The Tyco Scandal (2002)

Company Background: Tyco International Plc was a company dealing in security solutions and fire protection. Tyco was incorporated in the Republic of Ireland, with operational headquarters in Princeton, New Jersey, United States. Tyco was founded in 1960 by Arthur J. Rosenberg, and became a publicly traded company in 1964. Mr. Dennis Kozlowski joined Tyco in 1975, and become CEO in 1992, at the age of 46. Kozlowski, a ruthless cost cutter, transformed the small England manufacturer into a multinational worth more than $120 billion. Nothing seemed to hold Kozlowski back as a businessman, driving him to unforetold success, and later to his downfall. 

What Happened: Tyco's former CEO Dennis Kozlowski, former CFO Mark Swartz, and former General Counsel Mark Belnick gave themselves no-interest and very-low interest loans, sometimes disguised as special bonuses, without approval from the Tyco board, and never repaid these loans. These unapproved bonuses and uncensored extravagant spending of Tyco's funds enabled them steal $600 million dollars from Tyco International. For five years at least, Mr. Kozlowski financed his lavish lifestyle from Tyco's coffers.

 

Being a lover of art, Mr. Kozlowski satisfied his art cravings with Tyco's cash. He bought art, antiques, a $6,000 gold-and-burgundy floral patterned shower curtain and other rococo furnishings for his New York apartment. Tyco shareholder cash was spent in purchasing his $18 million apartment. Tyco paid half of the $2 million bill for the 40th birthday party of Kozlowski's then wife, Karen Mayo Kozlowski. The birthday party was disguised as a shareholder meeting, and took place in Sardinia - an Italian island. One of the party's flamboyant attractions was an ice sculpture of the Statue of David urinating Stolichnaya vodka. Mr. Kozlowski added his fitness instructor, his doctor, his favorite chef and Germán Frers - a yachting expert he hired - to Tyco's payroll. Other personal items Kozlowski had Tyco secretly pay for include: a $17,000 traveling toilet box, a $15,000 dog umbrella stand, an $80,000 American Express bill, $5,960 for two sets of sheets, a $1,650 notebook, a $2,200 gilt metal wastebasket, and a $445 pincushion.

How they were caught: In early 2002, the board of directors of Tyco learned that one of its members, Frank Walsh, was paid a $20 million commission (finder's fee) for the role he played in aiding and securing the CIT merger, a payment the rest of the board was unaware of. This prompted Tyco to carry out an in-depth internal investigation which uncovered many expense misemployments. In the same year, the New York State Bank Department observed the transfers of large sums of money from Tyco's accounts into Kozlowski's personal accounts.

Frank Walsh

Main Players: Tyco's former CEO Dennis Kozlowski, former CFO Mark Swartz, and former General Counsel Mark Belnick. Kozlowski was CEO of Tyco from 1992 to 2002 while Swartz was CFO from 1995 through 2002. However, Mark Belnick was found not guilty on all eight counts of fraud against him, including charges of falsification of business records, in July 2004. Belnick was accused of taking a $17 million bonus as a reward for helping to conceal corporate wrongdoing, but was acquitted of all charges by a Manhattan jury.

He however paid a $100,000 civil penalty for his role in the misappropriations.

Penalties and Consequences: Mr. Kozlowski resigned from Tyco on June 2, 2002, the day before he was charged with tax evasion. He was indicted for evading an 8.25% sales tax on the $14 million of rare artwork he bought for himself (approximately $1 million). The Securities and Exchange Commission levied civil fraud charges against Kozlowski, Swartz and Belnick. The three men sold millions of Tyco stock without disclosing the sale. Belnick also failed to disclose $14 million in interest-free loans he used for housing purchases.

Mr. Kozlowski was convicted on June 17, 2005 for looting approximately $100 million from Tyco. Kozlowski and former Tyco CFO, Swartz, were both found guilty on 22 of 23 counts of conspiracy, grand larceny, and violation of business law and falsification of business records. Both men were ordered to pay $134 million to Tyco. Kozlowski served a six and a half year jail term and was granted conditional release from the Lincoln Correctional Facility in New York City on January 17, 2014. In addition to his jail term, Mr. Kozlowski had to pay a $70 million fine. Swartz's fine amounted to $35 million, and he also served a little less than seven years in a correctional facility.

 

Lessons Learned: A company should never put too much power in the hands of an individual, that should be the take-home message. The Tyco scandal emphasizes the need for ethical corporate leadership. It also reminds businesses that shareholder value should not be the lone primary indicator of the health of a business.

Irony of the Scandal: Unlike other companies crumbled by white-collar crime in the early 2000s - notably Enron and WorldCom - Tyco survived and prospered, and its companies employ more than 57,000 people today. All the fraudulent activities carried out by Tyco's top executives were mirrored in the company's books. Tyco's financial statements were not doctored, nor were documents shredded. This distinguishes the Tyco fraud from other fraud scandals that have occurred in the last 20 years. The form of fraud perpetrated by Kozlowski and his associates was the lack of disclosure - they wrote themselves company loans, bonuses and incentive plans without the approval of the board of directors. 

Aftermath for Tyco, Kozlowski and Swartz: Edward Breen replace Kozlowski as CEO after Kozlowski's resignation. On October 1, 2012, Tyco officially announced its split into three separate companies - SimplexGrinnell, Tyco Integrated Security and ADT. Mr. Kozlowski maintained his innocence throughout the years but now admits that he and his colleague stole $150 million from Tyco through unauthorized bonuses.

Mr. Edward Breen 

Kozlowski had been working as a clerk at a software company since February 2012 to 2015 as part of a work-release program. In 2016, he was officially made chairman of the Fortune Society, a nonprofit advocacy organization and social service that helps ex-felons re-integrate society as productive people. It also seeks to promote alternatives to prison. His position is unpaid as he offers his services on a volunteer basis. In 2015, he set up a consultancy with former colleagues, called Harborside Associates to provide business expertise for start-ups and to help companies prepare for takeover. He and his wife Kimberly now live in a two-bedroom rental on the 35th floor of a building overlooking the East River in Manhattan.

In 2012, Swartz sued Tyco for $60 million in retirement and other money he claimed to be owed. In May 2018, Swartz and his wife Karen sold one of his real estates in Boca Raton. They sold unit 101, a condor tower at 1000 South Ocean Boulevard, for $5.56 million.