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Published: 24-03-2011, 04:49

Tyco International scandal

The Event: Looting of Tyco International by its chair to fund his lavish lifestyle

Date: 2002

Place: United States

Significance: 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 Kozlowski joined the company in 1975 as an assistant controller. The company subsequently shifted its focus from growth to profits within its three primary divisions: fire protection, electronics, and packaging. Kozlowski joined Tyco’s board in 1987 and became president and chief operating officer two years later. Kozlowski engineered a coup to become Tyco’s chief executive officer (CEO) in 1992 and the chair of the board in 1993. He diversified the company, branching into health care. Tyco eventually became the second largest producer of medical devices in the United States.

Former Tyco CEO Dennis Kozlowski enters Manhattan State Supreme Court in2005
Former Tyco CEO Dennis Kozlowski enters Manhattan State Supreme Court in2005. (AP/WideWorld Photos)

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.

Caryn E. Neumann

Further Reading

  • 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.

See also: Business crimes; U.S. Department of Justice.

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Piggy

3 февраля 2012 08:36

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why was this scandal ethically wrong?
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Kurt

27 февраля 2012 23:49

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Really? This is a pretty brief overview of a much larger issue with Tyco and the senior executives that had a role in its failure. Kozlowski is credited for both the expansion and failure of Tyco.

He used several company funds for personal use. As stated above, the use of those funds to throw a birthday party for his wife in Italy. There were also tax issues with purchases of art bought in NYC and then "shipped" to New Hampshire to avoid paying the NYC sales tax.

Commingling of corporate funds for personal use is unethical and illegal. This guys and his CFO are where they should be, in federal prison.
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Rich

8 апреля 2012 15:02

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If you are a minority by skin or by race, working at Tyco, especially during the period 2005-2007, was extremely depressing. I was with the company for 28 yeas, including formerly AMP and Tyco, and left the company with a big wound in my heart. Managers with only political skills were roaming the company, abusing the power to discriminate employees, talking bad behind employees creating race discrimination between employees themselves. I admit that there are some good managers who understood their subordinates and supported them in the job. I am proud to be AMP employee but do not have any sympathy with Tyco. This is my experience at Tyco in Harrisburg Pennsylvania.
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pop eye

13 ноября 2012 07:17

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how do i unbake a cake?