Monday, November 06, 2006
Tyco International Ltd. made several products, from healthcare supplies to electronic and plastic adhesives. It accused three former high-level executives to have entered into a fraud. The three accused managers were former CEO L. Dennis Kozlowski, former Chief Financial Officer Mark Schwartz, and former general counsel Mark Belnick who have since been indicted for fraud and theft by the Securities and Exchange Commission (SEC) as well as their former employer.
Both, the SEC and Tyco International indicted the former executives on charges of civil fraud and theft. They were accused of giving themselves interest-free or low interest loans for personal purchases of property, jewelry, and other frivolities. According to the SEC and Tyco, these loans were never approved or repaid. These former high-level executives were accused for the following reasons:
1. Waiver of Loans to employees and themselves:
Kozlowski and Schwartz were accused of issuing bonuses to themselves and other employees without approval of Tyco’s Board of Directors. These bonuses in effect acted as de facto loan forgiveness for employees who had borrowed company money or were used to buy the silence of those who suspected the former CEO and CFO of fraud. The individuals who received loan forgiveness said that they were not aware that they were participating in anything illegal; they were told the program had the board’s approval. Tyco and the SEC say it did not.
After an internal investigation into the matter by Tyco, it was revealed that 11 out of 51 Tyco employees were discharged from the liability of repaying loans at Kozlowski's direction and without board approval. This amounted to $56 M in bonuses that in effect canceled out loans they had taken from the company's relocation program, adopted in 1995. This went to such an extent that in addition to waiving the loan repayment, extra money was provided to reimburse them for the tax consequences of the loans.
How did it happen?
Kozlowski, issued a memo in September 2000 to an HR officer that the board had approved more than $95 million in forgiving loans to employees, even though it hadn't. Kozlowski told Patricia Prue, Tyco's Senior Vice President, HR, that the loan forgiveness payments were meant as a bonus for their good work. In turn, Prue also received a forgiven loan of about $1.3 M.
Mark Foley, a vice-president of finance, prepared a memo signed by Schwartz, that showed the company would include the expense as part of other charges, rather than account for the loans individually as employee compensation.The total payout from the program was $96 M, of which Kozlowski received $33 M and Schwartz $16.6 M.
2. Selling of Company Shares:
Kozlowski, Schwartz, and Belnick were also indicted on charges of selling their company stock without telling investors, despite their obligation to do so under SEC rules. In sum, the three are accused of stealing $430 M dollars from Tyco International.
3. Misuse of Company Funds:
Kozlowski used company’s funds for personal expenditures, including a $15,000 umbrella stand, $97,000 for flowers and $2,900 for coat hangers. Some of the furnishings that lacked any "legitimate business purpose" included a $17,100 traveling toilet box; a $6,000 shower curtain; and $2,200 gilt metal wastebasket.
The company said Kozlowski misused $62 million of the company's coffers to purchase a $16.8 million apartment on Fifth Avenue in New York and $14 million for improvements and furnishings to the apartment. The executives lived lavish life on the company’s funds.
4. Avoiding sales tax on paintings:
Kozlowski bought roughly $13 million in paintings and was charged with conspiracy, tampering with physical evidence, falsifying business records and sales tax violations. The paintings included "Fleurs et Fruits" by Pierre Auguste Renoir and "Pres Monte Carlo" by Claude Monet.
How did it happen?
Kozlowski and his coconspirators generated false documents, such as invoices and shipping documents, to make it appear as though the artwork was to be shipped out of state and therefore not covered by New York state sales tax provisions. In order to thwart tax auditors, Tyco employees were directed to sign false documents reflecting the receipt in New Hampshire of artwork.
Kozlowski actually shipped empty boxes out of state and had an art consultant remove a $425,000 painting from his $17 million duplex apartment at the corner of 76th Street and Fifth Avenue and ship it to Tyco offices in New Hampshire. There, an employee allegedly signed for it before it was immediately returned to Manhattan and reinstalled in the apartment.
How was it revealed?
Kozlowski's downfall started in early January, 2002, when Irwin Nack, an investigative counsel to the superintendent of the New York State Banking Dept., came across a series of bank transfers that struck him as highly unusual. Within few days, a number of transfers had moved into the bank account of high-end Manhattan art dealer Alexander Apsis. From there, they were quickly moved to offshore accounts. Morgenthau had put 6-8 people on the Kozlowski case full-time, including investigators, analysts who specialize in economic transactions and financial records, lawyers, and paralegals.The team worked all summer examining subpoenaed documents, e-mail, and financial statements -- and built a much larger case against Kozlowski and other Tyco executives. It accused the former CEO and CFO Mark Schwartz of taking $170 M out of the company and pocketing $430 M more in tainted stock sales. From one small suspicion grew one of the biggest white-collar cases in history.