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Tyco Lawsuit Seeks $400M From Former Finance Chief

Apr 3, 2003 | Boston Globe

Tyco International Ltd., saying it had failed in efforts to negotiate a settlement with former finance chief Mark Swartz through arbitration, filed a $400 million lawsuit against the executive late Tuesday, charging him with scheming and lying in efforts that netted him hundreds of millions of dollars in improper payments from the company.

The civil lawsuit, filed in US District Court in Manhattan, charges Swartz, Tyco's chief financial officer from 1995 through last August, with failing to faithfully perform his duties to the company.

''Instead, Swartz improperly took Tyco funds and assets personally and aided, abetted and facilitated the misappropriation of Tyco funds and assets by others,'' the suit charges.

In a statement, Swartz's lawyer, Charles Stillman, called the complaint a ''publicity stunt'' and said his client had put off arbitration because he sought to have his criminal trial completed before dealing with Tyco's civil issues.

In an indictment by Manhattan District Attorney Robert M. Morgenthau, Swartz is charged in executing a scheme with former chief executive L. Dennis Kozlowski with looting Tyco of $600 million in unauthorized pay and stock payments. Swartz and Kozlowski have pleaded not guilty, and a trial is set for September. Tyco said it is seeking a judgment of more than $400 million.

''As we have previously communicated to Tyco, we believe the appropriate time for such an arbitration is following the conclusion of the criminal case,'' said Stillman. ''There is no fair reason for Tyco to commence this court action now.'' He said the complaint ''appears to be nothing new.''

To be sure, the 18-page complaint repeats many of the allegations made by Morgenthau and findings contained in Tyco's internal investigation, which was conducted by the same law firm that filed the lawsuit.

Swartz, the complaint alleges, improperly took advantage of executive loan and relocation programs, turning them into vehicles for large payments. In the process, the complaint claims, he routinely misled or failed to inform the compensation committee of the board of directors, whose approval was needed for such payments. Swartz also engineered similar payments and other perks for Kozlowski and a handful of others.

But the complaint adds additional details on the transactions. For instance, in 1995, Tyco planned to help pay for executives to relocate from New Hampshire to New York. But the company never implemented a plan approved by the board and instead put in place a more generous plan open to just a handful of executives. The complaint alleges Swartz abused that program in several ways. First, he got the company to pay $210,000 a year in rent for an apartment he lived in at 30 East 85th St., longer than permitted. Then, he sold two homes in New Hampshire to Tyco one in Rye and one in Exeter for more than they were worth, according to the complaint.

But rather than moving to New York, Swartz used company financing to buy a luxurious home in Rye. He also got the company to finance a luxury condominium at 1 Central Park West.

At the same time, the complaint alleges, Tyco purchased and fixed up two other New York properties ''for Swartz's personal benefit.''

The complaint also lists a variety of perks Swartz allegedly manipulated the company into providing, including tuition at private schools for his children; $123,222 for tickets to the Miami Heat and Florida Panthers; $1,140 for tickets to a concert by Billy Joel and Elton John; a helicopter ride for his wife worth $6,028; and air travel on Tyco planes over three years worth nearly $1.3 million.

According to the complaint, Swartz allegedly tricked the board of directors by changing a clause in his employment agreement guaranteeing him the ''highest annual proxy bonus'' to read ''highest annual bonus earned.'' Tyco claims the change increased the value of Swartz's employment agreement more than tenfold, to $100 million.

When Swartz left Tyco last summer, he was given $45 million in severance and other pay, such as the value of life insurance policies. The company said at the time that if Swartz is found guilty in civil or criminal lawsuits, he could have to repay that money after an arbitrator heard the claim.

Swartz had been eligible for $91 million under the terms of the contract, the company said last fall, claiming it had fought to retain as much of the money as possible.

Throughout his go-go years with Kozlowski, Swartz defended Tyco's convoluted accounting and impenetrable structure. He claimed the company was growing not just through hundreds of acquisitions, but also by building its businesses. Last December, however, the internal investigation by the firm of Boies, Schiller & Flexner LLP found the company had burnished its results through the widespread use of ''financial engineering.''

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