TYCOSCANDAL

Company HistoryCompany History

Founded in 1960 by Arthur J. RosenburgFounded in 1960 by Arthur J. Rosenburg Initially supported by government Initially supported by government

research contractsresearch contracts In 1964 it became a publicly owned In 1964 it became a publicly owned

companycompany It was in control of 16 companies by 1968It was in control of 16 companies by 1968 In 1974 its stock was listed on the NYSEIn 1974 its stock was listed on the NYSE Between 1982 and 2000 it undertook Between 1982 and 2000 it undertook

several subdivisionsseveral subdivisions

Company OverviewCompany Overview

It participates in several different It participates in several different industries:industries: ElectronicsElectronics Fire & SecurityFire & Security HealthcareHealthcare Plastics & AdhesivesPlastics & Adhesives Engineered Products & ServicesEngineered Products & Services

It employs over 267,000 peopleIt employs over 267,000 people Its services and products are provided Its services and products are provided

worldwide worldwide

In January of 2002 In January of 2002 questions began to arise questions began to arise concerning the business concerning the business

practices of three top practices of three top executives at Tyco . . .executives at Tyco . . .

Dennis KozlowskiDennis Kozlowski Graduate of Seton Hall Graduate of Seton Hall

UniversityUniversity Began work at Tyco in Began work at Tyco in

19761976 Worked his way up Worked his way up

through the company, through the company, becoming CEO in 1992becoming CEO in 1992

Was key in an $850 Was key in an $850 million dollar purchase million dollar purchase of an under seas fiber-of an under seas fiber-optic cable business optic cable business from AT&T from AT&T

Dennis KozlowskiDennis Kozlowski

On June 3, 2002 he On June 3, 2002 he resigned for resigned for “personal reasons”“personal reasons”

On September 12, On September 12, 2002 he was 2002 he was formally indicted formally indicted on several chargeson several charges

On October 7, On October 7, 2003 he went to 2003 he went to trialtrial

Mark SwartzMark Swartz

Previously worked Previously worked for Deloitte & for Deloitte & ToucheTouche

Started working at Started working at Tyco in 1991Tyco in 1991

In 1995 he became In 1995 he became the CFOthe CFO

He was nominated He was nominated for a CFO Excellence for a CFO Excellence Award in 2000Award in 2000

Mark SwartzMark Swartz

September 12, September 12, 2002 he was 2002 he was formally charged formally charged and pleaded and pleaded innocentinnocent

October 7, 2003 he October 7, 2003 he went to trialwent to trial

February 10, 2004 February 10, 2004 he testified on his he testified on his behalfbehalf

Mark BelnickMark Belnick

Chief Legal Officer Chief Legal Officer of Tycoof Tyco

Mark BelnickMark Belnick He supposedly accepted He supposedly accepted

a 17 million dollar “gift” a 17 million dollar “gift” from the company to from the company to remain silentremain silent

He was indicted for He was indicted for falsifying business falsifying business recordsrecords

On July 15, 2004 he was On July 15, 2004 he was acquitted after deciding acquitted after deciding to risk prison time in to risk prison time in order to have his name order to have his name clearedcleared

Where the Money WentWhere the Money Went

Over 600 million was stolen from TycoOver 600 million was stolen from Tyco 9 million dollar home in Boca Raton, Fl and 9 million dollar home in Boca Raton, Fl and

Park Avenue apartment in Manhattan for Park Avenue apartment in Manhattan for Kozlowski Kozlowski

Bonuses of 56 million and 28 million to Bonuses of 56 million and 28 million to Kozlowski and Swartz respectivelyKozlowski and Swartz respectively

15,000 dollar umbrella stand, 6,300 sewing 15,000 dollar umbrella stand, 6,300 sewing basket, coat hangers for 2,900, and a 1,650 basket, coat hangers for 2,900, and a 1,650 dollar appointment bookdollar appointment book

A variety of expensive paintingsA variety of expensive paintings A bonus of 17 million to BelnickA bonus of 17 million to Belnick

“Pres Monte Carlos” by Monet from Kozlowski’s personal collection.

The ChargesThe Charges

They were charged with civil fraud and They were charged with civil fraud and thefttheft

Other charges against Kozlowski and Other charges against Kozlowski and Swartz included corruption, conspiracy, Swartz included corruption, conspiracy, grand larceny, and falsifying recordsgrand larceny, and falsifying records

The maximum sentence for the two The maximum sentence for the two would be 30 years eachwould be 30 years each

Belnick would only receive a maximum Belnick would only receive a maximum sentence of 4 yearssentence of 4 years

All three pleaded innocent in courtAll three pleaded innocent in court

Facts Related to Stock Facts Related to Stock MarketMarket

Kozlowski sold 5.5 million shares of Kozlowski sold 5.5 million shares of Tyco stock, receiving 280 million Tyco stock, receiving 280 million dollarsdollars

2 million shares were also sold by 2 million shares were also sold by Swartz who earned 125 million Swartz who earned 125 million dollarsdollars

None of the sales were disclosed to None of the sales were disclosed to the publicthe public

"Messrs. Kozlowski, Swartz and Belnick treated Tyco as their private bank, taking out hundreds of millions of dollars of loans and compensation without ever telling investors. Defendants put their own interests above those of Tyco's shareholders. Those shareholders deserved better than to be betrayed by the management of the company they owned.“ - Stephen M. Cutler (SEC Director of Enforcement)

OutcomesOutcomes

The trial of Kozlowski and Swartz The trial of Kozlowski and Swartz was declared a mistrial on April 2, was declared a mistrial on April 2, 20042004

They will be tried again in 2005They will be tried again in 2005 Belnick was proven innocent on July Belnick was proven innocent on July

15, 200415, 2004

ImplicationsImplications

ImplicationsImplications

The company re-structured their The company re-structured their management, firing a total of 9 management, firing a total of 9 executives on their boardexecutives on their board

Most notably, Edward Breen was Most notably, Edward Breen was hired as the new CEO and David hired as the new CEO and David FitzPatrick was hired as the new FitzPatrick was hired as the new CFOCFO

On May 6, 2003 a new ethical guide On May 6, 2003 a new ethical guide was distributed to all employees was distributed to all employees

Tyco Guide to Ethical Tyco Guide to Ethical ConductConduct

““Tyco's commitment to the highest Tyco's commitment to the highest standards of integrity begins with making standards of integrity begins with making sure that everyone across the Tyco sure that everyone across the Tyco organization understands the company's organization understands the company's core values— integrity, excellence, core values— integrity, excellence, teamwork, and accountability. That teamwork, and accountability. That understanding begins with the Tyco Guide understanding begins with the Tyco Guide to Ethical Conduct, a 32-page booklet that to Ethical Conduct, a 32-page booklet that provides a guide to help employees know provides a guide to help employees know what is expected from them and to help what is expected from them and to help them make good decisions.” them make good decisions.”

Link to Tyco Guide to Ethical Conduct

Possible PrecautionsPossible Precautions

Companies could more closely Companies could more closely monitor their employees for monitor their employees for unethical conductunethical conduct

The government could monitor The government could monitor accounting practices of companies accounting practices of companies more closelymore closely

Any executives of companies who Any executives of companies who exhibit suspicious behavior should exhibit suspicious behavior should be closely watchedbe closely watched