Tyco Corporate Scandal of 2002 (Ethics Case Analysis)

UPDATED AUG 10, 2015 JONATHAN ROMERO

Tyco ethics case study, 2002 corporate scandal, Kozlowski motivation avoid taxes, commingling assets,
Board of directors

Kozlowski’s mug shots. Tyco Corporate Scandal of 2002: What was Kozlowski’s motivation to avoid sales
taxes on art purchases? How did the concept of commingling assets and inaction of the Board of
Directors affect the case?

The case of Tyco’s corporate scandal of 2002 focuses on the problem of unethical business practice and
related issues. Tyco was a large organization that grew through numerous acquisitions. Tyco’s case
shows that the problem was the unethical business practices of a number of its top ranking officers,
especially CEO Kozlowski. Kozlowski was involved in numerous financial transactions that were not
included in the financial reports of the company. Kozlowski was also involved in unethical transactions
with other Tyco officers and lower ranking employees to cover up for Kozlowski’s illegal financial
transactions. Kozlowski even got outsiders involved in the problem when his second wife received
money diverted from the firm. Court proceedings proved that Kozlowski stole millions of dollars from
Tyco, and that his illegal financial transactions were extensive. Kozlowski and other officers from Tyco
were imprisoned. Tyco declined as investors lost confidence in the company.

This article analyzes the major ethics issues in the Tyco corporate scandal of 2002, CEO Kozlowski’s
motivation to avoid sales taxes on art purchases, the relevance of the concept of commingling assets,
and the role of the board of directors in monitoring adjustments in Tyco’s programs.

Major Ethics Issues in Tyco’s Case

Tyco’s case shows that ethics issues can occur in different parts of an organization. Even outsiders or
third parties could get involved in these ethics issues. The major ethics issues in Tyco’s case were as
follows:

Unethical Leadership

Unethical business practice of subordinates

Unethical auditing practice on Tyco’s business

Tyco’s Unethical Leadership. The unethical business practice of leaders was observed in Kozlowski.
Kozlowski was the main actor in the financial troubles and legal battles in this case. Kozlowski was the
main recipient of the money stolen from Tyco. In addition, he was the main influential person who
persuaded other top-ranking Tyco officers and lower ranking employees to get involved and to keep
silent to cover up for Kozlowski’s illegal activities. This case shows that extensive involvement of
Kozlowski and other leaders in unethical and illegal activity brought Tyco down.

Unethical Business Practice of Subordinates. The complications in Tyco’s case involved people other
than Kozlowski. Kozlowski recruited the support of other high-ranking officers in the organization. He
also convinced some lower ranking employees to keep their silence in exchange for financial benefits.
Also, Kozlowski convinced one of the board members to keep silent about the illegal financial
transactions on the mansion Tyco paid for the benefit of Kozlowski and his wife. In exchange, the board
member received financial benefits.

Unethical Auditing Practice. The auditing firm PricewaterhouseCoopers responsible for checking the
financial reports of Tyco failed to identify Kozlowski’s illegal financial transactions. As a result,
Kozlowski’s unethical business practice continued and became extensive. These practices became more
difficult to stop because of absent constraining influence from the auditing firm.

Kozlowski’s Motivation for Avoiding Sales Taxes on Art Purchases

Kozlowski’s motivation for trying to avoid sales tax on his art purchases were (1) his materialistic desires,
and (2) his avoidance of raising a red flag on his illegal activities at Tyco.

Kozlowski’s materialistic desires pointed to greed for financial or material gains. These desires led him to
commit illegal financial transactions at Tyco. This case shows that Kozlowski had a history of tax evasion
that goes even years before investigations started. Thus, he has a history of prioritizing materialistic
gains over ethical conduct.
Also, Kozlowski tried to avoid paying sales taxes for his art purchases because doing so would raise red
flags for authorities. Sales taxes create formal records of financial transactions. In Tyco’s case, the sales
taxes amounted to millions because the purchased art items were expensive. It would have been easier
for authorities to detect Kozlowski’s illegal financial transactions because it was unusual for Tyco officers
like Kozlowski to make such big purchases in a small amount of time.

Commingling of Assets in Tyco’s Case

The concept of commingling of assets in Tyco’s case refers to the adoption of the view that the assets of
an employee are similar to the assets of the company. Commingling of assets occurred when Kozlowski
considered the assets of Tyco as his own personal assets. The case shows that Kozlowski used Tyco’s
funds to pay for his personal expenses. He used Tyco’s money to pay for his second wife’s birthday
party. He also used Tyco’s money to cover the costs of properties he purchased. He used the company’s
money to purchase household items and art pieces for his personal use.

Tyco’s case shows that commingling of assets made it easy for Kozlowski to use the company’s assets for
personal needs. The company had programs that enabled Kozlowski to unethically use assets for
personal needs. Kozlowski’s use of Tyco’s money was not just mere stealing of funds. It was also an
exploitation of the weakness of the financial loopholes in the firm at the time of his leadership.

Board of Directors and Adjustments in Tyco’s Programs

It would have been possible for the board of directors to see the adjustments taking place in programs
at Tyco. This would have been so if the board of directors had appropriate mindsets and activity. Tyco’s
programs were a weakness in the organization. These programs provided benefits to officers and other
employees. The financial programs were opportunities for Kozlowski’s illegal financial transactions and
unethical business practices.

The board of directors should have examined these programs to evaluate their appropriateness. The
directors should have identified the programs’ weaknesses and loopholes, which Kozlowski and other
officers exploited for their own personal benefit for years. Thus, the ineffectiveness of the board of
directors in examining Tyco’s programs enabled Kozlowski’s unethical business practices.
Tyco International

From Wikipedia, the free encyclopedia

For the unrelated division of Mattel, see Tyco Toys.

Tyco International plc

Tyco.svg

Type

Subsidiary

Industry Security

Founded 1960

incorporated 1962

Headquarters Incorporation: Cork, Ireland

Operational/Corporate: Princeton, New Jersey, United States (prior to merger with Johnson Controls)

Key people

George R. Oliver

(CEO)

Edward D. Breen

(Chairman)

Products Security Solutions, Fire Protection

Revenue IncreaseUS$17.36 billion (2011)[1]

Operating income

IncreaseUS$2,119 million (2011)[1]

Net income

IncreaseUS$1,733 million (2011)[1]

Owner Johnson Controls

Number of employees
69,000 (2011)[1]

Website www.tyco.com[1]

Tyco International PLC is a security systems company incorporated in the Republic of Ireland,[2] with
operational headquarters in Princeton, New Jersey, United States (Tyco International (US) Inc.). Tyco
International is composed of two major business segments: Security Solutions and Fire Protection.

In 1997, Tyco International acquired AT&T Submarine Systems, gaining research and development and
fleet assets, along with the manufacturing capability to produce repeaters and transmission equipment.
[3] These additional capabilities, combined with cable manufacturing at Tyco Integrated Cables Systems
in Newington, New Hampshire, established Tyco Telecommunications as the world’s first vertically
integrated global optical network supplier, capable of developing the technology and manufacturing the
components, to designing, building and maintaining systems.

In June 2007, Tyco concluded a corporate separation that split the company into three publicly
independent companies: Covidien Ltd. (formerly Tyco Healthcare), TE Connectivity Ltd. (formerly Tyco
Electronics Ltd.) and Tyco International Ltd. (formerly Tyco Fire & Security and Tyco Engineered Products
& Services (TFS/TEPS)).

Tyco International announced in January 2011 that it is acquiring Brink's Home Security Holdings,
(operating as Broadview Security) in a transaction valued at $2.0 billion.[4] It is reported that Broadview
Security will merge into Tyco's ADT Security Services division.

On January 25, 2016, Johnson Controls announced that it will merge with Tyco in which all businesses of
Tyco and Johnson Controls will be combined under Tyco International plc to be renamed as "Johnson
Controls International plc."[5] The merger was completed on September 9, 2016[6]

Contents [hide]

1 Timeline

1.1 1960s

1.2 1970s

1.3 1980s
1.4 1990s

1.5 2000–2001

1.6 Early 2002

1.7 Late 2002

1.8 2003

1.9 2004

1.10 2005

1.11 2006–2007

1.12 2011–2012

1.13 2013

1.14 2014

2 Corporate scandal of 2002

3 Net revenues by year

4 Products

5 Environmental record

6 Restatement

7 See also

8 Notes

9 References

10 External links

Timeline[edit]

1960s[edit]

Founded by Arthur J. Rosenberg in 1960, Tyco, Inc. was formed as an investment and holding company
with two segments: Tyco Semiconductors and The Materials Research Laboratory. In the first two years
of operation, the company focused primarily on governmental research and military experiments in the
private sector.[7]
In 1962, the business was incorporated in Massachusetts and refocused on high-tech materials science
and energy conservation products. Two years later in 1964, the company went public and began to fill
gaps in its development and distribution network by acquiring Mule Battery Products, the first of Tyco’s
16 acquisitions in the next four years.[7]

1970s[edit]

Cover scan of the final issue of Tyco World, May 2006

In the 1970s, Tyco boomed, beginning the decade with consolidated sales and stockholder equity
reaching $34 million and $15 million, respectively.[7]

In 1974, Tyco was listed on the New York Stock Exchange (NYSE).[7]

By the end of the decade, Tyco had a larger and more diverse corporation with sales topping $500
million and a net worth of nearly $140 million. Tyco’s success was largely attributed to ambitious
acquisitions of Simplex Technology, Grinnell Fire Protection Systems, Armin Plastics and the Ludlow
Corporation.[7]

1980s[edit]

Following aggressive acquisition period through the 1970s, Tyco management focused the early 1980s
on organizing its newly acquired subsidiaries. Tyco divided the company into three business segments
(Fire Protection, Electronics, and Packaging), and implemented strategies to achieve significant market
share in each of Tyco’s product lines.[7]

Once organized, Tyco returned to the strategy of growth by acquisition in the later part of the decade
acquiring Grinnell Corporation, Allied Tube and Conduit, and the Mueller Company. Tyco then again,
reorganized its subsidiaries into four segments: Electrical and Electronic Components, Healthcare and
Specialty Products, Fire and Security Services and Flow Control. This reorganization remained in place
until 2007 when current CEO Ed Breen spun off the Electrical and Healthcare segments to create three
publicly independent companies.[7]
1990s[edit]

A TYCO Standard Spray Sprinkler head

In 1992, Dennis Kozlowski became CEO of Tyco International, and, for the next several years, the
company again adopted an aggressive acquisition strategy, eventually acquiring (by some accounts) over
1,000 other companies between 1991 and 2001.[citation needed]

Major acquisitions in the 1990s included: Wormald International Limited, Neotecha, Hindle/Winn,
Classic Medical, Uni-Patch, Promeon, Preferred Pipe, Kendall International Co., Tectron Tube, Unistrut,
Earth Technology Corporation, Professional Medical Products, Inc., Thorn Security, Carlisle, Watts
Waterworks Businesses, Sempell, ElectroStar, American Pipe & Tube, Submarine Systems Inc., Keystone,
INBRAND, Sherwood Davis & Geck, United States Surgical, Wells Fargo Alarm, AMP, Raychem, Glynwed,
Temasa and Central Sprinkler designs.[7]

To reflect Tyco’s global presence following the abundant acquisitions, the company’s name was changed
from Tyco Laboratories, Inc. to Tyco International Ltd. in 1993. In addition, Tyco launched The Pipeline,
an internal employee newsletter; the title was later changed to Tyco World. Its final issue was published
in April–May 2006.

In 1996, Tyco was added to the Standard & Poor's S&P 500 Composite Index, which consists of the 500
publicly traded companies in the United States with the largest market capitalization.[8]

In July 1997, Tyco merged by reverse takeover with smaller publicly traded security services company
named ADT Limited, controlled by Michael Ashcroft. As part of the deal, Tyco International Ltd. of
Massachusetts became a wholly owned subsidiary of ADT Limited, and simultaneously ADT changed its
name to Tyco International Ltd., retaining the former Tyco stock symbol, TYC. The merger moved Tyco’s
incorporation to Bermuda, a tax haven, where it was headquartered in the colonial capital of Hamilton.
A new subsidiary named ADT Security Services was also formed out of the merger.[9][10]

In 1999, Tyco acquired two S&P 500 companies in a buyout. They acquired the electronics connector
manufacturer AMP Inc., for $12.22 billion and a materials science company, Raychem Corp., for $1.4
billion.[11][12]
In 2000, Tyco closed the year spinning off a deep-sea fiber-optic cable-laying division it had purchased
from AT&T as Tyco Submarine Systems in an initial public offering.[citation needed]

2000–2001[edit]

Tyco’s aggressive acquisition strategy continued into the early 2000s, with the purchases of General
Surgical Innovations, Siemens Electromechanical Components, AFC Cable and Praegitzer. The additions
gave Tyco an ending fiscal 2000 year revenue exceeding $28 billion, near $2 billion coming from the sale
by a subsidiary of its common shares.[7]

In the fiscal 2001 year, Tyco acquired Mallinckrodt Inc. and Simplex Time Recorder Company which it
later merged in January 2002 with Grinnell Fire Protection to form an indirect wholly owned subsidiary,
SimplexGrinnell LP, the world's largest fire protection company. For the year ended September 2001,
the company's book value exceeded $110 billion. However, the company more than doubled its long-
term debt, by over $80 billion.[13]

In October 2001, the Engineered Products and Services segment acquired Century Tube Corp, and
followed it by buying Water & Power Technologies in November 2001. The following November, the
Tyco Electronics segment acquired Transpower Technologies. The next month, the Plastics and
Adhesives segment acquired LINQ Industrial Fabrics, Inc.[7]

Early 2002[edit]

With complexity growing within Tyco’s subsidiaries, in January 2002, Tyco announced a plan to split the
business into four separate companies. However, this plan was abandoned after a downgrade in its
credit rating and a significant drop in its stock price.

Later that month, Tyco’s acquisitions continued throughout all of its segments: the Electronics segment
acquired Communications Instruments, Inc. The Healthcare segment bought Paragon Trade Brands. The
Engineered Products and Services segment acquired Clean Air Systems. And the fire and Security
segment of Tyco acquired SBC/Smith Alarm Systems, DSC Group, and Sensormatic Electronics Corp.[7]

For all the acquisitions Tyco made in 2002, the company also incurred extensive losses. During the first
quarter of 2002, following the recession of the previous year, the electronics segment recorded a charge
of over $2 billion, related to massive overcapacity of fiber-optic cable, which in turn affected the in-
process buildout of Tyco's global undersea fiber-optic network, known as Tyco Global Network (TGN).
TGN generated a loss for fiscal 2002 of over $3 billion, with a restructuring charge of over $500 million.
Construction of TGN was eventually completed in 2003.[14]

The electronics segment also recorded over $1 billion in restructuring charges in 2002 from inventory
write-down and facility closures. In addition, 2002 struck Tyco with two goodwill impairments, the first
for over $500 million in the second quarter, due to their fiber-cable overcapacity issue and other
corporate problems. The second, costing the electronics segment $250 million related to sales issues in
Power Systems, Electrical Contracting Services, and the Printed Circuit Group. To make Tyco’s financial
matters worse, the company lost over a quarter of $1 billion in investment during 2002 in FLAG Telecom
Holdings Ltd.[14]

In an effort to cut losses, on July 8, 2002, Tyco divested its Tyco Capital business through an initial public
offering, with the sale of 100% of the common shares in CIT Group Incorporated. It recorded the CIT
divestment as discontinued operations for 2002, for a $6 billion loss, and as an almost $7 billion
impairment charge. That month, the Tyco Healthcare segment also divested Surgical Dynamics, Inc.[7]

For the year ended September 2002, Tyco revenue rose to nearly $35 billion. However, it suffered more
than a $9 billion loss that year, which included the asset impairment write-down of TGN by over $3
billion, losses of nearly $2 billion for the two restructuring charges, and over $1 billion from the two
goodwill impairment charges. In all, the net charges totaled nearly $7 billion of the loss that year. The
stock price plummeted.[14]

To add to the financial woes of the company, midway through the fiscal 2002 year, Tyco became
embroiled in a massive scandal involving the excesses by its former chairman and CEO, L. Dennis
Kozlowski, and his senior management team. Kozlowski resigned and former Tyco CEO John F. Fort
became interim CEO until the board of directors completed a search for a permanent replacement. Early
2002, Tyco was alleged in violation of the Securities Exchange Act by nondisclosure of major financial
information and artificially inflating its earnings.[15] On June 17, 2002, Tyco filed federal suit against
Mark H. Swartz, Tyco's former executive vice president and chief corporate counsel, and Frank E. Walsh,
a former director.[7]

Late 2002[edit]
In July 2002, Edward D. Breen was appointed president, CEO, and chairman of Tyco for an initial three-
year term. Breen had previously been president and COO of Motorola since his promotion at that
company in January 2002.[16]

Breen made an immediate impact on Tyco by gutting the existing board of directors and leadership team
that worked with Kozlowski and replacing them with a new set of managers. One month after his
appointment, Tyco announced the appointment of John Krol as lead director of the Board of Directors
with the priority of improving Tyco's Corporate Governance.[17]

Breen made additional changes, appointing David FitzPatrick as Executive Vice President and CFO,
William Lytton, Executive Vice President and General Counsel, and Eric Pillmore as Senior Vice President
of Corporate Governance.[citation needed]

With a new management team in place, Tyco began a two phase internal investigation of former CEO
Kozlowski. The investigation led to Tyco filing two federal lawsuits. On September 12 and December 6,
2002, Tyco filed a federal suit against Kozlowski and an arbitration claim against former CFO and
director, Mark H. Swartz. Swartz, however, failed to submit to the American Arbitration Association and
Tyco followed with a federal suit against him.[14]

On November 27, 2002, the State of New Jersey took action in the scandal, filing a federal suit against
Tyco and former personnel, with charges in part of violating the New Jersey Racketeer Influenced and
Corrupt Organizations Act (RICO) statute, stemming from the Kozlowski scandal.

As a result of the scandal, Tyco and some former directors and officers were named as defendants in
more than two dozen securities class-action lawsuits. Most of the cases were consolidated and
transferred to the United States District Court for the District of New Hampshire and filed by court-
appointed lead plaintiffs on January 28, 2003, as the case In Re Tyco International Securities Litigation,
citing causes of action under the Securities Act of 1933 and the Securities Exchange Act of 1934. That
March 31, Tyco made a motion to dismiss, which was granted in part over a year later, on October 14,
2004.[18]

2003[edit]
On February 3, 2003, the scandal continued to play out in the courts, Tyco and more personnel were
again named as defendants in an amended consolidated class-action federal suit brought on behalf of
retirees in its Retirement Savings and Investment Plans, citing causes under the Employee Retirement
Income Security Act. On December 2, 2004, the New Hampshire court granted in part Tyco's motion to
dismiss.[citation needed]

Removed from the scandal, Tyco made internal moves within the company in 2003 forming its Plastics &
Adhesives business segment, a former piece of the Healthcare & Specialty Products segment. Other
changes came in Tyco’s corporate governance: Tyco’s board re-elected John Krol as lead director, Tyco
reorganized the assignments of the board’s committee, adopted a new board of governance principles
and new Delegation of Authority policy which strengthened control over cash disbursements within the
company.[citation needed]

The final improvement on corporate governance came in the Guide to Ethical Conduct. The guide was
produced to advise employees as to correct procedures and warn of unethical practices and behavior.
All Tyco employees are now required to take a brief ethics course and sign an annual ethics statement.
[citation needed]

2004[edit]

In an effort to enhance consumer awareness and revive corporate image, in June 2004, Tyco launched a
new global print-advertising campaign, “Tyco a vital part of your world.” Tyco also began a divestiture
program following a review of its core businesses. Part of the plan was to sell TGN, which by then had
been entirely written off in value. Agreement for the sale was reached in November.

In the second quarter of 2004, ADT Security sold off Sonitrol.

In all, within its divestiture program, by fiscal year end of 2004, Tyco had divested 21 businesses and
liquidated four non-core businesses, primarily within the Fire and Security segment.

In September 2004, Tyco also divested Electrical Contracting Services from the electronics segment, due
to a decrease in sales. After September 30, Tyco divested an additional seven non-core businesses,
bringing the program aggregate proceeds up to $500 million that year.
By the end of 2004, Tyco employed under 260,000 people, with two-thirds outside the United States.
Revenue was up strongly, to over $40 billion for the first time. Once again the strengthening euro
against the dollar helped Tyco, accounting primarily for $1.5 billion of the increase in revenue. Various
charges, losses, and debt repayment totaled nearly $1 billion in 2004, however profitability tripled that
year to almost $3 billion.

2005[edit]

Videsh Sanchar Nigam Limited (VSNL), India acquired the Tyco Global Network (TGN) from Tyco
International for $130 million. The chief stockholder in VSNL is India's Tata Group, also one of India's
largest conglomerates. It was once valued at $3 billion during the telecommunications bubble.[citation
needed]

Tyco continued its divestiture program throughout 2005. The largest divestiture came in the
announcement of a definitive agreement to sell its Plastics, Adhesives and Ludlow Coated Products
businesses to an affiliate of private investment firm Apollo Management, L.P. Tyco believed the segment
no longer fit within the company's portfolio.[citation needed]

Tyco was awarded the largest statewide public safety communications project in the United States in
2004 when one of Tyco Electronics’ businesses, M/A-COM Technology Solutions, signed a contract to
maintain New York's Statewide Wireless Network (SWN). The contract was worth approximately $2
billion and would last for 20 years.[citation needed]

Tyco also acquired two key companies to its Healthcare segment, Vivant Medical Inc. and Floréane
Medical Implants.[citation needed]

2006–2007[edit]

On February 16, 2006, a group of institutional investors, part of an existing lawsuit against Tyco
International, sued the company to stop its proposed breakup plan.[19]

By the end of the fiscal year 2006, Tyco’s revenue had eclipsed $17 billion.[20][clarification needed]
Despite the strong cash flow, growing revenue and decreased debt, Tyco and its board of directors
approved a plan to separate Tyco into three publicly independent companies. Tyco believed that this
would allow for each segment to perform better within its particular market and create more value for
its shareholders.[citation needed]

The separation was completed in July 2007, when Tyco separated into three publicly independent
companies:[7]

Covidien Ltd. (formerly Tyco Healthcare)

Tyco Electronics Ltd. (now TE Connectivity)

Tyco International Ltd. (formerly Tyco Fire & Security and Tyco Engineered Products & Services
(TFS/TEPS))

Following the separation, Chairman and CEO Ed Breen remained at the head of Tyco International,
which was then composed of five major business segments: ADT Worldwide, Fire Protection Services,
Safety Products, Flow Control and Electrical and Metal Products. The company generated revenue of
$18.8 billion in 2007 and employs 118,000 people across all 50 states and in more than 60 countries.[1]

2011–2012[edit]

In September 2012, Tyco International’s directors announced plans to split the company once again,
separating the company’s Flow Control business, North America’s residential security business and its
international fire and security business in a plan that Chief Executive Ed Breen described as: “the best
path to create long-term shareholder value.”[21]

The separation was completed on October 1, 2012, resulting in the following companies being created:

Tyco: Focused on fire protection and electronic security products, installation and services worldwide.

The ADT Corporation in North America: Focused on residential and small business security installation
and services in North America.

Flow Control: Focused on water and fluid solutions, valves and controls, and equipment protection
products worldwide. This business merged with Pentair Inc. and is now part of Pentair Ltd.

The new Tyco is a $10+ billion global leader in fire protection and security solutions and provides the
following solutions: life safety products, fire protection products, fire protection installation and
services, security products and security installation and services.
Tyco retains use of the ADT brand for security installation and services outside of North America. ADT’s
commercial security installation and services business in North America was rebranded and is now Tyco
Integrated Security. Tyco has over 70,000 employees worldwide, operating in nearly 50 countries and
serves over three million customers.

In September 2012, Tyco was accused of violation of the Foreign Corrupt Practices Act (FCPA) and
agreed in a payment of around $13 million in civil penalties to the Securities Exchange Commission.[22]

2013[edit]

In November 2013, Tyco approached various private equity firms offering to sell its Korean security unit,
Caps Co.[23]

2014[edit]

In February 2014, US private equity firm Carlyle Group entered into talks with Tyco to acquire its South
Korean security systems unit, valued at around $2 billion.[24]

In 2014, Tyco International sold its New Zealand based security company Armourguard Security limited
to Evergreen International, The cost of the sale is yet to be released.

Corporate scandal of 2002[edit]

Former chairman and chief executive Dennis Kozlowski and former chief financial officer Mark H. Swartz
were accused of the theft of more than US$150 million from the company. During their trial in March
2004, they contended the board of directors authorized it as compensation. After a retrial in 2005,
Kozlowski and Swartz were each found guilty on over 30 separate violations.

During jury deliberations, juror Ruth Jordan, while passing through the courtroom, appeared to make an
"okay" sign on the table. She later denied she had intended that gesture, but the incident received much
publicity (including a caricature in the Wall Street Journal), and the juror received threats after her name
became public.[25] Judge Michael Obus declared a mistrial on April 4, 2004.
On June 17, 2005, after a retrial, Kozlowski and Swartz were convicted on all but one of the more than
30 counts against them. The verdicts carry potential jail terms of up to 25 years in state prison.
Kozlowski himself was sentenced to no less than eight years and four months and no more than 25 years
in prison. Swartz received the same sentence. Then in May 2007, New Hampshire Federal District Court
Judge Paul Barbadoro approved a class action settlement whereby Tyco agreed to pay $2.92 billion (in
conjunction with $225 million by Pricewaterhouse Coopers, their auditors) to a class of defrauded
shareholders represented by Grant & Eisenhofer P.A., Schiffrin, Barroway, Topaz & Kessler, and Milberg
Weiss & Bershad.

On January 17, 2014, Kozlowski was granted parole, from the Lincoln Correctional Facility in New York
City.

Tyco Background

Tyco International has operations in over 100 countries and claims to be the world's largest maker and
servicer of electrical and electronic components; the largest designer and maker of undersea
telecommunications systems; the larger maker of fire protection systems and electronic security
services; the largest maker of specialty valves; and a major player in the disposable medical products,
plastics, and adhesives markets. Since 1986, Tyco has claimed over 40 major acquisitions as well as many
minor acquisitions.

How the Fraud Happened

According to the Tyco Fraud Information Center, an internal investigation concluded that there were
accounting errors, but that there was no systematic fraud problem at Tyco. So, what did happen? Tyco's
former CEO Dennis Koslowski, former CFO Mark Swartz, and former General Counsel Mark Belnick were
accused of giving themselves interest-free or very low interest loans (sometimes disguised as bonuses)
that were never approved by the Tyco board or repaid. Some of these "loans" were part of a "Key
Employee Loan" program the company offered. They were also accused of selling their company stock
without telling investors, which is a requirement under SEC rules. Koslowski, Swartz, and Belnick stole
$600 million dollars from Tyco International through their unapproved bonuses, loans, and extravagant
"company" spending. Rumors of a $6,000 shower curtain, $2,000 trash can, and a $2 million dollar
birthday party for Koslowski's wife in Italy are just a few examples of the misuse of company funds. As
many as 40 Tyco executives took loans that were later "forgiven" as part of Tyco's loan-forgiveness
program, although it was said that many did not know they were doing anything wrong. Hush money
was also paid to those the company feared would "rat out" Kozlowski.
Ads by Google

Trader avec Fortrade

Trader avec des Outils Avancés.La perte peut excéder le dépôt.

www.fortrade.com/fr/

UP NEXT

10 Things You Should Never Buy Online

10 Online Scams That Target Small Businesses

How Wine Fraud Works

Does a smartphone raise your risk of identity theft?

Is there an easy way to spot money-making scams?

Essentially, they concealed their illegal actions by keeping them out of the accounting books and away
from the eyes of shareholders and board members.

How it Was Discovered

In 1999 the SEC began an investigation after an analyst reported questionable accounting practices. This
investigation took place from 1999 to 2000 and centered on accounting practices for the company's
many acquisitions, including a practice known as "spring-loading." In "spring-loading," the pre-
acquisition earnings of an acquired company are underreported, giving the merged company the
appearance of an earnings boost afterwards. The investigation ended with the SEC deciding to take no
action.

In January 2002, the accuracy of Tyco's bookkeeping and accounting again came under question after a
tip drew attention to a $20 million payment made to Tyco director Frank Walsh, Jr. That payment was
later explained as a finder's fee for the Tyco acquisition of CIT. In June 2002, Kozlowski was being
investigated for tax evasion because he failed to pay sales tax on $13 million in artwork that he had
purchased in New York with company funds. At the same time, Kozlowski resigned from Tyco "for
personal reasons" and was replaced by John Fort. By September of 2002, all three (Kozlowski, Swartz,
and Belnick) were gone and charges were filed against them for failure to disclose information on their
multimillion dollar loans to shareholders.
The SEC asked Kozlowski, Swartz, and Belnick to restore the funds that they took from Tyco in the form
of undisclosed loans and compensations.

Where Are They Now?

Kozlowski and Swartz were found guilty in 2005 of taking bonuses worth more than $120 million
without the approval of Tyco's directors, abusing an employee loan program, and misrepresenting the
company's financial condition to investors to boost the stock price, while selling $575 million in stock.
Both are serving 8 1/3-to-25-year prison sentences. Belnick paid a $100,000 civil penalty for his role.
Since replacing its Board Members and several executives, Tyco International has remained strong.

The difference in the Tyco case and some of the others is that it is more related to greed than
accounting fraud.