Tyco international fraud

Tyco Background
Tyco International has operations in over 100 countr ies and claims to be the world's largest
maker and servicer of electrical and electronic components; the largest designer and maker of
undersea telecommunications systems; the larger maker of fire protection systems and electronic
security services; the largest maker of specialty valves; and a major player in the disposable
medical products, plastics. Edward Breen, who replaced kozlowski removed nine members of
Tycos international board, and adhesives markets. Since 1986, Tyco has claimed over 40 major
acquisitions as well as many minor acquisitions.
How the Fraud Happened
According to the Tyco Fraud Infor mation Center, an internal investigation concluded that there
were accounting errors, but that there was no systematic fraud problem at Tyco. So, what did
happen? Tyco's for mer CEO Dennis Kozlowski, former CFO Mark Swartz, and former General
Counsel Mark Belnick were accused of giving themselves interest-free or very low interest loans
(sometimes disguised as bonuses) that were never appr oved by the Tyco boar d or repaid. Some
of these "loans" were part of a "Key Employee Loan" program the company offered. They were
also accused of selling their company stock without telling investors, which is a requirement
under SEC r ules. Koslowski, Swar tz, and Belnick stole $600 million dollars from Tyco
International thr ough their unapproved bonuses, loans, and extravagant "company" spending.
Rumors of a $6,000 shower curtain, $2,000 trash can, and a $2 million dollar birthday par ty for
Kozlowski's wife in Italy are just a few examples of the misuse of company funds. As many as
40 Tyco executives took loans that were later "for given" as part of Tyco's loan-forgiveness
program, although it was said that many did not know they were doing anything wrong. Hush
money was also paid to those the company feared would "rat out" Kozlowski.
Essentially, they concealed their illegal actions by keeping them out of the accounting books and
away from the eyes of shareholders and board members.
How it Was Discovered
In 1999 the SEC began an investigation after an analyst reported questionable accounting
practices. This investigation took place fr om 1999 to 2000 and centered on accounting practices
for the company's many acquisitions, including a practice known as "spring- loading." In "springloading," the pre-acquisition earnings of an acquir ed company are under reported, giving the

merged company the appearance of an ear nings boost afterwards. The investigation ended with
the SEC deciding to take no action.
In January 2002, the accuracy of Tyco's bookkeeping and accounting again came under question
after a tip drew attention to a $20 million payment made to Tyco director Fr ank Walsh, Jr. That
payment was later explained as a finder's fee for the Tyco acquisition of CIT. In June 2002,
Kozlowski was being investigated for tax evasion because he failed to pay sales tax on $13
million in artwork that he had purchased in New York with company funds. At the same time,
Kozlowski resigned from Tyco "for personal reasons" and was replaced by John Fort. By
September of 2002, all thr ee (Kozlowski, Swartz, and Belnick) were gone and charges were filed
against them for failure to disclose infor mation on their multimillion dollar loans to shareholders.
The SEC asked Kozlowski, Swartz, and Belnick to r estore the funds that they took from Tyco in
the form of undisclosed loans and compensations.
Where Are They Now?
Kozlowski and Swartz were found guilty in 2005 of taking bonuses worth more than $120
million without the approval of Tyco's directors, abusing an employee loan progr am, and
misrepresenting the company's financial condition to investors to boost the stock pr ice, while
selling $575 million in stock. Both are serving 8 1/3-to-25-year prison sentences. Belnick paid a
$100,000 civil penalty for his r ole. Since replacing its Board Members and several executives,
Tyco International has remained strong.
The difference in the Tyco case and some of the others is that it is more related to greed than
accounting fraud.
Tyco fraud
Tyco manufacture a wide var iety of products, from electronic components to healthcare products
.the conglomerate operates in over a 240,000 people. During 2002, exchange and securities
commission began an investigation at Tycos top executives. Inquiry into the accuracy of the of
the company s book began in Januar y. As investigation continues it uncovered that Dennis
kozlowski , Tyco former CEO , Mark Swartz Tycos former CFO and Mark Belnick the
companys chief legal officer had taken over $170 million in loans from Tyco without receiving
appropriate approval from Tycos compensation committee and notifying shareholders. for the
most part these loans were taken with low to no interest. Many of them were offset as bonuses
without open approval . kozlowski and Swartz also sold seven and a half million shares of Tyco
stock for $430 million without telling investors. For mal charges were made by the SEC
September 12, 2002.
Tyco has been able to regain much in lost ground under its new leadership because the acts of
securities fraud committed by former Tyco executives were concealed and for the most part
disguised, the majority of Tycos employee committed no acts of fraud knowingly . as, a
precautionary act however Edward Breen, who replaced kozlowski r emoved nine members of
Tycos international board.

Tyco investigation
The following time line chronicles the progress of investigation and indictments against Dennis
kozlowski , mark Swartz and mark belnick.
January 2002- Question rise about the accuracy of tycos bookkeeping and accounting. Stock
value drops 19 percent.
January 29, 2002- kozlowski explain that the $ 20 million paid to fr ank wolsh was a finders fee
for the acquisition of CIT.
January 30, 2002- kozlowski announces that he and mark swartz( tycos then CFO) will each
purchase 500,00 Tyco shares on open market .This move is made as an assurance of the value of
Tyco stock.
April 25, 2002- kozlowski explains 96 percent loss share for the quarter ending on march
31,2002 and outlines unusual cost that affected earnings.
June 3, 2002- kozlowski resigns as CEO of tyco for personal reasons. John fort is the name of
temporary CEO.
June 4, 2002- kozlowski is attempted for attempted tax evasion.
June10, 2002- belnick who was hired on tyci 1998 as the chief legal officer is fired.
June 17, 2002- Tyco through the law firm of boies.
Schiller and Flexner, begins the process of suing belnick for breach of fidiuacary duty and fr aud.
belnick maintains that he acted with integrity as Tycos chief legal officer.
August 1, 2002- CFO swar tz resign from Tyco
September 12, 2002- civil charges are filed against kozlowski, swartz and belnick by the SEC
for the failure to disclose of shareholders information on the multi million dollar loans they
borrowed from tyco.
The SEC asked kozlowski , swartz and belnick to restore funds they took from tycos various
forms of undisclosed loans and compensation.
Kozlowski and swartz were charged wit h :
Corruption
Conspiracy
Grand larceny

Falsifying recor ds.

The losses they caused tyco are estimated as $ 600 million.

Belnick is charged with:

Falsifying business records.
Failing to disclose loans to made himself ( for the purchase of his manhattan apartment and Utah
home ) to investors and tyco compensation committee.
September 19, 2002- kozlowski is freed on $100 million bail.the bail is paid with a $1oo million
bond and secured with $10 million in asset fr om kozlowskis ex wife.
Swartz is freed on $50 million bail. The bail is paid with a $50 million and secured with 500,00
of swar tz personal tyco stock.
Belnick is freed on a $1 million bond.
Tyco continues operation and has replaced many members from its boar d of directors.edward
breen the former Motorola executive has replaced kozlowski; david Fitzpatrick, who worked in
number of blue fir ms has replaced swartz and William lytton the former inter national paper
executive has replaced belnick.
When charisma turns crooked
Tyco International chairman and CEO Dennis Kozlowski is a prime example. For 27 years,
Kozlowski poured his heart and soul into building the Princeton, New Jersey industrial
conglomerate into a massive powerhouse. A gifted chief who thr ew extravagant company
parties, he is credited with a br illiant series of mergers and acquisitions that hugely boosted
profits. For instance, in fiscal 2000, Tyco sales leapt 28 percent and earnings, before
extraordinar y charges, increased 46 percent, to $3.7 billion.
While his Tyco annual compensation climbed to $100 million, Kozlowski reportedly began
surreptitiously siphoning company money -- some $400 million -- into his pockets. He didn't
hide his enormous wealth, either, throwing his wife a million-dollar 40th birthday party,
indulging in a $6,000 shower curtain for their Manhattan home and buying acres of prime real
estate in pr icey Boca Raton, Florida.

Government investigators caught up to him in 2002, after his r esignation from the company.
They proved that Kozlowski had gone wildly astray, grabbing $150 million in unauthorized
bonuses, selling Tyco stock after artificially dr iving up share pr ices and in general, looting the
company. After the first prosecution ended in a mistrial, a second jury convicted him of almost
two dozen counts of grand larceny, among other crimes.
He was sentenced to an 8-to-25-year sentence in 2005, and is ser ving his time at Mid-State
Correctional Facility in Marcy, New York. His wife, Karen Kozlowski, filed for divorce in July,
2006. Like the multitude of stockholders who have made civil-court claims against him, she is
suing Kozlowski, now 60, for alimony and half their mar ital assets. She also filed a lien against
their Boca Raton mansion.
Kozlowski, who insists he is innocent of wrongdoing, blames jealous jurors for his prison term.
During a March, 2007 interview from Mid-State, Kozlowski told 60 Minutes' Morley Safer that
he was "a guy sitting in a courtroom making $100 million a year [ and] I think a juror sitting there
would just have to say, 'All that money? He must have done something wrong.'"
A downward journey of many steps
Kozlowski was able to rationalize his cupidity because ther e was probably never a single
moment when he morphed from a corpor ate shepher d to a ravenous wolf. I nstead, he inched
along ethically, cheating a wee bit here, falling back on a useful white lie there, and as the years
went by, the cheating grew and the lies multiplied.
The journey into dishonesty is easier if, like Kozlowski, leaders surround themselves with brash
young hustler s who lack business seasoning and, anxious to ride the boss's coattails, hesitate to
challenge him or her.
"This is a gr adual, step-by-step process. A CEO doesn't wake up one day and say, 'Gee, I think
gigantic fraud is the way to go.' It's not a fast crash and burn," .

what are the et hical and legal issues in this case?

The ethical and legal issues at Tyco International r ange from
discrimination, accounting fraud,
grand larceny. The issues involved cohesion on the part of the CEO,
and the members of his
team. In addition, they placed gr eat emphasis on placing their own
values ahead of what was
good for the organization.
What role did Tyco's corporate culture play in the scandal? What
roles did the board of directors,
CEO, CFO and legal counsel play?

Tyco's corporate culture was driven by the CEO, Dennis Kozlowski who admir ed the
extravagant and lavish lifestyle lavish of the former CEO, Joseph Gaziano. He took an assertive
approach to acquisitions and mergers, which helped Tyco, maintain a 14 year growth within the
business units. He viewed himself as the organizations, ther efore, conducted business as such.
The Boards of Directors are responsible for protecting Tyco's shar eholder s interest. In some
cases, some of the board members wer e not aware of the fraud, and other unethical deals that
were going on behind the scenes. The board members that were aware, did not bring the issues to
the other members of the board, therefore, they were just as guilty of unethical behaviors as the
CEO and his dir ect reports. The reason this could have transpired is pr obably due to the major ity
of board member s being on the board >10 years, and the relationships that had been established
over time.
The CEO, CFO and legal counsel, due to the nature of their positions, were not honest and
transparent with the stakeholders concerning the issues relating to the accounting fraud and
conflicts of interest. They all engaged in an enterprise of corruption and collusion.
Now we will evaluate the planning function of the Tyco Company and analyze the impact that
legal issues, ethics, and corporate social r esponsibilities have on management planning. The year
2000 was a year marked by scandal over the accounting practices of some of the biggest
corporations in the world, including Tyco International Incor porated. Tycos top executives were
indicted and convicted of fr aud char ges stemming from both improper accounting practices as
well as improper personal use of company funds. The planning str ategy of these executives
seems to have been more focused on personal gain than on the best interests of the company and
its shareholders. They ignored their responsibilities to the laws governing corporate management
and to their investors and employees. Dennis Kozlowski, the chief executive officer, alone
plundered the company of over 400 million dollar s. Using company funds, he threw a toga party
for his wifes birthday that cost two million dollars. He bought millions of dollars worth of art to
decorate his home. He spent six thousand dollars of company money on a shower curtain and 15
thousand dollars on an umbrella stand shaped like a poodle. Unlike most of the companies
targeted by those investigations, Tyco survived the scandals and is still in business today because
it changed the way that it operates. Three of the factors that influence management planning
today are their ability to obtain materials and components for manufacturing, the rate of attrition
for their home security products and services and the ongoing litigation and investigations.

The Tyco guide to ethical conduct

The Tyco Guide to Ethical Conduct- has been developed to advise employees on what the
correct pr actices and procedures ar e, when working for Tyco, the guide also outlines examples of
unethical behaviour and ways in which it can be reported.

Formulation of the Guide

The Tyco Guide to Ethical conduct was developed in 2003 to help set ethical standards and code
of conduct for its employees. The drive to develop this Ethical guide was due to the unethical
practices for former CEO Dennis Kozlowski. In 2002, Kozlowski and for mer CFO Mark Swartz
were accused of stealing from the company $170 million and $430 million in stock sales,[1] both
executives have been sentenced to jail and have also been forced to pay back some of the money.
During Kozlowskis time as CEO he adopted a strategic incentive scheme to help the aggressive
growth of the organization. The scheme is focused on growth and earnings targets and all
employees benefit when targets are met. Along with the incentive payments comes responsibility
- as well as fr eedom - for Tyco executives.
Due to the unethical behavior and subsequent sentencing of Tycos executives, the new CEO
Edward Br een, sought to improve the ethical standar ds of the company and introduced the Tyco
Guide to Ethical Conduct. Tyco International is under constant scrutiny now to ensure that the
ethical guidelines ar e followed and that the company is conducting business in manner which is
honest and abides by the laws set down in every country.
Code Topics
The guide covers a number of topics and outlines what types of behavior are acceptable and
which is not; it also provides examples of unethical behavior the topics cover ed in the code are:
1. Equal Employment
Outlines the equal opportunity and fair treatment should extend to all employee, it prohibits
discr imination on the basis of age, colour, disability, ethnicity, mar ital, or family status, national
origin, race, religion, sex, sexual orientation, veteran status, or any other char acteristic.
2. Harassment-Free Workplace States that certain behavior is not permitted such as,
unwelcome conduct, abusive language, aggression or sexual harassment.
3. Substance-Free Workplace Prohibits being in possession or under the influence of alcohol,
illegal drugs or other controlled substances.
4. Health, Safety and the Environment Prohibits the possession of weapons, does not allow
threats of harm. Enforces that stringent safety procedures, be adhered to at all times and that all
operations are in compliance with the applicable environmental laws.
5. Political Activities States employees must comply with all state and local laws regarding
participation in political affairs also that employees can not make contr ibutions of company
funds to political parties.

6. Conflicts of Interest Employees must notify human resources if they have any involvement
with or ganizations outside of Tyco, also that employees must make decisions bases on the needs
of the company not on personal interests or relationships.
7. Gifts This outlines what kinds of gifts may be acceptable and places a maximum monetary
value for these gifts, it also states that employees are expected to disclose any gifts that they
receive to the company.
8. Fraud States that intentional acts of fraud are subject to disciplinary action and include things
such as: submitting false expense reports, forging or altering checks, inflating sales figures by
shipping inventory know to be defective of non-conforming.
9. Antitrust
Looks at ensur ing that competition remains free from collusion and unlawful conduct such as:
discussing with a competitor price, costs and production. Restricting the r ight of a customer to
sell or lease a product or service at or above a certain price.
10. Propriety and Confidential Information
Outlines that the companies proprietary and confidential information not be shared with anyoneincluding coworkers who may not need to know about it, it discusses the need for protection of
intellectual property and financial infor mation.
11. Inside Information and Trading Tyco Securities
Prohibits employees form buying or selling Tyco stock as a result of receiving inside
infor mation.
12. The Media and Financial Community
Any communication with the news or media should be directed to the cor porate public relations
office, this includes discussing speculation on stock price changes, rumors about mergers or
acquisitions, management changes or new products, policies, or strategies.
13. E-Mail, the Int ernet and the Use of Company Property
Discusses the use and duration of E-mail and the internet for personal use, also discusses the use
of personal software on company computers, states that equipment is provided to enable
employees to perform their jobs and that the use of company property should be for the sole
purpose of conducting business related tasks
14. Record-Keeping, Financial and Export Controls
States that financial r ecords and infor mation must follow the U.S generally accepted accounting
principles; and effective internal controls. The topic also states that all information must be

communicated in an accurate and timely manner, it also discussed record keeping and retention
and how documents and files should be saved.
The code also includes information about where employees can go for help and includes contact
infor mation for the toll free Concer nLINE, the office ombudsman or alter native contacts such as
the human resour ces department of the corporate governance office.
Application
The ethical guide provides employees with a tool in which they can utilize on a daily basis to
enable them to make decisions about what sort of behavior is considered ethical or unethical by
the company. The guide ties in closely with Tycos vision and values which are; integrity,
excellence, teamwork and accountability.

Handling an unet hical situation

If you discover an ethically questionable situation at work, don't jump up at the next department
meeting and say "I work for unethical morons," . Instead, say something such as, "there are some
issues here that we should be concerned about, and we probably ought to fix these problems
before they get more serious. Our current approach to meeting goals may not be a sustainable
economic model." Thoughtful input -- especially when grounded in the corporate histories we
now have works.
And you're better off quitting than getting sucked into a corporate culture of groupthink that is
likely to make negative headlines at some point. If you feel subtly or blatantly squeezed to cross
the line, it's probably time to update your resume. But if you're asked to do something illegal,
type that resignation letter..
Don't worry about explaining your resignation to potential employers,. Get out now, because
workers who go down with the ship often are tainted by the organization's implosion; then tell
the truth, "that you had the wisdom to walk away from a bad situation."
"People tend to see this decision only in terms of what they are giving up by leaving -- salary and
benefits. But even if you're the sole provider for a family, you're still better off losing a job than
getting caught up in falsifying financial information, for instance,".
Bottom Line:
y Tyco International chairman and CEO Dennis Kozlowski reportedly hauled home more

than $150 million in unauthor ized bonuses, prosecutors said at his trial.

y Jeff Dachis co-founded Razorfish as the dotcom phenomenon surged, then fell victim to

his own hype; he was washed out of the Internet consulting firm within just seven years
of start-up.

y Ethical icons exist, such as Southwest Airlines' Herb Kelleher.

y If confronted with an ethical lapse at work, point it out as an issue that needs to be

addressed because of the business implications.

If you find that the culture at your company supports unethical practices, resign and avoid the
taint that comes with the inevitable exposure.
Morals? Ethics? The Law?
These three ter ms are sometimes used interchangeably when in fact they describe different and
fundamentally independent concepts. Clar ifying the terms will clarif y what type of dilemma you
might be facing.
Morals are those values or core beliefs that guide your decisions and are the output of your
culture, how you were raised, and your experiences along the way. They are what allow you to
determine right from wrong. What is moral and what is not is an internal judgment and var ies
from per son to person, culture to culture, and society to society.
Ethics are standards of behavior within a group or society that indicate how we should behave to
achieve the moral goals upon which the society places importance. Ethics are related to how we
act and interact with others, and so ar e external in nature. These vary from society to society, but
individuals within the society are expected to maintain these standards. If they do not, there is
often a social price to pay.
Laws are the minimum code of conduct to which the group has agreed to adhere. Breaking laws
means breaking the social contract to which you agreed in becoming a member of that society. In
turn this means that the society has the right to punish you by revoking some or all of the rights
granted by that society.
The most difficult ethical problems (i.e., how to act) ar e when one is faced with a conflict
between two or more conflicting morals (i.e., what we see as r ight and wrong). What may be a
moral choice is not always an ethical one, and what may be an ethical choice is not always a
moral decision, as seen in figure 1 below. Lets say that you get test results indicating that your
product fails to meet its specification limits. The CEO tells you to pass it anyway. What do you
do?
Notice that the law may or may not apply to any of these decisions.

Establish internal systems for the periodic sampling, review, and assessment of cr itical
databases for reliability and validity
Ensure that among the guidelines provided to external suppliers, ethical expectations associated
with the provision be clearly specified and that the consequences of failure to comply with these
basic standards be swift, severe, and unambiguous
Encourage upper and middle- level management to participate in meaningful education on the
process by which ethical decision making in business and industry can be accomplished
Telling employees to do the right thing just isnt effective. Ethical dilemmas ar e not clear
choices between breaking the law and being law-abiding; they are at times complex moral mazes
with no easy answers. It is not illegal to place the health of the company and investor s money
into
riskyapplied
investments
forfraud
short-term
Theory
in tyco
case :profits, but a case can be made that it is unethical. The good
news is that these moral mazes can be better navigated if employees are trained in ethical
Ethical egoism falls
underand
the principles.
consequentialistic theor y that claims that moral conduct is
decision-making
processes
determined solely by a cost-benefit analysis of an actions consequences. The normative claim of
The
timeegoism
to avoid
the results
of unethical
is before
it occurs,
not after.bad
As quality
ethical
is that
one should
act so behavior
as to maximize
good
and minimize
for oneself. The
professionals,
we
learned
a
long
time
ago
that
prevention
is
superior
to
inspection.
In
no area
foundational claim for this theor y is that humans are poorly self-interested and there
are no moral
might
this beyond
be moreself-interest,
important than
business
ethics. to anyone other than myself. Therefore, under
demands
i.e.,
no obligations
this theory, it is understood that humans should act selfishly if they wish to live healthy and
CONCLUSION
meaningful lives. we can see in this case study too as the CEO think of his own personal interest
rather than of the or ganization. Decisions made are not for the good of the entire industry but for
.the
"Ingood
the case
of Tyco
International,
we have seen
what
of the
individual
or organizational
inter
est.corporate greed can eventually lead to.
After this scandal as well other scandals such as the Enr on and WorldCom scandals, many
citizens lost trust in corporations. In order to reestablish trust and prevent future executives from
In conclusion,
I must
say that I see
many
in this theor
y and
therefore
I do are
notnow
agreebeing
with
acting
dishonest,
the SarbanesOxley
Actfaults
was passed,
and more
internal
control
it.
In
regards
to
ethical
egoism
an
individual
believes
that
whatever
serves
his
own
interests
is
implemented. In the future, if an executive is confident enough to try and bypass the regulations
morally
I do
not an
seeorganization,
this as beinghe
anwill
efficient
way of
looking
at ethical
issues
since
and stealright.
money
from
face even
more
serious
charges.
Corporate
fulfilling only
rightoffor
oneself
many differ
problems
can elite
comemembers
up. Another
reason
I
executives
suchwhats
as CEO's
major
corporations
areent
among
the most
of Amer
ican
do
not
agree.
society. They are extremely well paid, they have excellent benefits, and they are in the position
to br ing wealth to their families. Given the amount of money they are already receiving, many
would
find it ridiculous that a corporate executive would even consider stealing money. It is
Solutions
important to understand, however, that people with so much pride and ambition often have no
limits,
and professionals,
to them, nothing
ever enough.
Their
greedand
often
gets inreliable
the wayand
of their
As quality
ourisability
to acquire,
utilize,
maintain
validhonesty
databases
and
loyalty
to
the
people
around
them,
resulting
in
scandals
like
the
one
described
and
is at risk and will continue to be at risk at least in the near future. Whether out-and-out fr audulent
demonstrating
theto
need
ethics inwe
business
mor of
e acts
of government
interventionevery
.
data are provided
us, for
or whether
are theand
victims
data-shaving
or data-shading,
quality professional is likely to exper ience this tr end at some point in his or her career. In a larger
sense, the ethical behavior of a company is certainly part of the Quality-with- a-big Q that we
seek to enhance ever y day. Creating an ethical culture and enforcing ethical behavior is the
function of upper management, not just the quality department, but there are some things within
our control that we can do to improve the situation. We believe that the implications of this
reality suggest that every quality professional should: