With revenues in 2001 of $38 billion and 240,000 employees worldwide, Tyco was one of America’s largest conglomerates, but a 2002 corporate fraud case nearly destroyed the firm. By the time the dust of the scandal had settled, the company stood $28 billion in debt, and its shareholders had lost over $90 billion, more than 80 percent of Tyco’s peak market value.
Tyco Laboratories began operations in 1960, performing experimental work for the U.S. government. The firm went public in 1964 and quickly expanded, mostly by acquisition, to exploit the commercial applications of its work. Dennis
Former Tyco CEO Dennis Kozlowski enters Manhattan State Supreme Court in 2005.
Kozlowski’s business practices raised some eyebrows. In 1999, the Securities and Exchange Commission (SEC) initiated an inquiry into Tyco’s practices that resulted in a restatement of the company’s earnings. In January, 2002, questionable accounting practices came to light. Tyco had forgiven a $19 million, no-interest loan to Kozlowski in 1998 and had paid the CEO’s income taxes on the loan.
Kozlowski enjoyed an extravagant lifestyle, with multiple homes, lavish parties, a racing yacht, and numerous charitable donations. His most notorious expenditure was $2.1 million on a party celebrating his wife’s fortieth birthday in Sardinia, Italy, that featured a life-sized ice sculpture of Michelangelo’s David with vodka flowing from its penis. To pay for these and other expenses, Kozlowski used over $75 million of Tyco funds. None of these expenditures was publicly revealed to the company’s shareholders.
Kozlowski resigned on June 2, 2002, just before being charged with evading more than $1 million in New York State sales taxes on art purchases. In September, 2002, the SEC filed a civil enforcement action against Kozlowski and two other top executives, charging that they had failed to disclose Kozlowski’s forgiven loans. In 2005, Kozlowski and Mark Swartz, Tyco’s chief financial officer, were convicted of twenty-two counts of fraud and received prison sentences of eight to twenty-five years as well as fines and compensation orders that totaled $240 million.
Kozlowski’s successor at Tyco replaced 220 of the firm’s 250 top managers. All board members who had served under Kozlowski had resigned by 2003. The corporate governance consultant Institutional Shareholder Services (ISS) had classified only four of Tyco’s eleven directors as completely independent, and most of the board’s nonexecutives were long-serving members. The firm survived the scandal, albeit in a shrunken state.
Farrell, Greg. Corporate Crooks: How Rogue Executives Ripped Off Americans . . . and Congress Helped Them Do It! Amherst, N.Y.: Prometheus Books, 2006. Hamilton, Stewart, and Alicia Micklethwait. Greed and Corporate Failure: The Lessons from Recent Disasters. New York: Palgrave Macmillan, 2006.
U.S. Department of Justice
Securities and Exchange Commission