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Tyco International

During the 1990s, Tyco International, under the leadership of CEO Dennis (“Deal-a-Month-Dennis”) Kozlowski, had become one of the most admired publicly owned conglomerates on Wall Street. The electronics and medical supplies company achieved $36 billion in annual revenue, consisted of more than 2,300 subsidiaries, and employed more than 270,000 people. Kozlowski was among the highest paid corporate executives in the United States, receiving more than $286 million in compensation from 1997 through 2001, including $137.5 million in 2000 alone.

But beginning in 1995, Kozlowski and Chief Financial Officer Mark Swartz started stealing what would amount to $170 million from Tyco in unauthorized loans and bonuses and defrauding investors of an additional $430 million through tainted stock sales. Kozlowski and Swartz filed materially false annual reports and proxy statements with the SEC, lied to auditors, and falsified accounting entries to conceal secret compensation arrangements. In 2005, both executives were convicted on 22 of 23 counts of grand larceny, conspiracy, securities fraud, and falsifying business records and sentenced to up to 25 years in prison.

Stealing from Tyco

Kozlowski, born into a working-class New Jersey family, joined a Tyco subsidiary as an auditor in 1975. He progressed to the top of the corporate ladder, becoming CEO and chairman of the board of the $3 billion company in 1992. Five years later, Tyco changed its charter to be incorporated in Bermuda to avoid paying U.S. taxes. Over the next 3 years, Kozlowski achieved 20% annual growth rates by acquiring 700 companies. Kozlowski, as chairman of the board, handpicked board members and dominated board activities.

As CEO and CFO, Kozlowski and Swartz had a strict fiduciary duty to act at all times honestly and in good faith with a view to the best interests of company shareholders. They breached their fiduciary duties and treated company resources as their private bank account by engaging in the following illegal activities.

Abuse of KELP Loans

In 1983, Tyco established a “Key Employee Loan Program” (KELP) to provide low-interest loans to Tyco executives and employees for the purpose of paying federal income taxes on vested shares of Tyco stock. From 1997 to 2002, Kozlowski improperly borrowed $242 million from the loan program to pay for the purchase of art, antiques, yachts, automobiles, jewelry, a New York City apartment, a Massachusetts mansion, business investments, and more than $1 million toward a $2 million private birthday party for his new wife on an exotic Italian island. During the same time period, Swartz improperly borrowed $72 million from the loan program to fund his personal investments, business ventures, real estate holdings, and trusts. Kozlowski and Swartz failed to disclose their improper use of KELP loans to the board of directors, the SEC, or shareholders.

Abuse of the Relocation Loan Program

In 1995, Tyco established an interest-free loan program for employees relocating from corporate headquarters in Exeter, New Hampshire, to new corporate offices in New York and, subsequently, Boca Raton, Florida. Beginning in 1996, Kozlowski improperly borrowed $28 million in relocation loans to purchase personal properties in New Hampshire, Massachusetts, and Connecticut, and a $7 million New York City apartment for his soon-to-be ex-wife. During the same period, Swartz improperly borrowed $9 million in relocation funds, purchasing a yacht and funding real estate investments. Kozlowski also gave these interest-free loans to other key employees, including $10 million to Tyco's chief legal counsel, who purchased a ski chalet in Utah.

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