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Tyco's Auditor To Testify Against Former Chiefs

Aug 24, 2003 |

Prosecutors have struck an important blow in their effort to convict Dennis Kozlowski, the former head of Tyco, by securing the testimony of the conglomerate's former lead auditor.

Richard Scalzo, who this month was barred for life from practising as an auditor of a public company, will testify against Mr Kozlowski and Mark Swartz, Tyco's former chief financial officer, in a criminal trial scheduled to start at the end of September.

The PwC partner's testimony is likely to be important. Mr Kozlowski and Mr Swartz are facing multiple charges alleging that they gained $600m by looting Tyco and engaging in improper share deals. Other charges include evidence tampering, conspiracy and falsifying business records. Mr Kozlowski is also facing charges of tax evasion.

Mr Scalzo was banned by the Securities and Exchange Commission, the US's chief financial regulator, in a civil case in which he neither admitted nor denied wrongdoing. The SEC contends that he "engaged in improper professional conduct".

Crucially, Robert Morgenthau, the Manhattan district attorney, announced at the same time that it had closed its case against Mr Scalzo and the whole of PwC. That announcement came after Mr Scalzo had agreed to give evidence against the former Tyco executives, people close to the talks said. Mr Morgenthau's office, PwC and lawyers for Mr Scalzo declined to comment.

The first line of defence in corporate trials is often that controversial accounting treatments were approved by an outside auditor. Mr Scalzo, people close to the talks said, will say that he did not know about the actions of Mr Kozlowski and Mr Swartz and had not given approval.

Lawyers for the former Tyco executives are likely to attack Mr Scalzo's credibility, questioning whether he avoided criminal prosecution by cutting a deal with Mr Morgenthau.

Jury selection is scheduled to begin on September 29.

Although Mr Morgenthau's office has finished with PwC, the SEC stresses that its investigation into the audit firm's conduct at Tyco is continuing. PwC faces greater SEC scrutiny the more Tyco reveals, securities lawyers say.

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