Tyco Chief Quits Amid Tax Probe
Tyco International Ltd. Chairman and Chief Executive L. Dennis Kozlowski resigned early Monday amid a criminal probe into his personal taxes, ending the career of one of the nation’s most controversial CEOs and deepening investors’ crisis of confidence in corporate America.
Kozlowski, 55, quit after a series of weekend conferences with Tyco directors that began Friday when he told the board he was under investigation by the Manhattan district attorney’s office for possible evasion of New York state sales taxes.
Dist. Atty. Robert Morgenthau confirmed the probe Monday, saying, through spokeswoman Sherry Hunter: “We have a sales tax investigation involving Kozlowski and others.” Hunter declined to comment further.
The probe may involve Kozlowski’s failure to pay taxes on at least $10 million worth of art purchases made through family trusts, the Associated Press said, citing an anonymous source close to the investigation.
Kozlowski’s criminal lawyer, Stephen E. Kaufman, did not return a telephone call. The company said the CEO resigned “for personal reasons.”
Under Kozlowski, a confrontational, 6-foot-4, motorcycle-riding executive, Tyco has been a deal-making machine: The company completed more than 200 acquisitions over the last decade that turned it into a conglomerate manufacturing electronic components, specialty valves, medical equipment, burglar alarms and other products.
Tyco’s sales topped $36 billion last year, up from $13 billion in 1997. Some analysts likened the firm to a smaller version of General Electric Co.
But Tyco and Kozlowski for years have fought attacks by critics who alleged that the company engaged in deceptive accounting related to its acquisition binge, largely financed by debt.
The accounting charges triggered a Securities and Exchange Commission investigation in 1999, but that probe eventually was dropped.
Still, Kozlowski continued to stir controversy. This year, he announced plans to split Tyco into four parts, only to drop the unpopular idea a few months later, issuing a humiliating apology to shareholders for even proposing it.
Tyco’s stock, which has ridden a roller coaster in recent years as bulls and bears battled over the firm’s prospects, opened the year at $58.90. It then plunged on news of the planned breakup. On Monday, the collapse continued as investors pushed the stock down $5.90, or 27%, to $16.05 on the New York Stock Exchange, fearful of what Kozlowski’s departure may mean for the company.
Kozlowski’s resignation also darkened the mood on Wall Street, where investors this year have faced a torrent of scandals involving misleading corporate accounting and other misdeeds by managers. The Dow industrial average slumped 215.46 points, or 2.2%, to 9,709.79, lowest since February.
In a predawn board meeting conducted by telephone Monday, former Tyco CEO John F. Fort agreed to become interim chief while the board searches for a permanent replacement.
The investigation “is an issue for Dennis personally,” Tyco spokesman J. Brad McGee said. “Based on everything we know, there is no connection whatsoever” to the company itself, he said.
Fort, in an effort to calm investors, said he is committed to the recently announced plan to use an initial public stock offering of Tyco’s financial services unit, CIT Group, to raise money to pay off some of Tyco’s heavy debt.
Fort also said, “I fully support the evolution of the company’s long-term operating strategy to focus more on organic growth.”
One longtime critic of Tyco, Dallas-based money manager David Tice, said Monday that Tyco has been shown to be “an assemblage of slow-growing businesses that were masquerading as a fast-growth business through acquisitions and charge-offs.”
One of many Tyco controversies under Kozlowski was the firm’s 1997 decision to move its legal headquarters to Bermuda to save on corporate taxes. Tyco maintains its executive offices in Exeter, N.H., where Kozlowski has a home.
Tyco’s offshore status has drawn increasing criticism, especially since Connecticut-based hardware maker Stanley Works announced this year that it too would move to Bermuda. On Monday, Connecticut’s attorney general called on the SEC to investigate Stanley Works’ decision.
Kozlowski’s credibility was hurt in February when a company filing with the SEC disclosed that he had netted at least $330 million since July 1999 on large sales of company stock. Kozlowski had long maintained that he seldom sold personal shares.
Kozlowski was among America’s best-paid executives, last year taking home a package worth about $125 million, including $10 million in salary, bonus and other compensation and $30.3 million in restricted stock awards, plus 1.4 million stock options worth $85million at Tyco’s year-end price.
On Monday, Tyco said Kozlowski’s resignation voided his contract, which had spelled out terms for severance pay. Instead, Kozlowski and the board “agreed to enter into good-faith negotiations” to arrive at a new severance package, spokesman McGee said.
His original severance package was worth more than $100 million last year, when the company’s stock traded mostly above $40.
Some analysts said Kozlowski’s fall and news of the probe into his taxes will intensify investors’ distrust of corporate America.
“In some sense, it doesn’t even shock anymore, and that’s the most damaging thing about these constant revelations,” said Robert P. Lawry, director of the Center for Professional Ethics at Case Western Reserve University in Cleveland. “It hurts us in a larger sense because we lose confidence in these [scandals’] being once-in-a-while matters and worry that they’re all-the-time matters.”
“It’s demoralizing for the people working at the lower levels of an organization--on the shop floor, in the managerial ranks--to see the people at the top who receive huge financial rewards use the prerogatives of power to play fast and loose with the law,” said James Fisher, director of the Emerson Center for Business Ethics at St. Louis University.
