Bankrupt cable TV operator Adelphia Communications Corp. sued Motorola Inc. this week for more than $1 billion, alleging that the Schaumburg-based company assisted in the fraud that led to Adelphia’s collapse in 2002.
Motorola, which denies the charge, was one of two prime suppliers of TV set-top boxes to Adelphia, whose founder has been sentenced to prison for fraud.
Meanwhile, Adelphia’s other set-top vendor, Scientific-Atlanta, was charged Thursday by federal regulators with abetting fraud at Adelphia.
Scientific-Atlanta agreed to pay $20 million and settle civil charges from the Securities and Exchange Commission. Neither the SEC nor Motorola would comment on whether regulators have undertaken a similar probe of Motorola.
While best known for making mobile phones and wireless communication equipment, Motorola also dominates the U.S. market for cable TV set-top boxes, along with Scientific-Atlanta.
Colorado-based Adelphia sued Motorola Thursday in U.S. Bankruptcy Court in New York. It claims Motorola “knowingly assisted” in fraudulent schemes by Adelphia executives to improperly boost the TV operator’s operating profits.
In a statement, Motorola said it “was unaware of the fraudulent activities conducted by the principals of Adelphia.”
The suit asks Motorola to pay back $62 million and be liable for more than $1 billion in fraud-induced damages suffered by Adelphia.
Paul Jacobson, an Adelphia spokesman, said the company pursued potential claims against Scientific-Atlanta that were similar to those levied against Motorola.
“But we had some negotiations with them [Scientific-Atlanta] and entered into a tentative confidential settlement subject to approval by the bankruptcy court,” Jacobson said.
Adelphia collapsed in 2002 and lost more than $2 billion because of a fraud perpetrated by the company’s founder, John Rigas, and his son Timothy, Adelphia’s chief financial officer. In 2004, both were convicted of 18 felony fraud counts.
The Rigases used “sleight-of-hand accounting techniques” in 2000 and 2001 to book hundreds of millions of dollars in operating profit gains that “had no basis in reality,” according to Adelphia’s suit.
“Motorola knowingly assisted the Rigas insiders’ scheme to improperly book a substantial portion of the income that they needed to sustain the false appearance of growth in [Adelphia’s] cable businesses,” the suit says.
Specifically, Motorola agreed to retroactively increase the price of set-top boxes already sold to Adelphia, and then “kick back” the “false price increase” in the form of a “marketing support” payment to Adelphia, the suit claims.
The transactions created a circular flow of money that permitted the Rigases to misstate Adelphia’s income.
Motorola, in a statement, said it “has no control over its customers’ accounting decisions and played no role in Adelphia’s decision on how to account for Adelphia’s transactions.”
Motorola added that it is confident that its sales to Adelphia were properly recorded on its own books.
The marketing support payments noted in Adelphia’s suit against Motorola are also at the heart of the SEC’s complaint against Scientific-Atlanta.
Scientific-Atlanta made marketing support payments to Adelphia to help Adelphia increase demand for digital set-top boxes, the SEC said. Scientific-Atlanta would then get the money back through a corresponding increase in the price of digital boxes supplied to Adelphia.
The deal would have no “economic impact” on Scientific-Atlanta, the SEC complaint said, but it would help a key customer.
But Adelphia executives did not use the payments the way they were supposed to, the SEC said, claiming that instead of using the money for marketing they used it to artificially increase earnings by about $43 million.
Meanwhile, Scientific-Atlanta executives “were confronted with numerous facts… that the marketing support agreement was being misused by Adelphia,” the SEC said.
The company “directly or indirectly… aided and abetted” Adelphia, the SEC concluded.
Scientific-Atlanta was bought in February by Cisco Systems Inc. Motorola got into the cable TV equipment business in 2000 when it bought Horsham, Pa.-based General Instrument.