Former Tyco Executives Are Indicted
Two former Tyco International Ltd. executives were accused Thursday of systematically looting the conglomerate in a scheme that allegedly netted them more than $600 million.
In a criminal indictment and a civil suit filed here, prosecutors charged that L. Dennis Kozlowski, Tyco’s former chief executive, and Mark H. Swartz, its former chief financial officer, stole $170 million from Tyco by granting themselves loans and bonuses that were not authorized by the firm’s directors.
The loan money was used to buy homes, boats, jewelry and fine art, the indictment said.
The government also accused the men of illicitly gaining more than $400 million since 1995 by selling personal Tyco shares while concealing material information from investors.
The charges, brought jointly by the Manhattan district attorney and the Securities and Exchange Commission, are the latest moves by prosecutors in what has been a wave of fraud allegations directed against executives who once were among the most highly regarded leaders in corporate America.
A third Tyco executive, former chief corporate counsel Mark A. Belnick, was separately charged Thursday with falsifying business records to conceal company loans of more than $14 million, which he allegedly used to buy homes.
Also Thursday, Tyco--under new management since Kozlowski was ousted in June--sued its former chief, seeking the return of allegedly misappropriated funds.
At an arraignment Thursday afternoon, the three men pleaded not guilty to the charges.
New York State Supreme Court Justice Michael Obus released the men after setting bond at $100 million for Kozlowski and at $50 million for Swartz. They must put up 10% of those amounts.
Prosecutors also unsealed a judge’s order temporarily freezing $600 million in assets belonging to Kozlowski and Swartz until a court hearing later this month.
The self-dealing charges against the executives echo allegations made against corporate officers at companies including Enron Corp., Adelphia Communications Corp. and WorldCom Inc. this year.
“It’s really a case where, once again, another company management abused its position of trust and put themselves and their checkbooks first,” said Stephen Cutler, head of the SEC’s enforcement unit. “It’s the kind of behavior that shocks the conscience, even among those of us who prosecute securities cases for a living.”
The indictment was the second legal action against Kozlowski by Manhattan Dist. Atty. Robert Morgenthau.
Kozlowski--one of the highest-paid U.S. CEOs in recent years--was charged in June with evading more than $1 million in state and city taxes on purchases of artwork. Prosecutors said at the time that Kozlowski went to great pains to circumvent paying taxes.
In one instance, they alleged, he had a painting removed from his Manhattan apartment, shipped to New Hampshire and trucked back to New York to give the impression that the sale took place out of state and thus was not subject to New York levies. The case is pending.
Lawyers for Kozlowski and Swartz defended their clients.
“The charges today are exactly that: They’re accusations. They’re unproven. They’re unsubstantiated,” said Stephen Kaufman, Kozlowski’s attorney.
In a written statement, Swartz’s lawyer, Charles Stillman, said his client was “totally innocent” and a “hard-working family man who never received a penny from Tyco that was not fully authorized.”
The 95-page indictment against Kozlowski and Swartz paints a picture of systematic fraud from 1995 through this year.
The two men allegedly misappropriated funds from two Tyco loan programs designed to help employees buy company stock and relocate if their jobs required it.
The government said the executives used the funds, at low or no interest, to buy homes in Manhattan, Boca Raton, Fla., and Nantucket, Mass. They also spent some of the millions on yachts, art and sports team investments and to pay for a birthday party in Sardinia, the indictment said.
Under the stock purchase loan program, Kozlowski borrowed $270 million but used only $29 million for its intended purpose, according to the SEC.
Swartz borrowed $85 million under the plan, $13 million of which went for the program’s intended purpose, the SEC said.
Neither directors nor shareholders of Tyco were informed of how the rest of the money was used, prosecutors said. That omission would violate securities laws.
The SEC further alleged Kozlowski and Swartz arranged for the company to forgive “tens of millions” of the loans, also without disclosure to Tyco shareholders.
The men also reaped a total of $84 million in unauthorized bonus payments, the indictment said.
Kozlowski, 55, set up a system in which he could approve millions in expenditures for personal expenses, the government said. He avoided detection by limiting internal audits and requiring that auditors report to him rather than to Tyco directors and by paying off key employees to gain their silence, the indictment said.
Swartz, 42, aided the process by having the finance department, which he controlled, rather than the legal department handle the release of financial information, the government said.
Prosecutors also allege that Kozlowski and Swartz took in $280 million and $125 million, respectively, through stock sales that were fraudulent because the men misrepresented their own and the company’s finances. Some of the sales were made to Tyco units situated offshore.
The indictment also said Kozlowski pressured a major brokerage to replace a stock analyst who covered Tyco with someone considered friendlier to the firm. Kozlowski then allegedly exchanged gifts valued at thousands of dollars with the new analyst.
The brokerage was Merrill Lynch, according to a source. In 1999, Merrill replaced its Tyco analyst with Phua Young, whom it hired away from Lehman Bros.
“The reason this particular analyst was hired was his standing in the industry,” Merrill spokesman Jim Wiggins said. “As for any gifts exchanged, the company had no knowledge of any such gifts. And if that is the case, it would have violated our policies.”
Merrill fired Young in April for violating Merrill policies by distributing his reports to large investors before they had been approved by the firm’s compliance department, Wiggins said. Young could not be reached for comment Thursday.
In the criminal case, Kozlowski and Swartz were charged with enterprise corruption and grand larceny under New York state law. The men could face up to 30 years in prison if convicted.
Belnick, 55, faces up to four years in prison if found guilty. His lawyer, Reid Weingarten, said in a statement that Belnick “has done nothing wrong.”
Kozlowski, a native of Newark, N.J., was hired by Tyco in 1976 and rose to become president in 1989. Tyco always had been a conglomerate--operating in many disparate businesses--but Kozlowski sought to take it to a new level in the 1990s. He was viewed by many analysts as a corporate builder who sought to succeed General Electric Co.’s Jack Welch as the most celebrated conglomerate chief.
Under Kozlowski, Tyco made hundreds of acquisitions in the 1990s with its highflying stock. Kozlowski also moved the firm’s official headquarters to Bermuda in the 1990s to save on taxes.
Tyco’s sales ballooned to $36 billion by 2001. Many analysts lauded Kozlowski for creating a highly profitable giant with key business lines in undersea telecom cable, electronic components, security systems and health-care products.
But along the way, a handful of critics contended that Tyco engaged in questionable accounting practices that enhanced its financial results. The SEC investigated the firm in 2000 but dropped the probe without bringing charges.
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Charges Against Former Tyco Officials
Criminal and civil charges filed Thursday against L. Dennis Kozlowski, Tyco International’s former chief executive, and Mark H. Swartz, the firm’s former chief financial officer, center on the alleged misuse of company funds through low-interest loan programs and payment of unauthorized bonuses. Here are some of the allegations in the cases filed by the Manhattan district attorney and the Securities and Exchange Commission:
L. Dennis Kozlowski
* Directed $56 million in unauthorized bonus payments to himself.
* Used $12 million in company loans to pay for art for personal residences.
* Used $7 million in company loans to buy a New York apartment for his former wife as part of a divorce settlement.
* Used more than $240,000 in company loans for payment to jeweler Harry Winston Inc.
Kozlowski pleaded not guilty to all charges at an arraignment Thursday.
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Mark H. Swartz
* Received $28 million in unauthorized bonus payments.
* Used almost $9 million in company loans to buy a yacht and real estate.
* Lived rent-free in a New York apartment Tyco bought for him, without disclosing the perquisite to shareholders.
Swartz pleaded not guilty to all charges at an arraignment Thursday.
