In 1999, when John Brennan and Chris Felipe, two of Boston’s mutual fund stars struck out on their own to launch a hedge fund, they invited many of their wealthy friends and executives they’d met over the years to invest with them. Among those who signed up: two Tyco executives who were then riding high, L. Dennis Kozlowski and Mark Swartz.
The former MFS Investments fund managers could not have guessed back then that the Tyco executives would not reach into their own pockets to invest in the sought-after hedge fund. Instead, Tyco would foot the bill.
According to public filings, Swartz, Tyco’s former chief financial officer, dipped into the company’s ”key employee loan program,” to meet the $1 million minimum investment in the Boston hedge fund, Sirios Capital Partners II. Kozlowski, Tyco’s disgraced former chief executive, took advantage of the same loan program, which was designed to help employees invest in Tyco shares, to put $5 million into Sirios in his own name.
Kozlowski’s investment was revealed in an 8-K filing with the Securities and Exchange Commission last week, which revealed results of the Bermuda conglomerate’s internal investigation, launched after Kozlowski was indicted in June on charges he evaded taxes on art purchases. Kozlowski and Swartz were indicted this month in New York on sweeping charges of fraud and looting Tyco International Ltd. and its shareholders of $600 million. Both men have pleaded not guilty to the charges.
The 8-K report said Kozlowski and Swartz used the loan program ”like an unlimited line of credit” to fund their lavish lifestyles. From 1999 to 2002, they bought multimillion-dollar houses, yachts, and jewelry with money from the loan fund. They also made charitable donations and personal investments with the money. In August 1999, a month after he invested in the hedge fund, Kozlowski had $56 million in loans outstanding to Tyco, according to the filing. In all, he improperly borrowed $270 million from the company, $43 million of which he has not yet paid back, according to the 8-K. Swartz allegedly improperly borrowed $99 million in total; $2.8 million is still outstanding.
For Brennan and Felipe, landing the former Tyco top brass as investors in their fund was surely a coup at the time, said lawyers who are specialists in launching hedge funds. Given the surging popularity of hedge funds – private portfolios that can invest more exotically than mutual funds – in the late 1990s, attracting big names could lend significant cachet to upstart managers.
Brennan and Felipe already had glowing reputations when they left MFS, one of the hottest mutual fund shops in the country in 1999. They also were no strangers to Tyco. Brennan, in particular, was a big believer in the Tyco story in the late ’90s and held a large position in the stock in the MFS Capital Opportunities Fund.
Brennan did not return several phone calls to his office seeking comment. Felipe, who retired from the firm earlier this year, could not be reached.
A review of SEC records found no sign that Brennan and Felipe continued to invest in Tyco at Sirios. As for how Kozlowski’s and Swartz’s investments fared, Sirios is a private fund, and its performance is not a matter of public record.