Risk & Compliance

Kozlowski and Swartz Convicted

The former Tyco executives were found guilty of grand larceny, securities fraud, conspiracy, and falsifying business records.
Dave Cook and Helen ShawJune 17, 2005

Former Tyco International Ltd. chairman and chief executive officer Dennis Kozlowski, 58, and former chief financial officer Mark Swartz, 44, were found guilty of grand larceny, securities fraud, conspiracy, and falsifying business records in their criminal trial in New York state court in Manhattan.

Each faces a maximum sentence of 25 years in prison on the top count of grand larceny.

The former executives were accused of stealing $150 million from the company by improperly forgiving company loans to themselves and awarding themselves unauthorized bonuses. They were also indicted for collecting an additional $430 million by secretly selling company shares as they “artificially” inflated the stock’s value.

The six-man, six-woman jury returned the verdicts on the 11th day of deliberations, concluding a trial that began January 18.

The first case against Kozlowski and Swartz ended in a mistrial in April 2004 after one juror received a threatening letter. Former executive vice president and chief corporate counsel Mark Belnick, who was named in the original indictment, was acquitted of grand larceny in a separate trial last July.

Both the prosecution and the defense altered their approaches for Kozlowski and Swartz’s retrial. In 2004, the prosecution seemed intent on emphasizing Kozlowski’s wealth by presenting exhibits of his opulent Park Avenue apartment and videotape evidence of a lavish birthday party for his wife in Sardinia. In the retrial, prosecutors reportedly presented a much leaner case that stressed the flow of Tyco money to Kozlowski and Swartz.

As for the defense, Swartz testified on his own behalf last month, as he had during the earlier trial. But in a change of defense tactics intended to “humanize” the former CEO, Kozlowski — who did not testify in 2004 — took the stand this time around to declare his innocence.

Tyco, which is nominally headquartered in Bermuda but now operates out of West Windsor, N.J., was one of the most acquisitive companies of the 1990s. In 1998, 1999, and 2000, the conglomerate finalized more than 350 acquisitions, with a total purchase price of about $28 billion. Although allegations surfaced in the fall of 1999 that Tyco had set up “cookie-jar” reserves to pump up future profits, and had encouraged several targets to take big, premerger write-offs, the Securities and Exchange Commission cleared the company the following July.

In January 2002, Tyco surprise analysts by announcing that it would split into four companies — a restructuring, Kozlowski explained at the time, intended to improve the company’s flexibility, financial reporting, and shareholder value. The decision to split the company was later reversed, but it may have drawn even more attention to the company’s accounting. Indeed, that same month an in-house probe revealed major breakdowns in Tyco’s financial controls, including transparency problems in the plastics division and suspect operating income, related to dealer accounts, at the ADT unit.

Kozlowski and Swartz resigned later that year after being indicted on personal tax evasion charges. In September 2002, they were indicted on the charges that were the subject of the just-concluded trial.