06/06 10:47
Tyco Loan Fund Is Focus of New York Investigation (Update3)
By Rachel Layne
New York, June 6 (Bloomberg) -- Tyco International Ltd.'s loan fund for ``key executives'' is a focus of a continuing investigation of former Chairman and Chief Executive Dennis Kozlowski, the Manhattan district attorney's office said.
Kozlowski borrowed $35.7 million from the fund during the two years ended Sept. 30, according to regulatory filings. Manhattan District Attorney Robert Morgenthau said Kozlowski, indicted for sales-tax evasion, used a Tyco fund ``available for executives to exercise their stock options'' to finance the purchase of $13.2 million in paintings, including works by Monet and Renoir.
The Securities and Exchange Commission has begun an informal inquiry into whether the former CEO used a company loan for purposes other than designated by Tyco in its regulatory filings, people familiar with the matter said.
Morgenthau is also investigating whether Kozlowski improperly used company funds to buy his $18 million Fifth Avenue apartment, the Wall Street Journal reported earlier, adding prosecutors may be trying to see if he paid all required state income taxes.
The Tyco compensation committee would have had to approve any loans, according to a company proxy statement filed Jan. 28, shortly before its annual shareholder meeting. The proxy described the ``1983 Key Employee Corporate Loan Program'' as providing loans for taxes associated with shares granted to executives under the company's restricted-stock plan.
``To the extent that the proxy statement misstates the purpose of the loan, it's a proxy violation,'' said Michael A. Perino, a securities law professor at St. John's University School of Law in New York.
Looking for Evidence
SEC spokeswoman Christi Harlan declined to comment. People familiar with the investigations said no evidence has turned up yet showing Tyco board members administering the loan fund were aware of any loans given Kozlowski to purchase artwork, the Journal reported.
Tyco spokesmen Brad McGee wouldn't comment on the possibility of a federal inquiry and said the company is conducting its own investigation. He declined to give any details about the fund's operation.
``Obviously we would disclose any formal or informal investigation inquiries if we believed them to be material,'' he said. Tyco is cooperating with Morgenthau's office, he said.
Not Guilty Plea
Tyco, which runs hundreds of businesses, is the biggest maker of electronic connectors, undersea fiber-optic cable and security systems. Kozlowski's problems and questions about Tyco's accounting have cost shareholders $83 billion in market value this year. The stock, which rose 53 cents to $17.30 yesterday. was down about 75 cents at $16.55 in early New York Stock Exchange trading.
Kozlowski pleaded not guilty and was released on $3 million bond after being indicted Tuesday on charges of evading New York State sales taxes on six paintings he bought for his Fifth Avenue apartment. `A jury or a court will find these (charges) to be lacking of substance,'' Kozlowski's lawyer, Stephen E. Kaufman, said.
``All of the money, initially, for these purchases was provided by Tyco,'' Morgenthau said. ``Some of the money was returned without interest.''
Loan Program
``The history of controversial CEOs who leave under a black cloud is that things were always worse than they appeared to be,'' said James Chanos, a short seller and president of Kynikos Associates Ltd., a New York-based investment firm. Short sellers sell borrowed stock hoping to profit from a price decline that will allow them to repurchase the shares for less than they received.
Tyco's January proxy statement said its ``1983 Key Employee Corporate Loan Program...is designed to encourage ownership of Tyco common shares by executives and other key employees. Loans under the program may be used for the payment of taxes due as a result of the vesting of ownership of shares granted under Tyco's restricted share ownership plan.''
Corporate loan programs designed to encourage executives to purchase their company's shares are common in the U.S., said Charles Elson, director of the Center for Corporate Governance at the University of Delaware.
Kozlowski borrowed and repaid $23 million in the fiscal year that ended Sept. 30, 2001, and $12.7 million in fiscal 2000, according to Tyco proxy statements.
`Good Bank'
The company's compensation committee would have had to approve any loans, according to the January proxy statement.
It listed the committee members as directors Stephen W. Foss, chairman and chief executive officer, Foss Manufacturing Co., Hampton, New Hampshire; James S. Pasman Jr., director of several funds, including CSAM Income Fund and CSAM High Yield Fund; and W. Peter Slusser, president of Slusser Associates, New York. Slusser declined to comment. Repeated calls to the two other directors weren't returned.
``This is, for the executives, a very good bank,'' said Stephen Bankler, a San Antonio-based certified public accountant and tax expert. Bankler, who served as an investigative accountant for the Senate Whitewater Committee, said after reading the proxy language that he believes money borrowed from the fund could be used for purposes unrelated to purchases of Tyco stock. ``It looks to me as if it's wide open,'' he said.
Based in Bermuda
Morgenthau said Kozlowski's art purchases came to light as part of an investigation of companies that use offshore accounts to launder money and evade taxes. Tyco is based in Bermuda, but run from Exeter, New Hampshire.
The district attorney's investigation, which began with a focus on money laundering, is continuing and may include more charges against Kozlowski, spokeswoman Sherry Hunter said.
If Tyco's compensation committee knew it was authorizing loans to Kozlowski for purposes other than that described in the company's proxy statement, ``the SEC might view it as a disclosure issue,'' said Michael Missal, a former SEC senior enforcement lawyer who is now a partner at Kirkpatrick & Lockhart.
Some legal authorities said any lawyers hoping to sue Tyco on behalf of shareholders would find it difficult to make a case. David M. Becker, former SEC general counsel, said lawyers would have to prove the company knew Kozlowski was going to misuse the funds, and that Kozlowski's indictment was the direct cause of the recent drop in Tyco stock.
Loan programs to encourage purchases of company stock are frowned upon by corporate-governance advocates, said Elson. ``Any activity where a company becomes a financial intermediary is not an effective use of shareholder assets,'' he said.
Patrick McGurn, director of corporate programs at Institutional Shareholder Services, which advises many of the largest U.S. fund managers on corporate governance, said: ``This is why shareholders don't like these programs. They start to seem like slush funds.'' |
