Tyco Alleges Kozlowski Misused $100 MillionSep 13, 2002 | The Boston Globe
Tyco International Ltd. yesterday lashed out at its former chief executive L. Dennis Kozlowski in a lawsuit that alleges the hard-charging chief executive used the company as a personal bank to support a lavish lifestyle while concealing his actions from Tyco's board of directors.
The civil complaint, filed in U.S. District Court in New York, alleges a pattern of self-dealing in which Kozlowski misused funds from corporate relocation and executive loan programs for purchases that included luxury apartments and estates in New York, Massachusetts, and Florida, expensive art, and a 130-foot yacht. In all, the suit states Kozlowski misappropriated more than $100 million in company funds.
According to the suit, Kozlowski was able to divert funds by winning the silence of Mark Swartz, the company's former chief financial officer, and Mark Belnick, its former general counsel. Belnick is facing a separate civil suit from the company.
Some of the allegations in the company's 49-page suit mirror the charges in a criminal action brought separately yesterday by Manhattan District Attorney Robert Morgenthau against Kozlowski, Swartz and Belnick. Lawyers for all three men did not have any immediate comment on the company's civil suit.
The civil suit comes as Edward Breen, the company's new chief executive, has been working to distance Tyco from Kozlowski, who has become a symbol of corporate greed in the post-Enron era. While the complaint repeatedly says that Kozlowski concealed his actions from the board, suggesting that the directors were not at fault, the company is seeking to bring in a slate of new outside board members. It said yesterday it would not support any of the nine directors who served during Kozlowski's tenure for reelection .
The suit is the result of a monthslong internal investigation into Kozlowski's actions at Tyco by David Boies, who conducted the federal government's prosecution of Microsoft. Tyco hired Boies's firm shortly after Kozlowski resigned June 2, the day before he was indicted on charges of evading New York sales tax in connection with art purchases.
''If the allegations in the Tyco case against Kozlowski are even halfway true, it exposes this former corporate head as the mastermind of one of the most incredible series of violations of ethical propriety in the history of corporate America,'' said W. Michael Hoffman, executive director of the Center for Business Ethics at Bentley College in Waltham.
Kozlowski joined a predecessor company of Tyco's in 1975 as an internal auditor and by 1992 had risen through the ranks to become chief executive of the far-flung conglomerate, which is headquartered in Bermuda but run from Exeter, N.H. Kozlowski led Tyco through a period of dramatic growth by making hundreds of acquisitions, and by 2001 was ''widely recognized as one of the best managers in Corporate America,'' the complaint states.
The complaint notes that by that time he was also ''one of the highest, if not the highest,'' paid executives in the country, who had earned nearly $337 million in cash, restricted stock and other benefits in a three-year period ending in 2001. Despite that compensation, the complaint said, beginning as early as 1995, Kowzlowski began misappropriating money and assets.
''Through a pattern of conduct abundant with conflicts of interest, self-dealing and other serious legal and ethical problems, Kozlowski secretly devised means to enrich himself with corporate assets outside the attention of the company's Board, its Compensation Committee, and the public's eye,'' the complaint states.
For instance, the complaint alleges, Kozlowski converted an executive relocation program that was available to all employees into a special program that allowed him to purchase two New York apartments worth more than a total of $38 million.
The largest amount of money allegedly misused by Kozlowski came from a ''key employee loan program,'' meant to encourage executives to own Tyco stock by lending them the money to pay taxes that came due when their company-awarded shares vested.
But rather than cover the costs of holding stock, the complaint states, Kozlowski used the program as a ''personal line of credit to fund myriad personal expenditures.'' They included Busy Body Home Fitness equipment, art purchases, real estate maintenance, construction and remodeling costs to his homes, purchases of a yachts, antiques, furniture and investment property, and salaries for domestic help.
From 1997 to 2002, Kozlowski borrowed $274 million under the program, much of which he repaid, the complaint states. But, the complaint adds, more than $245 million of that amount was used for purposes other than paying tax liabilities.
Although the case names only Kozlowski as a defendant, it alleges that Swartz helped Kozlowski conceal tens of millions of dollars of forgiven loans and improper payments. Swartz allegedly followed Kozlowski's directions to make a $25 million credit to his executive loan account as a way of reducing his ''extraordinary level of indebtedness.''
Swartz and Belnick also allegedly benefited improperly by receiving undisclosed benefits. ''Through repeated unauthorized grants of stock and benefits, Kozlowski bought the silence of his chief corporate counsel Mark Belnick,'' the complaint states.
Belnick, the complaint states, in addition to his regular salary, received cash bonuses of $1.5 million in 1999 and $4 million in 2000 and three large stock awards. Kozlowski made the bonus and stock awards without board approval, according to the complaint.
Tyco's complaint doesn't specify an exact amount of damages, but seeks to recover money already expended and misappropriated by Kozlowski. The funds include personal compensation of more than $250 million, various amounts used in real estate transactions, and $43 million in ''charitable contributions that enriched Kozlowski,'' the civil case states.
One of those was a $1.3 million donation of company money Kozlowski allegedly made to the Nantucket Conservation Foundation Inc. The suit states the donation was used to purchase property adjacent to Kozlowski's $5 million Nantucket home to prevent anything from ever being built on it.
The case also recites a litany of ''questionable business expenses'' submitted by Kozlowski, including $20 million for artwork, antiques and furnishings; a $1 million birthday party in Sardinia for his wife; and $110,000 for the use of Endeavor, a company-owned 130-foot yacht ''on which he has had occasional business guests. No records were submitted to justify this expense,'' the suit charges.
Other sections of the complaint offer new detail into workings of Kozlowski's Tyco that have already attracted criticism. The document describes a $20 million payment Kozlowski arranged to a company director at the time, Frank Walsh, for his role in Tyco's 2001 purchase of The CIT Group, a financial-services company.
Confronted later by other Tyco directors angry that they hadn't been told of the payment, Kozlowski admitted that he had ''screwed up,'' according to the complaint. At a board meeting last Jan. 16, other directors unanimously demanded Walsh to return the money.
According to the complaint, ''Walsh responded by gathering up his papers, saying `adios' to the other directors, and walking out of the meeting.