Tyco International Ltd. on Tuesday disclosed tens of millions in unauthorized payments to dozens of employees under the company’s indicted former chief executive.
The conglomerate also alleged that the former leader, Dennis Kozlowski, tried to thwart an investigation of the payments and induced former general counsel Mark Belnick to go along for the ride with a hefty, secret compensation package.
The filing Tuesday with the Securities and Exchange Commission followed a four-month internal investigation and was the first time Tyco outlined details of a loan forgiveness program. Eleven executives are named as among the 51 Tyco employees who — at Kozlowski’s direction and without board approval received $56 million in bonuses that effectively canceled out loans they had taken from the company’s relocation program.
The forgiveness program included not only relocation loans, but extra money to reimburse employees for the tax consequences of the loans.
Another $50 million was paid to Kozlowski and former chief financial officer Mark Swartz, both of whom were indicted last week on charges of looting the company. Belnick also was indicted for falsifying documents to cover up a loan he’d taken.
Tyco also detailed tens of thousands of dollars in personal expenditures Kozlowski made with company money, including $15,000 for an umbrella stand, $97,000 for flowers and $2,900 for coat hangers.
Paul Lapides, a corporate governance expert at Kennesaw State University in Georgia, said the unauthorized spending should have been caught by board members years ago and he expects the company’s management shake-up to continue.
“Here’s a big company that is being run like a monarchy, and I think what the report is saying is the reign of King Kozlowski is over,” Lapides said. “The king is gone and it’s time for full and fair disclosure and getting back to the basics.”
In a lawsuit Tyco filed last week against Kozlowski, the company alleges some of the money was used to buy employees’ silence about his misdeeds.
Tyco spokesman Gary Holmes said the lawsuit was referring just to Belnick and Swartz. The other employees were “misled by Mr. Kozlowski to believe these programs were authorized and proper.” He declined to elaborate.
Tyco, which makes everything from security systems to undersea fiber optic cable and had $36 billion in revenue last year, said the forgiven loans were not disclosed to the board.
The lawsuit seeks repayment from Kozlowski for the loans he approved.
State securities regulators said Tuesday afternoon there was enough evidence for them to take regulatory action against Tyco and they would decide how to proceed in the next few days. They declined to elaborate.
Kozlowski asserted in a September 2000 memo to a human resources officer that more than $95 million in forgiven loans had been approved by the board, even though it hadn’t, the company said in the filing.
Kozlowski told Patricia Prue, Tyco’s senior vice president of human resources, the payments were bonuses for good work. Prue received a forgiven loan of about $1.3 million, the filing said.
Mark Foley, a vice president of finance, prepared a memo signed by Swartz that showed the company would include the expense as part of other charges, rather than account for the loans individually as employee compensation, the filing said.
The filing also said Kozlowski and Belnick secretly agreed to tie Belnick’s compensation to Kozlowski’s, “thereby giving Belnick an undisclosed incentive to aid and facilitate Kozlowski’s improper diversion of company funds to Kozlowski’s personal benefit.”
The terms of Belnick’s compensation were not disclosed to the board, but Belnick kept a copy of a letter from Kozlowski in his office that said Belnick’s bonuses would be no smaller than one-third of Kozlowski’s.
Tyco released only the names of senior executives who benefited from the loan forgiveness program in its filing. Holmes said the names of lower-level employees would not be released.
Those beneficiaries named for the first time are: Jerry R. Boggess, president of Tyco’s fire and securities services division; Stephen B. McDonough, former president of Tyco’s plastics division; Neil R. Garvey, former president and chief executive of Tyco subsidiary TyCom Ltd.; former general counsel Irving Gutin; executive vice president Brad McGee; Prue; Jeffrey Mattfolk; Michael Robinson; and Scott Stevenson.
Messages left for the named Tyco officials were not immediately returned Tuesday. Kozlowski’s lawyer, Stephen Kaufman, also did not return a call seeking comment. A lawyer for Swartz, Charles Stillman, said in a statement that his client is innocent of wrongdoing.
“Mark Swartz never received a penny from Tyco that was not fully authorized,” Stillman said.
Kozlowski, 55, and Swartz, 42, were charged last week in New York with enterprise corruption and grand larceny for allegedly stealing $170 million from the company and obtaining $430 million through the fraudulent sales of securities. Both pleaded innocent.
Belnick was charged with falsifying business records to conceal $14 million in loans to himself. He also has pleaded innocent. The three men have declined to talk to reporters.