Tyco Files Suit Against Former Chairman and CEO, L. Dennis Kozlowski for Misappropriating Money and Assets From the Company
Tyco Says Kozlowski Abused Trust Put in Him by the Board and Engaged in Concerted Pattern of Conduct to Conceal His Larcenous Acts From the Board; Complaint States Kozlowski Abused Relocation and Key Employee Loan Programs, Obtaining Loans Under False Pretenses and Using Programs to Fund Personal Expenditures; Company Says Kozlowski Took Unauthorized Bonuses, Took Credit for Charitable Contributions Paid by Company and Engaged in Self-Dealing Transactions Involving Company Assets That Were Used by Him and His Family; Misused Company Funds Were Expensed in Prior Financial Statements; Company Seeking to Recover Funds Plus Damages; No Material Adjustments to Prior Statements Expected
Thursday September 12, 11:19 am ET
PEMBROKE, Bermuda, Sept. 12 /PRNewswire-FirstCall/ -- Tyco International (NYSE: TYC; BSX; LSE: TYI) today announced that it has filed suit against its former Chairman and Chief Executive Officer, L. Dennis Kozlowski, charging that he misappropriated money and assets from the Company and engaged in a concerted pattern of conduct to conceal larcenous acts from the Board of Directors.
The lawsuit accuses Kozlowski of fraud and self-dealing that included, among other actions: abusing Tyco's relocation and Key Employee Loan programs and obtaining under false pretenses loans that he used to fund personal expenditures; misappropriating for himself over $100 million, including unauthorized bonuses totaling $58 million and unauthorized loans of over $43 million; taking personal credit for more than $43 million in charitable donations that actually were made by Tyco; and engaging in a number of self-dealing transactions involving property he sold the Company at inflated prices and real estate that was used by him and his family without compensating Tyco.
The lawsuit seeks to recover all funds misappropriated from Tyco for Kozlowski himself or awarded by Kozlowski to his senior executives and key managers without appropriate authorization from the Compensation Committee of the Board of Directors, plus damages and other forms of relief. Although the actual amounts are to be determined when the lawsuit goes to trial, the Company specified that it will seek, at a minimum, the recovery of all unauthorized compensation paid by Kozlowski to other employees from 1997 to 2002, repayment of outstanding loans he improperly borrowed from Tyco, and the forfeiture of all income and benefits received by him from 1997 to 2002.
This filing is a result of the previously announced internal investigation being conducted by the outside law firm Boies, Schiller & Flexner.
The Company said that Mr. Kozlowski's misuse of funds and assets, while unauthorized, have already been expensed in Tyco's prior financial statements. It does seek through the lawsuit to recover these monies plus damages. The Company does not expect to make material adjustments to its prior financial statements as a consequence of the internal investigation to date.
Kozlowski Breached Fiduciary Duties and Violated Trust
In a statement, the Company said, "As Tyco's Chairman and Chief Executive Officer from July 1992 through June 3, 2002, Mr. Kozlowski was one of the highest, if not the highest, compensated executive in the country. Despite his being paid handsomely, he misappropriated hundreds of millions of dollars from Tyco that have not been repaid. He failed to inform, and actively concealed from, the Compensation Committee the true facts about his compensation."
The Company also said, "Kozlowski was required to act honestly and in good faith with a view to the best interests of the Company and to exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. Kozlowski breached these duties to the Company and, as a result, the Company has been damaged in an amount that far exceeds the amounts that Kozlowski directly misappropriated for himself. To hold him accountable for his misconduct, we seek not only full payment for the funds he misappropriated but also punitive damages for the serious harm he did to Tyco and its shareholders."
Specific Actions by Kozlowski
Among the specific actions through which Kozlowski failed in his duties to Tyco are:
* Abuse of New York Relocation Program -- In 1995, after he decided to
relocate to New York City, Kozlowski transformed a Compensation
Committee-approved relocation program intended for all employees into a
special program for a few senior executives that was never sanctioned
by the Board. Kozlowski obtained these substantial benefits under the
unapproved, transformed plan:
-- Beginning in July 1997, he rented a lavish Fifth Avenue apartment in
New York at an annual rent of $264,000, paid for by the Company.
-- He used an interest-free loan to buy a Company-owned, $7-million
Park Avenue apartment, at depreciated book value and without
appraisals, which he never occupied and instead deeded to his
ex-wife a few months after the purchase.
-- He sold his Exeter, New Hampshire home to the Company for
significantly more than its market value, resulting in a $3-million
overpayment to him by Tyco.
-- He had the Company purchase a second, more extravagant, Fifth Avenue
apartment in 2001 for $16.8 million, plus $3 million in improvements
and $11 million in furnishings, without disclosing to the Board or
its Compensation or Audit Committees that this home was paid for by
Tyco and carried by the Company as a corporate asset.
-- He "grossed up" the benefits he received under the program to
insulate himself from New York State income tax liability related to
the relocation to New York.
Kozlowski knew that the benefits to him and other key executives under
such a program required Compensation Committee approval and never
sought such approval from the Board.
* Abuse of Key Employee Loan Program -- The long-standing Key Employee
Loan Program (KEL) was designed to encourage stock ownership by
executives by obviating their need to liquidate shares to meet tax
liabilities. However, Kozlowski systematically abused this program,
turning it into a personal line of credit. From 1997 to 2002, he took
more than 200 loans from the program, borrowing more than $274 million,
of which more than $245 million was not used in accordance with the
purpose of the program. Instead, he used these funds for a wide
variety of personal needs, including purchases of everything from
homes, yachts, antiques and furniture to payments to his domestic help.
* Unauthorized Credits to KEL Program -- To offset his indebtedness to
Tyco, without the knowledge or approval of the Board, Kozlowski
directed Chief Financial Officer Mark Swartz to effect credits of
$25 million to Kozlowski's KEL account and $12.5 million to Swartz's
account. (When the Board learned of these unauthorized journal entries
during the course of the investigation, it directed that they be
reversed.) Kozlowski continued to abuse the KEL program, and when he
left the Company on June 3, 2002, he owed this program $43,840,461,
plus interest, all of which is due.
* Unauthorized Florida Relocation Program -- After the 1997 reverse
merger with ADT, Kozlowski decided to relocate more than 40 corporate
employees to ADT's U.S. headquarters in Boca Raton, Florida and created
a new relocation program by appropriating the terms of the earlier New
York program. He circumvented the need for Compensation Committee
approval of this program by creating a program somewhat similar to the
New York program. As in New York, he created two versions of the
program, one for general use that met the IRS standards and a second
for the use of a few executives. Without changing his primary
residence, Kozlowski used this program to obtain $29,756,110 in
interest-free loans to assemble five lots into a compound and build an
estate in an exclusive Boca enclave called "The Sanctuary." Kozlowski
did not obtain Compensation Committee approval of this program and
concealed these benefits from the Board.
* "TyCom Bonus" -- Unauthorized Forgiveness of Relocation Loans -- In
September 2000, Kozlowski still owed Tyco more than $37 million, so he
"contrived, promoted and fraudulently executed" a plan to obtain
relief. He falsely informed the Senior VP of Human Resources that the
Board had decided to forgive all of the Florida relocation loans to the
more than 40 employees - and to "gross up" this benefit by making each
employee whole on an after-tax basis for the forgiveness -- as a reward
for completion of the TyCom IPO. The unauthorized loan and gross-up
program was in addition to a more limited program of cash bonuses and
restricted stock awards that the Compensation Committee -- unaware of
the Kozlowski program -- approved the next month. Kozlowski's
unauthorized program cost Tyco close to $100 million, including
Kozlowski's share of $32,644,338.
* Unauthorized "ADT Automotive Bonus" -- In November 2000, still pressed
by his indebtedness to Tyco, Kozlowski contrived another special bonus
program. This bonus was supposed to recognize executives for
contributions to the divestiture of Tyco's ADT Automotive business via
cash and "relocation" benefits, even though the beneficiaries had
already recovered the grossed-up cost of their "relocations" under the
TyCom forgiveness bonus. This "bonus" cost Tyco nearly $56 million, of
which $25.6 million benefited Kozlowski. As with the "TyCom Bonus,"
Kozlowski led other executives to believe the program was Board
approved, which it was not. Adding everything up, including his
authorized compensation and the money misappropriated as purported
compensation, Kozlowski's income from Tyco in 2000, as reported to the
IRS, was an incredible $137,491,353.39.
* Fraudulently Procured Retention Agreement -- In 2001, Kozlowski pressed
the Company to sign a retention agreement, which among other things,
provided for ongoing compensation and benefits for three years
following age 62. The monetary value of this provision, as approved by
the Compensation Committee, would have been approximately $20 million.
However, he fraudulently deceived the Committee into amending the
compensation formula that, unbeknownst to the Committee, would have
resulted in a ten-fold increase in the compensation that would be due
to him.
* Unauthorized Payment to Walsh -- In early 2001, Kozlowski approved the
payment of a $20-million finder's fee to then-director Frank Walsh in
connection with the acquisition of The CIT Group. Kozlowski and Walsh
concealed this payment from the Board, which did not become aware of it
until reading a draft proxy in January 2002 and demanded immediate
repayment. The Board was galvanized into action by this payment and,
in February 2002, undertook a review of all transactions involving
senior management. Also, in early May 2002, the Board hired
independent counsel, Boies Schiller & Flexner, to represent the Company
with regard to the Walsh matter.
* Frustration of Board's Investigation -- As a result of the Walsh
payment, the Board began a wide-ranging investigation into the
activities of Kozlowski and other senior managers. Throughout early
2002, while paying lip service to the heightened Board oversight, at no
time did Kozlowski disclose the enormous compensation he had taken for
himself and others over the past several years. From February through
May 2002, Kozlowski continued to conceal the facts from the Board and
attempted to delay and frustrate the investigation.
* Failure to Report Subpoena to Board -- On May 3, 2002, in the course of
investigating Kozlowski's failure to pay state sales taxes, the
Manhattan District Attorney served Kozlowski with a subpoena for
records relating to his compensation and his recent purchases.
Kozlowlski had an affirmative duty to inform the Board of this, but
failed to do so. In fact, he did not inform the Board until May 31,
the day he learned he was to be indicted.
* Charitable Contributions -- From 1997 to 2002, Kozlowski committed
donations and pledges to charitable organizations with Company money
amounting to more than $106 million. At least $43 million of these
donations were made for his personal benefit or were represented as his
personal donations. For example, in 2001, Kozlowski donated
$1.3 million of Company money to the Nantucket Conservation Foundation,
Inc., which in turn purchased property adjacent to Kozlowski's own
Nantucket estate to prevent future development of the land. He also
pledged $10 million to the California International Sailing Association
in his name. Other Tyco contributions were made in his name to
schools, colleges, hospitals, and Nantucket institutions with which he
had a personal connection.
* Other Elements of Kozlowski's Fraud and Self-Dealing -- Other actions
by Kozlowski that formed a pattern of fraud and self-dealing included
expensing to the Company the following items, among others:
-- Millions of dollars for the personal use of his various residences
and purchases of furniture and other items for these residences;
-- $700,000 for a personal investment in the movie, "Endurance;"
-- More than $1 million for a lavish celebration of his wife's birthday
in Sardinia, Italy;
-- Reimbursement for $1 million of business expenses without proper
documentation for such items as jewelry, clothing, wine, club
membership dues, flowers and a private venture; and.
-- At least $110,000 for the corporate use of his personal yacht, the
"Endeavour." |
