Cisco Subsidiary Charged With Enabling Adelphia Communications to Commit Fraud (ADELQ, CSCO)

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Includes: ADELQ, CSCO
by: Belvedere

A story that’s an echo of bubble years past: Thursday the SEC charged Scientific-Atlanta, which is now a unit of Cisco Systems (NASDAQ:CSCO) with aiding and abetting fraud at Adelphia Communications (ADELQ) before that particular box of tinder exploded into flames. So how did Scientific-Atlanta “aid and abet”?

Around August 2000, Adelphia asked Scientific-Atlanta to increase the price of digital cable television set-top boxes it was selling to them - then kick back the difference in price to them as “marketing support” for moving the set-top boxes. Adelphia performed no such support, which is where the machinations get interesting: it capitalized the price increases paid to Scientific-Atlanta. When it received marketing support payments from Scientific-Atlanta, Adelphia treated them as a contra marketing expense, reducing its marketing expense - and increasing EBITDA.

(Those of you who believe EBITDA doesn’t lie, take note.)

The SEC alleges that Scientific-Atlanta knew Adelphia was gaming the marketing support agreement while helping it along. Essentially, the charges were that the firm knew there was no substance to the transactions: they were designed to provide an unsupportable accounting appearance. Without admitting or denying guilt, Scientific-Atlanta is settling the charges for $20 million.

ADELQ 5-yr chart:

ADELQ 5-yr chart

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