A.

COMPANY

1. Mission
To increase the value of our company and our global portfolio of
diversified brands by exceeding customers’ expectations and achieving
market leadership and operating excellence in every segment of our
company.

2. About
Tyco International Ltd. is a diversified manufacturing and service
company, with five main operating groups.
a. Tyco Fire and Security (generating 31% of total revenues) is the
world leader in the design, manufacture, installation, monitoring,
and service of fire detection, protection, and suppression systems,
as well as being the world leader in electronic security services.
b. Tyco Electronics (28% of revenues) is one of the world’s largest
suppliers of electronic components and leading position in passive
electronic components, and is also one of the worlds’ leading
providers of undersea fiber-optic networks and services.
c. Tyco Healthcare (23% of revenues) manufactures and distributes a
wide variety of medical devices and supplies including sutures and
surgical staplers, needles, and syringes, laparoscopic instruments,
and adult incontinence products. The healthcare and specialty
products and is involved in vehicle auction and reconditioning
services.
d. Tyco Engineered Products and Services (13% of revenues) is the
world’s leading maker of industrial valves and controls, serving the
petroleum, chemical, petrochemical, power generation, water
management, pharmaceutical, pulp and paper, food and beverage,
commercial construction, and other industries.
e. Tyco Plastics and Adhesives (5% of revenue) is the number one
producer of plastic trash bags in the United States. It is one of the
largest extruders of plastic film in the country -and holds world-
leading positions in both plastic garment hangers and duct tape.
Domiciled in Bermuda for tax purposes, Tyco International
maintains its operational headquarters in West Windsor, New
Jersey.

3. History

Key dates:
a. 1960: Arthur J. Rosenburg opens a research laboratory in Waltham,
Massachusetts, doing experimental work for the government.
b. 1962: Rosenburg incorporates Tyco Inc. and changes the focus to
high-tech products for the commercial sales.
c. 1964: The company goes public.
d. 1965: Mule Battery Manufacturing Company is the firm’s first
acquisition; the company changes its name to Tyco Laboratories,
Inc.
e. 1970: Rosenburg is eased out by the BOD.
f. 1973: Joseph P. Gaziano is appointed chairman and CEO
g. 1974: Tyco stocks is listed in New York Stock Exchange; Simplex
Wire and Cable Company is acquired.
h. 1975: The Grinnell subsidiary of International Telephone and
Telegraph (ITT) is acquired.
i. 1979: Tyco acquires Armin Corporation.
j. 1981: Ludlow Corporation is acquired.
k. 1982: Gaziano dies suddenly; John F. Fort succeeds him; the new
leader soon divests peripheral units and recognized the remaining
operations into three divisions: fire protection and plumbing,
electronics, and packaging.
 l. 1986: Grinnell Flow Control is purchased from ITT.
m. 1987: The acquisition of Allied Pipe & Tube Corporation is
completed.
n. 1988: Tyco purchases Mueller Company.
o. 1990: Australia- based Wormald International Ltd. is acquired.
p. 1992: The company changes its name to Tyco International Ltd.
q. 1994: Kedall International is acquired.
r. 1997: Tyco acquires the undersea cable-laying and maintenance
operations of AT&T Corp., Keystone International Inc., and
Bermuda-based ADT Ltd.; Tyco merges into the latter, becoming a
Bermuda- domiciled firm.
s. 19980: Acquisition include American Home Products’ Sherwood-
Davis & Geck division and United States Surgical Corporation.
t. 1999: AMP Incorporated is acquired for 11.3 billion dollar; Raychem
Corporation is also acquired.
u. 2000: Tyco acquires the global electronics connection business of
Thomas & Betts Corporation, Lucent Technologies Inc.’s power
systems division, and Mallinckrodt.
v. 2001: CIT Group, Inc. is acquired for 9.5 billion dollar.
w. 2002: Tyco announces plans to split into four separate publicly
traded companies but soon reverses course, splitting off only CIT
Group through a public offering; Kozlowski resigns under a cloud
suspicion; Edward D. Breen is brought in from outside as the new
chairman and CEO; Tyco reports a net loss of 9.41 billon dollar; New
York prosecutors indict Kozlowski and Mark H. Swartz (former Tyco
CFO) on numerous counts of grand larceny, securities fraud, and
enterprise corruption.
x. 2003: Restructuring is launched that involves the divestiture of
more than 50 noncore businesses, the elimination of about 7200
jobs, and the closure of 219 facilities worldwide.
y. 2004: The trial of Kozlowski and Swartz ends in a mistrial.

A. MAIN PLAYERS

The main players in the Tyco Scandals were Dennis Kozlowski, former
CEO; Chairman and Mark Swartz, former CFO; and former General Counsel
Mark Belnick.

B. WHAT HAPPENED and HOW THEY DID IT?

There were numerous accounting and ethical scandals committed by

these two main players as well as other executive officers.

1. What?
 They took advantage of the accounting techniques of
acquisitions and disposals to inflate their CFFO and profits
significantly.
How?
 Tyco shifted the two sections of the cash flow statement: the
operating and investing cash flows particularly, the acquisitions
accounts. Basically, instead of having an outflow in its operating
section, it carried it as one of its investing activity. This affects the
CFFO positively by showing strong numbers on quarterly basis. For
instance, when ADT security was becoming a well-known desirable
brand in1990s, Tyco benefited significantly from several sales
forces from dealers as an outsourcing service. The main problem
was Tyco manipulated accounts by considering the received
payments amounts as “acquisition to contracts” when recorded into
its financial statement. Hence, shifting this from an expense to an
investing outflows in the cash flow statement would overstate the
cash flow from operations (CFFO). (Shcilit & Perler, 2010).
  When it acquired another company, this can be done through two
ways: either by offering stocks in exchange, which there is no cash
outflow, or through paying out cash, which falls as an investing
outflow under accounting regulations. When Tyco now owns the
company, this makes it benefit from the new inflows of the acquired
company, in that case, all the revenues of the acquired are
recorded as sales on Tyco financial statements and the same for all
the other accounts, falling under one company. (Shcilit & Perler,
2010).
 Between 1997 and 2001, Tyco’s revenues climbed 48.7 percent
annually and its pretax operating margins increased to 22.1 percent
due to escalated mergers and acquisitions which was assisted by
Mark Swartz, Tyco’s CFO. In February 2002, Tyco announced that it
had spent over $8 billion on more than seven hundred acquisitions
in the last three years. Some of the merged companies were
dissatisfied with the arrangement.
 Kozlowski forced acquired companies to scale back sharply,
eliminating any segments that were not profitable. This affected
and showed a strong performance of CFFO by adding new sales
streams from new companies boosting the operating section. They
concentrated on showing favorable results only and hide the slow
growth of acquired companies in order to earn market attention
from investors. Tyco overstated its financial statements by boosting
their income around $500 million. With the inflated profit, Tyco’s
stock price is artificially inflated as well misleading now many
investors. Tyco’s shareholders and directors, however, were thrilled
with the company’s performance, increasing Kozlowski’s salary
from $8 million in 1997 to $170 million in 1999, making him the
second-highest-paid CEO in the United States at the time.

2. What?
 Tyco violated the SEC’s Act of disclosure.
How?
 A. Secret Loans:
o Under the Tyco's Key Employee Corporate Loan Program (the
"KELP") which was established to encourage employees to
own Tyco shares, Kozlowski took an aggregate of
approximately $270 million dollars from 1997 to 2002. KELP
loans were intended to be used to pay taxes due as a result
of the vesting of ownership of shares granted under Tyco's
restricted share ownership plan. Kozlowski disregarded the
purpose of the program by borrowing at least $270 million
but using only about $29 million to cover taxes due as a
result of the vesting of his restricted shares of the company.
He used the remaining $242 million of supposed KELP loans
for personal expenses, including yachts, fine art, estate
jewelry, luxury apartments and vacation estates, personal
business ventures and investments, all unrelated to Tyco.
During the same period, Swartz took an aggregate of
approximately $85 million of KELP loans but used only $13
million for taxes and spent the remaining $72 million for
personal investments, business ventures, real estate
holdings and trusts.
o From 1996 to 2002, Kozlowski took more than $46 million in
interest-free relocation loans intended to assist Tyco
employees who were required to relocate from New
Hampshire to New York, when Tyco moved its corporate
offices from New Hampshire to New York City. Kozlowski used
at least $28 million of those relocation loans to purchase,
among other things, luxury properties in New Hampshire,
 Nantucket and Connecticut as well as a $7 million Park
Avenue apartment for his then (now former) wife.
o Swartz took more than $32 million of interest-free relocation
loans. Swartz used almost $9 million of relocation loans for
unauthorized purposes, including purchasing a yacht and
investing in real estate.
o Belnick took an aggregate of approximately $14 million in
undisclosed, interest-free relocation loans. In 1998, when
Belnick joined Tyco, he took a $4 million relocation loan to
purchase an apartment in New York City on Central Park
West even though he had never worked at Tyco
headquarters in New Hampshire, a requirement of the
program, and already owned a house in Westchester County,
a suburb just outside of New York City. In September of 2001,
he took a $10 million relocation loan to purchase a house in
the Park City, Utah ski resort, even though Tyco did not have
a corporate presence in Utah and despite the fact that
Belnick already owned a $2 million dollar home in Park City.
 B. Undisclosed Compensation
o In August of 1999, Kozlowski authorized, and Swartz caused
to be recorded in Tyco's books and records, a $25,000,000
loan forgiveness against Kozlowski's outstanding KELP
balance and a $12,500,000 credit against Swartz's
outstanding KELP balance.
o In September of 2000, Kozlowski engineered the covert
forgiveness of more than $33 million of his relocation loans
and more than $16 million of Swartz's relocation loans. To
keep these payments secret, each promised not to disclose
this compensation "to anyone other than [his] financial, tax
or legal advisors." In addition, Kozlowski, together with
Swartz, directed others to falsify Tyco's books and records to
bury this secret compensation by offsetting the cost of the
relocation loan forgiveness against the gain from an
unrelated initial public offering of a Tyco subsidiary.
o In November of 2000, Kozlowski and Swartz engineered
another program for their benefits (and for the benefit of
other favored employees) in the form of a cash bonus, Tyco
stock, and forgiveness of relocation loans. Kozlowski and
Swartz covered up these transactions same way they did on
September 2000.
o In June of 2001, Kozlowski and Swartz directed the
acceleration of the vesting of Tyco stock for the benefit of
themselves and certain other favored employees. As a result,
Kozlowski and Swartz realized profits of approximately
$8,000,000 and $4,000,000, respectively. Kozlowski and
Swartz once again covered this transaction same way they
did on the past fraudulent activities.
o Tyco paid $20 million commission to Frank Walsh (one of its
members) for his part in securing and aiding the CIT merger,
without the knowledge of the rest of the board.
 C. Undisclosed related-party transactions
o Kozlowski and Swartz also engaged in undisclosed real estate
transactions with Tyco and its subsidiaries which include
Kozlowski's purchase from Tyco (with funds borrowed under
the KELP) of the $7 million Park Avenue apartment for his
wife and a subsidiary of Tyco's purchase of Swartz's New
Hampshire property for far more than its fair market value.
 D. Fraudulent stock trading
o Kozlowski and Swartz sold millions of dollars of Tyco stock
back to Tyco itself through Tyco subsidiaries located in
offshore bank-secrecy jurisdictions. Swartz also sold stock in
 the open market through family partnerships. Belnick sold
millions of dollars of Tyco stock in the open market.

3. What?

 Kozlowski influenced and persuaded other senior Tyco

employees to conceal about his operations in exchange for
his financial benefits/ bribery of other executive officers.
How?
 Hush money was paid to those company employee who feared
would "rat out" Kozlowski. As many as 40 other Tyco executives
took loans that they didn't need to pay back in exchange to keep
them quiet. Moreover, they paid numbers of board members and
employees to keep the selling of additional $430 million in stock
options as a secret to the public. Essentially, they concealed their
illegal actions by keeping them out of the accounting books and
away from the eyes of other shareholders and board members.

4. What?
 Kozlowski’ lavish lifestyle/ excessive unethical personal
spending.
How?
 In 2002, the New York State Bank Department observed large sums
of money moving in and out of Tyco’s accounts. These funds were
being transferred into Kozlowski’s personal accounts. Kozlowski
made Tyco pay $14.7 million for an artistic painting he bought and
for the purchase of $18 million apartment at Manhattan that came
with complete $ 6000 shower curtain. It was also said that he
purchased a $2,000 trash can. Moreover, he thrown a lavish
international birthday party for his wife on a rented Italian island of
Sardinia with famous singer Jimmy Buffett as the featured
entertainment amounting to $2 million all courtesy of Tyco.
 Kozlowski and Swartz enjoyed numerous and extensive undisclosed
perquisites that they bestowed upon themselves, all at the expense
of Tyco shareholders. For example, Kozlowski lived rent-free in a
$31 million Fifth Avenue apartment that Tyco purchased in his
name while Swartz lived rent-free in a multi-million dollar
apartment Tyco purchased in his name on New York City's Upper
East Side. Both used Tyco corporate jets for personal use at little or
no cost. Moreover, Kozlowski directed millions of dollars of
charitable contributions in his own name using Tyco funds.

5. What?
 Tax evasion.
How?
 In June 2002, the Manhattan district attorney accused Kozlowski of
massive sales tax evasion. He failed to pay $1 million for the
artworks he had purchased in New York using company funds.
These artworks he had purchased in New York were said to go to its
one company in New Hampshire but were found in his home in
Manhattan instead. To assist in perpetrating the fraud, Kozlowski
instructed the shipping company to send empty boxes to New
Hampshire along with the invoices. Kozlowski was caught in the act.
It was even found out that Tyco paid Kozlowski’s income taxes
using this interest free loans.

6. What?
 Kozlowski is known for his aggressive approach to business
resulting to clashes to other corporate officers.
 How?
 His aggressiveness to acquire large companies during his time
being a company’s president and CFO resulted to clash between
Tyco’s CEO, John F. Fort III. Fort was unhappy with the purchase of
Wormald International, a $360 million global fire-protection
company being the largest purchase Kozlowski made since it
became problematic for Tyco. Fort and Kozlowski disagreed over
important issues in the company as they have different purposes
and means. Fort later resigned after the board decided to side
Kozlowski with his proposal that Tyco must continue acquiring
companies. The new CEO then choose few trusted individuals such
as Mark Swartz and placed them in key positions.

7. What?
 They ousted people who criticized Tyco’s activities.
How?
 In 1999 the SEC began an investigation after an analyst reported
questionable accounting practices. This investigation took place
from 1999 to 2000 and centered on accounting practices for the
company's many acquisitions, including a practice known as
"Spring-loading." (The pre-acquisition earnings of an acquired
company are underreported, giving the merged company the
appearance of an earnings boost afterwards. The investigation
ended with the SEC deciding to take no action.)
 Jeanne Terrile, an analyst from Merrill Lynch who worked for Tyco
wrote a negative review about Tyco’s rapid acquisitions and
mergers. Being an analyst, her job at Merrill Lynch was to make
recommendations to investors on whether to buy, hold, or sell
specific stocks. She refused to give a favorable recommendation for
Tyco. Shortly after Kozlowski and David Komansky, Merrill Lynch’s
CEO had a meeting, Jeanne was replaced and Merrill’s
recommendation for Tyco was upgraded to “buy” from
“accumulate.” Merrill Lynch continued as one of Tyco’s top
underwriters as well as one of its primary advisers for mergers and
acquisitions.

C. HOW THEY GOT CAUGHT AND PENALTIES

The Securities and Exchange Commission (SEC) investigated Tyco’s financials
in 1999 when the company restated its earnings causing suspicion (Giroux,
2008). In 2002, The Manhattan district attorney accused Kozlowski of
massive sales tax evasion which prompted a further investigation into Tyco’s
illegal activities (Kaplan, 2009).

In 2005, Kozlowski and Swartz both were found guilty on:

 Twenty-two of twenty-three counts of grand larceny

 Conspiracy
 Falsifying business records
 Violating business law
 The judge ordered both to pay $134 million to Tyco.
 Kozlowski was also ordered to pay a $70 million fine and Swartz a $35
million fine.
 Tyco was ordered to pay out around $50 million into a special fund to
compensate affected investors from its fraudulent actions during the
period of 1996 – 2002. ((SEC v. Tyco International Ltd., 2006)
 Jail time for both appears to be a little less than seven years in a state
facility.

D. FUN FACT
 The lavish international party of Kozlowski’s wife actually happened at the
height of Kozlowski’s scandal.

E. WHERE ARE THEY NOW?

Tyco is now a 10- million dollar global leader in fire protection and security
solutions offering life safety products, fire protection products and services,
and more.

Sources:

Tyco International Ltd. Case Study: The Implications of Unethical Behavior By:
Lori M. Thanos North Central University

Tyco International: Leadership Crisis By: Daniels Fund Ethics Initiative,

University of New Mexico

Tyco International – Corporate Scandal By: Rami Sheik and Hashem Hadid

Shcilit, H. M., & Perler, J. (2010). Financial Shenanigans. New York: McGraw-
Hill.

https://www.referenceforbusiness.com/history2/97/Tyco-
InternationalLtd.html#ixzz6EyFKtUkO

https://www.encyclopedia.com/books/politics-and-business-magazines/tyco-
international-ltd

https://craft.co/tyco-international

https://prezi.com/pdopksznsfiu/tyco-accounting-scandal/ (Tyco Accounting

Scandal by Ame Leung)

https://money.howstuffworks.com/cooking-books10.htm (How Cooking the

Books Works by Lee Ann Obringer)

Securities and Exchange Commission v. L. Dennis Kozlowski, Mark H. Swartz

and Mark A. Belnick, Civil Action No. 02 CV 7312

(United States Securities and Exchange Commission; Litigation Release No.

17722 / September 12, 2002; Accounting and Auditing Enforcement;
Release No. 1627 / September 12, 2002)