U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 19953 / December 21, 2006
Accounting and Auditing Enforcement Release No. 2527 / December 21, 2006
SEC v. Richard D. Power, Edward Federman, and Richard J. "Skip" Heger, Civil Action No. 06 CV 15343 (S.D.N.Y. filed December 21, 2006)
SEC Charges Two Former Tyco Executives for Fraud That Overstated Income by More Than One-Half Billion Dollars
Third Former Tyco Executive Settles Financial Reporting and Record-keeping Charges
The U.S. Securities and Exchange Commission today filed a civil injunctive action in the United States District Court for the Southern District of New York against Richard D. Power and Edward Federman, two former executives of Tyco International Ltd. The Commission's complaint alleges that Power and Federman designed and implemented fraudulent accounting practices at Tyco and thereby violated the antifraud and record-keeping provisions of the federal securities laws and aided and abetted Tyco's violations of the antifraud, reporting, and record-keeping provisions. The complaint alleges that Richard J. "Skip" Heger, a third former Tyco executive, violated the record-keeping provisions of the federal securities laws and aided and abetted Tyco's violations of the reporting and record-keeping provisions.
The Commission's complaint alleges that Power and Federman inflated Tyco's operating income by hundreds of millions of dollars through the use of a sham transaction. In that transaction, Tyco charged authorized dealers of Tyco's ADT Security Services, Inc. (ADT) subsidiary a "dealer connection fee" whenever the company purchased security monitoring contracts from them. However, the connection fee was fully offset by a simultaneous increase in the purchase price ADT allocated to the dealers' security monitoring contracts. Thus, the transaction lacked economic substance. No additional money changed hands as a result of the dealer connection fee transaction. The sham transaction was designed by Power immediately following Tyco's 1997 merger with ADT Ltd. Federman subsequently defended the transaction when concerns were raised in meetings with Tyco's independent accountant. His defense was successful, and the income inflation from the transaction continued unabated. The complaint alleges that the transaction inflated Tyco's operating income by $567 million from the company's fiscal year 1998 through its fiscal quarter ended December 31, 2002.
The complaint alleges that Power and Federman further inflated Tyco's operating income by means of fraudulent acquisition accounting, including the pre-acquisition reduction of asset valuations and overstatement of liabilities in connection with several of Tyco's most significant business acquisitions. In addition, Federman engaged in the improper use of accounting reserves to enhance Tyco's reported financial results, directing the reversal of reserves at Tyco's fiscal year-end to offset an unanticipated $40 million compensation expense.
Heger was responsible for the financial results of the Tyco division that included the company's security monitoring business. He approved division financial results that he knew, or was reckless in not knowing, had been inflated by the sham transaction and improper acquisition accounting and that had been enhanced or smoothed by the improper use of reserves.
The complaint alleges that Power and Federman violated Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Rules 10b-5 and 13b2-1 thereunder, and aided and abetted Tyco's violations of Sections 10(b), 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, and 13a-13 thereunder. The complaint alleges that Heger violated Exchange Act Rule 13b2-1 and aided and abetted Tyco's violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder. The complaint seeks permanent injunctions, disgorgement with prejudgment interest thereon, and penalties from each of the defendants, as well as an order barring Power and Federman from serving as an officer or director of a public company.
Heger, without admitting or denying the complaint's allegations, has consented to the entry of a proposed final judgment permanently enjoining him from violating Exchange Act Rule 13b2-1 and from aiding and abetting violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder, and ordering him to pay disgorgement of $300,000, prejudgment interest of $100,000, and a penalty of $50,000. The Commission intends to have any disgorgement, prejudgment interest, and penalty amounts paid into a court account pursuant to the Fair Fund provisions of Section 308(a) of the Sarbanes-Oxley Act of 2002, for ultimate distribution to victims of the fraud.
See Litigation Release No. 17722 / September 12, 2002; Litigation Release No. 17896 / December 17, 2002; Exchange Act Release No. 48328 / August 13, 2003; Litigation Release No. 19657 / April 17, 2006; Litigation Release No. 19678 / May 1, 2006.