stated that proceeds would be used to purchase a cable system in Cleveland from Cablevision Systems Corp. ($990 million), a cable system from Prestige Communications ($700 million) and another group of systems from Prestige by the Rigases ($400 million).

Also, according to loan documents, the number of subscribers held in the Rigas family partnership — called Highland Prestige — was disproportionately small compared with what the partnership borrowed.

The suit said the CCH co-borrowing partnership had about 1.53 million subscribers, but Highland Prestige only controlled about 55,831 customers, or 3.6% of the assets supporting the loan.

Still, Highland Prestige drew down $1.6 billion (67%) of the $2.48 billion available through the loan agreement.

Margin loans

The suit claims other loans were made in part to cover "hundreds of millions of dollars" of personal margin loans the Rigas family had with the banks and secured by Adelphia stock.

As Adelphia stock plummeted — after the co-borrowing loans were discovered in March 2002 — the suit states the banks continued to fund co-borrowing loans even though they knew the proceeds would be used to pay margin calls.

"Just like the fraudulent uses of the co-borrowing facilities, each of these margin loan payments was made with the intent to defraud creditors, who received no consideration from these transfers," the suit stated.