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Witness: Tyco Loan Program Meant For Taxes

Oct 10, 2003 | USA TODAY

A former Tyco International chairman testified Thursday that a loan program central to the corruption case against former CEO Dennis Kozlowski and former CFO Mark Swartz was to be used for tax payments, not the jewelry, boats and other luxuries the two allegedly acquired using the money.

John Fort III, a former Tyco CEO and director, also testified that he did not recall the company's board of directors ever voting the necessary approval for millions in bonuses and loan forgiveness for Kozlowski and Swartz.

The testimony from the soft-spoken Fort, who gained a reputation for maximizing shareholder value during his tenure as Kozlowski's predecessor, provided the first evidence indirectly supporting prosecution charges that Kozlowski and Swartz looted $600 million from the manufacturing conglomerate.

Fort, 61, chaired Tyco's board in 1983, when the company created the Key Employee Loan Program. Answering questions by prosecutor Gerard Murphy, he testified that the program was designed to help executives pay federal taxes on awards of Tyco stock.

Asked by Murphy if top company executives could use loan funds for jewelry, boats and yachts, personal investments and expensive art as the defendants stand accused of doing in a 35-count indictment Fort said "that was never the intent of the program."

"Its only use was for taxes," Fort said.

Separately, Murphy questioned Fort about millions of dollars in bonuses and forgiveness of Tyco loans Kozlowski and Swartz received for their work on several corporate deals. The projects included Tyco's sale of an auto auction firm and successful initial public offering for an undersea cable division.

"No," repeated Fort, again and again, when Murphy asked whether he recalled whether Tyco's board or its compensation committee had approved the bonuses and loan forgiveness.

"I don't recall this, but I can't believe that I wouldn't remember it," Fort said.

He also testified that a Tyco bylaw authorizing the board of directors to delegate some decisions to the CEO was not intended to apply to the transactions in question.

Murphy questioned Fort on the point in anticipation that defense lawyers, set to question Fort next week, will focus on the bylaw to argue that Kozlowski acted with proper authority.

Fort said he supported Kozlowski's 1992 ascension to the CEO post because Kozlowski had been a key to Tyco's Wall Street stock success. Support turned to suspicion in January 2002, when Kozlowski asked the board to retroactively ratify his approval of $20 million that had secretly been paid to Tyco director Frank Walsh for his role in a $9 billion acquisition.

Fort, who said Kozlowski should have sought board approval beforehand, said the incident "made me wonder whether there were other things" Kozlowski had hidden.

The board hired the firm of attorney David Boies to investigate the $20 million Walsh payment and examine Tyco spending on real estate, charitable contributions and other expenses. That examination helped uncover evidence of millions in allegedly improper spending by Kozlowski and Swartz.

"It seemed that he (Kozlowski) had quite a few apartments in New York and residences that we weren't aware of," Fort said.

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