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Intoduction Tyco International Ltd

Tyco International Ltd is a highly diversified global manufacturing company incorporated in Switzerland, with United States operational headquarters in Princeton, New Jersey. The Tyco Group (the Group) is a diversifies, global provider of diversified products ranging from electronic security and alarm monitoring to fire-fighting equipment and breathing apparatus, water purification and flow control solutions. The Company diversifies its activities into three segments: Tyco Security Solutions; Tyco Fire Protection and Tyco Flow Control. The Tyco Security Solutions segment designs, sells, installs, services and monitors electronic security systems, as well as designs, manufactures and sells security products. The Tyco Fire Protection segment designs, manufactures, sells, installs and services fire detection and fire suppression systems, among others. The Tyco Flow Control segment designs, manufactures, sells and services valves, pipes, fittings, automation and controls, valve automation and heat tracing products for various industries.

Background of the case


In year 2001, Tyco International Ltd. was one of Americas largest conglomerates, the company had revenue of $38 billion and about 240000 employees worldwide. During 2002, the Securities and Exchange Commission began an investigation of Tyco's top executives. Inquiries into the accuracy of the company's books began in January. On 1 January 2001, 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. At this moment, the stock value was drops 19 percent. On 30 January 2001, Dennis Kozlowski who as the company executive officer (CEO) announces that he and Mark Swartz (Tyco's then CFO) will each purchase 500,000 Tyco shares on the open market. This move is made as an assurance of the value of Tyco stock. On 25 April 2001, Dennis Kozlowski explains a 96-cent loss per share for the quarter ending on 31 March and outlines unusual costs that affected earnings. On 3 June 2001, Dennis Kozlowski was resigns as CEO of Tyco for personal reasons and was replaced by John Fort. One day after that, Dennis Kozlowski was being investigated for tax evasion about $1 million because he failed to pay sales tax on $13 million in artwork that he had purchased in New York with company funds. On 10 June 2001, Mark Belnick who was hired on to Tyco in 1998 as the chief legal officer is fired. Tyco have through the law firm of Boies, Schiller & Flexner, begins the process of suing Mark Belnick for breach of fiduciary duty and fraud. But Mark Belnick maintains that he acted with integrity as Tyco's chief legal officer. On 1 August 2001, the chief financial officer (CFO), Mark Swartz also resigns from Tyco. On 12 September 2001, the civil charges are filed against Dennis Kozlowski, Mark Swartz, and Mark Belnick by the Securities and Exchange Commission (SEC) for failure to disclose to shareholders information on the multi-million dollar loans they borrowed from Tyco. The investigations continued it was uncovered that Dennis Kozlowski, Tyco's former CEO; Mark Swartz, Tyco's former CFO; and Mark Belnick, the company's chief legal officer, had taken over $170 million in loans from Tyco without receiving appropriate approval from Tyco's compensation committee and notifying shareholders. For the most part these loans were taken with low to no interest. Many of them were offset as bonuses without open approval. Some of these loans were part of a Key Employee Loan (KEL) program that company had been established for the purpose of facilitating the continued ownership of Tyco stock. Besides that, 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" Dennis Kozlowski. Furthermore, Dennis Kozlowski and Mark Swartz also sold seven and a half million shares of Tyco stock for $430 million without telling investors, which it is a requirement under SEC rules. As conclude, Dennis Koslowski, Mark Swartz, and Mark Belnick stole $600 million from Tyco International through their unapproved bonuses, loans, and extravagant "company" spending. The SEC asks Dennis Kozlowski, Mark Swartz, and Mark Belnick to restore funds they took from Tyco in various forms of undisclosed loans and compensations. On 19 September 2001, Dennis Kozlowski is freed on $100 million bail. The bail is paid with a $100 million bond and secured with $10 million in assets from Kozlowski's ex-wife. Mark Swartz is freed on $50 million bail. The bail is paid with a $50 million bond and secured with 500,000 of Swartz's personal Tyco stock. Lastly, Mark Belnick is freed on a $1 million bond. Tyco continues operations and has replaced many members of its board of directors. Edward Breen, the former Motorola executive, has replaced Dennis Kozlowski; David Fitzpatrick, who worked in a number of blue chip firms, has replaced Mark Swartz; and William Lytton, the former International Paper executive, has replaced Mark Belnick. Dennis Kozlowskis successor at Tyco replaced 220 of the firms 250 top managers. All board members who had served under Dennis Kozlowski had resigned by 2003. The corporate governance consultant Institutional Shareholder Services (ISS) had classified only four of Tycos eleven directors as completely independent, and most of the boards nonexecutives were long-serving members. The firm survived the scandal, albeit in a shrunken state. In the year of 2005, Dennis Kozlowski and Mark Swartz, Tycos chief financial officer, were convicted of twenty-two counts of fraud and received prison sentences of eight to twenty-five years as well as fines and compensation orders that totaled $240 million. Mark Belnick was paid a $100,000 civil penalty for his role.

Acceptable ethical practice

Unethical practice
Breach of fiduciary duties Fiduciary duties of directors were first elaborated by common law judges, operating without any guidance from the formal written law. Indeed, the company laws of the United States, and many other common law jurisdictions, contain no statement at all of the core fiduciary duties of care and loyalty. The fiduciary duties of directors are continuing to evolve, again without formal written law. The classic statement, still found in many American law school textbooks, is that Directors owe to shareholders, or perhaps to the corporation, two basic fiduciary duties: the duty of loyalty and the duty of care. The basic principles are set out in a statute in the Nevada Revised Statutes (NRS) 116.3103 establishes that board members owe a fiduciary duty. It provides: "In the performance of their duties, the officers and members of the executive board are fiduciaries. The members of the executive board are required to exercise the ordinary and reasonable care of directors of a corporation, subject to the business-judgment rule." Nevada Revised Statutes (NRS)82.221, Section 1 provides: "Directors and officers shall exercise their powers in good faith and with a view to the interests of the corporation." As the Chairman and Chief Executive Officer of the Company, Kozlowski owed strict fiduciary duties to the Company. Kozlowski was required to act at all times honestly and in good faith with a view to the best interests of the Company and to exercise the care, diligence, and skill that a reasonably prudent person would exercise in comparable circumstances. But, Kozlowski failed to fulfill his obligations to the Company, failed to faithfully execute service, and breached his duties to Tyco in various ways, including by: a. failing to seek or obtain authorization for substantial amounts of purported compensation; b. failing to seek or obtain authorization for compensation programs, loans and awards for other senior executives of the Company; c. failing to inform, and affirmatively concealing from, the Board the true facts concerning amounts he had taken as purported compensation for himself and the unauthorized compensation programs and loans he had approved for other senior executives of the Company;

d. failing to seek or obtain approval for the $20 million payment to Frank Walsh before such payment was made, and conspiring with Walsh to conceal that payment from the Board until Walsh was forced to disclose it in early 2002 as part of the Companys preparation of its proxy statement; e. failing to inform the Board about the criminal investigation of him that began in early June 2002, and the fact that he had used Company resources to carry out his unlawful sales tax avoidance scheme; and As a direct and proximate result of Kozlowskis breaches of his fiduciary duties detailed above, the Company has been damaged in an amount that far exceeds the amounts Kozlowski directly misappropriated for himself. Inducing breach of fiduciary duties Kozlowski was well aware of the duties that each of he, Swartz and Belnick owed to the Board and the Company, and he deliberately used his position as Chairman and Chief Executive Officer to induce others within the Company to breach their fiduciary duties to Tyco, and to fail to faithfully execute service to their principal, Tyco. Specifically, Kozlowski induced Swartz and Belnick, and each of them, to breach their duties to the Company in various ways, including: a. enabling Kozlowski to obtain, and to conceal from the Board, the unapproved and undisclosed purported compensation and benefits described above; and b. enriching persons in the Company whom Kozlowski particularly wished to reward, through undisclosed and unauthorized benefits and loans. Conspiracy Kozlowski, Mark Swartz and Mark Belnick were the most senior officers of the Company. But rather than fulfill their duties to the Company, Kozlowski, Swartz and Belnick agreed among themselves to breach their duties to the Company and fail to faithfully execute service to their principal. Kozlowski, Swartz and Belnick, in furtherance of their common scheme and objective, acted in concert to: a. failing to inform the Compensation Committee of the true facts concerning the amount of Kozlowskis purported compensation; b. failing to obtain Compensation Committee approval for Kozlowskis purported compensation and agreements related thereto; c. failing to inform the Board about the criminal investigation of Kozlowski and the hiring of criminal defense counsel for Kozlowski and the Company; and

d. failing to cooperate with and actively impeding the Boards efforts to investigate these matters. Fraud The Oxford English Dictionary defines fraud as wrongful or criminal deception intended to result in financial or personal gain. In academic literature, fraud is defined as leading to the abuse of a profit organization's system without necessarily leading to direct legal consequences. The accounting fraud is defined by accounting professionals as deliberate and improper manipulation of the recording of data in financial statements in order to achieve an operating profit of the company and appear better than it actually is. In fact, Kozlowski indebtedness owed Tyco in connection with loan granted in connection with the Companys *KEL program+. Kozlowski concealed from the Company, the extent of his individually tailored relocation loans, his KEL loans used for non-program purposes and violated the authorization limits of the program. Moreover, Kozlowski fraudulently concealed facts from the Board, namely all amounts received by him as purported compensation and benefits arising from his illegal conduct. Accounting Kozlowski breached his fiduciary and other duties to the Company, and failed to faithfully execute service, in various ways, and profited from his breach of duty through the receipt of unauthorized and undisclosed amounts of money and credits, interest-free use of millions of dollars of Tycos funds for unauthorized relocation loans, and unauthorized grants of hundreds of thousands of shares of Company stock, which Kozlowski promptly sold and on which he earned millions. Kozlowski commingled the funds he received in breach of his fiduciary duties, and the proceeds obtained on his use of those funds, with his own funds. As a fiduciary, Kozlowski must account to his principal, Tyco, for the funds that he received during the course of his employment. The amount in total was exceeds a hundred million dollars. But Kozlowski was not render an account to Tyco for the funds that he received during the course of his employment, including an accounting for the interest on the funds he obtained and benefits he obtained as a result of his wrongful use of the Companys funds.