Manhattan District Attorney Robert M. Morgenthau has announced the indictment of the three top officers of Tyco International.
L. Dennis Kozlowski, formerly the Chairman and CEO, and Mark H. Swartz, until this week the Chief Financial Officer, have been charged with Enterprise Corruption for stealing more than $170 million from Tyco and obtaining more than $430 million by fraud in the sale of securities.
Mark A. Belnick, Tyco’s former Chief Corporate Counsel, has been separately charged for falsifying business records, and to conceal loans to himself from the company that totalled more than $14 million.
The indictment alleges that from January 1, 1995 through September 9, 2002, Kozlowski and Swartz were members of the Top Executives Criminal Enterprise (TEXCE). TEXCE was created and operated by the defendants for the purpose of stealing money from Tyco and defrauding investors by falsifying records, concealing material information and providing false information to Tyco’s board of directors and stockholders.
According to the indictment, Kozlowski was in charge of the enterprise and looted the company by granting himself and others excess compensation, including bonuses, without regard for restrictions put on compensation by the board of directors.
Kozlowski is said to have established a system that permitted him, through his assistant, to authorise millions in expenditures for personal items, using personnel in the executive treasury department to pay his personal bills.
Kozlowski is also said to have controlled the flow of information to the board by limiting the scope of internal audits, having the auditors report directly to him, and entering into financial transactions with other executives and directors of Tyco which were kept secret from the board. As part of the enterprise, he met with and defrauded investors, analysts and journalists, with the assistance of Tyco’s Investor Relations department, in order to manipulate the company’s stock price.
Swartz was chief of operations of TEXCE and was Kozlowski’s second-in-command. Swartz exercised control over the transfer of funds, the booking of accounting entries, and the operations of those portions of Tyco’s Human Resources department dealing with certain compensation, bonuses, and loans.
Swartz ensured that the Finance Department – not Tyco’s Legal Department — controlled the information going into Tyco’s filings with the United State Securities and Exchange Commission to make certain that Tyco’s filings were false and deceptive, and hid the money they were looting from the company. Swartz deceived investors and the board by misallocating substantial personnel costs resulting in falsely enhanced operating performance.
Because they were the two highest-ranking officers of Tyco, Kozlowski and Swartz were reportedly able to recruit others to join the criminal enterprise, and were also able to use others at Tyco as unwitting agents of the criminal enterprise.
While keeping the board and its committees in ignorance of what was actually happening, members of TEXCE used their positions in the company not only to steal corporate funds for themselves and their friends, but also concealed thefts and other wrongdoing by corrupting key employees with lucrative payments to influence their behaviour.
According to the indictment, Kozlowski and Swartz stole millions of dollars from Tyco by awarding themselves and others unauthorised compensation, principally in the form of bonuses and loans, the repayment of which was subsequently forgiven, and took steps to conceal these payments form the board. In doing so, they allegedly violated the express requirement of the board that executive compensation be set exclusively by the Board’s Compensation Committee. They manipulated two corporate loan programs – the Key Employee Loan Program and the New York City Corporate Headquarters Relocation Loan Program – and employed a variety of other ruses to steal money from Tyco, with the assistance of several other people.
The Key Employee Loan Program (KELP) is a program through which Tyco employees who had been granted stock through a restricted stock ownership plan could obtain loans from the company for the purpose of paying federal and state taxes incurred on the vesting of such stock and for the purpose of repaying other similar loans, and for no other purpose.
The New York City Corporate Headquarters Relocation Loan Program (NYC Relo), as approved by the Compensation Committee and the board in 1995, was a program through which any employee, if required to relocate to Tyco’s New York City corporate headquarters, would be permitted an interest free loan to buy a home, under certain circumstances and conditions.
Both of these loan programs were, unbeknownst to the board, used by the defendants to take hundreds of millions in loans for a variety of personal purposes well outside the limits of the programs.
Kozlowski used $12 million under the KELP program to pay for art for his personal residences. He faces pending charges in New York County for failing to pay New York sales taxes on those purchases. In other instances, Kozlowski borrowed $9 million ostensibly under the relocation program to purchase property in Boca Raton in 1998. He also borrowed $7 million from the program to purchase an apartment on Park Avenue in May, 2000 for his wife as part of a divorce settlement. Ultimately, Kozlowski and Swartz caused a substantial portion of the loans they had taken from the company to be forgiven. Both the loans and the loan forgivenesses were concealed from the board.
It is also charged that the defendants caused millions in unauthorised ‘bonus’ payments to be made to them, $56 million to Kozlowski and $28 million to Swartz, none of which were disclosed to the board.
According to the indictment, Kozlowski and Swartz used the millions of dollars they stole from Tyco to buy expensive property and homes in Manhattan, Boca Raton, Florida, Nantucket, Massachusetts, and Rye, New Hampshire. They also purchased yachts; paid for home renovations and bought jewellery from Harry Winston and Tiffany.
They also used the money to invest in private family trusts, sports teams, a birthday party in Sardinia, artwork, interest-free loans and properties to favoured employees and friends. They also used the money to pay the salaries of personal employees; and to exchange expensive presents with a sympathetic securities industry analyst.
They are both also charged with stealing $20 million by giving it to a Tyco director without telling the board of directors or getting its approval. Kozlowski is charged with stealing $2 million and 200,000 shares of stock, similarly, by giving Belnick an unauthorised bonus.
To add to the list of charges, Kozlowski and Swartz will have to explain how they obtained more than $400 million from investors. It is alleged that they falsely represented and omitted material information in proxy statements and other documents in meetings with investors, analysts and journalists. For example, they concealed that Tyco executives received tens of millions of dollars in forgiven loan and ‘gross-up’ payments.
They also concealed that executives received tens of millions in credit lines and loans from Tyco. With loan balances in the millions, Kozlowski, Swartz and Belnick routinely submitted ‘Directors and Officers Questionnaires,’ which were used to gather information for proxy statements, falsely stating that they had no indebtedness to the company in excess of $60,000.
The defendants also misrepresented the extent to which they were selling Tyco stock. Kozlowski told investors that he had the greatest faith in Tyco while misrepresenting the extent of his own Tyco stock sales. In fact, Kozlowski’s own sales of Tyco stock exceeded 5.5 million shares and for which he received in excess of $280,000,000; SWARTZ sold more than 2 million shares of Tyco stock, obtaining more than $125,000,000.
Finally, the defendants are also charged with artificially inflating certain measures of the value of Tyco stock. It is alleged that Swartz caused the booking of unauthorised bonuses as ‘non-recurring charges’ with the intent to raise Tyco’s earnings per share before non-recurring charges. The amounts misbooked in this and other ways exceeded $150 million.
If found guilty of the charges, Kozlowski and Swartz face up to 30 years in prison, with fines and penalties. Belnick faces up to four years in prison. The United States Securities and Exchange Commission has separately sued the three defendants.