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Name ± Priyanka Bisht
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Case Study: Tyco international fraud
Tyco International has operations in over 100 countries and claims to be the world's largest
maker and servicer of electrical and electronic components; the largest designer and maker of
undersea telecommunications systems; the larger maker of fire protection systems and electronic
security services; the largest maker of specialty valves; and a major player in the disposable
medical products, plastics. Edward Breen, who replaced kozlowski removed nine members of
Tyco¶s international board, and adhesives markets. Since 1986, Tyco has claimed over 40 major
acquisitions as well as many minor acquisitions.
How the Fraud Happened
According to the Tyco Fraud Information Center, an internal investigation concluded that there
were accounting errors, but that there was no systematic fraud problem at Tyco. So, what did
happen? Tyco's former CEO Dennis Kozlowski, former CFO Mark Swartz, and former General
Counsel Mark Belnick were accused of giving themselves interest-free or very low interest loans
(sometimes disguised as bonuses) that were never approved by the Tyco board or repaid. Some
of these "loans" were part of a "Key Employee Loan" program the company offered. They were
also accused of selling their company stock without telling investors, which is a requirement
under SEC rules. Koslowski, Swartz, and Belnick stole $600 million dollars from Tyco
International through their unapproved bonuses, loans, and extravagant "company" spending.
Rumors of a $6,000 shower curtain, $2,000 trash can, and a $2 million dollar birthday party for
Kozlowski's wife in Italy are just a few examples of the misuse of company funds. As many as
40 Tyco executives took loans that were later "forgiven" as part of Tyco's loan-forgiveness
program, although it was said that many did not know they were doing anything wrong. Hush
money was also paid to those the company feared would "rat out" Kozlowski.
Essentially, they concealed their illegal actions by keeping them out of the accounting books and
away from the eyes of shareholders and board members.
How it Was Discovered
In 1999 the SEC began an investigation after an analyst reported questionable accounting
practices. This investigation took place from 1999 to 2000 and centered on accounting practices
for the company's many acquisitions, including a practice known as "spring-loading." In "spring-
loading," the pre-acquisition earnings of an acquired company are underreported, giving the
merged company the appearance of an earnings boost afterwards. The investigation ended with
the SEC deciding to take no action.
In January 2002, the accuracy of Tyco's bookkeeping and accounting again came under question
after a tip drew attention to a $20 million payment made to Tyco director Frank Walsh, Jr. That
payment was later explained as a finder's fee for the Tyco acquisition of CIT. In June 2002,
Kozlowski was being investigated for tax evasion because he failed to pay sales tax on $13
million in artwork that he had purchased in New York with company funds. At the same time,
Kozlowski resigned from Tyco "for personal reasons" and was replaced by John Fort. By
September of 2002, all three (Kozlowski, Swartz, and Belnick) were gone and charges were filed
against them for failure to disclose information on their multimillion dollar loans to shareholders.
The SEC asked Kozlowski, Swartz, and Belnick to restore the funds that they took from Tyco in
the form of undisclosed loans and compensations.
Where Are They Now?
Kozlowski and Swartz were found guilty in 2005 of taking bonuses worth more than $120
million without the approval of Tyco's directors, abusing an employee loan program, and
misrepresenting the company's financial condition to investors to boost the stock price, while
selling $575 million in stock. Both are serving 8 1/3-to-25-year prison sentences. Belnick paid a
$100,000 civil penalty for his role. Since replacing its Board Members and several executives,
Tyco International has remained strong.
The difference in the Tyco case and some of the others is that it is more related to greed than
Tyco manufacture a wide variety of products, from electronic components to healthcare products
.the conglomerate operates in over a 240,000 people. During 2002, exchange and securities
commission began an investigation at Tyco¶s top executives. Inquiry into the accuracy of the of
the company¶s book began in January. As investigation continues it uncovered that Dennis
kozlowski , Tyco former CEO , Mark Swartz Tyco¶s former CFO and Mark Belnick the
company¶s chief legal officer had taken over $170 million in loans from Tyco without receiving
appropriate approval from Tyco¶s compensation committee and notifying shareholders. for the
most part these loans were taken with low to no interest. Many of them were offset as bonuses
without open approval . kozlowski and Swartz also sold seven and a half million shares of Tyco
stock for $430 million without telling investors. Formal charges were made by the SEC
September 12, 2002.
Tyco has been able to regain much in lost ground under its new leadership because the acts of
securities fraud committed by former Tyco executives were concealed and for the most part
disguised, the majority of Tyco¶s employee committed no acts of fraud knowingly . as, a
precautionary act however Edward Breen, who replaced kozlowski removed nine members of
Tyco¶s international board.
The following time line chronicles the progress of investigation and indictments against Dennis
kozlowski , mark Swartz and mark belnick.
January 2002- Question rise about the accuracy of tyco¶s bookkeeping and accounting. Stock
value drops 19 percent.
January 29, 2002- kozlowski explain that the $ 20 million paid to frank wolsh was a finders fee
for the acquisition of CIT.
January 30, 2002- kozlowski announces that he and mark swartz( tyco¶s then CFO) will each
purchase 500,00 Tyco shares on open market .This move is made as an assurance of the value of
April 25, 2002- kozlowski explains 96 percent loss share for the quarter ending on march
31,2002 and outlines unusual cost that affected earnings.
June 3, 2002- kozlowski resigns as CEO of tyco for personal reasons. John fort is the name of
June 4, 2002- kozlowski is attempted for attempted tax evasion.
June10, 2002- belnick who was hired on tyci 1998 as the chief legal officer is fired.
June 17, 2002- Tyco through the law firm of boies.
Schiller and Flexner, begins the process of suing belnick for breach of fidiuacary duty and fraud.
belnick maintains that he acted with integrity as Tyco¶s chief legal officer.
August 1, 2002- CFO swartz resign from Tyco
September 12, 2002- civil charges are filed against kozlowski, swartz and belnick by the SEC
for the failure to disclose of shareholders information on the multi million dollar loans they
borrowed from tyco.
The SEC asked kozlowski , swartz and belnick to restore funds they took from tyco¶s various
forms of undisclosed loans and compensation.
Kozlowski and swartz were charged with :
The losses they caused tyco are estimated as $ 600 million.
Belnick is charged with:
Falsifying business records.
Failing to disclose loans to made himself ( for the purchase of his manhattan apartment and Utah
home ) to investors and tyco compensation committee.
September 19, 2002-kozlowski is freed on $100 million bail.the bail is paid with a $1oo million
bond and secured with $10 million in asset from kozlowski¶s ex wife.
Swartz is freed on $50 million bail. The bail is paid with a $50 million and secured with 500,00
of swartz personal tyco stock.
Belnick is freed on a $1 million bond.
Tyco continues operation and has replaced many members from its board of directors.edward
breen the former Motorola executive has replaced kozlowski; david Fitzpatrick, who worked in
number of blue firms has replaced swartz and William lytton the former international paper
executive has replaced belnick.
When charisma turns crooked
Tyco International chairman and CEO Dennis Kozlowski is a prime example. For 27 years,
Kozlowski poured his heart and soul into building the Princeton, New Jersey industrial
conglomerate into a massive powerhouse. A gifted chief who threw extravagant company
parties, he is credited with a brilliant series of mergers and acquisitions that hugely boosted
profits. For instance, in fiscal 2000, Tyco sales leapt 28 percent and earnings, before
extraordinary charges, increased 46 percent, to $3.7 billion.
While his Tyco annual compensation climbed to $100 million, Kozlowski reportedly began
surreptitiously siphoning company money -- some $400 million -- into his pockets. He didn't
hide his enormous wealth, either, throwing his wife a million-dollar 40th
indulging in a $6,000 shower curtain for their Manhattan home and buying acres of prime real
estate in pricey Boca Raton, Florida.
Government investigators caught up to him in 2002, after his resignation from the company.
They proved that Kozlowski had gone wildly astray, grabbing $150 million in unauthorized
bonuses, selling Tyco stock after artificially driving up share prices and in general, looting the
company. After the first prosecution ended in a mistrial, a second jury convicted him of almost
two dozen counts of grand larceny, among other crimes.
He was sentenced to an 8-to-25-year sentence in 2005, and is serving his time at Mid-State
Correctional Facility in Marcy, New York. His wife, Karen Kozlowski, filed for divorce in July,
2006. Like the multitude of stockholders who have made civil-court claims against him, she is
suing Kozlowski, now 60, for alimony and half their marital assets. She also filed a lien against
their Boca Raton mansion.
Kozlowski, who insists he is innocent of wrongdoing, blames jealous jurors for his prison term.
During a March, 2007 interview from Mid-State, Kozlowski told 60 Minutes' Morley Safer that
he was "a guy sitting in a courtroom making $100 million a year [and] I think a juror sitting there
would just have to say, 'All that money? He must have done something wrong.'"
A downward journey of many steps
Kozlowski was able to rationalize his cupidity because there was probably never a single
moment when he morphed from a corporate shepherd to a ravenous wolf. Instead, he inched
along ethically, cheating a wee bit here, falling back on a useful white lie there, and as the years
went by, the cheating grew and the lies multiplied.
The journey into dishonesty is easier if, like Kozlowski, leaders surround themselves with brash
young hustlers who lack business seasoning and, anxious to ride the boss's coattails, hesitate to
challenge him or her.
"This is a gradual, step-by-step process. A CEO doesn't wake up one day and say, 'Gee, I think
gigantic fraud is the way to go.' It's not a fast crash and burn," .
what are the ethical and legal issues in this case?
The ethical and legal issues at Tyco International range from discrimination, accounting fraud,
grand larceny. The issues involved cohesion on the part of the CEO, and the members of his
team. In addition, they placed great emphasis on placing their own values ahead of what was
good for the organization.
What role did Tyco's corporate culture play in the scandal? What roles did the board of directors,
CEO, CFO and legal counsel play?
Tyco's corporate culture was driven by the CEO, Dennis Kozlowski who admired the
extravagant and lavish lifestyle lavish of the former CEO, Joseph Gaziano. He took an assertive
approach to acquisitions and mergers, which helped Tyco, maintain a 14 year growth within the
business units. He viewed himself as the organizations, therefore, conducted business as such.
The Boards of Directors are responsible for protecting Tyco's shareholders interest. In some
cases, some of the board members were not aware of the fraud, and other unethical deals that
were going on behind the scenes. The board members that were aware, did not bring the issues to
the other members of the board, therefore, they were just as guilty of unethical behaviors as the
CEO and his direct reports. The reason this could have transpired is probably due to the majority
of board members being on the board >10 years, and the relationships that had been established
The CEO, CFO and legal counsel, due to the nature of their positions, were not honest and
transparent with the stakeholders concerning the issues relating to the accounting fraud and
conflicts of interest. They all engaged in an enterprise of corruption and collusion.
Now we will evaluate the planning function of the Tyco Company and analyze the impact that
legal issues, ethics, and corporate social responsibilities have on management planning. The year
2000 was a year marked by scandal over the accounting practices of some of the biggest
corporations in the world, including Tyco International Incorporated. Tyco¶s top executives were
indicted and convicted of fraud charges stemming from both improper accounting practices as
well as improper personal use of company funds. The planning strategy of these executives
seems to have been more focused on personal gain than on the best interests of the company and
its shareholders. They ignored their responsibilities to the laws governing corporate management
and to their investors and employees. Dennis Kozlowski, the chief executive officer, alone
plundered the company of over 400 million dollars. Using company funds, he threw a toga party
for his wife¶s birthday that cost two million dollars. He bought millions of dollars worth of art to
decorate his home. He spent six thousand dollars of company money on a shower curtain and 15
thousand dollars on an umbrella stand shaped like a poodle. Unlike most of the companies
targeted by those investigations, Tyco survived the scandals and is still in business today because
it changed the way that it operates. Three of the factors that influence management planning
today are their ability to obtain materials and components for manufacturing, the rate of attrition
for their home security products and services and the ongoing litigation and investigations.
The Tyco guide to ethical conduct
The Tyco Guide to Ethical Conduct- has been developed to advise employees on what the
correct practices and procedures are, when working for Tyco, the guide also outlines examples of
unethical behaviour and ways in which it can be reported.
Formulation of the Guide
The Tyco Guide to Ethical conduct was developed in 2003 to help set ethical standards and code
of conduct for its employees. The drive to develop this Ethical guide was due to the unethical
practices for former CEO Dennis Kozlowski. In 2002, Kozlowski and former CFO Mark Swartz
were accused of stealing from the company $170 million and $430 million in stock sales,
executives have been sentenced to jail and have also been forced to pay back some of the money.
During Kozlowski¶s time as CEO he adopted a strategic incentive scheme to help the aggressive
growth of the organization. The scheme is focused on growth and earnings targets and all
employees benefit when targets are met. Along with the incentive payments comes responsibility
- as well as freedom - for Tyco executives.
Due to the unethical behavior and subsequent sentencing of Tyco¶s executives, the new CEO
Edward Breen, sought to improve the ethical standards of the company and introduced the Tyco
Guide to Ethical Conduct. Tyco International is under constant scrutiny now to ensure that the
ethical guidelines are followed and that the company is conducting business in manner which is
honest and abides by the laws set down in every country.
The guide covers a number of topics and outlines what types of behavior are acceptable and
which is not; it also provides examples of unethical behavior the topics covered in the code are:
1. Equal Employment
Outlines the equal opportunity and fair treatment should extend to all employee, it prohibits
discrimination on the basis of age, colour, disability, ethnicity, marital, or family status, national
origin, race, religion, sex, sexual orientation, veteran status, or any other characteristic.
2. Harassment-Free Workplace States that certain behavior is not permitted such as,
unwelcome conduct, abusive language, aggression or sexual harassment.
3. Substance-Free Workplace Prohibits being in possession or under the influence of alcohol,
illegal drugs or other controlled substances.
4. Health, Safety and the Environment Prohibits the possession of weapons, does not allow
threats of harm. Enforces that stringent safety procedures, be adhered to at all times and that all
operations are in compliance with the applicable environmental laws.
5. Political Activities States employees must comply with all state and local laws regarding
participation in political affairs also that employees can not make contributions of company
funds to political parties.
6. Conflicts of Interest Employees must notify human resources if they have any involvement
with organizations outside of Tyco, also that employees must make decisions bases on the needs
of the company not on personal interests or relationships.
7. Gifts This outlines what kinds of gifts may be acceptable and places a maximum monetary
value for these gifts, it also states that employees are expected to disclose any gifts that they
receive to the company.
8. Fraud States that intentional acts of fraud are subject to disciplinary action and include things
such as: submitting false expense reports, forging or altering checks, inflating sales figures by
shipping inventory know to be defective of non-conforming.
Looks at ensuring that competition remains free from collusion and unlawful conduct such as:
discussing with a competitor price, costs and production. Restricting the right of a customer to
sell or lease a product or service at or above a certain price.
10. Propriety and Confidential Information
Outlines that the companies proprietary and confidential information not be shared with anyone-
including coworkers who may not need to know about it, it discusses the need for protection of
intellectual property and financial information.
11. Inside Information and Trading Tyco Securities
Prohibits employees form buying or selling Tyco stock as a result of receiving inside
12. The Media and Financial Community
Any communication with the news or media should be directed to the corporate public relations
office, this includes discussing speculation on stock price changes, rumors about mergers or
acquisitions, management changes or new products, policies, or strategies.
13. E-Mail, the Internet and the Use of Company Property
Discusses the use and duration of E-mail and the internet for personal use, also discusses the use
of personal software on company computers, states that equipment is provided to enable
employees to perform their jobs and that the use of company property should be for the sole
purpose of conducting business related tasks
14. Record-Keeping, Financial and Export Controls
States that financial records and information must follow the U.S generally accepted accounting
principles; and effective internal controls. The topic also states that all information must be
communicated in an accurate and timely manner, it also discussed record keeping and retention
and how documents and files should be saved.
The code also includes information about where employees can go for help and includes contact
information for the toll free ConcernLINE, the office ombudsman or alternative contacts such as
the human resources department of the corporate governance office.
The ethical guide provides employees with a tool in which they can utilize on a daily basis to
enable them to make decisions about what sort of behavior is considered ethical or unethical by
the company. The guide ties in closely with Tyco¶s vision and values which are; integrity,
excellence, teamwork and accountability.
Handling an unethical situation
If you discover an ethically questionable situation at work, don't jump up at the next department
meeting and say "I work for unethical morons," . Instead, say something such as, "there are some
issues here that we should be concerned about, and we probably ought to fix these problems
before they get more serious. Our current approach to meeting goals may not be a sustainable
economic model." Thoughtful input -- especially when grounded in the corporate histories we
now have ± works.
And you're better off quitting than getting sucked into a corporate culture of groupthink that is
likely to make negative headlines at some point. If you feel subtly or blatantly squeezed to cross
the line, it's probably time to update your resume. But if you're asked to do something illegal,
type that resignation letter..
Don't worry about explaining your resignation to potential employers,. Get out now, because
workers who go down with the ship often are tainted by the organization's implosion; then tell
the truth, "that you had the wisdom to walk away from a bad situation."
"People tend to see this decision only in terms of what they are giving up by leaving -- salary and
benefits. But even if you're the sole provider for a family, you're still better off losing a job than
getting caught up in falsifying financial information, for instance,".
y Tyco International chairman and CEO Dennis Kozlowski reportedly hauled home more
than $150 million in unauthorized bonuses, prosecutors said at his trial.
y Jeff Dachis co-founded Razorfish as the dotcom phenomenon surged, then fell victim to
his own hype; he was washed out of the Internet consulting firm within just seven years
y Ethical icons exist, such as Southwest Airlines' Herb Kelleher.
y If confronted with an ethical lapse at work, point it out as an issue that needs to be
addressed because of the business implications.
If you find that the culture at your company supports unethical practices, resign and avoid the
taint that comes with the inevitable exposure.
Morals? Ethics? The Law?
These three terms are sometimes used interchangeably when in fact they describe different and
fundamentally independent concepts. Clarifying the terms will clarify what type of dilemma you
might be facing.
Morals are those values or core beliefs that guide your decisions and are the output of your
culture, how you were raised, and your experiences along the way. They are what allow you to
determine right from wrong. What is moral and what is not is an internal judgment and varies
from person to person, culture to culture, and society to society.
Ethics are standards of behavior within a group or society that indicate how we should behave to
achieve the moral goals upon which the society places importance. Ethics are related to how we
act and interact with others, and so are external in nature. These vary from society to society, but
individuals within the society are expected to maintain these standards. If they do not, there is
often a social price to pay.
Laws are the minimum code of conduct to which the group has agreed to adhere. Breaking laws
means breaking the social contract to which you agreed in becoming a member of that society. In
turn this means that the society has the right to punish you by revoking some or all of the rights
granted by that society.
The most difficult ethical problems (i.e., how to act) are when one is faced with a conflict
between two or more conflicting morals (i.e., what we see as right and wrong). What may be a
moral choice is not always an ethical one, and what may be an ethical choice is not always a
moral decision, as seen in figure 1 below. Let¶s say that you get test results indicating that your
product fails to meet its specification limits. The CEO tells you to pass it anyway. What do you
Notice that the law may or may not apply to any of these decisions.
Theory applied in tyco fraud case :
Ethical egoism falls under the consequentialistic theory that claims that moral conduct is
determined solely by a cost-benefit analysis of an action¶s consequences. The normative claim of
ethical egoism is that one should act so as to maximize good and minimize bad for oneself. The
foundational claim for this theory is that humans are poorly self-interested and there are no moral
demands beyond self-interest, i.e., no obligations to anyone other than µmyself¶. Therefore, under
this theory, it is understood that humans should act selfishly if they wish to live healthy and
meaningful lives. we can see in this case study too as the CEO think of his own personal interest
rather than of the organization. Decisions made are not for the good of the entire industry but for
the good of the individual or organizational interest.
In conclusion, I must say that I see many faults in this theory and therefore I do not agree with
it. In regards to ethical egoism an individual believes that whatever serves his own interests is
morally right. I do not see this as being an efficient way of looking at ethical issues since
fulfilling only what¶s right for oneself many different problems can come up. Another reason I
do not agree.
As quality professionals, our ability to acquire, utilize, and maintain reliable and valid databases
is at risk and will continue to be at risk at least in the near future. Whether out-and-out fraudulent
data are provided to us, or whether we are the victims of data-shaving or data-shading, every
quality professional is likely to experience this trend at some point in his or her career. In a larger
sense, the ethical behavior of a company is certainly part of the ³Quality-with-a-big µQ¶´ that we
seek to enhance every day. Creating an ethical culture and enforcing ethical behavior is the
function of upper management, not just the quality department, but there are some things within
our control that we can do to improve the situation. We believe that the implications of this
reality suggest that every quality professional should:
Establish internal systems for the periodic sampling, review, and assessment of critical
databases for reliability and validity
Ensure that among the guidelines provided to external suppliers, ethical expectations associated
with the provision be clearly specified and that the consequences of failure to comply with these
basic standards be swift, severe, and unambiguous
Encourage upper and middle-level management to participate in meaningful education on the
process by which ethical decision making in business and industry can be accomplished
Telling employees to ³do the right thing´ just isn¶t effective. Ethical dilemmas are not clear
choices between breaking the law and being law-abiding; they are at times complex moral mazes
with no easy answers. It is not illegal to place the health of the company and investors¶ money
into risky investments for short-term profits, but a case can be made that it is unethical. The good
news is that these moral mazes can be better navigated if employees are trained in ethical
decision-making processes and principles.
The time to avoid the results of unethical behavior is before it occurs, not after. As quality
professionals, we learned a long time ago that prevention is superior to inspection. In no area
might this be more important than business ethics.
. "In the case of Tyco International, we have seen what corporate greed can eventually lead to.
After this scandal as well other scandals such as the Enron and WorldCom scandals, many
citizens lost trust in corporations. In order to reestablish trust and prevent future executives from
acting dishonest, the Sarbanes-Oxley Act was passed, and more internal control are now being
implemented. In the future, if an executive is confident enough to try and bypass the regulations
and steal money from an organization, he will face even more serious charges. Corporate
executives such as CEO's of major corporations are among the most elite members of American
society. They are extremely well paid, they have excellent benefits, and they are in the position
to bring wealth to their families. Given the amount of money they are already receiving, many
would find it ridiculous that a corporate executive would even consider stealing money. It is
important to understand, however, that people with so much pride and ambition often have no
limits, and to them, nothing is ever enough. Their greed often gets in the way of their honesty
and loyalty to the people around them, resulting in scandals like the one described and
demonstrating the need for ethics in business and more acts of government intervention .