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Secret Payment By Tyco Is Target Of Investigation

Sep 30, 2002 | The Wall Street Journal

Investigators at the Securities and Exchange Commission and the Manhattan District Attorney's Office in New York are looking into whether a secret $40 million payment that Tyco International Ltd. made to settle a lawsuit in 2000 represented a payoff to hide possible accounting improprieties, people familiar with the matter told The Wall Street Journal.

Tyco settled the lawsuit after plaintiffs obtained new information that indicated U.S. Surgical Corp. slowed revenue growth and wrote off assets before its acquisition by Tyco was completed, these people say.

The current probes cover ground similar to that of an earlier informal SEC investigation, begun in 1999, into Tyco's merger-related accounting. Among the issues in the earlier probe was whether Tyco, which had acquired more than 120 companies in the 1990s, had depressed the results of its merger targets prior to completing the takeovers so that it could later report higher profits and growth rates from the deals. That earlier SEC investigation lasted nine months and ended without any enforcement action.

Three people with knowledge of the $3.17 billion Tyco takeover of U.S. Surgical in 1998 said they were unsure if the SEC had later received the documents that the plaintiffs in the settled lawsuit against Tyco uncovered. Just before Tyco's takeover of U.S. Surgical, the medical-products maker took $ 322 million in one-time charges.

These people said the allegedly incriminating documents were memoranda between two former top financial executives of Tyco discussing the ways that Tyco would help U.S. Surgical slow its growth after Tyco agreed to acquire that company, but months before the purchase was completed.

In one instance, a former Tyco executive termed the Tyco plan for U.S. Surgical "financial engineering," according to people with knowledge of the memoranda. Another of the documents involved a chart Tyco produced detailing which divisions U.S. Surgical should retain and which ones it should divest before the merger. Tyco was, in effect, controlling U.S. Surgical even before it owned the company, according to a person involved in the merger. This type of premerger control could violate federal securities laws.

"This transaction is part of the Phase 2 investigation by the law firm of Boies, Schiller & Flexner," which has been retained by Tyco, said a Tyco spokesman. "The company will not have a detailed comment on it until the investigation is completed." The Tyco spokesman added that the "matter has been discussed recently with the SEC" and that Tyco is trying to determine whether all the documents that should have been produced in 1999 and 2000 actually were. The spokesman also said it doesn't expect the outcome of this matter to be material to Tyco's financial results.

A spokesman for the SEC couldn't immediately be reached for comment.

The SEC reopened an investigation of Tyco in June, after L. Dennis Kozlowski, Tyco's former chief executive, was charged with evading New York state sales taxes by the Manhattan District Attorney's office. Added charges were filed earlier this month by New York prosecutors, who say Mr. Kozlowski and former Chief Financial Officer Mark Swartz reaped $600 million in illicit gains from the company.

Prompted in part by recent inquiries about the U.S. Surgical matter in the past month, Tyco is conducting its own internal probe into accounting practices, according to people close to the company.

In late 1999, responding to questions about the unusual premerger charges by U.S. Surgical, Mr. Swartz agreed the charges had the effect of making Tyco's postdeal growth comparisons look better. But he said the decision about the timing and size of the charges had been made by U.S. Surgical managers, adding that nothing improper had been done.

The information now coming to light stems from a March 1999 lawsuit brought by nine former shareholders of Progressive Angioplasty Systems Inc. Progressive had been acquired by U.S. Surgical in 1997 for $75 million in stock. U.S. Surgical was then obligated to pay up to an additional $75 million in stock after the acquisition, based on sales, over a five-year period. The lawsuit sought damages, saying that the shutdown prevented the payouts from occurring.

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