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Chief Executive Sought Harsh Penalty For Underling

Dec 31, 2002 | The Boston Globe In 1995, Dennis Kozlowski, chairman and chief executive of Tyco International Ltd., took a personal interest in an obscure criminal case in Houston.

Girish P. Shah, an assistant controller at Tyco's Grinnell fire-protection division, was charged with stealing $988,000 from the company over eight years. According to transcripts, Shah pleaded no contest in state court to overcharging customers and siphoning money from funds that went unclaimed by subcontractors.

Though Shah was ready to immediately repay $728,000 and borrow money from relatives to repay most of the rest, Kozlowski still wanted to see the former Tyco employee sentenced to 30 years in jail.

''I view Mr. Shah's crime as particularly egregious,'' Kozlowski wrote to court officials. ''Not only did he steal from the stockholders of this Fortune 500 company, but he breached the fiduciary duty placed in him by the company and his supervisor(s).''

Kozlowski said ''white collar'' crimes like Shah's shouldn't be treated any differently than murder and other violent crimes.

''I urge you to impress upon Mr. Shah and those others who commit similar crimes that wrongdoing of this nature against society is considered a grave matter by the Texas Court and will not be condoned.''

Shah, 41 years old at the time, was sentenced to 20 years in prison.

Kozlowski now stands accused of corporate crimes that eclipse those perpetrated 10 years ago by the assistant controller in Houston. New York prosecutors allege Kozlowski and his finance chief, Mark Swartz, ran a ''criminal enterprise'' that stole from Tyco and defrauded the company's investors. All told, Kozlowski and Swartz allegedly stole $170 million and profited by another $400 million by selling Tyco shares while giving investors false information about the company's finances, according to an indictment released in September.

Now it is Kozlowski who, if convicted, faces a possible 30 years in prison.

Kozlowski has pleaded not guilty.

Shah said he was shocked by Kozlowski's letter, which he never saw when he was sentenced by Judge Jan Krocker. Shah, who was paroled in 1999 after serving 31/2 years and lives in Sugar Land, Texas, said he's not completely surprised by the allegations of fraud, self-dealing, and theft made by New York prosecutors against Kozlowski.

''The signs were there at the time I was at the company,'' he said. Investigators looking for wrongdoing ''would have seen a lot more. I'm sure it was happening at the same time he was writing that letter.''

He said he concocted his embezzling scheme after seeing his superiors take advantage of unfair bonus plans.

''When you see what the bigger fish are getting away with, the smaller fishes want a piece of it, too,'' he said.

According to testimony at Shah's sentencing hearing, Grinnell often used subcontractors to install fire-protection equipment. About 10 percent of the payment due to subcontractors would be held back by Grinnell until after the job was finished and the work inspected. After the job was completed, a subcontractor would have to submit an invoice for the amount held in the retention account.

But some contractors never submitted final bills, and Grinnell kept the retained funds as profits, even though the money didn't belong to Grinnell, according to the testimony of Michael M. Buchanan, a Grinell vice president.

Shah paid himself from the retention accounts. He also took money from bonuses to be paid to Grinnell employees after jobs were completed. Finally, Shah concocted phony invoices that were sent to one of Grinnell's largest customers, DuPont Co., the Delaware chemical giant. Tyco had to repay DuPont more than $200,000, to make up for the phony invoices, according to court testimony. Tyco couldn't figure out how much money it owed DuPont and had to ask its customer to take records out of storage to help with its audit before it could repay the fraudulent billings. The situation caused Tyco considerable ''embarrassment,'' Kozlowski wrote in his letter to the Texas court.

A spokesman for Kozlowski said: ''There is an awfully big difference between someone embezzling funds and of someone being accused merely accused, not convicted of misuse of a loan program. Mr. Kozlowski stands by the statement that he is innocent of these things.''

In the New York indictment, prosecutors alleged that Kozlowski ''looted'' the company by giving himself and others millions of dollars in compensation and bonuses that hadn't been approved by the board of directors. In particular, Kozlowski is charged with borrowing $242 million under a company program intended to help executives pay taxes on stock options. He is alleged to have spent much of the money on a lavish lifestyle that included a 130-foot vintage yacht, the Endeavor, and fine art from Impressionist painters.

Kozlowski allegedly used $46 million in loans from a Tyco executive relocation program to buy a $5 million home on Nantucket and a $7 million apartment in New York, and to build a $19 million mansion in Boca Raton, Fla.

In sworn testimony, Shah said the money he stole was used for part of the $29,000 down payment for a $171,000 house. He bought two cars, a Lexus and a Mitsubishi Montero SUV.

Shah said he took vacations to India, Europe, and Colorado. Otherwise, he said, he spent ''some extra on things and clothes, a little bit more extra than we normally would spend.''

In his efforts to fully repay Tyco, Shah sold his Lexus for $37,000, liquidated a $109,000 retirement account, and then went, hat in hand, to friends and relatives. He secured pledges for loans of $180,000, and told Judge Krocker he would work at a second job to repay the final $71,000.

Three years after having been released from prison, Shah said he is getting by, having worked for a few firms on a temporary basis and performing accounting for his own clients.

''I'm basically surviving,'' he said.

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