Former Tyco International Ltd. board member Frank Walsh yesterday agreed to pay $22.5 million in fines and restitution to settle criminal and civil charges stemming from Tyco’s $9.5 billion acquisition of CIT Group Inc. in 2001.
Walsh, 61, will repay a $20 million fee that Tyco had paid to him and one of his favorite charities in exchange for Walsh’s help in arranging the CIT deal. Payment of the fee had not been disclosed to other Tyco board members or to shareholders, in violation of federal securities regulations and New York state law.
”Shareholders entrusted [Walsh] with the responsibility of watching out for their interests in Tyco’s boardroom and executive suite,” said Thomas C. Newkirk, an associate director of enforcement for the Securities and Exchange Commission. ”Instead Mr. Walsh himself took secret compensation and kept those same shareholders in the dark.”
Walsh will pay an additional $2.5 million in fines and legal costs to the state of New York and the office of Manhattan District Attorney Robert Morgenthau, which has led the investigation of financial improprieties at Tyco.
Walsh helped to arrange the CIT deal in early 2001. Tyco paid him a $10 million ”finder’s fee” and paid another $10 million on Walsh’s behalf to the Community Foundation of New Jersey, a charitable organization.
Only Walsh, Tyco’s then-CEO L. Dennis Kozlowski, and chief financial officer Mark H. Swartz knew about the payments, according to a statement issued by Walsh yesterday. Other Tyco board members were not informed. In addition, when Tyco made a required SEC filing to inform regulators and investors of the deal, the filing made no mention of the payments.
”The filing with the commission contained the statement to the effect that the finder’s fees were going to be limited to identified investment bankers,” said SEC assistant director of enforcement James Coffman. ”He was not one of those identified.”
Walsh’s attorney, Joel Cohen, yesterday called Walsh a man of ”uncommon decency, a God-fearing, daily church-going man who has basically dedicated the last 10 years of his workaday life to charitable pursuits.”
Walsh admitted wrongdoing and expressed remorse in a statement issued yesterday.
”I have attempted throughout my career to hold myself to the highest standards of personal and professional behavior,” said Walsh, ”and I deeply regret my conduct in this instance.”
Walsh said he would pay the $22.5 million out of his own resources, and that the Community Foundation of New Jersey would keep the $10 million donation.
John Falvey, a corporate crime attorney at Boston’s Testa, Hurwitz & Thibeault, says that had the board voted for the payment to Walsh, and had it been disclosed to the SEC, there would have been no violation of law. But he added that Walsh’s part in the CIT-Tyco deal was so minor that a $20 million payment seemed questionable.
”It does go to show the very unusual corporate climate at Tyco, that senior officers and directors expected to be rewarded richly for fairly ordinary functions,” said Falvey.
The Tyco board didn’t find out about the payments until January 2002. The news caused a 20 percent plunge in the value of Tyco shares as investors began to suspect that the company would become ensnared in the same sort of legal and ethical morass that had devastated the giant energy-trading firm Enron.
This concern was well founded. Manhattan District Attorney Morgenthau was already investigating Kozlowski for possible state sales tax fraud. In June, Kozlowski resigned from Tyco, and was indicted shortly thereafter. Swartz, the chief financial officer, was also indicted.
Tyco brought in a new management team, which filed suit against Walsh and former general counsel Mark Belnick, demanding repayment of millions of dollars they should not have received. In July, Tyco spun off CIT in a stock offering that raised $4.6 billion, less than half what Tyco had paid for the company.
The Tyco lawsuit against Walsh is still ongoing, despite yesterday’s settlement. A spokesman for Tyco declined to comment on whether the company would withdraw the case.