Tyco Fraud

Tyco manufactures a wide variety of products, from electronic components to healthcare products. The conglomerate operates in over a hundred countries around the world and employs 240,000 people. During 2002, the Securities and Exchange Commission began an investigation of Tyco's top executives. Inquiries into the accuracy of the company's books began in January. As investigations continued it was uncovered that Dennis Kozlowski, Tyco's 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 the Tyco's employees committed no acts of fraud knowingly. As a precautionary act, however, Edward Breen, who replaced Kozlowski, removed nine members of Tyco's original board.

Tyco Investigation

The following timeline chronicles the progress of investigations and indictments against Dennis Kozlowski, Mark Swartz, and Mark Belnick.

  • January 2002 - Questions rise about the accuracy of Tyco's bookkeeping and accounting. Stock value drops 19 percent.
  • January 29, 2002 - Kozlowski explains that the $20 million paid to Frank Walsh was a finder's fee for the acquisition of CIT.
  • January 30, 2002 - Kozlowski announces that he and Mark Swartz (Tyco's then CFO) will each purchase 500,000 Tyco shares on the open market. This move is made as an assurance of the value of Tyco stock.
  • April 25, 2002 - Kozlowski explains a 96-cent loss per share for the quarter ending on March 31, 2002 and outlines unusual costs that affected earnings.
  • June 3, 2002 - Kozlowski resigns as CEO of Tyco for personal reasons. John Fort is named the temporary CEO.
  • June 4, 2002 - Kozlowski is indicted for attempted tax evasion.
  • June 10, 2002 - Belnick, who was hired on to Tyco in 1998 as its chief legal officer, is fired.
  • June 17, 2002 - Tyco, through the law firm of Boies, Schiller & Flexner, begins the process of suing Belnick for breach of fiduciary duty and fraud. Belnick maintains that he acted with integrity as Tyco's chief legal officer.
  • August 1, 2002 - CFO Swartz resigns from Tyco.
  • September 12, 2002 - Civil charges are filed against Kozlowski,Swartz, and Belnick by the SEC for failure to disclose to shareholders information on the multi-million dollar loans they borrowed from Tyco.

The SEC asks Kozlowski, Swartz, and Belnick to restore funds they took from Tyco in various forms of undisclosed loans and compensations.
Kozlowski and Swartz are charged with:

  • Corruption
  • Conspiracy
  • Grand larceny
  • Falsifying records

The losses they caused Tyco are estimated at $600 million.

Belnick is charged with:

  • Falsifying business reports
  • Failing to disclose loans made to himself (for the purchase of his Manhattan apartment and Utah home), to investors and Tyco's compensation committee

September 19, 2002

  • Kozlowski is freed on $100 million bail. The bail is paid with a $100 million bond and secured with $10 million in assets from Kozlowski's ex-wife.
  • Swartz is freed on $50 million bail. The bail is paid with a $50 million bond and secured with 500,000 of Swartz's personal Tyco stock.
  • Belnick is freed on a $1 million bond.

Tyco continues operations and has replaced many members of its board of directors. Edward Breen, the former Motorola executive, has replaced Kozlowski; David Fitzpatrick, who worked in a number of blue chip firms, has replaced Swartz; and William Lytton, the former International Paper executive, has replaced Belnick.

Share |

Keyword Tags: securities fraud, white collar crimes

Still Have a Question? Ask a Lawyer in Your Area