Tyco International Is a Worldwide Manufacturing Company

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.

Introduction:

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 is a detailed explanation of what each of these key players's alleged fraud included & #8230;

Dennis Kozlowski:

Mr. Dennis Kozlowski became an employee at Tyco International in 1975 and left in 2002 following the fraudulent accusations leveled against him to which he was found guilty. During his time with the company, Kozlowski rose to be the chief executive and chairman of the board of directors at Tyco. He is one of the three executives who were accused of being involved in fraudulent activities that threw Tyco International into a deep crisis. Kozlowski is accused of taking an aggregate of close to $270 million from the company's loan program from 1997 to 2002 and using a huge percentage of the money for personal expenses. The company's Key Employee Corporate Loan Program was established in order to encourage its employees to own the company's share. Kozlowski ignored the purpose of this loan program by using approximately $29 million out of the $270 million to cover taxes ("Litigation Release," 2002). He used the rest of the money for personal expenses that were not related to the company while neglecting the requirement of disclosing the loans to shareholders according to federal laws.

Kozlowski also took over $46 million in interest-free relocation loans from 1996 to 2002 to purchase his luxurious properties and that of his former wife. The relocation loans were meant to help employees who were forced to relocate when the company moved its corporate offices and operations. While he used a large proportion of the amount for personal luxurious expenses, he didn't disclose the loans to shareholders as stipulated in federal securities laws. He was then involved in engineering two loan forgiveness of outstanding balances and other program for personal benefit. In 1999 and 2000, Kozlowski engineered the loan forgiveness of his $25 million KELP balance and forgiveness of his $33 million relocation loan respectively. Both of these separate compensations were not disclosed to the company's shareholders as necessitated by the federal securities laws.

He engineered a program for personal benefit together with other favored employees in 2000 and 2001 in form cash bonuses and the company's stock while forging Tyco's books and records to cover the covert compensations. Kozlowski also enjoyed wide undisclosed perquisites that he granted himself at the expense of the company's shareholders including living in a $31 million rent-free apartment that the company purchased in his name. He also used Tyco's corporate jets for personal gain at minimal or no costs, involved in hidden real estate transactions and directing huge amounts of charitable donations in his own name using the company's funds. To ensure that he covers for these hidden transactions and other fraudulent compensations, Kozlowski didn't reveal anything to the shareholders or investors.

Mark Swartz:

Mark H. Swartz became an employee of Tyco International in 1991 and left in 2002 after being found guilty of the fraudulent accusations leveled against him by the Securities and Exchange Commission. During his period of service in the company he rose to become chief financial officer and a director of Tyco International. Following the investigations by the Securities and Exchange Commission, Swartz was found to have engaged in fraudulent practices in conspiracy with Kozlowski. He is accused of taking an aggregate of around $85 million of KELP loans but only using $13 million for the intended tax purposes of the loan program while the rest was used for personal expenses from 1997 to 2002. Swartz also took over $32 million of interest-free relocation loans and spent $9 million of this amount for unauthorized purposes during the 1996 to 2002 period. In both instances, Swartz violated the federal securities laws that required him to disclose these loans to the shareholders (Obringer, n.d).

In conspiracy with the then chief executive officer of the company, Swartz engineered the secret forgiveness of his $12.5 million of outstanding KELP balance and over $16 million of his outstanding relocation loan balance. In order to keep these compensations as a secret, Swartz and Kozlowski promised not to disclose these payments to anyone other than their legal, financial and tax advisors. Additionally, the two conspired to forge the books and records of the company in order for the compensations to remain hidden. Similar to Kozlowski, Swartz also engineered other programs for his personal benefit in the form of cash bonuses and the company's stock. He also enjoyed several and broad undisclosed privileges that he granted himself living in a rent-free apartment that the company bought in his name and using the company's corporate jets for personal gain. Swartz also participated in hidden real estate transactions with the company and its subsidiaries as well as selling a huge proportion of Tyco's stock through family partnerships.

Mark Belnick:

Mark A. Belnick was hired as an employee of Tyco International in 1998 and served as the company's chief legal officer until 2002 when he was fired because of involvement in fraudulent practices ("Tyco Fraud," n.d.). He is accused of taking close to $14 million in secret interest-free relocation loans and a $4 million relocation loan to buy an apartment in New York upon joining the company. While Belnick took the $4 million to purchase the apartment in 1998, he was not eligible to receive the loan because he had never worked for the company. For one to be eligible for this program there was a requirement to have worked at Tyco International. Additionally, he took $10 million of the interest-free relocation loan in 2001 to buy a house in Utah despite of the fact that the company had no corporate presence in this area. Belnick is also accused of the sale of huge amounts of the company's stock on the open market. Furthermore, he was found guilty of thwarting the disclosure of information to investors and shareholders regarding these loans that he took from Tyco.

Current Status of the Company:

Throughout its history, Tyco International has continued to grow and currently offers a wide range of products that include fire-fighting equipments, electronic security, flow control solutions and breathing apparatus among others. The company is composed of five major business sections that include Safety Products, ADT Worldwide, Flow Control, Fire Protection Services as well as Electrical and Metal Products. While Tyco International has its operational headquarters located in Princeton New Jersey in the United States, the worldwide manufacturing company is incorporated in Switzerland. The company successfully split its corporate section into three public independent companies i.e. Tyco Healthcare, Tyco International Ltd. And Tyco Electronics Ltd. In mid-2007. The company acquired Broadview Security, Brink's Home Security Holdings in January 2010 for a value of $2.0 million merging it with its ADT Security Services division.

The company continued to register significant growth even after the 2002 accounting scandal that involved three of its former top executives unlike other companies like WorldCom and Enron. Towards the end of the 2006 financial year, the revenue of Tyco International had reached $17 billion with a strong cash flow and reduced debt. Given the strong revenue growth, the company registered revenue of $18.8 billion by the end of the 2007 fiscal year. The company continues to experience a steady cash flow that has seen it trade an approximate of 2.7 million shares with an average monthly volume of 3.9 million shares in the last few days ("Watch for Continued Gains," 2011). The company's shares closed at $46.4 in the New York Stock Exchange in February 7, 2011, a characteristic of its new 52-week high and 0.6% increase as compared to its previous trading.

Sarbanes-Oxley Act:

Sarbanes-Oxley Act is the Public Accounting Reform and Investor Protection Act that was endorsed in July 2002 following a string of high-profile corporate scandals that involved various companies in the United States. Section 404 of this act requires companies to provide information on the internal control over financial reporting. The section also necessitates that auditors should give their opinions on the reports and the effectiveness of the internal control. This is because of the fact that many companies have never been concerned with internal control issues in the past due to the management's little discussion on the matter in their annual reports. Additionally, companies were not concerned with internal control matters because of carelessness on its adequacy. The series of accounting scandals that hit many companies in America in the early 2000s revealed the fact that companies had under-invested in the essentials of internal control (Weirich, Arndt & Ciesielski, 2005). As a result, public companies have been involved in measures of documenting and evaluating the effectiveness of internal control.