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Tyco International Ltd

Tyco International Ltd. Tyco, a diversified manufacturing and service company has business segments in:. fire and security services electronics healthcare and specialty products undersea telecommunications networks . Tyco operates in 100 countries Reported revenues of $34 million in 2001. .

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Tyco International Ltd

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  1. Tyco International Ltd

  2. Tyco, a diversified manufacturing and service company has business segments in: • fire and security services • electronics • healthcare and specialty products • undersea telecommunications networks

  3. Tyco operates in 100 countries • Reported revenues of $34 million in 2001.

  4. How investors were misled • A pattern of improper and illegal activity by former management that included unauthorized payments to dozens of Tyco employees at various levels

  5. Who were some of the actors? • Mark A. Belnick – former general counsel • L. Dennis Kozlowski – former CEO and Chairman of the Board of Directors • Mark H. Swartz – former CFO and Director • Frank E. Walsh, Jr. – former Director and Chairman of Board of Directors

  6. Also involved were Tyco employees who allegedly, at Kozlowski's direction and without board approval, received $56 million in bonuses that in effect canceled out loans they had taken from the company's relocation program.

  7. What triggered the fraud discovery? • Learning of an unapproved finder’s fee paid to Walsh, Tyco’s Board undertook a close review of management compensation and corporate governance procedures in January 2002 • Based on a tip from the Banking Dept., the NY County District Attorney issued a subpoena to Kozlowski on May 3, 2002 seeking information regarding purchases of artwork on which no taxes had been paid and compensation information. • The attempted removal on June 10, 2002 by Belnick of confidential company documents

  8. SEC alleges violations of anti-fraud provisions of federal securities laws in part by: • failure to disclose and improper disclosure to shareholders of low-interest and interest-free loans • failure to disclose to shareholders forgiveness of loans • false and misleading registration statements regarding fees and commissions related to CIT Group acquisition

  9. The fraud included • Undisclosed compensation • Secret loans • Undisclosed related-party transactions • Fraudulent stock trading

  10. Improper loans • $14 million to Belnick used to acquire 2 residences, a NYC apartment and a $10 million home in Park City, Utah • $242 million of KELP loans to Kozlowski used for yachts, fine art, estate jewelry, luxury apartments, vacation estates and personal business ventures and investments • $72 million to Swartz used for personal investments, business ventures and real estate holdings and trusts

  11. Misuse of relocation monies • $28 million by Kozlowski for luxury properties in NH and Conn. • $7 million by Kozlowski for Park Ave apartment for his now former wife • $9 million by Swartz for personal yacht and real estate investments • $4 million by Belnick to purchase a NYC Central Park apartment when already owning a Westchester home • $10 million by Belnick for a home in Park City, Utah where Tyco has no corporate presence

  12. Asset Embezzlement • Tens of millions of dollars in personal spending that Kozlowski made with company money. • Kozlowski used company money to buy everything from a $17,100 traveling toilet box to a $15,000 dog umbrella stand • They include his $16.8 million apartment on Fifth Avenue • $3 million in renovations • $11 million in furnishings • $7 million apartment on Park Avenue for his former wife.

  13. Asset Embezzlement (con’t) Kozlowski had the company pay for personal items like: • An $80,000 American Express bill • A $72,000 fee to Germán Frers, a yacht maker • A $6,300 sewing basket • A $6,000 shower curtain • $5,960 for two sets of sheets • A $2,900 set of coat hangers • A $2,200 gilt metal wastebasket • A $1,650 notebook • And a $445 pincushion

  14. How Bad Was The Misuse? • In addition to enjoying the homes, the art, the furnishings Tyco bought for her husband, Karen Kozlowski celebrated her 40th birthday with a $2.1 million party on the Italian island of Sardinia. Half the bill was footed by Tyco. • Remember when people used to complain that government should be run more like a business? The $640 toilet seat cover the Pentagon was lambasted for buying in 1985 was a bargain compared to what's turned up in Kozlowski's shopping cart, at the expense of Tyco shareholders.

  15. How was the fraud hidden • $86.5 million written off as loan forgiveness against gain from an unrelated IPO • Monies in the form of cash bonuses, Tyco stock or relocation loan forgiveness were also offset against an unrelated gain realized on the disposal of a Tyco subsidiary • Acceleration of stock vesting yielded $12 million in profits for Kozlowski and Swartz which were offset against an unrelated gain on sale of common stock • Nondisclosure to shareholders as required by securities law

  16. Tyco stated that "This pattern of improper and illegal activity occurred for at least five years prior to June 3, 2002, when former CEO L. Dennis Kozlowski resigned, and that this activity was concealed from the board and its relevant committees." (Sept. 17, 2002 press release)

  17. Why won’t Tyco have to restate the Financial Statements?     "The amount of money improperly diverted by Tyco's former senior executives from the company to themselves is very small in comparison with Tyco's total revenues and profits, but it is very large by any other relevant comparison; and the extent of the former executives' misconduct has harmed Tyco's reputation and credibility with investors, lenders and others," Tyco said.

  18. Warning signs • Purchase of Bermuda-based ADT which was structured as a reverse merger • Subsequent move of Tyco's headquarters to an island haven where the corporate tax rate is zero. • Tyco no longer pays U.S. taxes on its overseas income • Tyco's liberal use of merger-related charges.

  19. Warning signs (con’t) • Aggressive targets set • Due diligence ignored • Excessive employee bonuses • In 2001, Gromer, President of Tyco Electronics, received a base salary of $625,000. But after he nearly tripled Tyco Electronics' operating income on 62% higher sales, he pocketed a $13 million bonus. • Kozlowski, with a $1.35 million salary, took home $125.3 million in total compensation--more than GE's Welch.

  20. Warning Signs (con’t) • There was about half a billion dollars of unreported stocks sold back by Mr. Kozlowski and his chief financial officer at a time when Kozlowski said he had great confidence in and was supporting the company. In fact, like Ken Lay at Enron, he was saying one thing and doing something different. • Tyco has made more than 200 acquisitions in the past three years, and its books have been complicated by a web of legitimate but bewildering tax-avoidance schemes.

  21. The Bermuda Angle • Bermuda incorporated companies are less accountable to shareholders • Bermuda law grants broader immunity to directors • Bermuda law forbids certain shareholder suits

  22. CEO And Corporate Greed • Dennis pulled in $331 million over his last three years at Tyco in salary, bonuses and in sales of stock options. • And that doesn't count the $61.7 million in unauthorized, interest-free loans or any of the company money squandered for personal use.

  23. COMPLAINTS FILED IN 2002 • June 1– Kozlowski subject of criminal investigation for sales tax violations • June 17– Walsh accused of fiduciary duty breach regarding $20 million in unauthorized self payments - Belnick accused of fiduciary duty breach of fraudulently procured loans • Sept. 12– Kozlowski accused of his fiduciary duty breach and inducing the breach of others, conspiring to breach as well as fraud and other wrongful acts

  24. COMPLAINTS (con’t) • Sept. 12 – Kozlowski and Swartz for enterprise corruption, fraud, conspiracy, grand larceny, business record falsification - Belnick for business record falsification • Sept. 12 - Civil fraud action against all three for violations of antifraud, reporting, proxy and recordkeeping provisions • Sept. 13 – State of NY froze assets and property of Kozlowski and Swartz including those of family and dependents

  25. Status NY trial in 2004 of Kozlowski and Swartz ended in a mistrial due to misconduct by a juror A retrial is scheduled for January 2005

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