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Litigation born out of the federal criminal trial of four Adelphia Communications executives in New York has now stretched all the way to Fulton County Superior Court in Georgia. A group of Adelphia investors — whose aggregate losses in the now-bankrupt cable company amounted to $50 million — filed suit on Oct. 25 against Scientific-Atlanta and Motorola, charging the set-top cable box manufacturers with engaging in a “conspiracy” to inflate Adelphia’s earnings artificially. “Our clients have suffered significant losses as a result of conduct documented in sworn testimony in the Adelphia trial, and we look forward to helping them recover their losses,” said Rickman P. Brown, one of the attorneys representing the plaintiffs. The lawyer, who is of counsel with Dietrick, Evans, Scholz & Williams in Atlanta, declined to comment further. The complaint also names two executives from Scientific-Atlanta as defendants: Wallace G. Haislip, the company’s senior vice president in charge of finance and operations, and Julian W. Eidson, Scientific-Atlanta’s chief financial officer and treasurer. Adelphia’s Chapter 11 bankruptcy status prevented it from being a defendant. According to the complaint, Scientific-Atlanta and Motorola overcharged Adelphia for the set-top boxes and then “washed” the overcharges by paying them back to Adelphia in the form of fictional “marketing support” services. AIG DKR SoundShore Holdings v. Scientific-Atlanta, No. 2004CV92819 (Fult. Super. filed Oct. 25, 2004). Adelphia used the back-and-forth transactions to boost its bottom line by immediately realizing the “marketing support” payments as earnings while amortizing the inflated cost of the set-top boxes over several years, the suit alleges. The arrangement helped Adelphia boost earnings by approximately $91 million over 2000 and 2001, according to the suit. A spokeswoman for Scientific-Atlanta, Sara Stutzenstein, said the company would not comment on the allegations. “By corporate policy, we don’t comment on matters of ongoing litigation.” For its part, Motorola issued a prepared statement through a spokeswoman. “Motorola has reviewed the accounting for its sales of set-top boxes to Adelphia,” the statement read. “The company is confident that these transactions have been recorded on Motorola’s books in accordance with Generally Accepted Accounting Principles (GAAP). These transactions were done at the request of Adelphia over a two-year period and the portion designated as marketing support totaled approximately $46 million. We intend to vigorously defend the claims against the company.” SIMILAR SUITS The complaint mirrors a similar suit filed against the same defendants last July by a different group of Adelphia investors in federal court in the Southern District of New York. That suit, which seeks class action status, is pending. Argent Classic Convertible Arbitrage v. Scientific-Atlanta, No. 1:04CV05759 (S.D.N.Y. filed July 23, 2004). Scientific-Atlanta also was named as a defendant in another federal suit in New York, this one filed prior to the criminal trial of the Adelphia executives but involving similar complaints with regards to the purchase of set-top boxes and the marketing support agreement. In re Adelphia Comm. Corp., No. 1:03CV01529 (S.D.N.Y. filed Aug. 1, 2003). Scientific-Atlanta issued press releases after being named as a defendant in each case. Both times the company said it “intends to vigorously defend” itself. THE BASIS FOR ALLEGATIONS The substance of the allegations against Scientific-Atlanta and Motorola came to light during testimony given in the federal criminal trial in Manhattan of four former Adelphia executives, including the company’s founder, John J. Rigas, and two of his sons, Michael J. Rigas and Timothy J. Rigas. In July, a jury convicted John and Timothy Rigas of conspiracy, bank fraud and securities fraud charges, but the panel deadlocked on charges against Michael Rigas. The fourth defendant, former Adelphia treasurer Michael Mulcahey, was acquitted on all counts. No sentencing date has been set for John and Timothy Rigas. Last week, a federal judge refused to dismiss the charges against Michael Rigas, clearing the way for prosecutors to retry him on 15 counts of securities fraud. The new trial has yet to be scheduled. The government’s star witness in the criminal trial was James R. Brown, Adelphia’s former vice president of finance who earlier pleaded guilty to securities fraud and agreed to testify in exchange for leniency. Like the other convicted executives, Brown has not yet been sentenced. A spokeswoman for the U.S. attorney’s office in the Southern District of New York said Brown would not be sentenced until after the retrial of Michael Rigas. The complaint filed in Fulton states that, until Brown’s testimony, the “extent of involvement of Scientific-Atlanta and Motorola” remained undisclosed. Both companies previously insisted they had done nothing wrong, according to the suit. The suit goes on to state that Adelphia had been one of the largest customers of set-top cable boxes, accounting for approximately 18 percent of Scientific-Atlanta’s sales and 4 percent of Motorola’s broadband communications sales in 2002. During the criminal trial, Brown said that the idea for the washed earnings came in mid-2000 when Adelphia realized it would not meet Wall Street’s earnings target. The earnings shortfall was due in part to the company incurring higher-than-expected costs related to the rollout of new cable set-top boxes purchased from Scientific-Atlanta and Motorola. After some negotiating with both companies, Brown said Adelphia executives were able to gain the cooperation of Scientific-Atlanta and Motorola. The suit stated that an internal Scientific-Atlanta e-mail, dated Aug. 11, 2000, “revealed” that Haislip and Eidson approved the transactions. According to Brown, Scientific-Atlanta and Motorola profited from the arrangement by demanding Adelphia buy more set-top equipment as payment for participating in the deal. PAYMENTS OFFSET EACH OTHER In the first quarter of 2001, Adelphia altered its prior contracts with Scientific-Atlanta and Motorola by retroactively increasing the price of cable boxes that already had been purchased in 2000 by approximately $32 a box. At the same time, the suit stated, the companies created other agreements to have the overpayments returned to Adelphia as “marketing support payments.” The complaint states that to enhance the appearance of legitimacy, the parties exchanged offsetting checks. In May 2001, Adelphia authorized payment to Motorola in the amount of $18,317,806 for “digital box price increases.” A few days later, Motorola sent a check in the same amount to Adelphia for marketing support. Over the same time period, Adelphia and Scientific-Atlanta traded checks for $16,809,998. In December 2001, Scientific-Atlanta and Motorola assisted Adelphia again by adjusting their sales figures, the complaint says. HIDDEN DEBT REVEALED Adelphia’s fortunes quickly reversed during the first half of 2002. Upon disclosure of the company’s true financial picture, the stock price plummeted from $20.39 a share on March 26, 2002, to 79 cents a share on June 3, 2002, when NASDAQ delisted the security. The stock continues to trade in the pink sheets and closed Tuesday at 25 and a half cents per share. According to the Securities and Exchange Commission, the top executives who faced criminal prosecution had been responsible for excluding $2.3 billion in debt from Adelphia’s books between mid-1999 and the end of 2001. The executives attempted to hide the liabilities through “sham transactions backed by fictitious documents” and “misleading financial statements,” the government said. The SEC also accused company executives of making “repeated misstatements in press releases, earnings reports and commission filings” by inflating the number of basic cable subscribers, the extent of Adelphia’s cable plant upgrades and the company’s earnings. The government said the Rigas family looted the company by using Adelphia funds to finance “stock purchases, purchase timber rights to land in Pennsylvania, construct a golf club for $12.8 million, pay off margin loans and other Rigas family debts and purchase luxury condominiums in Colorado, Mexico and New York City.” In May 2002, John Rigas resigned from the company he founded 50 years earlier. His son, Timothy, also resigned, and a month later the company filed for Chapter 11 bankruptcy. Adelphia is now for sale and accepting bids for any or all of seven “strategic clusters” of cable systems the company operates throughout the country. At the moment, Adelphia remains the fifth-largest cable company in the nation, providing service to more than 5.3 million customers and employing more than 15,000 people.

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