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Tyco Charges Eyed For Auditors

Failure To Disclose Kozlowski Bonus Reported At Issue

Oct 10, 2002 | Bloomberg News

New York prosecutors are considering criminal charges against PricewaterhouseCoopers LLP auditors who reviewed compensation for the indicted former chief executive of Tyco International Ltd., people familiar with the situation said.

Manhattan District Attorney Robert Morgenthau is examining whether Pricewaterhouse auditors based in New York and Boston broke the law when they failed to disclose that a proxy statement didn't include a $33 million bonus paid to then chief executive L. Dennis Kozlowski, the people said. Kozlowski was indicted last month for looting Tyco.

Prosecutors are considering using the prospect of an indictment as leverage to persuade the auditors to testify against Kozlowski and other indicted former Tyco executives, the people said.

''An auditor at Pricewaterhouse represents a particularly dangerous witness,'' said George Washington University law professor Jonathan Turley, a white-collar crime expert. ''A defense attorney for the auditors would probably be exploring who they can offer up for a generous deal.''

Rick Scalzo is the lead Pricewaterhouse partner for the firm's Tyco account, according to company filings. Scalzo, based in Boston, did not return phone messages left at his office for comment on whether he had been contacted by the district attorney's office.

The Wall Street Journal said Sept. 30 that prosecutors' interest in Pricewaterhouse's audits of Tyco ''suggests they now may be attempting to make a criminal case'' against the accounting firm, the world's largest.

The district attorney's office is investigating individual auditors, not the firm, said people familiar with the situation.

Had Pricewaterhouse faced indictment, any conviction would have suspended it automatically from auditing public companies.

Tyco spokesman Gary Holmes declined to identify which auditors Pricewaterhouse used in New York or Boston.

Pricewaterhouse spokesman David Nestor said the firm is providing information as ''a witness'' about Tyco to the district attorney.

The district attorney's office has at its disposal a New York law called the Martin Act to use in determining whether the auditors' failure to inform the board about the incomplete proxy is a crime. The law does not require that prosecutors prove there was intent to commit securities fraud. Some New York courts have ruled that omitting a fact that is material for investors is a violation of the law.

The $33 million payment to Kozlowski that is of interest to prosecutors was part of $96 million in bonuses paid to 51 Tyco employees. The bonuses related to a $2.1 billion initial public offering of TyCom Ltd. stock in July 2000. TyCom was Tyco's undersea fiber-optic cable subsidiary.

The bonuses were used to pay off $56.4 million in relocation loans to the employees, plus additional money to cover their tax liability on the payments, according to a company filing with the SEC.

Tyco bought back the publicly traded stake in TyCom about a year later for less than half the IPO price.

Kozlowski got $33 million of the payments. Chief financial officer Mark Swartz got $16.6 million. Tyco later fired both men.

Federal law requires that compensation paid to the five highest-paid executives of a publicly traded company be disclosed in proxy statements. Kozlowski and Swartz were among the five.

Auditors have no duty under securities laws to certify proxy statements. Prosecutors have determined that the auditors were aware of the amount of the TyCom bonuses and had read the proxy statements that purported to inform investors of compensation.

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