Investigators at the Securities and Exchange Commission and the Manhattan District Attorneyâ€™s Office in New York are looking into whether a secret $40 million payment that Tyco International Ltd. made to settle a lawsuit in 2000 represented a payoff to hide possible accounting improprieties, people familiar with the matter say.
TYCO SETTLED THE LAWSUIT after plaintiffs obtained new information that indicated U.S. Surgical Corp. slowed revenue growth and wrote off assets before its acquisition by Tyco was completed, these people say.
The current probes cover ground similar to that of an earlier informal SEC investigation, begun in 1999, into Tycoâ€™s merger-related accounting. Among the issues in the earlier probe was whether Tyco, which had acquired more than 120 companies in the 1990s, had depressed the results of its merger targets prior to completing the takeovers so that it could later report higher profits and growth rates from the deals. That earlier SEC investigation lasted nine months and ended without any enforcement action.
Three people with knowledge of the $3.17 billion Tyco takeover of U.S. Surgical in 1998 said they were unsure if the SEC had later received the documents that the plaintiffs in the settled lawsuit against Tyco uncovered. Just before Tycoâ€™s takeover of U.S. Surgical, the medical-products maker took $322 million in one-time charges.
These people said the allegedly incriminating documents were memoranda between two former top financial executives of Tyco discussing the ways that Tyco would help U.S. Surgical slow its growth after Tyco agreed to acquire that company, but months before the purchase was completed.
In one instance, a former Tyco executive termed the Tyco plan for U.S. Surgical â€œfinancial engineering,â€� according to people with knowledge of the memoranda. Another of the documents involved a chart Tyco produced detailing which divisions U.S. Surgical should retain and which ones it should divest before the merger. Tyco was, in effect, controlling U.S. Surgical even before it owned the company, according to a person involved in the merger. This type of premerger control could violate federal securities laws.
â€˜PHASE 2 INVESTIGATIONâ€™
â€œThis transaction is part of the Phase 2 investigation by the law firm of Boies, Schiller & Flexner,â€� which has been retained by Tyco, said a Tyco spokesman. â€œThe company will not have a detailed comment on it until the investigation is completed.â€� The Tyco spokesman added that the â€œmatter has been discussed recently with the SECâ€� and that Tyco is trying to determine whether all the documents that should have been produced in 1999 and 2000 actually were. The spokesman also said it doesnâ€™t expect the outcome of this matter to be material to Tycoâ€™s financial results.
A spokesman for the SEC couldnâ€™t immediately be reached for comment.
The SEC reopened an investigation of Tyco in June, after L. Dennis Kozlowski, Tycoâ€™s former chief executive, was charged with evading New York state sales taxes by the Manhattan District Attorneyâ€™s office. Added charges were filed earlier this month by New York prosecutors, who say Mr. Kozlowski and former Chief Financial Officer Mark Swartz reaped $600 million in illicit gains from the company.
Prompted in part by recent inquiries about the U.S. Surgical matter in the past month, Tyco is conducting its own internal probe into accounting practices, according to people close to the company.
In late 1999, responding to questions about the unusual premerger charges by U.S. Surgical, Mr. Swartz agreed the charges had the effect of making Tycoâ€™s postdeal growth comparisons look better. But he said the decision about the timing and size of the charges had been made by U.S. Surgical managers, adding that nothing improper had been done.
The information now coming to light stems from a March 1999 lawsuit brought by nine former shareholders of Progressive Angioplasty Systems Inc. Progressive had been acquired by U.S. Surgical in 1997 for $75 million in stock. U.S. Surgical was then obligated to pay up to an additional $75 million in stock after the acquisition, based on sales, over a five-year period. The lawsuit sought damages, saying that the shutdown prevented the payouts from occurring.
Even before the Tyco takeover, U.S. Surgical began to sharply curtail Progressiveâ€™s operations. The moribund unit was then shut down altogether weeks after the U.S. Surgical purchase was completed. And Progressive did, indeed, appear in the â€œdivestâ€� category in the premerger chart drawn up by Tyco for U.S. Surgical, according to a person who saw the chart and two others who were told about it.
A GAG ORDER
Robert Hess, former president of Progressive, said terms of the $40 million settlement, in November 2000, called for a gag order on the lawsuitâ€™s participants and the return of all documents to Tyco. Karen Krasney, a lawyer representing the plaintiffs, declined to comment, citing the â€œconfidentiality agreement.â€�
People with knowledge of the current Tyco accounting probes say one of the issues New York prosecutors and the SEC are focusing on is whether Tyco gave the SEC all of the information the agency had asked for in 1999. The same people say the SEC didnâ€™t have the allegedly damaging documents in its files. Any intent to hide damaging documents relevant to an investigation could be subject to civil and criminal penalties.
â€œThe question is whether this was a $40 million payoffâ€� by Tyco so that the SEC wouldnâ€™t learn details that would have been germane to its 1999-2000 probe into Tycoâ€™s acquisition-related accounting practices, said a person with knowledge of the current inquiries.