Tyco International is a worldwide manufacturing company that is involved in production of various products since its inception in the 1960s. The company is currently divided into five main business segments which are Safety Products, ADT Worldwide, Flow Control, Fire Protection Services as well as Electrical and Metal Products. Furthermore, the company recently split its corporate sections into three independent companies i.e. Tyco Healthcare, Tyco International Ltd. And Tyco Electronics Ltd. In mid-2007. Tyco International continues to thrive in the New York Stock Exchange because of a strong cash flow and revenue growth.
The company was hit by a major accounting scandal in the early 2000s that involved its former three top executives. The then CEO, CFO and CLO were found guilty of defrauding the company an approximate of $600 million through fraudulent practices. These three former executives took interest-free loans from the company and spent huge amounts of the money on personal expenses without notifying the company's shareholders and investors. Additionally, the three individuals engineered the covert forgiveness of their huge loans and forged the company's books and records in order to hide these compensations. They also granted themselves huge benefits and luxurious lives using Tyco's money at the expense of the company's shareholders. They kept details of these fraudulent practices a secret by the failure to notify the company's shareholders and investors as required by the federal securities law.
The Securities and Exchange Commission filed civil charges against the three on different accounts to which they were found guilty and imprisoned. Following this major accounting scandal that was a characteristic of many companies, the Sarbanes-Oxley Act was implemented in 2002. Section 404 of this Act requires management of companies to provide information regarding internal control over financial reporting in order to avoid such scandals.
Tyco International is a global manufacturing company that started in 1960 with its headquarters in Princeton, New Jersey. The company manufactures a broad range of products that include electronic components and health products in more than a hundred countries across the globe. Currently, Tyco International has a workforce of around 240,000 employees and had a vision of growing to be the next General Electric. Because of its ambition and vision to develop into the next General Electric, the company became the fast-growing conglomerate. The conglomerate is composed of various products and services such as safety products, metal products, security services, electrical products, flow control and fire protection services. As a reflection of the current state of business in America, Tyco International has registered huge profits in the last ten years. This huge profit of Tyco has been mainly because of financial manipulations and acquisitions rather than results of growing productive capacity (Kay, 2002). The company achieved flourishing earnings reports and increasing stock value through accounting tricks and utter fraud.
The company obviously promoted the most corrupt elements into the chief ranks of management because of the parasitic nature of economic operations. Consequently, the company fell into a deep crisis after a series of revelations regarding its corrupt practices and top management. Tyco International was well on its way to developing into the next General Electric until its top management were involved in accounting scandals in mid-2002. These top executives of the company eventually faced white-collar criminal prosecution that was a symbol of the era of corporate greed. The executives were found guilty of defrauding the shareholders of Tyco International of over $400 million at the culmination of the case in mid-2005. Two of the three guilty executives were later expelled from serving as directors of any public company.
Tyco's Accounting Fraud:
After a series of revelations emerged in 2002 regarding the corrupt practices of Tyco International and that of its top executives, the Securities and Exchange Commission (SEC) started investigations of the company's top management. These investigations of Tyco International by SEC included examinations into the precision of the company's books. With the investigations still in process, it was discovered that the three former top executives of Tyco had taken more than $170 million in loans without receiving the proper approval from the company's compensation committee ("Tyco International Ltd.," n.d.).
Furthermore, these former executives i.e. Dennis Kozlowski, former CEO; Mark Swartz, former CFO and Mark Belnick, Chief legal Officer had taken the huge loans without notifying the company's shareholders. Shockingly, the former three executives of the company had taken most these loans with little or no interest in addition to most of them being offset as bonuses without the appropriate approval. The Securities and Exchange Commission made formal charges against these three executives after uncovering their corrupt practices. Additionally, SEC filed civil fraud charges against the three former executives after investigations uncovered that they had sold over seven million shares of the company's stock for $430 million without notifying investors.
Key Players in the Fraud:
According to the civil fraud charges that were filed by the Securities and Exchange Commission, there are three key players in Tyco's accounting fraud. As mentioned earlier, these three key players in the fraud included L. Dennis Kozlowski, Mark H. Swartz and Mark A. Belnick. Kozlowski was not only the company's chief executive officer but he was also the chairman of the board of directors. On the other hand, Swartz was Tyco's chief financial officer and a director of the company while Belnick was the company's chief legal officer. SEC filed charges against the three for their violation of the federal securities laws by failing to reveal to the shareholders the huge low interest and interest-free loans they had taken from the company. The three top executives also caused the company to secretly forgive ten of millions of dollars of their outstanding loans without notifying investors as stipulated in the federal securities laws. Furthermore, they were involved in other hidden related party transactions that resulted in the company's shareholders losing huge amounts of money.
While Dennis Kozlowski and Mark Swartz were charged with conspiracy, falsifying records, corruption and grand larceny; Mar Belnick was charged with failing to reveal to the investors and compensation committee loans made to himself and forging business records. The estimated amount of the fraud that the three former executives caused Tyco International was approximately $600 million. In the lawsuit against these three, the Securities Exchange Commission sought for final judgments on various issues. These judgments included ordering the defendants to return all the ill-gotten gains, imposing public money consequences and enjoining the three from future infringement of the federal securities laws ("SEC Sues," 2002).
While SEC filed for various judgments on the three former executives, Kozlowski and Swartz had similar judgments. As stipulated in SEC's lawsuit, the Commission wanted Kozlowski and Swartz to disgorge all compensations they received from the company as a result of their fraudulent practices. The Commission also wanted the two to be barred from serving as top executives in any public company again and an order enjoining them from future infringement of the federal securities laws. In Belnick's case, the Commission wanted an order for him to return the rent payments he received from the company for the home office he preserved in the Utah residence among other orders that were similar to that of the other two.
Defense Strategy of the Key Players:
According to the Director of Enforcement of the Securities and Exchange Commission, the three former executives of Tyco International treated the company as their private bank by taking huge amounts of loans and compensations without notifying investors. He further argues that the defendants escalated their personal interests above those of the company's shareholders who didn't deserve the betrayal they received from the management of the company they owned. As part of their defense strategy through their lawyers, both Kozlowski and Swartz pleaded for leniency from the judge. In his plea, Kozlowski argued that he had done many positive things in life and pleaded with the judge to be as lenient as possible. Furthermore, he stated that he is a good and decent person whose reputation had been tarnished and didn't deserve a destruction of his life (Associated Press, 2005).
On his part, Swartz also pleaded for leniency by the judge arguing that he is a person of remarkable decency. In addition to their plea for leniency by the judge, both Kozlowski and Swartz testified that they had never stolen anything from the company. They also testified that they never received anything from Tyco International to which they were not entitled and pointed out the company's ongoing success after the scandal as an important factor. Given that other companies like WorldCom and Enron nearly collapsed after accounting scandals, the two stated that Tyco's continuous success revealed that they were innocent.
Explanation of the Player's Alleged Fraud:
After conducting thorough investigations on the accounting fraud at Tyco International, the Securities and Exchange Commission filed charges against the three former executives of the company. Each of these three former had been involved in fraudulent practices that resulted in the company falling into a deep crisis in mid-2002. The following…