Breaking Down the Tyco International Corporate Scandal of 2002

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In 1975, Dennis Kozlowski was hired by Tyco as an assistant controller and began his executive rise within the company. By 1992, he was the Chief Executive Officer (CEO); he became Chairman of the Board in 1993.

Tyco grew to be a worldwide company that had 240,000 employees and annual operating revenues of $38 billion. By December 1999, its shares on the New York Stock Exchange sold for almost $60 a share.

Trouble Brewing
Unfortunately for investors, Tyco’s business practices started being questioned as early as 1999. By 2002, Kozlowski was being investigated for state and local sales tax evasion and questionable accounting practices related to his position at Tyco. Even so, in January 2002, Kozlowski was named by Business Week as one of the 25 top company managers of 2001. This success was short-lived.

Six months later, Kozlowski was forced to resign as news of the tax evasion investigation became public and he was indicted for evading more than $1 million in sales tax on some purchases of fine art he had made.

By September 2002, Kozlowski and his Chief Financial Officer, Mark Swartz, were charged with stealing more than $170 million from Tyco and obtaining another $430 million by fraudulently selling company shares. There were two trials and an appeal.

The First Trial

In the first trial, the prosecutor focused on Kozlowski’s lavish lifestyle and irresponsible spending. His $6,000 shower curtain and other lavish furnishings from his Tyco-owned $18 million New York apartment were shown to the jurors. They also saw a video of his wife’s birthday party, which cost $2.1 million. The extravagant party had been billed as a “shareholder’s meeting,” and Tyco company funds paid for half of the bill. A mistrial was declared when a juror appeared to give an “okay” hand sign to the defense.

The Second Trial

In the second trial, the prosecutor switched the focus from the lavish lifestyle of Kozlowski to the evidence that the money he spent so lavishly was not his to spend. The shower curtain, lavish apartment, and birthday party were not mentioned.

Kozlowski, who did not testify in the first trial, took the stand on his own behalf in the second trial. He testified that he was entitled to all the money he had obtained and that the Tyco board authorized him to take the money. After 11 days of deliberations, the jury found Kozlowski and Swartz guilty of all but one of the almost 30 crimes they had been charged with. The conviction meant that the jury found Kozlowski and Swartz had taken an exorbitant $600 million from Tyco.

Kozlowski and Swartz were sentenced to spend from 8.3 to 25 years in prison. Kozlowski was ordered to pay back $70 million and Swartz ordered to repay $35 million. They appealed, and their convictions were upheld.

The Sarbanes-Oxley Act of 2002.

As a result of the major financial problems of companies like Tyco, Senator Paul Sarbanes and Representative Michael Oxley joined together to pass legislation that reformed public reporting requirements for public companies. The result was the Sabranes-Oxley Act. The purpose of the act is to protect shareholders from fraudulent practices by executives and board members. The Act is a complex piece of legislation that created a Public Company Accounting Oversight Board to monitor the financial dealings of public financial firms. The goal is to more closely monitor companies and assign personal responsibility for loss to board members, executives, and auditors so that nobody in the future can repeat Kozlowski’s and Swartz’s actions.

Byline

Ben Staten, a freelance writer based in Queens, NY, focuses his efforts on legal topics such as Auto Accidents, Personal Injury, Banking Law, White Collar Crime, Financial Regulation.