Acct 320 Final Paper - Tyco International Ltd.

Final Research Paper

Tyco Scandal of 2002

Roger Armiger

ACCT 320 798[pic 1]0 Fraud Detection and Deterrence (2168)

Professor Paul Reich

Fall 2016

Introduction

        Johnson Controls is the owner of Tyco International Ltd. that provides many services ranging from Fire and Security Brands to Cooling and Heating Equipment Brands. Some of the name brands including Tyco Integrated Fire and Security, Tyco Integrated Security, and ADT Securities. In 2002, the SEC discovered that Tyco International Ltd. had been reporting false documents to the SEC and its investors. Denis Kozlowski was the CEO of Tyco International Ltd. when the fraud began to occur. Kozlowski was accused by the Securities & Exchange Commission of running his company like a “private bank,” (Symonds). Kozlowski was lavishing hundreds of millions in unauthorized loans and exorbitant gifts on himself and his lieutenants.  

        Kozlowski’s financial advisor, Mark Swartz, was also accused who helped with the scheme be a success. Both were accused of using the money to pay for everything from an apartment on Park Avenue and homes in Boca Raton, Florida, to jewelry from Harry Winston and Tiffany’s (Sorkin). Kozlowski and Swartz were also accused of bribing a Tyco board member and several Tyco employees to keep their scheme secret. The charges filed were enterprise corruption which is a charge often used in Mafia prosecutions.

Trial Begins

As the trial beings lawyers estimated that the trial would take roughly two months to complete. Both appeared in a court hearing where Kozlowski and Swartz pleaded not guilty to the charges. The judge set a personal recognizance bond of $100 million for Kozlowski and $50 million for Swartz. They both had to surrender their passports and return to court only a few days later. Kozlowski and Swartz was accused of looting $600 million from Tyco and spending the money on everything from high art to furniture, including a $6,000 shower curtain and a $15,000 umbrella stand (2 Corporate). In one well-known episode, Tyco picked up half the tab for a $2 million dollar birthday party for Kozlowski’s wife in Italy that featured musician Jimmy Buffet. Kozlowski was clearly not careful to cover his tracks when spending the money so publicly.

        Swartz’s lawyer portrayed his client as a victim of an overly aggressive team of prosecutors seeking to take down Kozlowski. His lawyer stated that Swartz had been swept up in this investigation without consideration for the merits of his own individual case, and that Swartz is totally innocent of these charges (Sorkin). His lawyer also stated that the charges should not have been brought against him. The prosecutors stated that Swartz used $72 million of Tyco loans, which were intended to cover tax payments, but instead paid for Swartz’s assortment of personal investments, business ventures, real estate holdings and trusts. Swartz also used $9 million in relocation loans to purchase a yacht. The indictment also stated that Kozlowski and Swartz concealed the cost of the forgiven loans by instructing subordinates to “bury” them in unrelated expenses for mergers and other company business (Sorkin).

Verdict & Resolution

As the trial began to come to a close Kozlowski and Swartz looked guilty of all charges, even though they both claimed they were not guilty. The Investigation proved that they had in fact stollen funds from Tyco International Ltd. under many false documents, loans, and subordinate companies. Kozlowski was found to be the main contributor in the charges filed, and was an unethical leader for Tyco. His unethical leadership was the main influential person who persuaded other top-ranking Tyco officers and lower ranking employees to get involved and keep silent to cover up for Kozlowski’s illegal activities (Romero). Also found to be happening was unethical auditing practices by Tyco’s auditing firm Price Waterhouse Coopers. The auditing firm 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 containing influence from the auditing firm.