TYCO SCANDAL

Company History Founded in 1960 by Arthur J. Rosenburg Initially supported by government research contracts In 1964 it became a publicly owned company It was in control of 16 companies by 1968 In 1974 its stock was listed on the NYSE Between 1982 and 2000 it undertook several subdivisions

Company Overview It participates in several different industries: Electronics Fire & Security Healthcare Plastics & Adhesives Engineered Products & Services It employs over 267,000 people Its services and products are provided worldwide

In January of 2002 questions began to arise concerning the business practices of three top executives at Tyco . . .

Dennis Kozlowski Graduate of Seton Hall University Began work at Tyco in 1976 Worked his way up through the company, becoming CEO in 1992 Was key in an $850 million dollar purchase of an under seas fiber-optic cable business from AT&T

Dennis Kozlowski On June 3, 2002 he resigned for “personal reasons” On September 12, 2002 he was formally indicted on several charges On October 7, 2003 he went to trial

Mark Swartz Previously worked for Deloitte & Touche Started working at Tyco in 1991 In 1995 he became the CFO He was nominated for a CFO Excellence Award in 2000

Mark Swartz September 12, 2002 he was formally charged and pleaded innocent October 7, 2003 he went to trial February 10, 2004 he testified on his behalf

Mark Belnick Chief Legal Officer of Tyco

Mark Belnick He supposedly accepted a 17 million dollar “gift” from the company to remain silent He was indicted for falsifying business records On July 15, 2004 he was acquitted after deciding to risk prison time in order to have his name cleared

Where the Money Went Over 600 million was stolen from Tyco 9 million dollar home in Boca Raton, Fl and Park Avenue apartment in Manhattan for Kozlowski Bonuses of 56 million and 28 million to Kozlowski and Swartz respectively 15,000 dollar umbrella stand, 6,300 sewing basket, coat hangers for 2,900, and a 1,650 dollar appointment book A variety of expensive paintings A bonus of 17 million to Belnick

“Pres Monte Carlos” by Monet from Kozlowski’s personal collection.

The Charges They were charged with civil fraud and theft Other charges against Kozlowski and Swartz included corruption, conspiracy, grand larceny, and falsifying records The maximum sentence for the two would be 30 years each Belnick would only receive a maximum sentence of 4 years All three pleaded innocent in court

Facts Related to Stock Market Kozlowski sold 5.5 million shares of Tyco stock, receiving 280 million dollars 2 million shares were also sold by Swartz who earned 125 million dollars None of the sales were disclosed to the public

"Messrs. 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. Defendants put their own interests above those of Tyco's shareholders. Those shareholders deserved better than to be betrayed by the management of the company they owned.“ - Stephen M. Cutler (SEC Director of Enforcement)

Outcomes The trial of Kozlowski and Swartz was declared a mistrial on April 2, 2004 They will be tried again in 2005 Belnick was proven innocent on July 15, 2004

Implications

Implications The company re-structured their management, firing a total of 9 executives on their board Most notably, Edward Breen was hired as the new CEO and David FitzPatrick was hired as the new CFO On May 6, 2003 a new ethical guide was distributed to all employees

Tyco Guide to Ethical Conduct “Tyco's commitment to the highest standards of integrity begins with making sure that everyone across the Tyco organization understands the company's core values— integrity, excellence, teamwork, and accountability. That understanding begins with the Tyco Guide to Ethical Conduct, a 32-page booklet that provides a guide to help employees know what is expected from them and to help them make good decisions.” Link to Tyco Guide to Ethical Conduct

Possible Precautions Companies could more closely monitor their employees for unethical conduct The government could monitor accounting practices of companies more closely Any executives of companies who exhibit suspicious behavior should be closely watched