TYCO CASE

BACKGROUND –
Tyco International was founded in 1960 by Arthur J. Rosenberg, situated in Waltham, Massachusetts. Tyco
International has operations in over 100 countries 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, and adhesives markets.
 In 1964, it became a publicly owned company.
 It was in control of 16 companies by 1968.
 In 1974, its stock was listed on the NYSE.
 Since 1986, Tyco has claimed over 40 major acquisitions as well as many minor acquisitions and thus
through these acquisitions, Tyco became a very large organization
 Between 1982 and 2000, it undertook several subdivisions.
 Tyco’s corporate scandal of 2002 focuses on the problem of unethical business practice and related
issues.

HAPPENING OF THE SCANDAL –

 According to the Tyco Fraud Information Centre, an internal investigation concluded that there were
accounting errors, but on official records, there was no systematic fraud problem at Tyco.
 Tyco's former CEO Dennis Koslowski, 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 approved by the Tyco board 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 (Securities & Exchange Commission) Rules.
 Koslowski, Swartz, and Belnick stole $600 million dollars from Tyco International through 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 party for Koslowski'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 "forgiven" as part of Tyco's loan-forgiveness
program, although it was said that many did not know they were doing anything wrong.
 Essentially, they concealed their illegal actions by keeping them out of the accounting books and away
from the eyes of shareholders and board members.
MAJOR ISSUES IN TYCO’S CASE –
 The Major issues in Tyco’s case were as follows –
1. Unethical Leadership
2. Unethical Business Practice of Subordinates
3. Unethical Auditing Practice on Tyco’s Business
4. Embezzlement
5. Bribery
6. Accounting Fraud

 UNETHICAL LEADERSHIP - The unethical business practice of leaders was observed in Kozlowski.
Kozlowski was the main actor in the financial troubles and legal battles in this case. Kozlowski was the main
recipient of the money stolen from Tyco. In addition, he was the main influential person who persuaded other
top-ranking Tyco officers and lower ranking employees to get involved and to keep silent to cover up for
Kozlowski’s illegal activities. This case shows that extensive involvement of Kozlowski and other leaders in
unethical and illegal activity brought Tyco down.
 UNETHICAL BUSINESS PRACTICE OF SUBORDINATES – The complications in Tyco’s case involved
people other than Kozlowski. Kozlowski recruited the support of other high-ranking officers in the
organization. He also convinced some lower ranking employees to keep their silence in exchange for financial
benefits. Also, Kozlowski convinced one of the board members to keep silent about the illegal financial
transactions on the mansion Tyco paid for the benefit of Kozlowski and his wife. In exchange, the board
member received financial benefits.
 UNETHICAL AUDITING PRACTICE – The auditing firm PricewaterhouseCoopers responsible for
checking the financial reports of Tyco failed to identify Kozlowski’s illegal financial transactions. As a result,
Kozlowski’s unethical business practice continued and became extensive. These practices became more
difficult to stop because of absent constraining influence from the auditing firm.
 EMBEZZLEMENT - Embezzling fund is a big issue which involved conflict of interest in this case
study. This act is a conflict of interest in this case study as the leaders in Tyco International give priority to
self interest rather than the interests of the shareholders and stakeholders. In order to fulfil self interest,
luxurious life, the leaders embezzled the company funds that should be used to manage the company in the
best interest of shareholders and stakeholders. The deeds of the leaders in the company were unethical. The
deed of embezzling company fund had breached the principle of ends. According to the principle of ends,
we must never exploit others to achieve our own objective. Furthermore, the principles of duty were also
breached by the board of directors in Tyco International by embezzling company fund. Principles of duty
apply that each person has his or her own duty or obligation that he or she should fulfil as a human being. In
this case, Kozlowski and other directors had their duties to manage the company well. However, they did not
manage the company well as they had misappropriated the funds.
 BRIBERY - Another ethical issue under conflict of interest in the scandal of Tyco International is
bribery. In this scandal, two major bribery cases were occurred. The first case is Frank E. Walsh Jr., the
director of Tyco International had received $20 million for helping the arrangement of the acquisition of CIT
Group without the knowledge of the rest of the board of director. Next, the second case is Stephen W. Foss,
the member of Tyco’s board of director received $751 101 for supplying a Cessna Citation aircraft and pilot
services. Thus, it violated the theory of utilitarianism which says that utilitarianism is a moral theory that
applies to particular actions and takes an action to be morally right if and only if it produces the highest utility
of any available alternative action. It also can be said that we should act in ways that bring most pleasure or
happiness to the greatest number of people affected by our actions or else the action is wrong. This company
also had abused the principle of rights. Principle of rights is the duty-based principle. In this principle, one
should not make decisions based upon the consequences but should observe his or her duties as human being
rights. The employees and the shareholders have the rights to know the company actual activities. Based on
what Frank E. Walsh Jr., he should disclose the information to the management group and the shareholders
about the fees that he received from the arrangement of the acquisition of CIT Group. Ironically, Walsh has
refused to do so and he took all the “fees” for his personal use. With this kind of act, he had broken the rules
and it is an unlawful behavior.
 ACCOUNTING FRAUD - In this case, Tyco International failed to give true financial picture for
several years. Dennis Kozlowski, Mark Swartz and Mark A. Belnick were those Tyco’s executives who
committed fraud by charged with falsifying business record to conceal a great amount of loan without
approval. Besides, it had been found out that Tyco engaged in “financial gimmicky” to deliberate and
manipulating its earnings. Jerry Boggess, the president of Tyco Fire and Security is the one who involved in
bookkeeping fraud that affected the earning per share in Tyco in this case. Besides, Dennis Kozlowski also
indicted on tax evasion for avoiding just over $1 million in New York State and local sales tax (Andrew and
Alex, 2002). In addition, Scalzo (Tyco’s former auditor) who audited Tyco’s financials from the years 1997
until 2001, found that he failed to conduct sufficient steps in audit procedures which related to certain
executive benefits, executive compensation, and related party transactions. Furthermore, he also engaged in
improper professional conduct. Thus, this also violated the principle of utilitarianism and principle of rights.

DISCOVERY OF THE SCANDAL –

 In 1999 the SEC began an investigation after an analyst reported questionable accounting practices.
 This investigation took place from 1999 to 2000 and centered on accounting practices for the
company's many acquisitions, including a practice known as "spring-loading."
 In "spring-loading," the pre-acquisition earnings of an acquired company are underreported, giving the
merged company the appearance of an earnings 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 Frank 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 three (Kozlowski, Swartz, and Belnick) were gone and charges were filed
against them for failure to disclose information on their multimillion dollar loans to shareholders.
 The SEC asked Kozlowski, Swartz, and Belnick to restore the funds that they took from Tyco in the
form of undisclosed loans and compensations.

TRIAL AND JUDGMENT –

 All three (Kozlowski, Swartz, and Belnick) were accused of the theft of more than US$150 million
from the company. During their trial in March 2004, they contended the board of directors authorized it as
compensation.
 During jury deliberations, juror Ruth Jordan, while passing through the courtroom, appeared to make
an "okay" sign on the table.
 She later denied she had intended that gesture, but the incident received much publicity (including a
caricature in the Wall Street Journal), and the juror received threats after her name became public.
 Judge Michael Obus declared a mistrial on April 4, 2004.
 On June 17, 2005, after a retrial, Kozlowski and Swartz were convicted on all but one of the more than
30 counts against them.
 The verdicts carry potential jail terms of up to 25 years in state prison. Kozlowski and Swartz were
each sentenced to no less than eight years and four months and no more than 25 years in prison.
 Then in May 2007, New Hampshire Federal District Court Judge Paul Barbadoro approved a class
action settlement whereby Tyco agreed to pay $2.92 billion (in conjunction with $225 million by
Pricewaterhouse Coopers, their auditors) to a class of defrauded shareholders represented by Grant &
Eisenhofer P.A., Schiffrin, Barroway, Topaz & Kessler, and Milberg Weiss & Bershad.