Tyco International Ltd. detailed what it called a pattern of improper and illegal activity by former management that included nearly $100 million in unauthorized payments to dozens of Tyco employees at various levels.
In a filing Tuesday with the Securities and Exchange Commission, the conglomerate also alleged the company’s indicted former chief executive, Dennis Kozlowski, tried to thwart an investigation of the payments.
The filing, detailing the results of the company’s four-month internal investigation, was the first time Tyco outlined details of the loan forgiveness. The filing lists seven or eight names among the 51 Tyco employees who, at Kozlowski’s direction and without board approval received $56 million in bonuses that in effect canceled out loans they had taken from the company’s relocation program, adopted in 1995.
Another $50 million was paid to Kozlowski and former chief financial officer Mark Swartz, who was indicted last week along with Kozlowski for looting the company.
The forgiveness program included not only relocation loans, but extra money to reimburse them for the tax consequences of the loans.
In a lawsuit Tyco filed last week against Kozlowski, the company alleges some of the money was used to buy the employees’ silence about Kozlowski’s misdeeds. The lawsuit seeks to have Kozlowski repay the company for the loans he approved.
“This pattern of improper and illegal activity occurred for at least five years prior to June 3, 2002, when former CEO L. Dennis Kozlowski resigned, and that this activity was concealed from the board and its relevant committees,” the company said in a statement Tuesday. Tyco makes everything from security systems and undersea fiber optic cable and had $36 billion in revenue last year.
Kozlowski asserted in a September 2000 memo to a human resources officer that more than $95 million in forgiven loans to employees had been approved by the board, even though they hadn’t, the company said Tuesday.
Kozlowski told Patricia Prue, Tyco’s senior vice president of human resources, that the loan forgiveness payments were meant as a bonus for their good work.
According to the filing, 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 names released in the filing are of senior executives. Tyco spokesman Gary Holmes said the other names, including those of lower-level employees, would not be released.
“The names being released are because of their rank, not because they didn’t play by the rules,” Holmes said. “They were misled by Mr. Kozlowski to believe these programs were authorized and proper.”
A source close to the company said several board members questioned the lower-level employees about the loans. The employees responded that they didn’t know they were doing anything wrong, the source said.
“They wouldn’t have any reason to know they were doing something wrong,” the source said. “In retrospect, their sniffers should have been out.”
According to the Tyco lawsuit, Kozlowski fabricated another bonus program in favor of himself and two dozen select executives in November 2000. The money was “used to induce their cooperation or buy their silence,” the suit says. Those bonuses also were detailed in Tuesday’s SEC filing.
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.
Former general counsel Mark 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.
The costs associated with the program were included in Tyco’s financial statements, but were disguised as other expenses. While Tyco will not have to restate financial results, executives said the company has been damaged by the misuse of funds.
“The amount of money improperly diverted by Tyco’s former senior executives from the company to themselves is very small in comparison with Tyco’s total revenues and profits, but it is very large by any other relevant comparison; and the extent of the former executives’ misconduct has harmed Tyco’s reputation and credibility with investors, lenders and others,” Tyco said.
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