Posted on 06/04/2002 11:19:35 PM PDT by HAL9000
Adelphia Communications Corp.'s board and auditors have come under fire for the cable concern's self-dealing, but another player is starting to take heat for its role in the company's implosion, Wednesday's Wall Street Journal reported.Salomon Smith Barney acted as Adelphia's lead underwriter for some recent big offerings of Adelphia stock, while its parent Citigroup Inc. was one of the cable firm's primary creditor banks. Salomon has also been hired to help sell the company's cable-TV assets.
The intimate involvement of Citigroup's different departments with Adelphia put it in a prime position to know about the co-borrowing arrangements and loans that have helped land Adelphia and its founding Rigas family under criminal and regulatory investigations, say people close to the Adelphia inquiry.
The Securities and Exchange Commission, which is conducting a formal probe into Adelphia, is looking at what information Salomon had prior to two public offerings of Adelphia stock last year, according to people familiar with the matter. Securities experts said such inquiries are relatively common in cases like this. Citigroup declined to comment.
Salomon led a $1.5 billion stock offering at $25.50 a share in January, and was a co-manager of a $1 billion stock sale at $21.50 a share in November, with the proceeds used to help pare the Coudersport, Pa., cable concern's mounting debt. The sales were accompanied by preferred stock offerings totaling $800 million. Adelphia, which closed at 70 cents when it was delisted Monday from the Nasdaq Stock Market, traded at 85 cents in over-the-counter trading yesterday.
Adelphia didn't disclose until several months after the offering that the company was co-borrower on $3.1 billion in loans to a partnership owned by the Rigas clan. The family used $1.4 billion of the loans to buy shares of the company, including at least $600 million during the January and November stock offerings.
The co-borrowing arrangements allowed Rigas family members to keep their stake the same in Adelphia by buying some of the additional shares, but also added to the company's already-debt-swollen balance sheet. Investors who bought shares in the November and January offerings have complained they were blindsided, because they didn't realize that Adelphia was co-borrower with the clan on the loans, adding to Adelphia's debt load of more than $15 billion.
Some of the $3.1 billion in borrowed funds came from credit lines provided by Citigroup to Adelphia. Citigroup was one of several banks, including Bank of America and First Union, that provided credit lines to Adelphia. It's unclear how much either Salomon or Citigroup knew about the co-borrowing arrangements and whether the firms were aware the Rigases were using borrowed funds to buy company stock. People familiar with the situation said that is one of many things Adelphia's board is trying to determine.
People familiar with the situation said Citigroup assumed Adelphia was using the borrowed money for working-capital purposes. These people said Citigroup had no visibility into where the money was going and that there was no way to tie the co-borrowing agreements to the Rigas family's stock purchases.
What Salomon knew or didn't know could prove to be a liability for the firm because of securities laws governing the role of underwriters.
When Salomon agreed to underwrite two public offerings of Adelphia shares, it was required to perform a certain amount of "due diligence" to make sure the information it presented to potential investors was accurate, said Seth Taube, a former SEC enforcement chief.
Wall Street Journal Staff Reporter Deborah Solomon contributed to this report.
Copyright 2002 Dow Jones & Company, Inc.
All Rights Reserved.
Instead of the government going after Microsoft, the government should go after these banks and brokers.
Some of the $3.1 billion in borrowed funds came from credit lines provided by Citigroup to Adelphia. Citigroup was one of several banks, including Bank of America and First Union, that provided credit lines to Adelphia.
It's unclear how much either Salomon or Citigroup knew about the co-borrowing arrangements and whether the firms were aware the Rigases were using borrowed funds to buy company stock.
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