Opinion ID: 2725
Heading Depth: 3
Heading Rank: 3

Heading: Adelphia's Inflated EBITDA

Text: 28 Several witnesses testified that investors commonly use EBITDA to assess the earnings from operations of cable companies. Brown testified that he told John Rigas Adelphia's real EBITDA and how it compared with its competitors' results. Brown also told John Rigas what would happen if Adelphia reported the actual EBITDA: Adelphia would default on some of its public debt, its stock price could decline, and its interest expenses and the cost of borrowing from banks would increase. While John Rigas told Brown that Adelphia needed to get away from using what Brown described as accounting magic to manipulate the numbers, he never told Brown to stop manipulating the numbers. 29 The accounting magic used to manipulate EBITDA comprised two schemes: (1) fraudulent allocations of management fees that the RMEs owed to Adelphia and (2) wash transactions with Adelphia's suppliers. 7 Brown explained that he would arbitrarily inflate the management fees that an RME owed to Adelphia, and then record a corresponding interest expense that Adelphia owed the RME. The interest expense would ensure that there was no real cost to the RME as a result of the scheme but, because it was interest, it would not be included in Adelphia's EBITDA. As a result, then, this scheme—which Timothy Rigas went along with—artificially inflated Adelphia's EBITDA. 30 In his testimony about the wash transactions, Brown indicated that Timothy Rigas discussed, and then implemented, schemes with two separate equipment suppliers, Motorola and Scientific Atlanta. The effect of the wash transaction schemes was to increase Adelphia's EBITDA by $87.1 million. In these schemes, Adelphia increased the price it paid to Motorola and Scientific Atlanta for digital converter boxes, and Motorola and Scientific Atlanta agreed to pay Adelphia the amount of the increase for advertising and market support. Because the payments to the equipment suppliers were booked as capital expenses, and the payments from the suppliers were booked as revenue, this scheme artificially inflated the EBITDA. 8 According to Brown, Timothy Rigas instructed him to book nearly $20 million in increased advertising revenue even before the two equipment suppliers agreed to the wash transaction scheme; Adelphia never provided any advertising services for these suppliers. 31