A Plea Of Guilt In Tyco Scandal
Ex-Director Settles In Securities FraudDec 18, 2002 | Newsday
In the latest example of corporate greed at Tyco International Ltd., its former lead director pleaded guilty to securities fraud yesterday and agreed to pay $22.5 million to settle the charges.
Frank E. Walsh, 61, whose job was to provide oversight, admitted he did not disclose to his board that he would receive a $20 million finder's fee for helping to broker Tyco's acquisition of the CIT Group Inc., a financial services company, in June 2001. He pleaded guilty to a felony for violating the state's general business law.
"I deeply regret my conduct," a teary-eyed Walsh said in State Supreme Court in Manhattan.
As part of a deal hatched with indicted former Tyco chief executive L. Dennis Kozlowski, Walsh received $10 million from Tyco as a finder's fee and designated a New Jersey charity to receive another $10 million from Tyco, authorities said. Yesterday, he repaid Tyco the full $20 million, although the charity, the Community Foundation of New Jersey, will keep its donation, according to Manhattan Assistant District Attorney John Moscow.
Walsh also wrote out two checks for $1.125 million each, one to New York State, the other to the city, as part of the settlement, according to Moscow, and he paid the district attorney's office $250,000 for the cost of prosecution.
State Supreme Court Justice Michael Obus gave Walsh a conditional discharge, as sought by prosecutors, the only condition being that the checks cleared.
If convicted of the anti-fraud provisions of the Martin Act at trial, Walsh could have received up to 4 years in prison or a fine of up to twice the gain.
In addition, he settled a civil action brought by the Securities and Exchange Commission for violating federal securities laws with regard to the secret deal through restitution and an agreement barring him from ever again being an officer or director of a publicly held company.
"This is another important public step in our Tyco investigation," said Thomas Newkirk, associate director of enforcement at the Securities and Exchange Commission, at a news conference in the Manhattan district attorney's office yesterday. "It is also another important milepost in our efforts to punish and deter corporate wrongdoing and to protect our capital markets."
Walsh, of Convent Station, N.J., was an outside director at Tyco, head of the compensation committee, the lead director and a member of the corporate governance committee, according to officials.
"His duty was to protect shareholder interests and to provide an independent check on the executive suite," said Newkirk. "Instead he entered into a secret agreement with Tyco's chief executive officer to take millions of dollars."
According to the SEC, Walsh lied to investors, even signing a public document stating there was no such payment made: a registration statement with misleading statements about fees paid in connection with the $9.2-billion acquisition of CIT Group.
Walsh held 50,000 shares of CIT stock at the time of the deal. Although it is unknown whether he made money on those shares, Tyco eventually lost $7 billion on CIT, according to prosecutors.
Kozlowski and Tyco's former chief financial officer Mark Swartz were indicted in Manhattan earlier this year on charges of looting Tyco of $600 million - $170 million in unauthorized pay and $430 million through stock fraud.
"As far as I know, this is the first time ... a director has been charged for his malfeasance," Manhattan District Attorney Robert Morgenthau said. He called Walsh's actions "a serious breakdown in the checks and balances you expect to find in a corporation."
Prosecutors said yesterday that the secret deal with Walsh already was incorporated into the charges against Kozlowski and Swartz.
Prosecutors said Walsh earned between $100,000 and $150,000 annually for his work for Tyco, where he served as a director for 10 years, starting in 1992. He was chairman of the Westray Capital Corp., a New York investment firm, from 1989 to 1996.