Former Tyco International Ltd. chief executive L. Dennis Kozlowski and the company’s former chief financial officer, Mark H. Swartz, were indicted today for allegedly using $170 million in company money to throw lavish parties and buy expensive homes, jewelry and art for themselves, and for making $430 million more by selling stock at artificially inflated prices.
Kozlowski and Swartz allegedly used improper bonuses and company loans — most of them later forgiven — to buy a long list of luxury items.
These include: $12 million worth of art; a $2.5 million home in Boca Raton, Fla., and $9 million more for other property in Boca Raton; $5 million for property in Nantucket, Mass.; $900,000 for property in Greenwich, Conn.; $240,000 for jewelry from high-end dealer Harry Winston; a $7 million Park Avenue apartment in New York for Kozlowski’s wife as part of a divorce settlement; $1 million for a private party for Kozlowski on the Italian island of Sardinia; a $1 million gift in Kozlowski’s name to Cambridge University; and expensive cars, yachts and investments in sports teams and other ventures.
The scope of today’s indictment dwarfs one handed down earlier this year charging Kozlowski with evading more than $1 million in New York sales taxes on art, including works by Renoir and Monet, that he purchased with company funds.
Former Tyco general counsel Mark Belnick was also indicted today for allegedly falsifying business records to conceal $14 million in interest-free loans he received from the company, which he used to buy an apartment in New York and a house in Park City, Utah.
All three pleaded not guilty after a brief court appearance in which they arrived in handcuffs. If convicted, Kozlowski and Swartz face up to 30 years in prison. Belnick faces up to four years.
“Dennis Kozlowski was a recognized business leader and believes that the charges against him are unfounded and unfair,” Kozlowski’s attorney, Stephen Kaufman, said after the arraignment. Attorneys for Belnick and Swartz also asserted their clients’ innocence.
Prosecutors today alleged that Kozlowski and Swartz kept some Tyco board members in the dark about the loans and other payments by having internal auditors report directly to Kozlowski, and that they co-opted other board members with improper payments, including $20 million to one director who was not named in the indictment. Two other directors also allegedly received payments, although the indictment does not make a direct connection between the payments and the alleged theft.
The fresh charges recall a similar indictment earlier this year alleging that Adelphia Communications Corp. founder John Rigas and his family members treated the company like a personal piggy bank, siphoning over $1 billion from the cable-TV operator and helping drive it into bankruptcy. Attorneys for the Rigas family have denied wrongdoing by their clients.
Manhattan District Attorney Robert M. Morgenthau today said the new Tyco charges indicate that the Securities and Exchange Commission and prosecutors are working together to punish a wave of corporate wrongdoing that has spooked investors and chilled the markets.
“These guys got away with this for a significant amount of time but they did get caught,” he said. “I hope that there are a lot of corporate officials out there who aren’t going to sleep so well tonight.”
Also today, Tyco filed suit against Kozlowski, seeking hundreds of millions of dollars in damages, including repayment of five years’ salary, benefits, loans and bonuses and payments made to other employees. The amount includes at least $20 million in personal expenses that, according to the suit, Kozlowski charged to the company. The company has already filed suit against Belnick, accusing him of failing to disclose $35 million in compensation and loans.
Tyco, a conglomerate nominally headquartered in Bermuda but run from Exeter, N.H., and New York, makes an array of products across numerous markets. Its core businesses are in electronics and telecommunications. Once viewed as a mini-General Electric, the firm has seen its share price plunge in recent months following inquiries into the activities of Kozlowski and other executives and questions about how the firm accounts for acquisitions. Trading in the stock was halted this morning.
Morgenthau announced the new charges shortly after the SEC filed a companion civil suit against the former executives, saying they failed to disclose millions of dollars in loans taken from the company.
The 94-page indictment describes Kozlowski as “the boss” and Swartz as “chief of operations” of a criminal enterprise that manipulated Tyco’s stock price through false public statements and fraudulent accounting entries. It also says Kozlowski and Swartz “concealed thefts and other wrongdoing by corrupting key employees with lucrative payments to influence their behavior.”
Prosecutors also say Kozlowski and others sought to persuade a large securities brokerage to replace an analyst with an individual whom Kozlowski viewed as more friendly to Tyco. Kozlowski and the new analyst then allegedly “exchanged presents worth thousands of dollars.”
At Morgenthau’s request, a judge signed a temporary order freezing $600 million in assets belonging to Kozlowski and Swartz, Bloomberg News reported. In its civil suit, the SEC asks that Kozlowski, Swartz and Belnick be forced to repay all money received as a result of the alleged fraud, including loans, salary, bonuses, stock options and stock losses they avoided.
“Kozlowski, Swartz and Belnick treated Tyco as their private bank, taking out hundreds of millions of dollars of loans and compensation without ever telling investors,” SEC enforcement director Stephen M. Cutler said in a statement.
Morgenthau said he decided not to charge Tyco as a corporation because he felt it would be unfair to punish the firm’s 270,000 employees for the deeds of a few. But both Morgenthau and SEC officials said the investigation was ongoing and could lead to new charges.
The theft charges allege that Kozlowski and Swartz abused two corporate loan programs , one intended to help executives pay taxes on stock grants, the other to help them relocate to the New York area. While the loans were being made, Kozlowski and Swartz allegedly signed sworn documents saying they had no indebtedness to the company over $60,000.
Kozlowski and Swartz are also charged with fraudulently transferring $55 million from Tyco’s sale of its ADT Automotive business to their own accounts.
Prosecutors also say Kozlowski committed fraud by publicly expressing confidence in Tyco’s future while selling thousands of shares at prices inflated by the company’s false financial reporting, making $280 million in the process. Swartz allegedly sold over 2 million shares worth $125 million.
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