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Ex-Director Pleads Guilty To Tyco Fraud

Dec 18, 2002 | Washington Post

The former chairman of Tyco International's compensation committee was arrested this morning and agreed to give back a $20 million payment that was not properly disclosed to shareholders and the board.

The former Tyco board member, Frank E. Walsh Jr., pleaded guilty to criminal charges of securities fraud lodged by Manhattan District Attorney Robert Morgenthau. In addition to return of the $20 million, Walsh, 61, agreed to pay a $2.5 million fine. The plea will spare him from serving jail time and also settles civil fraud charges filed by the Securities and Exchange Commission.

Walsh's plea marks the first time prosecutors investigating the recent wave of alleged corporate crime have brought charges against a member of a company's board of directors.

In a proxy statement, the company said the money was awarded to Walsh in July 2001 by Tyco chief executive L. Dennis Kozlowski as a "finder's fee" after the company purchased financial services firm CIT Group Inc. But Walsh's payment was not disclosed at the time of the purchase and only appeared on the proxy statement in January of this year. The payment was not approved by the board.

Prosecutors have alleged that Kozlowski and Chief Financial Officer Mark H. Swartz conspired to steal hundreds of millions of dollars from Tyco by circumventing most board members and buying the silence of other employees by handing out generous loans that were later forgiven. Kozlowski, Swartz and former general counsel Mark A. Belnick were indicted on multiple criminal charges this past summer. All have pleaded not guilty.

Walsh, who was released this afternoon, expressed contrition. "I have attempted throughout my life to hold myself to the highest levels of personal and professional conduct," Walsh said at his court hearing. "I deeply regret my conduct in this instance."

The swift action against Walsh was hailed by corporate governance advocates, who said the fact that the former director received such a large payment without approval from the board and without immediately disclosing it to shareholders, amounted to a "smoking gun" for prosecutors.

Corporate directors sometimes perform services for a company beyond their duties as a board member and receive payment for them, but such payments must be quickly disclosed.

"That's the kind of thing you need to make a case like this," Nell Minow, an investor advocate and head of the Corporate Library in Washington, said of the unapproved and undisclosed $20 million payment. "This is a very satisfying result. You almost never see any of these guys pay one penny out of their own pocket."

At a news conference announcing the plea deal, Morgenthau called Walsh's $20 million payment "a serious breakdown in the checks and balances you expect to find in a corporation." He said this was the first time he could remember that a corporate director faced criminal charges for securities fraud.

In an interview, Thomas C. Newkirk, associate enforcement director at the Securities and Exchange Commission, said Walsh's plea deal should send a strong signal to corporate boardrooms. "It's important that outside directors remember they've got responsibilities and jobs to do and that they should not be co-opted by the executive suite," he said.

Corporate governance advocates and regulators heralded the plea agreement as a milestone in the government's attempt to address alleged corporate wrongdoing. But they cautioned against expecting directors at other troubled companies to face similar charges.

"Until now, the most remarkable thing about these corporate fraud cases was that so little attention had been paid to directors whose job it is to oversee these companies," said Sarah Teslik, executive director of the Council of Institutional Investors, which represents large pension funds. Teslik and others, however, said Walsh's case was unique because of the failure to disclose the payment.

Criticism of directors at other firms enmeshed in scandal has mainly focused on their managements' failure to discover allegedly fraudulent accounting and other improper activities. One possible exception is former WorldCom Inc. director Stiles A. Kellett Jr., who was pressured to step down after revelations that he leased a company jet at below-market rates. The lease was negotiated with WorldCom founder and former chief executive Bernard J. Ebbers around the same time that Kellett approved more than $400 million in loans to Ebbers.

In the Tyco case, Walsh received $10 million of his $20 million payment directly. Tyco donated another $10 million to the Community Foundation of New Jersey, a charity Walsh recommended. Walsh said today that he will pay back the entire $20 million and that the charity will not be forced to give up any of the money. The proxy statement filed in January described the payments as a finder's fee for Walsh's help in the CIT purchase. Walsh was close to CIT's chief executive, Albert R. Gamper Jr.

Tyco filed a lawsuit against Walsh earlier this year seeking repayment of the $20 million after learning about the payment in the proxy statement. In the lawsuit, Tyco said it demanded that Walsh return the money in January but that Walsh refused, walking out of a board meeting with a dismissive "adios." He resigned from Tyco's board in February.

Several corporate governance experts said that even if directors at other firms are not charged, Walsh's guilty plea today could signal to boards the dangers of cozy relationships with management.

Tyco is among the world's largest makers of security systems, electrical connectors and under-sea fiber-optic cable. Prosecutors allege that Kozlowski stole millions of dollars from Tyco and used the money to purchase lavish homes and furnish them with expensive art and other decorations, including a $6,000 shower curtain. Tyco's stock has been battered this year. It closed at $16.85 per share today, down 28 cents, or about 1.6 percent. The stock is down 72 percent from its 52-week high.

Tyco recently hired David Boies, a prominent lawyer who represented former vice president Al Gore in the dispute over the 2000 presidential vote in Florida, to conduct a review of the company's finances. Tyco expects to submit Boies's report to the SEC as early as this week. Early reports on Boies's findings have suggested that they largely exonerate the company and fail to investigate all its complicated dealings. Boies has dismissed those reports, and the firm has declined to comment on them.

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