Deloitte's audit team had been auditing Adelphia and Rigas ...



Rigas Case

Adelphia and Rigas Audits

Ref. SEC Rel. No. 57244/ January 31,2008

Admin. Proc. File No. 3-12064 Matter of Gregory Dearlove

Deloitte's audit team had been auditing Adelphia and Rigas for numerous years.  The 2000 audit remained largely unchanged from prior years. The team consisted of about twenty staff accountants and tax professionals, divided into subgroups that were supervised by ten Deloitte managers and headed by senior manager William Caswell, who reported directly to Dearlove.

Several of the Deloitte managers had significant prior experience auditing and reviewing Adelphia's annual and quarterly reports: Caswell had spent six years working on Adelphia engagements; Ivan Hofmann and Robert Fitzgerald, both audit managers, had each spent five years. In addition, Michael Lindsey served as the concurring partner as he had on Adelphia audits since 1996, and Stephen Biegel was assigned as risk review partner after serving in that capacity for the 1999 Adelphia audit. Dearlove had once met Caswell at a firm meeting but did not otherwise know any members of the Adelphia audit team when he assumed his role as engagement partner.

Deloitte devoted an estimated 21,000 hours to the audit of Adelphia's 2000 financial statements and related accounting advisory activities; Dearlove himself spent over 700 hours. Dearlove spent a total of ten to fifteen days on-site in Coudersport with the audit team. Dearlove participated in discussions with the team, reviewed workpapers and underlying Adelphia documents when the team brought them to his attention, and "worked through the issues" with his staff in what Dearlove characterized as a "consultative process." At the end of the audit, Dearlove looked at certain workpapers and drew conclusions as to whether the team completed its review. Dearlove testified that he also consulted Deloitte's national office on a number of accounting issues during the course of the audit, mostly involving revenue recognition.

On March 29, 2001, Deloitte issued its independent auditor's report, signed by Dearlove, which stated that it had conducted its audit in accordance with GAAS and that such audit  provided a reasonable basis for its opinion that Adelphia's 2000 financial statements fairly presented Adelphia's financial position in conformity with GAAP.

Dearlove asserts that he could place some reliance on audit precedent. Moreover, in his view, the fact that prior auditors reached the same conclusions is "compelling evidence" that Dearlove acted reasonably.

Between 1996 and 2000, several Adelphia subsidiaries and some of the Rigas Entities had entered as co-borrowers into a series of three credit agreements with a consortium of banks. Although the agreements differed in the amount of credit available, their terms were substantially the same: each borrower provided collateral for the loan; each could draw funds under the loan agreement; and each was jointly and severally liable for the entire amount of funds drawn down under the agreement regardless of which entity drew down the amount.  

Combining the features of term loans and revolving credit lines, the agreements permitted co-borrowers to draw funds and repay the loans at will and required almost no principal payments until the loans began to mature in 2004. The amount of debt outstanding under the agreements therefore could fluctuate as co-borrowers drew down and made payments on the loans. Cross-default provisions in the agreements provided that it was considered an event of default if the borrowers failed to timely pay any other substantial debts – co-borrowed or otherwise – they had assumed, which would permit the banks to demand immediate payment of all outstanding amounts. The agreements also provided that an event of default occurred if the Rigas family lost its majority control of the co-borrowing companies.

Independent Audits (directed by the Prosecution)

Independent consultant auditor Robert DiBella had stated that obligations accrued by a Rigas entity were entered in the journals appropriately. Mr. DiBella oversaw 25 independent workers who prepared the 22-page summary of transactions from 1999 and April 2002. There were 100,000 transactions analyzed. Consultant Mr. DiBella (while on the stand) was asked if there was anything ''sinister'' about the entries.  Mr. DiBella said  "If there is, then I've been in the wrong profession" 

Mr. Mulcahey’s Testimony

Mr. Mulcahey told federal jurors in New York that internal records kept by Adelphia on syndicated loans were not inaccurate and merely showed more detail than the reports given to lenders.

Mr. Mulcahey was found not guilty, while John and Tim Rigas were convicted to serve 15 to 20 years in prison.

Justice Department and John Ashcroft’s Shifting

There has been a major shift of policy of the Justice Department, once known for taking down giant corporations, including the accounting firm Arthur Andersen, has put off prosecuting more than 50 companies suspected of wrongdoing over the last three years. NY Times reference states that John Ashcroft’s consulting firm has been involved in cases to avoid criminal prosecution. It also indicates that a few years earlier, in the age of Enron, these kinds of charges would probably have resulted in a criminal indictment. Apparently, Monsanto was allowed to pay $1 million and avoid criminal prosecution by entering into a monitoring agreement with the Justice Department.

John and Tim Rigas who have audit evidence that they did nothing wrong are serving 15 and 20 years in prison while Ashcroft’s clients are only paying fines.

Reference:

Notes from the Rigas Memorandum Submitted to the courts dated 4/15/2008 (highlights)

Prior to the criminal trial, Carl Rothenberger of Buchanan Ingersoll & Rooney Law Firm who had performed legal matters for Adelphia consistently refused to speak with the Rigases’ defense counsel. Through his counsel, he advised the Rigas defense team that, if he were subpoenaed to testify at trial, he would invoke his Fifth Amendment rights. Rigas defense counsel was also advised that Rothenberger took a similar view with respect to the government: he would not talk to government investigators or lawyers and would assert a Fifth Amendment privilege if subpoenaed. 

 

He did in fact agree to be interviewed by the U.S. Attorney’s Office prior to the criminal trial. The interview took place over two days shortly before the criminal trial. He was interviewed on February 20 and 21, 2004 by Christopher Clark, one of the prosecution’s trial lawyers and by Thomas Feeney, a U.S. Postal inspector. Thomas Feeney took notes of the interview. Letter from Clark dated February 24, 2004 did not disclose that Rothenberger had been interviewed nor did it advise defense counsel what exculpatory information was in the government’s possession. Following the interview, the prosecutors decided not to call Rothenberger as a witness at trial.

 

After the Rigases’ trial, Rothenberger was also interviewed by the SEC in December 2004 concerning the SEC’s investigation of Adelphia matters. There was a court reporter present who transcribed the interview. The government has never produced the transcript of this interview.

After the criminal trial, Rothenberger was deposed in a civil proceeding for 13 days – far longer than any other witness. He offered a vast amount of exculpatory evidence on the very issues that the government had questioned him about and Rothenberger stated consistently that he did not believe that any type of fraud had occurred. His statements during the government interview were surely consistent with his subsequent sworn testimony and must have contained similar exculpatory evidence.

It is indicated that the government has still not identified the names of any other Buchanan representatives that it interviewed let alone produced those notes. In addition to the Buchanan lawyers, the government has also refused to produce any notes from interviews of representatives from the banks involved in the co-borrowing facilities that were used for many of the securities purchases at issue in this case or even to identify who was interviewed.

In September 2007, the government informed the Rigases for the first time that it had taken notes of its initial interview with Rothenberger. The government then refused to produce those notes in response to an informal request by the Rigases.

Following the criminal trial, the government has refused to produce the notes taken by the SEC during Brown’s preparation for his testimony in that case. Given the exculpatory nature of Brown’s testimony in the SEC proceedings, it stands to reason that the notes of interviews in preparation for that testimony would contain exculpatory information that should be produced to the defense. The production of all of this information is constitutionally mandated.

Basically, the government argued that the Rigases were not entitled to the notes mainly because the law only requires that the government identify those witnesses of which the defense is not aware and that the law does not require that exculpatory evidence be produced. Although the Rigases strongly opposed the government’s arguments, the Court nonetheless denied their motion.

By letter dated February 28, 2008, counsel for the Rigases requested that the

Government produce:

1.  any and all notes of interviews by the government of any Buchanan Ingersoll attorney including, but not limited to, Carl Rothenberger, Bruce Booken and Paula Zawadski.

 

2. Any and all notes of interviews conducted by the SEC of James Brown

 

3. Any and all notes of interviews of representatives from the banks involved in the co-borrowing facilities.

 

By letter dated March 25, 2008, the government refused the Rigases’ request, citing Judge Sand’s opinion in the criminal case that the government has no obligation to turn over information already in the possession of the defense.

The Rigas argument is the government should produce to the Rigases the notes from the interviews conducted by the prosecutors in the SDNY action and the SEC with Buchanan Ingersoll attorneys, including Carl Rothenberger, representatives of the banksinvolved with the co-borrowing facilities, and Jim Brown. The government has an affirmative duty to produce any evidence favorable to the defendant that is material to either guilt or punishment.

James Rigas Statement (May 22,2008)

One of the factors which grossly distorted the trial record was the testimony of the government’s lead witness, Jim Brown. During the spring and summer of 2002, he repeatedly and emphatically told me that all accounting and disclosure matters were handled properly at Adelphia.  He was confident that he and the Rigases had done nothing to violate the law.  But he also expressed tremendous fear that a jury would not understand the complicated issues involved and, since Adelphia had cut off his right to indemnification, that he would not have the funds necessary to defend himself adequately.  He further confided in me that his wife would not stay married to him if he received a long prison sentence, and that he would do whatever it took to make sure that that did not happen. From Brown’s testimony in subsequent civil proceedings, we now have conclusive evidence that he gave untruthful testimony at the criminal trial.  

Summary

There is now a consistency of documented information and evidence from the Dearlove Case, Dibella Testimony, Mulcahey Testimony; as well as the Buchanan Ingersoll Law Partners, Deloitte and Touche auditors, Adelphia Employees, Adelphia vendors, and James Brown at the civil proceedings which is evidence that John and Tim Rigas did nothing illegally. There is now conclusive evidence that the prosecution’s James Brown gave untruthful testimony at the criminal trial.

John Rigas Interview



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