NY Times: Insiders dumped $100 million of TYC stock
2 Tyco Officials Sold Stock by Returning It to Company
January 30, 2002
By ALEX BERENSON
Two senior executives of Tyco International Ltd.
(news/quote) quietly disposed of more than $100 million in
Tyco stock during the company's last fiscal year, despite
public comments that they rarely if ever sold Tyco shares.
L. Dennis Kozlowski, Tyco's chairman, and Mark Swartz, its
chief financial officer, returned the stock to the company
in late 2000 and 2001, according to forms filed with the
Securities and Exchange Commission in November.
Like Kenneth L. Lay, the former chairman of the Enron
Corporation (news/quote), Mr. Kozlowski and Mr. Swartz used
an uncommon tactic to reduce their Tyco positions,
returning their shares directly to the company instead of
selling them on the open market. As a result, they did not
have to disclose the sales within 10 days after the month
of the sale, as they would have had to do with ordinary
sales of stock.
Mr. Kozlowski returned stock then worth about $70 million
to the company, while Mr. Swartz returned stock worth $35
million. The men returned their shares during periods when
Tyco's stock was trading at levels much higher than it was
today. They received new stock options from Tyco to replace
all the shares that they sold back to the company.
The company said in a statement last night that Mr.
Kozlowski had returned his shares to Tyco to pay taxes,
repay loans to Tyco, or for tax planning purposes. The
company added that Mr. Kozlowski's stake in Tyco had
increased during 2001.
The transactions were in addition to $40 million in pay,
bonuses and stock grants that Mr. Kozlowski received last
year and $20 million in pay, bonuses and stock grants for
Mr. Swartz.
Mr. Kozlowski has repeatedly told analysts and the media
that his large holdings in Tyco stock demonstrate his
commitment to the company.
"I'm paid in Tyco stock," Mr. Kozlowski said in an
interview last month. "We, the board, everybody, feel the
best way to keep management's interest aligned with
shareholders is to keep 100 percent of our net worth in
Tyco's stock."
Mr. Kozlowski returned about 1.25 million shares of stock
to the company last year, according to the filings. Mr.
Kozlowski owns about three million shares of Tyco stock,
according to a report Tyco filed Monday with the S.E.C.,
and has an additional 11 million Tyco options.
Questions about aggressive accounting practices have
depressed the stock of Tyco, a Bermuda-based conglomerate
employing 240,000 people worldwide and a maker of security
systems, health care products and telecommunications
equipment.
The company's stock has plunged 43 percent this year,
cutting its market value by more than $50 billion. To
restore shareholders' confidence, Tyco has promised to
answer questions about its financial statements, but the
company has declined to disclose some information that
analysts and investors would like.
Last week, Tyco announced it would split into four
companies and sell a fifth division. This reversed
overnight the company's decade- long strategy of growth by
acquisition.
Yesterday, Tyco shares plunged $8.35, or 19.9 percent, to
$33.65, after the company disclosed in a report filed with
the S.E.C. that it had paid an outside director $10 million
last year. The payment came in exchange for work the
director, Frank E. Walsh Jr., performed last year when Tyco
bought the CIT Group, a financial company, for $9.2
billion. In addition to the $10 million payment, Tyco
donated $10 million to a charity controlled by Mr. Walsh.
In a statement, Mr. Kozlowski called the payment
"appropriate in light of Mr. Walsh's efforts."
Mr. Kozlowski defended Tyco's accounting practices and said
the company was "prepared to openly discuss whatever
legitimate questions or concerns our shareholders, the
analyst community, or the media might have."
But Tyco, which has made $30 billion in acquisitions during
the last three fiscal years, has refused to show investors
the financial statements of the companies it acquires after
Tyco has agreed to buy them but before they are actually
folded into Tyco.
Short sellers, who profit when a company's stock falls,
have said Tyco should disclose those statements so that
investors can see whether the companies that Tyco buys are
taking one-time charges and manipulating their cash flow
downward before they are merged.
By cutting their earnings and cash flow before the
acquisition is completed, the acquired companies enable
Tyco to report higher earnings and cash flow after the
deals close, according to James Chanos, president of
Kynikos Associates, and other short sellers.
Despite questions from Mr. Chanos and some Wall Street
analysts, Tyco has also refused to disclose the balance
sheets of acquired companies at the time it takes them
over. The company should explain why it has recorded more
than $30 billion in good will related to acquisitions over
the last three years, the short sellers say.
Good will is the excess of the price that Tyco pays for the
companies over their real, or tangible, assets. By marking
up good will and marking down real assets when the deals
are completed, Tyco can inflate its profits, the short
sellers contend.
Mike Donnelly, senior vice president of Federated
Investment Management, which owns three million Tyco
shares, said Tyco was being unfairly compared to Enron. "I
don't think there's fraud," Mr. Donnelly said. "They've
obviously pushed the envelope in terms of their tax
management, first and foremost, and their accounting as
well." |
