Financial FraudFebruary 23, 2004 Kozlowski/Tyco Scandal Financial Fraud Nicole Billick Dwain Carryl Ian Lyngen

Financial FraudFebruary 23, 2004 Kozlowski/Tyco Scandal Financial Fraud Egregious Looting Scheme 1996 through June 2002 Senior Executives stole hundreds of millions of dollars, and concealed the transactions from shareholders, while assuring them, “nothing was hidden behind the scenes.” Dennis Kozlowski – Tyco’s Chairman, Pres., & CEO Mark Swartz – Tyco’s CFO & Executive VP Mark Belnick – Tyco’s Chief Corporate Counsel & Executive VP Richard Scalzo – PwC, Tyco’s auditor

Financial FraudFebruary 23, 2004 Kozlowski/Tyco Scandal Financial Fraud How did Kozlowski & Swartz pull it off? KELP Loans (Key Employee Corporate Loan Program) Relocation Loan Program Undisclosed Related Party Transactions with Tyco Undisclosed Perquisites Fraudulent Stock Sales, Misrepresentations to Shareholders, and Lying to Auditors

Financial FraudFebruary 23, 2004 Kozlowski/Tyco Scandal Financial Fraud Action/Resolution Sept 12, 2002 – SEC filed civil fraud charges against Kozlowski, Swartz, and Belnick. Dec 17, 2002 – Frank E. Walsh, former Tyco Director & Chairman of Compensation Committee, sued for hiding $20M payment from shareholders. Aug 13, 2003 – SEC filed ‘cease and desist’ proceedings against Richard Scalzo of PwC. Case continues to unravel…

Financial FraudFebruary 23, 2004 Kozlowski/Tyco Scandal Financial Fraud Detection: In April 1999: Tyco buys electronics marker AMP Inc. for $11.3B. October 1999: Money manager David Tice publicly questions the use of large reserves related to the acquisitions, saying they obscured results. December 1999: SEC conducts nonpublic, informal inquiry into charges and reserves linked to acquisitions. June 2000: Restatement of 1999 earnings : SEC looking closely at Tyco and upper management. June 3, 2002: Kozlowski resigns abruptly and is under investigation for avoiding personal taxes. September 13, 2002: Kozlowski and Swartz indicted for misusing $170M in company money and artificially inflating stock prices.

Financial FraudFebruary 23, 2004Financial Fraud Conceptually, What Went Wrong? The Board contends that Kozlowski and Swartz were simply stealing millions from the firm through the key employee loan program. The CEO and CFO were siphoning money from the firm through expenses that the board should have seen. Implicitly, by not disclosing all of the expenses to the shareholders, the two were pumping up the stock price and profiting at the shareholders expense. Had the expenses been made public, Tyco’s stock price would have been much lower. Kozlowski/Tyco Scandal

Financial FraudFebruary 23, 2004 Kozlowski/Tyco Scandal Financial Fraud Source: Tyco’s website at

Financial FraudFebruary 23, 2004 Kozlowski/Tyco Scandal Financial Fraud How Could This Fraud Have Been Prevented? Practical suggestions: Board was more active in day-to-day management. Increased accountability and controls. Put in place specific guidelines regarding the use of corporate funds. In this case, fraud prevention was all a matter of internal and external controls.