Litigation Release No. 17722 / September 12, 2002

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

TYCO Former Executives L. Dennis Kozlowski, Mark H. Swartz and Mark A. Belnick Sued for Fraud

All Three Charged with Failure to Disclose Millions of Dollars of Low Interest and Interest-Free Loans They Received from the Company During Their Employment at Tyco

Kozlowski and Swartz Alleged to Have Forgiven Without Proper Authorization, Tens of Millions of Dollars of Their Own Loans and Entered Into Other Secret Transactions with the Company

Securities and Exchange Commission v. L. Dennis Kozlowski, Mark H. Swartz and Mark A. Belnick, Civil Action No. 02 CV 7312

The Securities and Exchange Commission today filed a civil enforcement action against three former top executives of Tyco International Ltd. charging that they violated the federal securities laws by failing to disclose to shareholders the multi-million dollar low interest and interest-free loans they took from the company. L. Dennis Kozlowski, the former chief executive officer and chairman of Tyco's board of directors, and Mark H. Swartz, the former chief financial officer and a director, granted themselves hundreds of millions of dollars in secret low interest and interest-free loans from the company that they used for personal expenses. They then covertly caused the company to forgive tens of millions of dollars of those outstanding loans, again without disclosure to investors as required by the federal securities laws. In addition, they engaged in other undisclosed related party transactions that cost shareholders hundreds of thousands, if not millions of dollars. Mark A. Belnick, the former chief legal officer, failed to disclose the receipt of more than $14 million of interest-free loans from the company to acquire two residences, an apartment in New York City and a $10 million home in Park City, Utah, where he already owned another home. Kozlowski, Swartz and Belnick also sold their shares of Tyco stock valued at millions of dollars while their self-dealing remained undisclosed.

The Commission seeks a final judgment ordering the defendants to disgorge all ill-gotten gains, imposing civil money penalties, and enjoining the defendants from future violations of the federal securities laws. In the cases of Kozlowski and Swartz, this includes (i) disgorgement of all compensation they received subsequent to their fraudulent acts and omissions, including salary, bonuses, stock options and grants and any advances that have not been repaid; (ii) all loans not properly repaid by them to Tyco; (iii) interest imputed at market rates on all low interest or interest-free loans that they should have disclosed to investors; (iv) all losses avoided from their sales of Tyco securities subsequent to their fraudulent acts and omissions; (v) prejudgment interest on the amounts disgorged; (vi) civil money penalties; (vii) orders barring them from ever again serving as officers or directors of a publicly-held company; and (viii) an order enjoining them from violating the antifraud, proxy, reporting, books and records and lying to auditor provisions of the federal securities laws.

In the case of Belnick, the Commission seeks (i) disgorgement of all loans not properly repaid by him to Tyco; (ii) interest imputed on all low interest or interest-free loans that he should have disclosed to investors; (iii) all losses avoided from his sales of Tyco securities subsequent to his fraudulent acts and omissions at market rates; (iv) all rent payments that he received from Tyco for the home office he maintained in the Utah residence; (v) prejudgment interest on the amounts disgorged; (vi) civil money penalties; (vii) an order barring him from ever again serving as an officer or director of a publicly-held company; and (viii) an order enjoining him from violating the antifraud, proxy and reporting provisions of the federal securities laws.

Specifically, the Commission's Complaint alleges, among other things:

The secret loans:

  • From 1997 to 2002, Kozlowski took an aggregate of approximately $270 million dollars from Tyco's Key Employee Corporate Loan Program (the "KELP"), a program established to encourage employees to own Tyco shares. 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. These loans were not disclosed to shareholders, contrary to the requirements of the federal securities laws.
     
  • 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. These loans were not disclosed to shareholders, contrary to the requirements of the federal securities laws.
     
  • 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, and, subsequently, to assist Tyco employees who were required to relocate to Boca Raton, Florida when Tyco moved its U.S. operations there. 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. These loans were not disclosed to shareholders, contrary to the requirements of the federal securities laws.
     
  • 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. These loans were not disclosed to shareholders, contrary to the requirements of the federal securities laws.
     
  • 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.

The undisclosed compensation:

  • 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. This executive compensation was never disclosed, contrary to the requirements of the federal securities laws.
     
  • 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.
     
  • In November of 2000, Kozlowski and Swartz engineered another program for their benefit (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 In addition, Kozlowski and Swartz directed others to falsify Tyco's books and records to bury this secret compensation by offsetting the costs against an unrelated gain realized on the disposal of a Tyco subsidiary. This executive compensation was never disclosed, contrary to the requirements of the federal securities laws.
     
  • 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 directed others to falsify Tyco's books and records to bury this secret compensation by offsetting the cost against an unrelated gain on the sale of common stock of a Tyco subsidiary. This executive compensation was never disclosed as part of Kozlowski's and Swartz's executive compensation, contrary to the requirements of the federal securities laws.
     
  • 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. This executive compensation was not disclosed to shareholders, contrary to the requirements of the federal securities laws

Undisclosed related-party transactions

  • Kozlowski and Swartz also engaged in undisclosed real estate transactions with Tyco and its subsidiaries. These 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. These transactions were not disclosed to shareholders, contrary to the requirements of the federal securities laws.

Fraudulent stock trading

  • Kozlowski and Swartz, while preventing disclosure to shareholders and potential investors of the material facts concerning their self-dealing and fraudulent loans as set forth above, sold millions of dollars of Tyco stock back to Tyco itself through Tyco subsidiaries located in offshore bank-secrecy jurisdictions. Swartz also sold stock on the open market through family partnerships.
     
  • Belnick, while preventing disclosure of material information to shareholders and potential investors concerning loans he took from the company as set forth above, sold millions of dollars of Tyco stock on the open market.

The Commission's Complaint alleges that defendants violated or aided and abetted violations of the anti-fraud provisions of the federal securities laws (Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act") and Exchange Act Rule 10b-5, the periodic reporting provisions (Section 13(a) of the Exchange Act and Exchange Act Rules 12b-20 and 13a-1), the proxy provisions (Section 14(a) of the Exchange Act and Exchange Act Rule 14a-9) and (with respect to Kozlowski and Swartz only) the books and records, internal controls, and lying to auditors provisions (Sections 13(b)(2)(A) and 13(b)(5) of the Exchange Act and Exchange Act Rules 13b2-1 and 13b2-2).

The Commission's investigation is continuing. The Commission acknowledges the assistance and cooperation of the Manhattan District Attorney and the New York City Police Department.

SEC Complaint in this matter