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Tyco Scam


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The 2002 Tyco CEO and CFO Scam

Published in: Economy & Finance, Business
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Tyco Scam

  1. 1. A Corporate Governance Failure -Palak Jain-158 -Anubhav Agrawal-28 -Naman Rastogi-463
  2. 2. 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.
  3. 3. 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. • Among market leaders in all industries Leading Provider
  4. 4. PRIOR TO JULY 1992 JULY 2001 GROWTH NET PROFITS $95 MILLION $5.1 BILLION 54 TIMES RETURN ON SALES 3.1% 13.8% 4.5 TIMES SHARE PRICE $4.30 $58.00 13.5 TIMES COMPANY PERFORMANCE HISTORY • June 1991 • Hired Mark Swartz, who went on to become the CFO in 1995. • July 1992 • Hired Dennis Kozlowski as CEO and President of Operations.
  5. 5. DENNIS KOZLOWSKI • Graduate of Seton Hall University, New Jersey • Began work at Tyco in 1976. Kozlowski's job was to fix up some of the floundering acquisitions of the company at that time. • 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. • Previously worked for Deloitte & Touché. • Started working at Tyco in 1991. • In 1995 he became the CFO. • He was nominated for a CFO Excellence Award in 2000. MARK SWARTZ KEY MANAGEMENT PERSONNEL
  6. 6. 1986 Restructure to 4 core segments 1990s Named Tyco International Early 2000s > 30 acquisitions, 4 segments trade independently 1996 – 2001 $ 240 mil - $ 4.8 bil 1992 Fort resign as CEO Assisted by CFO, acquisition escalated, operating margin +22.1% 2002, spent $ 8 bil on >700 acquisitions in last 3 yrs. SEC investigate on amending Tyco’s EPS during 1999-2000 TYCO‟S GROWTH UNDER DENNIS KOZLOWSKI 2002 EPS >40% growth 1992 CEO: Kozlowski, 46yrs Acquired Kendall & doubled earning Increase salary $ 2.1 mil 1997 CEO salary $ 8 mil 1999 CEO salary $ 170 mil
  7. 7. FIRST INVESTIGATION • SEC launched the first investigation in late 1999. • Findings • Overstated expected costs of new acquisitions. • Made acquisitions appear financially unstable. • Results • Technically no laws were broken. • Tyco agreed to restate earnings. • No fines assessed or penalties imposed.
  8. 8. SECOND INVESTIGATION • SEC launched the second investigation in early 2002 against CEO Dennis Kozlowski and CFO Mark Swartz. • Tax Evasion. • Robert Morgenthau aka Sherlock Holmes. • Improper use of company funds. • Payoffs were paid to directors to cover up improper use of funds. • Undisclosed stock sales. $430 million made by Kozlowski and Swartz. • No Whistle Blower.
  9. 9. CHARGES • Inflated operating income by $567 million. • Improper acquisition accounting by undervaluing acquired assets and overvaluing acquired liabilities. • Used reserves to make adjustments and smoothen its publicly reported results to meet earnings forecasts. • Failure in disclosure of executive compensation, indebtedness and related party transactions of its former senior management in annual reports.
  10. 10. • Evading $1 million sales tax • Failure to disclose forgiven loans of $19 million • Misappropriating funds of $170 million • CEO sold 5.5 million shares receiving $280 million dollars. CFO sold 2 million shares earning $125 million. None of the sales disclosed to the public. CEO and CFO
  11. 11. Received hush money of $17 million as bonus from CEO, unapproved by BOD to conceal corporate wrong doings. CLO-Mark Belnick
  12. 12. PUNISHMENTS • TYCO- $50 million civil penalty • CEO & CFO • 8-25 years of prison • $240 million fine • CLO-Acquitted of all charges
  13. 13. WHERE DID THE MONEY GO ? • $106 million to employees through Loan forgiveness and relocation program • $2.1 million for the birthday party of Kozlowski's wife was billed to Tyco. • Kozlowski used Tyco to avoid around $1 million import taxes after purchasing $14 million in rare artwork • $2.5 million for a home in Florida, $9 million for additional property, $5 million for Massachusetts property, $900,000 for Connecticut property and $240,000 jewelry for Mrs. Kozlowski. • Kozlowski received $81 million in unauthorized bonuses • Stephen Foss received $751,101 for supplying aircraft and pilot services to Tyco. • Lord Michael Ashcroft used $2.5 million in Tyco funds to purchase a home • Frank E. Walsh, Jr. received $20 million commission
  14. 14. • Pre Kozlowski was made CEO: Stock - $4.30 per share • Ten years later: Stock - $58 per share • Post Kozlowski: Stock – $16.05 per share STOCK PRICE 1999-2005
  15. 15. • Worst-practices included: • Poor documentation. • Inadequate policies and procedures to prevent the misconduct of senior professionals. • Inadequate procedures for proper corporate authorizations. • Inadequate approval procedures and documentation. • A lack of oversight by senior management at the corporate level. • Aggressive accounting & improper auditing by auditors. Internal Control & Governance Failures
  16. 16. • Public Company: Financial Statements – Overstating expenses • Acquisitions • Undisclosed sales of stock • Company funds for personal expenses • Special “bonuses” to keep quiet! • Kozlowski, CEO – Tax Evasion ETHICAL DUTIES NOT COMPLIED • Company‟s CEO Dennis Kozlowski, and CFO Mark Swartz • Inside and outside directors who were involved • Company saves on taxes • Company and employees • Customers BENEFIT TO SOME HARM TO OTHERS • Tyco • Government • Integrity of the company‟s CEO and CFO • Company‟s reputation • Performance • Stock price • Employees and their families • Executives that were not involved • Stockholders
  17. 17. REBUILDING • Company filed suit against CEO and CFO for more than $100 million. It fired a total of 9 executives on their board. CEO- Edward Breen CFO- David J. FitzPatrick • New management team recovered some of the funds taken by CEO and CFO hence restored investors faith. • New board of directors voted to make future executive agreement and board chairman to be an independent person rather than TYCO CEO. • Eric Pillmore was hired as VP of Corporate Governance.
  18. 18. NEW CORPORATE GOVERNANCE MODEL • Installation of corporate ethics programme and new ethical guide was distributed to all employees. • 90% of headquarters staff were replaced. • An Ombudsman position at Tyco who mediated between employees and management. • Published confidential hotline „Concern LINE‟. • In 2004, CEO Edward Breen was listed as one of the Business week‟s „Best Managers‟. • In 2008, Tyco was named Corporate Citizen of the year for helping the homeless.
  19. 19. LEARNING/PRECAUTIONS • Companies should more closely monitor their employees for unethical conduct • The government should monitor accounting practices of companies more closely • Any executive of companies who exhibit suspicious behavior should be closely watched • Is it right to make another company appear more unstable that it really is? • Is it right to use corporate money for personal use? • Is it right to bribe board members? • Is it right to have undisclosed sales of stocks? MORAL QUESTIONS TO BE CONSIDERED