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Officials Accused Of Using Tyco As 'Piggy Bank'

Sep 12, 2002 | USA Today

Pocketing compensation valued at more than $500 million over the past half a decade apparently wasn't enough to satisfy former Tyco CEO Dennis Kozlowski.

Kozlowski, operating with a key corporate lieutenant, looted at least an additional $170 million and obtained $430 million more by fraud from Tyco, according to sweeping indictments and lawsuits Thursday by the Manhattan district attorney's office, the Securities and Exchange Commission and Tyco against him and two other former top executives.

He allegedly used the money to fund everything from pricey Florida real estate to a $1 million birthday party in Sardinia for his wife.

Kozlowski is the latest high-profile executive sullied by revelations of accounting scandals, personal fraud charges or just plain greed. But Kozlowski — already under indictment for state income tax evasion in New York — may have fallen the furthest. During the latter half of his decade-long tenure at Tyco, he became one of Corporate America's best-paid CEOs as he propelled a small, obscure industrial parts maker into a far-flung, $36 billion conglomerate.

Thursday's legal actions paint Kozlowski more as a longtime crime boss than Wall Street visionary and media star. The new indictment and lawsuits charge him and key underlings with siphoning millions of dollars from secret Tyco accounts to fund real estate in Manhattan, Florida and Massachusetts worth more than $50 million, bonuses totaling $58 million and more than $100 million in charitable donations and pledges.

Authorities say Kozlowski concealed the scheme for about seven years — duping investors and most company officials and board members — by virtually commandeering a pair of corporate accounts earmarked for relocation expenses of Tyco executives and loans for key employees.

They say former CFO Mark Swartz, 42, was a key part of the scheme, obtaining millions in bonuses and loans that paid for a luxury Manhattan apartment, a Boca Raton, Fla., compound, a yacht and other investments, according to the indictment and lawsuits.

In all, Kozlowski and Swartz stole more than $170 million from Tyco and obtained more than $430 million by fraud through sales of securities, according to an indictment that charges them with corruption, conspiracy and grand larceny.

Mark Belnick, 55, the company's former chief corporate counsel, was indicted separately on charges he falsified Tyco business records to hide more than $14 million in interest-free loans he used to buy and renovate an apartment on Manhattan's Central Park West and a ski chalet in Park City, Utah.

All three pleaded not guilty Thursday during arraignments in Manhattan Supreme Court. Justice Michael Obus set bail bonds of $100 million for Kozlowski and Swartz and $1 million for Belnick. He also ordered the three to surrender their passports. They all have until Wednesday to post bail.

Defense attorney Stephen Kaufman said it could be difficult for Kozlowski to post bail because Manhattan District Attorney Robert Morgenthau's office obtained a temporary restraining order freezing many assets of the former highflying executive.

Kaufman said friends and relatives might have to hold a "fundraiser" to spring Kozlowski, who appeared in court in handcuffs and a dark suit.

Even in a year marked by allegations of mammoth Wall Street frauds, prosecutors and regulators said the three set a new standard by using Tyco as "their personal piggy bank."

The dollar amounts are "staggering," said Steven Cutler, SEC chief of enforcement.

Morgenthau's office uncovered the first hints of the alleged scheme in January through a tip from the State of New York Banking Department. It led to the June indictment that accused Kozlowski of evading New York taxes on expensive art by Monet and other masters.

From that beginning, Morgenthau's staff and SEC investigators subpoenaed Tyco records and started examining payments to the three former executives and other company officials. Morgenthau said the investigators uncovered suspicious transactions in two Tyco funds, one known as the Key Employee Loan Program and the other called the New York City Corporate Headquarters Relocation Loan Program.

On paper, the compensation committee of Tyco's board was in charge of overseeing compensation and benefits for key employees. But the indictment said Kozlowski, acting as "the boss" of a "criminal enterprise," circumvented Tyco's normal corporate oversight process by requiring the company's internal auditors to report to the board through him.

"He decided what bonuses would be paid, to whom, and when, without regard for the restrictions that the board had put on executive officers' compensation," the indictment charged.

Using that secret power, Kozlowski and Swartz allegedly obtained millions in bonuses for their roles in corporate acquisitions made by Tyco. They also allegedly tapped the New York relocation fund and the key employee loan program to obtain loans for themselves and other company officials — loans the indictment said Kozlowski subsequently ordered forgiven without disclosure to the Tyco board.

Kozlowski's loan take totaled about $270 million, according to the SEC's federal civil fraud lawsuit.

Additionally, at least three Tyco board members received payments approved by Kozlowski or the other defendants, Morgenthau said. The list included Lord Ashcroft, a former treasurer of England's Conservative Party who joined the board after he sold the ADT security and car auction business to Tyco in 1997.

Ashcroft received $2.5 million in a Kozlowski-approved transaction for a former Florida home — a property that had been sold months earlier to Ashcroft's wife for $100, authorities charged.

Morgenthau declined to say Thursday whether Ashcroft or other Tyco officials identified in the indictment as receiving loans or other payments are likely to face charges. Emphasizing that the investigation is continuing, he said, "You can't do everything at once." Tyco spokesman Gary Holmes said an Ashcroft representative could not immediately be reached for comment.

'Their own private bank'

The SEC lawsuit, filed in Manhattan federal court, accused Kozlowski and Swartz of treating Tyco "like their own private bank" by directing transactions from the two corporate funds without regard for their "legitimate and authorized purposes."

The lawsuit charged that Kozlowski initially funded a Nantucket, Mass., luxury estate from the relocation account, then reclassified the full amount of the debt to the employee loan program. Swartz used a similar financial route to fund the purchase of his New York City apartment, the lawsuit charged.

No expense was too large — or small. According to the SEC, Kozlowski also tapped Tyco funds to pay expenses for the historic racing sloop Endeavour, fine art, jewelry and wine.

"I think investors should feel very betrayed," Cutler said. He said the internal checks and balances required in a publicly traded firm like Tyco "clearly didn't work."

The lawsuit filed by the SEC aims at recovering more than $250 million in assets allegedly stolen from Tyco or obtained through fraudulent securities transactions. Cutler said any money recovered would be used to help repay defrauded Tyco investors.

However, the embattled conglomerate staked its own claim to a large chunk of those assets Thursday, suing Kozlowski for at least $230 million. The lawsuit demands repayment of the former CEO's outstanding loans, unauthorized compensation he ordered paid to other employees and all income and benefits Kozlowski got between 1997 and 2002.

The company also moved to clean house Thursday, ousting nine board members. Only Kozlowski's replacement, CEO Ed Breen, and former DuPont CEO Jack Krol will remain on the reconstituted board.

"The board recognizes the need for new independent directors ... and today's action is a significant step toward meeting that goal," Breen said.

The indictment, lawsuits and corporate shakeup had little immediate impact on the company's stock price. Tyco shares closed unchanged at $17.80 on heavy trading volume, despite a fresh buy rating by J.P. Morgan analyst Don MacDougall. He said Tyco's reform efforts were moving at "dazzling" speed.

The company said it does not expect to make material adjustments to its prior financial statements as a result of the alleged scheme. Even so, Tyco stock remains down more than 70% from its 52-week high.

More worrisome is the impact the latest charges could have on broad market sentiment. Investors have been unhinged by a series of corporate accounting scandals at Enron, WorldCom, Adelphia Communications, ImClone Systems and Dynegy.

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