Faculty of Business & Finance

Corporate Governance

Report Title:

Kozlowski/Tyco Scandal Financial Fraud

Student name: Sylvia Al-A’ma 1810351

Egregious Looting Scheme 1996 through June 2002 Senior Executives stole hundreds of
millions of dollars, and concealed the transactions from shareholders, while assuring
them, “nothing was hidden behind the scenes.” Dennis Kozlowski – Tyco’s Chairman,
Pres., & CEO Mark Swartz – Tyco’s CFO & Executive VP Mark Belnick – Tyco’s Chief
Corporate Counsel & Executive VP Richard Scalzo – PwC, Tyco’s auditor

How did Kozlowski & Swartz pull it off? KELP Loans (Key Employee Corporate Loan
Program) Relocation Loan Program Undisclosed Related Party Transactions with Tyco
Undisclosed Perquisites Fraudulent Stock Sales, Misrepresentations to Shareholders, and
Lying to Auditors

Financial Fraud Action/Resolution Sept 12, 2002 – SEC filed civil fraud charges
against Kozlowski, Swartz, and Belnick. Dec 17, 2002 – Frank E. Walsh, former Tyco
Director & Chairman of Compensation Committee, sued for hiding $20M payment from
shareholders. Aug 13, 2003 – SEC filed ‘cease and desist’ proceedings against Richard
Scalzo of PwC. Case continues to unravel…

In April 1999: Tyco buys electronics marker AMP Inc. for $11.3B. October 1999:
Money manager David Tice publicly questions the use of large reserves related to the
acquisitions, saying they obscured results. December 1999: SEC conducts nonpublic,
informal inquiry into charges and reserves linked to acquisitions. June 2000: Restatement
of 1999 earnings. 2001-2002: SEC looking closely at Tyco and upper management. June
3, 2002: Kozlowski resigns abruptly and is under investigation for avoiding personal
taxes. September 13, 2002: Kozlowski and Swartz indicted for misusing $170M in
company money and artificially inflating stock prices.

What Went Wrong? The Board contends that Kozlowski and Swartz were simply
stealing millions from the firm through the key employee loan program. The CEO and
CFO were siphoning money from the firm through expenses that the board should have
seen. Implicitly, by not disclosing all of the expenses to the shareholders, the two were
pumping up the stock price and profiting at the shareholders expense. Had the expenses
been made public, Tyco’s stock price would have been much lower. Kozlowski/Tyco
Scandal