Tyco Corporate Scandal of 2002 (Ethics Case Analysis)

UPDATED AUG 10, 2015 JONATHAN ROMERO

Tyco ethics case study, 2002 corporate scandal, Kozlowski motivation avoid taxes,
commingling assets, Board of directors
Kozlowskis mug shots. Tyco Corporate Scandal of 2002: What was Kozlowskis
motivation to avoid sales taxes on art purchases? How did the concept of
commingling assets and inaction of the Board of Directors affect the case?
The case of Tycos corporate scandal of 2002 focuses on the problem of unethical
business practice and related issues. Tyco was a large organization that grew
through numerous acquisitions. Tycos case shows that the problem was the
unethical business practices of a number of its top ranking officers, especially CEO
Kozlowski. Kozlowski was involved in numerous financial transactions that were not
included in the financial reports of the company. Kozlowski was also involved in
unethical transactions with other Tyco officers and lower ranking employees to
cover up for Kozlowskis illegal financial transactions. Kozlowski even got outsiders
involved in the problem when his second wife received money diverted from the
firm. Court proceedings proved that Kozlowski stole millions of dollars from Tyco,
and that his illegal financial transactions were extensive. Kozlowski and other
officers from Tyco were imprisoned. Tyco declined as investors lost confidence in the
company.

This article analyzes the major ethics issues in the Tyco corporate scandal of 2002,
CEO Kozlowskis motivation to avoid sales taxes on art purchases, the relevance of
the concept of commingling assets, and the role of the board of directors in
monitoring adjustments in Tycos programs.

Major Ethics Issues in Tycos Case

Tycos case shows that ethics issues can occur in different parts of an organization.
Even outsiders or third parties could get involved in these ethics issues. The major
ethics issues in Tycos case were as follows:

Unethical Leadership
Unethical business practice of subordinates
Unethical auditing practice on Tycos business

Tycos Unethical Leadership. The unethical business practice of leaders was

observed in Kozlowski. Kozlowski was the main actor in the financial troubles and
legal battles in this case. Kozlowski was the main recipient of the money stolen from
Tyco. In addition, he was the main influential person who persuaded other topranking Tyco officers and lower ranking employees to get involved and to keep
silent to cover up for Kozlowskis illegal activities. This case shows that extensive
involvement of Kozlowski and other leaders in unethical and illegal activity brought
Tyco down.

Unethical Business Practice of Subordinates. The complications in Tycos case

involved people other than Kozlowski. Kozlowski recruited the support of other highranking officers in the organization. He also convinced some lower ranking
employees to keep their silence in exchange for financial benefits. Also, Kozlowski
convinced one of the board members to keep silent about the illegal financial
transactions on the mansion Tyco paid for the benefit of Kozlowski and his wife. In
exchange, the board member received financial benefits.

Unethical Auditing Practice. The auditing firm PricewaterhouseCoopers responsible

for checking the financial reports of Tyco failed to identify Kozlowskis illegal
financial transactions. As a result, Kozlowskis unethical business practice continued
and became extensive. These practices became more difficult to stop because of
absent constraining influence from the auditing firm.

Kozlowskis Motivation for Avoiding Sales Taxes on Art Purchases

Kozlowskis motivation for trying to avoid sales tax on his art purchases were (1) his
materialistic desires, and (2) his avoidance of raising a red flag on his illegal
activities at Tyco.

Kozlowskis materialistic desires pointed to greed for financial or material gains.

These desires led him to commit illegal financial transactions at Tyco. This case
shows that Kozlowski had a history of tax evasion that goes even years before
investigations started. Thus, he has a history of prioritizing materialistic gains over
ethical conduct.

Also, Kozlowski tried to avoid paying sales taxes for his art purchases because doing
so would raise red flags for authorities. Sales taxes create formal records of financial
transactions. In Tycos case, the sales taxes amounted to millions because the
purchased art items were expensive. It would have been easier for authorities to
detect Kozlowskis illegal financial transactions because it was unusual for Tyco
officers like Kozlowski to make such big purchases in a small amount of time.

Commingling of Assets in Tycos Case

The concept of commingling of assets in Tycos case refers to the adoption of the
view that the assets of an employee are similar to the assets of the company.
Commingling of assets occurred when Kozlowski considered the assets of Tyco as
his own personal assets. The case shows that Kozlowski used Tycos funds to pay for
his personal expenses. He used Tycos money to pay for his second wifes birthday
party. He also used Tycos money to cover the costs of properties he purchased. He
used the companys money to purchase household items and art pieces for his
personal use.

Tycos case shows that commingling of assets made it easy for Kozlowski to use the
companys assets for personal needs. The company had programs that enabled
Kozlowski to unethically use assets for personal needs. Kozlowskis use of Tycos
money was not just mere stealing of funds. It was also an exploitation of the
weakness of the financial loopholes in the firm at the time of his leadership.

Board of Directors and Adjustments in Tycos Programs

It would have been possible for the board of directors to see the adjustments taking
place in programs at Tyco. This would have been so if the board of directors had
appropriate mindsets and activity. Tycos programs were a weakness in the
organization. These programs provided benefits to officers and other employees.

The financial programs were opportunities for Kozlowskis illegal financial

transactions and unethical business practices.

The board of directors should have examined these programs to evaluate their
appropriateness. The directors should have identified the programs weaknesses
and loopholes, which Kozlowski and other officers exploited for their own personal
benefit for years. Thus, the ineffectiveness of the board of directors in examining
Tycos programs enabled Kozlowskis unethical business practices.

Tyco International
From Wikipedia, the free encyclopedia
For the unrelated division of Mattel, see Tyco Toys.
Tyco International plc
Tyco.svg
Type
Subsidiary
Industry

Security

Founded

1960

incorporated 1962
Headquarters

Incorporation: Cork, Ireland

Operational/Corporate: Princeton, New Jersey, United States (prior to merger with

Johnson Controls)
Key people
George R. Oliver
(CEO)
Edward D. Breen
(Chairman)
Products

Security Solutions, Fire Protection

Revenue

IncreaseUS$17.36 billion (2011)[1]

Operating income
IncreaseUS$2,119 million (2011)[1]
Net income
IncreaseUS$1,733 million (2011)[1]
OwnerJohnson Controls
Number of employees
69,000 (2011)[1]
Website

www.tyco.com[1]

Tyco International PLC is a security systems company incorporated in the Republic

of Ireland,[2] with operational headquarters in Princeton, New Jersey, United States
(Tyco International (US) Inc.). Tyco International is composed of two major business
segments: Security Solutions and Fire Protection.

In 1997, Tyco International acquired AT&T Submarine Systems, gaining research and
development and fleet assets, along with the manufacturing capability to produce
repeaters and transmission equipment.[3] These additional capabilities, combined
with cable manufacturing at Tyco Integrated Cables Systems in Newington, New
Hampshire, established Tyco Telecommunications as the worlds first vertically
integrated global optical network supplier, capable of developing the technology
and manufacturing the components, to designing, building and maintaining
systems.

In June 2007, Tyco concluded a corporate separation that split the company into
three publicly independent companies: Covidien Ltd. (formerly Tyco Healthcare), TE
Connectivity Ltd. (formerly Tyco Electronics Ltd.) and Tyco International Ltd.
(formerly Tyco Fire & Security and Tyco Engineered Products & Services (TFS/TEPS)).

Tyco International announced in January 2011 that it is acquiring Brink's Home

Security Holdings, (operating as Broadview Security) in a transaction valued at $2.0
billion.[4] It is reported that Broadview Security will merge into Tyco's ADT Security
Services division.

On January 25, 2016, Johnson Controls announced that it will merge with Tyco in
which all businesses of Tyco and Johnson Controls will be combined under Tyco
International plc to be renamed as "Johnson Controls International plc."[5] The
merger was completed on September 9, 2016[6]

Contents [hide]
1

Timeline

1.1

1960s

1.2

1970s

1.3

1980s

1.4

1990s

1.5

20002001

1.6

Early 2002

1.7

Late 2002

1.8

2003

1.9

2004

1.10

2005

1.11

20062007

1.12

20112012

1.13

2013

1.14

2014

Corporate scandal of 2002

Net revenues by year

Products

Environmental record

Restatement

See also

Notes

References

10

External links

Timeline[edit]
1960s[edit]
Founded by Arthur J. Rosenberg in 1960, Tyco, Inc. was formed as an investment
and holding company with two segments: Tyco Semiconductors and The Materials
Research Laboratory. In the first two years of operation, the company focused
primarily on governmental research and military experiments in the private sector.
[7]

In 1962, the business was incorporated in Massachusetts and refocused on hightech materials science and energy conservation products. Two years later in 1964,
the company went public and began to fill gaps in its development and distribution
network by acquiring Mule Battery Products, the first of Tycos 16 acquisitions in the
next four years.[7]

1970s[edit]

Cover scan of the final issue of Tyco World, May 2006

In the 1970s, Tyco boomed, beginning the decade with consolidated sales and
stockholder equity reaching $34 million and $15 million, respectively.[7]

In 1974, Tyco was listed on the New York Stock Exchange (NYSE).[7]

By the end of the decade, Tyco had a larger and more diverse corporation with sales
topping $500 million and a net worth of nearly $140 million. Tycos success was
largely attributed to ambitious acquisitions of Simplex Technology, Grinnell Fire
Protection Systems, Armin Plastics and the Ludlow Corporation.[7]

1980s[edit]

Following aggressive acquisition period through the 1970s, Tyco management

focused the early 1980s on organizing its newly acquired subsidiaries. Tyco divided
the company into three business segments (Fire Protection, Electronics, and
Packaging), and implemented strategies to achieve significant market share in each
of Tycos product lines.[7]

Once organized, Tyco returned to the strategy of growth by acquisition in the later
part of the decade acquiring Grinnell Corporation, Allied Tube and Conduit, and the
Mueller Company. Tyco then again, reorganized its subsidiaries into four segments:
Electrical and Electronic Components, Healthcare and Specialty Products, Fire and
Security Services and Flow Control. This reorganization remained in place until 2007
when current CEO Ed Breen spun off the Electrical and Healthcare segments to
create three publicly independent companies.[7]

1990s[edit]

A TYCO Standard Spray Sprinkler head

In 1992, Dennis Kozlowski became CEO of Tyco International, and, for the next
several years, the company again adopted an aggressive acquisition strategy,
eventually acquiring (by some accounts) over 1,000 other companies between 1991
and 2001.[citation needed]

Major acquisitions in the 1990s included: Wormald International Limited, Neotecha,

Hindle/Winn, Classic Medical, Uni-Patch, Promeon, Preferred Pipe, Kendall
International Co., Tectron Tube, Unistrut, Earth Technology Corporation, Professional
Medical Products, Inc., Thorn Security, Carlisle, Watts Waterworks Businesses,
Sempell, ElectroStar, American Pipe & Tube, Submarine Systems Inc., Keystone,
INBRAND, Sherwood Davis & Geck, United States Surgical, Wells Fargo Alarm, AMP,
Raychem, Glynwed, Temasa and Central Sprinkler designs.[7]

To reflect Tycos global presence following the abundant acquisitions, the companys
name was changed from Tyco Laboratories, Inc. to Tyco International Ltd. in 1993. In
addition, Tyco launched The Pipeline, an internal employee newsletter; the title was
later changed to Tyco World. Its final issue was published in AprilMay 2006.

In 1996, Tyco was added to the Standard & Poor's S&P 500 Composite Index, which
consists of the 500 publicly traded companies in the United States with the largest
market capitalization.[8]

In July 1997, Tyco merged by reverse takeover with smaller publicly traded security
services company named ADT Limited, controlled by Michael Ashcroft. As part of the
deal, Tyco International Ltd. of Massachusetts became a wholly owned subsidiary of
ADT Limited, and simultaneously ADT changed its name to Tyco International Ltd.,
retaining the former Tyco stock symbol, TYC. The merger moved Tycos
incorporation to Bermuda, a tax haven, where it was headquartered in the colonial
capital of Hamilton. A new subsidiary named ADT Security Services was also formed
out of the merger.[9][10]

In 1999, Tyco acquired two S&P 500 companies in a buyout. They acquired the
electronics connector manufacturer AMP Inc., for $12.22 billion and a materials
science company, Raychem Corp., for $1.4 billion.[11][12]

In 2000, Tyco closed the year spinning off a deep-sea fiber-optic cable-laying
division it had purchased from AT&T as Tyco Submarine Systems in an initial public
offering.[citation needed]

20002001[edit]
Tycos aggressive acquisition strategy continued into the early 2000s, with the
purchases of General Surgical Innovations, Siemens Electromechanical Components,
AFC Cable and Praegitzer. The additions gave Tyco an ending fiscal 2000 year
revenue exceeding $28 billion, near $2 billion coming from the sale by a subsidiary
of its common shares.[7]

In the fiscal 2001 year, Tyco acquired Mallinckrodt Inc. and Simplex Time Recorder
Company which it later merged in January 2002 with Grinnell Fire Protection to form
an indirect wholly owned subsidiary, SimplexGrinnell LP, the world's largest fire
protection company. For the year ended September 2001, the company's book
value exceeded $110 billion. However, the company more than doubled its longterm debt, by over $80 billion.[13]

In October 2001, the Engineered Products and Services segment acquired Century
Tube Corp, and followed it by buying Water & Power Technologies in November
2001. The following November, the Tyco Electronics segment acquired Transpower
Technologies. The next month, the Plastics and Adhesives segment acquired LINQ
Industrial Fabrics, Inc.[7]

Early 2002[edit]
With complexity growing within Tycos subsidiaries, in January 2002, Tyco
announced a plan to split the business into four separate companies. However, this
plan was abandoned after a downgrade in its credit rating and a significant drop in
its stock price.

Later that month, Tycos acquisitions continued throughout all of its segments: the
Electronics segment acquired Communications Instruments, Inc. The Healthcare
segment bought Paragon Trade Brands. The Engineered Products and Services
segment acquired Clean Air Systems. And the fire and Security segment of Tyco
acquired SBC/Smith Alarm Systems, DSC Group, and Sensormatic Electronics Corp.
[7]

For all the acquisitions Tyco made in 2002, the company also incurred extensive
losses. During the first quarter of 2002, following the recession of the previous year,
the electronics segment recorded a charge of over $2 billion, related to massive
overcapacity of fiber-optic cable, which in turn affected the in-process buildout of
Tyco's global undersea fiber-optic network, known as Tyco Global Network (TGN).
TGN generated a loss for fiscal 2002 of over $3 billion, with a restructuring charge
of over $500 million. Construction of TGN was eventually completed in 2003.[14]

The electronics segment also recorded over $1 billion in restructuring charges in

2002 from inventory write-down and facility closures. In addition, 2002 struck Tyco
with two goodwill impairments, the first for over $500 million in the second quarter,
due to their fiber-cable overcapacity issue and other corporate problems. The
second, costing the electronics segment $250 million related to sales issues in
Power Systems, Electrical Contracting Services, and the Printed Circuit Group. To
make Tycos financial matters worse, the company lost over a quarter of $1 billion in
investment during 2002 in FLAG Telecom Holdings Ltd.[14]

In an effort to cut losses, on July 8, 2002, Tyco divested its Tyco Capital business
through an initial public offering, with the sale of 100% of the common shares in CIT
Group Incorporated. It recorded the CIT divestment as discontinued operations for
2002, for a $6 billion loss, and as an almost $7 billion impairment charge. That
month, the Tyco Healthcare segment also divested Surgical Dynamics, Inc.[7]

For the year ended September 2002, Tyco revenue rose to nearly $35 billion.
However, it suffered more than a $9 billion loss that year, which included the asset
impairment write-down of TGN by over $3 billion, losses of nearly $2 billion for the
two restructuring charges, and over $1 billion from the two goodwill impairment
charges. In all, the net charges totaled nearly $7 billion of the loss that year. The
stock price plummeted.[14]

To add to the financial woes of the company, midway through the fiscal 2002 year,
Tyco became embroiled in a massive scandal involving the excesses by its former
chairman and CEO, L. Dennis Kozlowski, and his senior management team.
Kozlowski resigned and former Tyco CEO John F. Fort became interim CEO until the
board of directors completed a search for a permanent replacement. Early 2002,
Tyco was alleged in violation of the Securities Exchange Act by nondisclosure of
major financial information and artificially inflating its earnings.[15] On June 17,
2002, Tyco filed federal suit against Mark H. Swartz, Tyco's former executive vice
president and chief corporate counsel, and Frank E. Walsh, a former director.[7]

Late 2002[edit]
In July 2002, Edward D. Breen was appointed president, CEO, and chairman of Tyco
for an initial three-year term. Breen had previously been president and COO of
Motorola since his promotion at that company in January 2002.[16]

Breen made an immediate impact on Tyco by gutting the existing board of directors
and leadership team that worked with Kozlowski and replacing them with a new set
of managers. One month after his appointment, Tyco announced the appointment of
John Krol as lead director of the Board of Directors with the priority of improving
Tyco's Corporate Governance.[17]

Breen made additional changes, appointing David FitzPatrick as Executive Vice

President and CFO, William Lytton, Executive Vice President and General Counsel,

and Eric Pillmore as Senior Vice President of Corporate Governance.[citation

needed]

With a new management team in place, Tyco began a two phase internal
investigation of former CEO Kozlowski. The investigation led to Tyco filing two
federal lawsuits. On September 12 and December 6, 2002, Tyco filed a federal suit
against Kozlowski and an arbitration claim against former CFO and director, Mark H.
Swartz. Swartz, however, failed to submit to the American Arbitration Association
and Tyco followed with a federal suit against him.[14]

On November 27, 2002, the State of New Jersey took action in the scandal, filing a
federal suit against Tyco and former personnel, with charges in part of violating the
New Jersey Racketeer Influenced and Corrupt Organizations Act (RICO) statute,
stemming from the Kozlowski scandal.

As a result of the scandal, Tyco and some former directors and officers were named
as defendants in more than two dozen securities class-action lawsuits. Most of the
cases were consolidated and transferred to the United States District Court for the
District of New Hampshire and filed by court-appointed lead plaintiffs on January 28,
2003, as the case In Re Tyco International Securities Litigation, citing causes of
action under the Securities Act of 1933 and the Securities Exchange Act of 1934.
That March 31, Tyco made a motion to dismiss, which was granted in part over a
year later, on October 14, 2004.[18]

2003[edit]
On February 3, 2003, the scandal continued to play out in the courts, Tyco and more
personnel were again named as defendants in an amended consolidated classaction federal suit brought on behalf of retirees in its Retirement Savings and
Investment Plans, citing causes under the Employee Retirement Income Security
Act. On December 2, 2004, the New Hampshire court granted in part Tyco's motion
to dismiss.[citation needed]

Removed from the scandal, Tyco made internal moves within the company in 2003
forming its Plastics & Adhesives business segment, a former piece of the Healthcare
& Specialty Products segment. Other changes came in Tycos corporate governance:
Tycos board re-elected John Krol as lead director, Tyco reorganized the assignments

of the boards committee, adopted a new board of governance principles and new
Delegation of Authority policy which strengthened control over cash disbursements
within the company.[citation needed]

The final improvement on corporate governance came in the Guide to Ethical

Conduct. The guide was produced to advise employees as to correct procedures and
warn of unethical practices and behavior. All Tyco employees are now required to
take a brief ethics course and sign an annual ethics statement.[citation needed]

2004[edit]
In an effort to enhance consumer awareness and revive corporate image, in June
2004, Tyco launched a new global print-advertising campaign, Tyco a vital part of
your world. Tyco also began a divestiture program following a review of its core
businesses. Part of the plan was to sell TGN, which by then had been entirely
written off in value. Agreement for the sale was reached in November.

In the second quarter of 2004, ADT Security sold off Sonitrol.

In all, within its divestiture program, by fiscal year end of 2004, Tyco had divested
21 businesses and liquidated four non-core businesses, primarily within the Fire and
Security segment.

In September 2004, Tyco also divested Electrical Contracting Services from the
electronics segment, due to a decrease in sales. After September 30, Tyco divested
an additional seven non-core businesses, bringing the program aggregate proceeds
up to $500 million that year.

By the end of 2004, Tyco employed under 260,000 people, with two-thirds outside
the United States. Revenue was up strongly, to over $40 billion for the first time.
Once again the strengthening euro against the dollar helped Tyco, accounting
primarily for $1.5 billion of the increase in revenue. Various charges, losses, and
debt repayment totaled nearly $1 billion in 2004, however profitability tripled that
year to almost $3 billion.

2005[edit]
Videsh Sanchar Nigam Limited (VSNL), India acquired the Tyco Global Network
(TGN) from Tyco International for $130 million. The chief stockholder in VSNL is
India's Tata Group, also one of India's largest conglomerates. It was once valued at
$3 billion during the telecommunications bubble.[citation needed]

Tyco continued its divestiture program throughout 2005. The largest divestiture
came in the announcement of a definitive agreement to sell its Plastics, Adhesives
and Ludlow Coated Products businesses to an affiliate of private investment firm
Apollo Management, L.P. Tyco believed the segment no longer fit within the
company's portfolio.[citation needed]

Tyco was awarded the largest statewide public safety communications project in the
United States in 2004 when one of Tyco Electronics businesses, M/A-COM
Technology Solutions, signed a contract to maintain New York's Statewide Wireless
Network (SWN). The contract was worth approximately $2 billion and would last for
20 years.[citation needed]

Tyco also acquired two key companies to its Healthcare segment, Vivant Medical
Inc. and Florane Medical Implants.[citation needed]

20062007[edit]
On February 16, 2006, a group of institutional investors, part of an existing lawsuit
against Tyco International, sued the company to stop its proposed breakup plan.[19]

By the end of the fiscal year 2006, Tycos revenue had eclipsed $17 billion.[20]
[clarification needed] Despite the strong cash flow, growing revenue and decreased
debt, Tyco and its board of directors approved a plan to separate Tyco into three
publicly independent companies. Tyco believed that this would allow for each
segment to perform better within its particular market and create more value for its
shareholders.[citation needed]

The separation was completed in July 2007, when Tyco separated into three publicly
independent companies:[7]

Covidien Ltd. (formerly Tyco Healthcare)

Tyco Electronics Ltd. (now TE Connectivity)
Tyco International Ltd. (formerly Tyco Fire & Security and Tyco Engineered Products
& Services (TFS/TEPS))
Following the separation, Chairman and CEO Ed Breen remained at the head of Tyco
International, which was then composed of five major business segments: ADT
Worldwide, Fire Protection Services, Safety Products, Flow Control and Electrical and
Metal Products. The company generated revenue of $18.8 billion in 2007 and
employs 118,000 people across all 50 states and in more than 60 countries.[1]

20112012[edit]
In September 2012, Tyco Internationals directors announced plans to split the
company once again, separating the companys Flow Control business, North
Americas residential security business and its international fire and security
business in a plan that Chief Executive Ed Breen described as: the best path to
create long-term shareholder value.[21]

The separation was completed on October 1, 2012, resulting in the following

companies being created:

Tyco: Focused on fire protection and electronic security products, installation and
services worldwide.
The ADT Corporation in North America: Focused on residential and small business
security installation and services in North America.
Flow Control: Focused on water and fluid solutions, valves and controls, and
equipment protection products worldwide. This business merged with Pentair Inc.
and is now part of Pentair Ltd.
The new Tyco is a $10+ billion global leader in fire protection and security solutions
and provides the following solutions: life safety products, fire protection products,
fire protection installation and services, security products and security installation
and services.

Tyco retains use of the ADT brand for security installation and services outside of
North America. ADTs commercial security installation and services business in
North America was rebranded and is now Tyco Integrated Security. Tyco has over
70,000 employees worldwide, operating in nearly 50 countries and serves over
three million customers.

In September 2012, Tyco was accused of violation of the Foreign Corrupt Practices
Act (FCPA) and agreed in a payment of around $13 million in civil penalties to the
Securities Exchange Commission.[22]

2013[edit]
In November 2013, Tyco approached various private equity firms offering to sell its
Korean security unit, Caps Co.[23]

2014[edit]
In February 2014, US private equity firm Carlyle Group entered into talks with Tyco
to acquire its South Korean security systems unit, valued at around $2 billion.[24]

In 2014, Tyco International sold its New Zealand based security company
Armourguard Security limited to Evergreen International, The cost of the sale is yet
to be released.

Corporate scandal of 2002[edit]

Former chairman and chief executive Dennis Kozlowski and former chief financial
officer Mark H. Swartz were accused of the theft of more than US$150 million from
the company. During their trial in March 2004, they contended the board of directors
authorized it as compensation. After a retrial in 2005, Kozlowski and Swartz were
each found guilty on over 30 separate violations.

During jury deliberations, juror Ruth Jordan, while passing through the courtroom,
appeared to make an "okay" sign on the table. She later denied she had intended
that gesture, but the incident received much publicity (including a caricature in the
Wall Street Journal), and the juror received threats after her name became public.
[25] Judge Michael Obus declared a mistrial on April 4, 2004.

On June 17, 2005, after a retrial, Kozlowski and Swartz were convicted on all but one
of the more than 30 counts against them. The verdicts carry potential jail terms of
up to 25 years in state prison. Kozlowski himself was sentenced to no less than
eight years and four months and no more than 25 years in prison. Swartz received
the same sentence. Then in May 2007, New Hampshire Federal District Court Judge
Paul Barbadoro approved a class action settlement whereby Tyco agreed to pay
$2.92 billion (in conjunction with $225 million by Pricewaterhouse Coopers, their
auditors) to a class of defrauded shareholders represented by Grant & Eisenhofer
P.A., Schiffrin, Barroway, Topaz & Kessler, and Milberg Weiss & Bershad.

On January 17, 2014, Kozlowski was granted parole, from the Lincoln Correctional
Facility in New York City.

Tyco Background
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,
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 Koslowski, 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 Koslowski'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.

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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-to25-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 accounting fraud.