The problems at Tyco International Ltd. began in 1995, according to a long narrative of greed run rampant in a report prepared for the company’s directors and filed today with the Securities and Exchange Commission.
L. Dennis Kozlowski, then Tyco’s chief executive, had decided to move some employees from the conglomerate’s Exeter, N.H., headquarters to a new office in New York City.
According to the report, Kozlowski proposed a relocation plan that would have benefited five or six executives. But after his lawyers told him such a plan would probably have to be disclosed as compensation for executives, he developed a broader plan for all employees. Then he proceeded to secretly develop a more generous relocation plan for the five or six executives, which was not authorized by the board of directors’ compensation committee.
It would be just the beginning.
In its detailed, 234-page report today, the Tyco directors say Kozlowski and several ranking executives conspired to deceive Tyco’s board and pillage the company for hundreds of millions of dollars to throw parties, speculate on real estate and other investments, and buy homes and yachts. In addition to the millions spent on major items, the report alleges that Kozlowski improperly used company funds to buy knickknacks such as a $17,100 “traveling toilette box,” a $6,300 sewing kit, a $15,000 “dog umbrella stand,” a $1,650 notebook and a $445 pincushion.
According to the report, Kozlowski engineered the payments primarily through two conventional corporate programs — the relocation package and another program designed to lend executives money to cover the taxes owed on stock options. He then buried the millions of dollars in expense in two large charges, one associated with an initial public offering of an affiliate’s stock and another connected to a spinoff of a company unit.
Kozlowski, along with former chief financial officer Mark H. Swartz and former general counsel Mark A. Belnick, were indicted on theft and fraud charges last week. All three pleaded not guilty.
Kozlowski could not be reached for comment today. His attorney, Stephen Kaufman, did not return a call. Charles Stillman, an attorney for Swartz, released a statement saying that his client “never received a penny from Tyco that was not fully authorized” and that the report “does not change that fact.” Belnick’s attorney, Reid Weingarten, did not return a call.
The Tyco report filed with the SEC today says the abuses of the relocation-loan program continued in 1997, after the company merged with ADT Ltd. and Kozlowski decided to move more than 40 employees to Boca Raton, Fla., where ADT was headquartered.
According to the filing, Kozlowski once again set up two plans, a legitimate one run through the human resources department and a covert one run through the then-treasurer’s office. Kozlowski allegedly borrowed $29.8 million from the company under the program to buy land and build a Boca Raton estate.
The filing alleges that Kozlowski stole from the company with the help of Swartz and Belnick. Swartz allegedly took out millions in loans that were not disclosed and were in part forgiven. Belnick took out loans and allegedly received millions in undisclosed bonuses tied to Kozlowski’s pay package.
Many other employees also allegedly had large loans forgiven, although the board said it was unaware that the forgiveness was not approved by the board or properly accounted for and disclosed to shareholders.
Instead, when it came time to account for the forgiven loans and other unauthorized bonuses, Kozlowski allegedly had them charged as costs of an initial public offering of stock in Tyco’s TyCom unit or as costs associated with the spinoff of Tyco’s ADT Automotive business. The payments were always accounted for — just not in places where investors and regulators would know to look for them.
In one case, Kozlowski allegedly awarded his lead director at the time — his link to the rest of the board — an undisclosed $20 million bonus. Kozlowski described the payment as a bonus for the director’s help in arranging Tyco’s acquisition of financial services firm CIT.
In another instance, when a human resources official asked for documentation that the board had approved loan forgiveness totaling close to $100 million, the report alleges that Kozlowski submitted a piece of paper simply saying “a decision has been made” to forgive the loans.
This week, Kozlowski told the Wall Street Journal that all the loans, bonuses and other payments were approved by onetime lead director and compensation committee chairman Phil Hampton. Hampton died last year.
Under the New York program, the report says, Kozlowski improperly borrowed $7 million to buy from the company, at a reduced price, a plush Park Avenue apartment that he later handed over to his ex-wife. He also allegedly rented a Fifth Avenue apartment and had the company pick up the annual rent of $264,000 for four years. Kozlowski then allegedly had the company buy a second Fifth Avenue apartment for him for $16.8 million, plus $14 million to spruce the place up.
In total, the report claims, Kozlowski took out $61.7 million in unauthorized, interest-free relocation loans. He allegedly paid back $21.7 million, forgave himself $19.4 million more without board authorization and moved $20.5 million to other loan accounts he had with the company.
The Tyco report suggests Kozlowski did not operate alone. It says Swartz used the New York relocation-loan program to buy a house in Rye, N.H., and an apartment in the Trump International Hotel and Tower at 1 Central Park West in Manhattan. He also allegedly took out $20 million in unauthorized loans under the Florida relocation program to buy property in Boca Raton. Of $33.1 million in unauthorized interest-free loans, Tyco says, Swartz repaid $10.8 million, had $9.8 forgiven by Kozlowski without board authorization and had $12.5 million transferred to other loan accounts.
Belnick, according to the filing, took out an unauthorized $4.2 million loan to buy an apartment on Central Park West. Like the other loans, the filing alleges, the loan was not disclosed as executive compensation in Tyco’s proxy statements. The report also says Belnick borrowed $10.4 million to buy land and build a home in the ski-resort town of Park City, Utah. Tyco has no office in Utah, and the filing says Belnick was never asked to relocate there.
The filing says that in addition to large salary and bonus payments, Kozlowski and Belnick also entered into a secret agreement under which Belnick would receive more money tied to Kozlowski’s compensation. The report says the arrangement gave Belnick, the general counsel, “an undisclosed incentive to aid and facilitate Mr. Kozlowski’s improper diversion of Company funds.”
Belnick allegedly reaped an extra $4 million in bonuses under the arrangement, making him one of the firm’s highest-paid employees. But Tyco said the bonuses were accounted for so that Belnick would not be included among those highly paid executives whose compensation must be reported to shareholders.
Many other Tyco employees got in on the act as well but the board said today that most were unaware the loans were not authorized by the board. Many of the employees who had loans forgiven had nothing to do with the TyCom IPO, the filing says.
Overall, Tyco says, Kozlowski forgave Florida relocation loans — and had the company pay associated taxes — for 51 employees, costing the company $96 million.
At one point, Patricia Prue, senior vice president for human resources (who had her own loan forgiven) asked Kozlowski for documentation that the forgiveness had been approved by the board. Kozlowski submitted a document to Prue saying that “a decision has been made to forgive the relocation loans” for those who helped with the TyCom IPO.
The problem was how to account for the nearly $100 million in payments.
According to the filing, Mark Foley, a vice president of finance, prepared a memo detailing how the charge would be distributed to several different accounts as expenses associated with the IPO. The report says all the forgiven loans were disclosed as compensation in individual W-2 forms but were never included in the company’s proxy statements for named officers.
Today’s filing named just nine recipients of the forgiven loans, a list that included Prue and Brad McGee, a Tyco spokesman. “The reason these names were disclosed is because of their rank, not because they didn’t play by the rules,” Tyco spokesman Gary Holmes said. “They were misled into believing these payments were authorized.”
Holmes also took issue with a report in Tuesday’s Washington Post that the Manhattan district attorney had not totally ruled out charging Tyco as a company. He said the firm has been assured no such charge will be brought. An official familiar with the investigation said that a charge against Tyco itself was extremely unlikely but that other officials and directors of the firm could face charges.
According to the SEC filing, the unauthorized payments did not stop with the Florida and New York relocation programs. The report says that, without authorization, Kozlowski approved $56 million worth of undisclosed bonuses to executives for their work on the sale of Tyco’s ADT automotive business: $25.6 million allegedly went to Kozlowski, $12.8 million to Swartz, $2.6 million to McGee and $737,090 to Prue. As with the TyCom bonuses, the report says, the awards were accounted for as costs associated with the spinoff.
In addition to the relocation loans, the Tyco report says Kozlowski took out $55.9 million in loans from a program intended to help executives pay taxes on stock awards. But Tyco says its former chief executive used the money for a long list of real estate and other investments and treated the program like an “unlimited line of credit.”
The company is now demanding that Kozlowski repay $43.8 million in outstanding loans under the program as well as interest.
The company said Swartz, as CFO, knew about the extent of Kozlowski’s loans and as a board member was required to inform the compensation committee. But the company said he did not do so and instead took out millions in unauthorized loans himself to fund a long list of investment ventures. The company said Swartz owes $2.9 million plus interest. Belnick, according to Tyco, borrowed $8.6 million under the program but paid it all back.