Tyco International Ltd Fraud – Dennis Kozlowski
The rise and fall of Dennis Kozlowski has been well chronicled. Once recognized as one of the top Chief Executive Officer in North America his reputation is now forever tarnished as he awaits parole in a New York state prison. Living as a man that once enjoyed the comforts of $6,000 shower curtains and other outlandish luxuries, Kozlowski was known for living an extravagant lifestyle. Could the very thing that drove Dennis Kozlowski to success in business be the same trait that caused his downfall and ultimately his imprisonment? Kozlowski used the same no holds barred approach in business as he did in his personal excess. In the end greed would be his undoing. Through the examining of his humble upbringing, to his rise and success in Tyco International Ltd, to the multi-million dollar fraud and his eventual trial and incarceration, the events of Dennis Kozlowski’s rise and fall will be made clear and be an example for the world to study and learn from.
Dennis Kozlowski grew up in a lower middle class neighborhood in Newark, NJ. His father, a second generation Polish-American, was an investigator while his mother was a school crossing guard. Leo, his father, also had something of a side career in politics aiding the Republican Party by delivering the Newark Polish vote. This gift of persuasion was passed down from father to son. As many fraudsters are described, Dennis is most often described as easygoing, comical, and was elected class politician in high school.
Dennis worked his way through college as an average accounting student. His first few years out of school are unaccounted for but his first job out of school was as an auditor for SCM Corporation in New York City.
Tyco International Ltd:
Tyco International Ltd. is a global manufacturing company located in Switzerland and having their American headquarters in Princeton, New Jersey. Founded in 1960 by Arthur J. Gandua, the company saw massive growth in the 1970’s from its early roots that focused on governmental research. The growth came from their increased diversification in company holdings that came from the acquisition of Simplex Technology, Armin Plastics, The Ludlow Corporation, and Grinnell Fire Protection Systems. This early success due to acquisitions led to the company establishing itself throughout the 1970’s and 1980’s, leading up to the 1990’s.
In 1992 Dennis Kozlowski was named Chief Executive Officer of Tyco International Ltd and aggressively continued the acquisition business practice that gave them their early success. As many as over one thousand companies were acquired by the company over a decade’s period, from 1991 – 2001.
Following the departure of Dennis Kozlowski, Edward D. Breen was named Chief Executive Officer and instantly removed those that had worked closely with Mister. Kozlowski .
Kozlowski at Tyco International Ltd:
Dennis went to work for Tyco International Ltd in 1975 under Chief Executive Officer Joseph Gaziano. Gaziano and Kozlowski were very similar in both business and personal excess. Gaziano favored growing Tyco International Ltd through acquisitions, mostly hostile, and used his position to afford himself a jet, helicopter, and multiple luxury apartments. It was during Gaziano’s time as chief executive officer that Kozlowski committed himself to working his way up the ladder at Tyco International Ltd. “Gaz” was a seminal influence on Kozlowski, who admired and to some extent emulated the older man’s daring and defiant individuality (BW). Gaziano passed away from cancer of the heart in 1982.
The new Chief Executive Officer at Tyco International Ltd was John Fort III. Fort had a completely different corporate strategy than Gaziano. Gone was the corporate excess as Tyco International Ltd’s focus shifted to profitability. It was during this time that Kozlowski started his climb up the corporate ladder. As president of Grinnell Fire Protection, Kozlowski cut overhead, increased operating efficiencies, and reworked the salary structure to reward the managers with the highest profitability in their divisions. The irony of course is that Kozlowski was at his best as a manager while pinching pennies when in his personal life he will forever be known for absurd spending. This success at Grinnell paved the way for Kozlowski to be put on the Tyco International Ltd board in 1987.
In a somewhat unprecedented shift of power, Kozlowski supplanted Fort for control of Tyco International Ltd while maintaining the backing of the outgoing Chief Executive Officer. In 1992 Fort resigned and Kozlowski was announced as the new Chief Executive Officer for Tyco International Ltd. Fort resigned the Chief Executive Officer position but remained on the Tyco International Ltd board during Kozlowski’s time as Chief Executive Officer. The man who had started working at Tyco International Ltd as an accountant making $28 thousand per year was now running the company (60).
Kozlowski had a solid understanding of Tyco International Ltd’s biggest weakness. Over 80% of Tyco International Ltd’s revenues came from the volatile commercial construction industry. As a way to fix this Kozlowski set out to acquire a medical supply company, Kendall International. This was a complete reversal from the conservative management of Fort. Kozlowski summoned his inner Gaziano (acquisitions) and father (persuasion) to get the deal completed. The addition of Kendall alone caused Tyco International Ltd’s earnings to nearly double in 1995, to $214 million (BW). During this time Kozlowski was awarded a generous raise and also elevated Mark Swartz to CFO.
With Tyco International Ltd generating record profits, an interesting dichotomy began to form. The corporate cost cutting initiatives, a key factor in Kozlowski’s climb to Chief Executive Officer, were still being encouraged to mid-level managers. While they were pinching pennies Kozlowski was changing the corporate culture back to the excess enjoyed when Gaziano was at the helm. Corporate offices were moved from Exeter N.H to Manhattan. It was the shift of Tyco International Ltd’s headquarters that appears to have prompted Kozlowski to begin lining his own pocket (BW). As a part of relocating the corporate headquarters the board approved a relocation plan to move employees from Exeter to Manhattan. Kozlowski setup a second, more generous, relocation plan outside the scope of what the board had approved. While this by itself seems to be a minor infraction, it was widely regarded as the first of many transgressions that would benefit Kozlowski, and those close to him, on the company dime.
Shortly after the relocation Kozlowski decided it was time for him to get a raise. Tyco International Ltd had acquired global security company ADT. Kozlowski appointed two officers from ADT to Tyco International Ltd’s compensation committee. As the committee only had four members Kozlowski decided it was time to rework compensation guidelines in Tyco International Ltd. As the Tyco International Ltd stock price continued to climb so did Kozlowski’s wealth. After the policy was re-written he earned the following: 1997 – $8.8 million, 1998 – $67 million, 1999 – $170 million.
Also during this time frame Kozlowski decided to relocate 40 more employees from Exeter to Boca Raton. Once again he established a relocation fund, with no board approval, which he would use from 1997 – 2001 as an interest free line of credit. Some of the items he purchased with funds from the relocation account include; a $29.8 million mansion in Boca Raton, $30.8 million to buy and furnish an apartment in New York City, $15 million for a classic yacht, $20 million in fine art, $43 million in personal contributions in his name, and a $2 million birthday party for his wife on the island of Sardinia held under the guise of being a shareholders meeting. Later Kozlowski would forgive over $100 million in relocation loans, essentially turning his interest free loan into a cash payment to himself and his conspirators.
Continuing the running tally of fraud charges, Kozlowski also initiated a payment of $20 million to Tyco International Ltd director Frank Walsh for his part in the CIT Group acquisition.
As a separate matter Kozlowski also sold shares of Tyco International Ltd stock without disclosing the sale to the SEC, which is a requirement of a Chief Executive Officer of a publicly traded company.
At this point it needs to be mentioned that the Tyco International Ltd fraud is very different from almost every other fraud case in the last twenty years. The main difference is that the company is still financially sound. Another difference is that all of the activity mentioned in the fraud case was reflected on the company’s books. There were no doctored financials or shredded documents. The fraud in question here is due to the lack of disclosure. Company loans, incentive plans, and bonuses are all items that require the approval of the board of directors. In the Tyco International Ltd case Kozlowski was operating without the approval of the board.
In January of 2002 the Tyco International Ltd board of directors was tipped off to the $20 million payment made to Frank Walsh for the “finders fee” on the CIT acquisition. This was the first knowledge the board had that Kozlowski was operating without their knowledge. This caused the board to launch an investigation which would ultimately unearth the other expense abuses purported by Kozlowski, Martz, and Belnick (chief legal officer).
The case would further unravel when another tip would lead the New York State Bank Department to investigate Mister Kozlowski’s art purchases. While investigating the art purchases they also found other suspicious activity in Kozlowski’s accounts. Upon further investigation they found money was being transferred from Kozlowski’s personal accounts and Tyco International Ltd’s accounts.
On June 2nd,2002 Dennis Kozlowski resigned as Tyco International Ltd Chief Executive Officer. The following day he was indicted on tax evasion. The indictment stated that he had bought $13million of art and had the invoices shipped to the Tyco International Ltd corporate offices in Exeter, New Hampshire. The art was actually displayed in one of Mister Kozlowski’s apartments in Manhattan. For good measure Kozlowski went as far as to have the shipping company send empty boxes to New Hampshire.
In addition to being indicted for tax fraud, Kozlowski, Swartz, and Belnick were all brought up on civil fraud charges by the SEC. The SEC suit was based on both Kozlowski and Martz giving themselves hundreds of millions of dollars in interest free loans that they used for personal gain. They later forgave a portion of these loans effectively stealing from Tyco International Ltd. Belnick was named in the suit for failing to disclose $14M in interest free loans that he used for housing purchases. The suit also alleged that all three men sold millions of dollars of Tyco International Ltd stock without disclosing the sale.
When the dust settled New York State had charged both Kozlowski and Swartz with conspiracy, corruption, grand larceny, and falsifying records. Belnick was only charged for falsifying records.
The main question at hand during the trial was if the board had approved of the interest free loans and large bonuses that had been taken by Kozlowski and Swartz. The board claimed they had no knowledge of the loans or bonuses while the defendants alleged everything had been approved. All three men plead not guilty to all charges.
The first trial focused on the lavish lifestyle enjoyed by Kozlowski and Swartz. Some of the details were the $2 million party thrown for Kozlowski’s wife, including a full size Michelangelo ice sculpture that urinated vodka, and the furnishings of Kozlowski’s New York apartment, all paid for by Tyco International Ltd. This event infamously became known as Tyco Roman Orgy. This trial ended in a mistrial as one of the jurors had received a letter pressing for a conviction. Belnick was acquitted of falsifying business records.
The prosecutors for the second trial focused on a much simpler presentation. They left out the gaudy details of personal excess and focused the case on the question of authority to receive the payments. Also differing from the first trial, Kozlowski choose to testify. While he was on the stand prosecuting attorneys were able to seriously damage the case of the defense. Kozlowski had earlier stated a $25 million loan was forgiven as a part of his 1999 salary. The prosecuting attorneys then played footage of the compensation committees meeting from that year. The loan forgiveness was not mentioned anywhere in the footage. This was seen as one of the more damaging items to the defense. Subsequent interviews with jurors revealed that most thought Kozlowski damaged his case by taking the stand. Throughout the trial Kozlowski maintained his innocence; “I never, ever intended to commit any of the crimes (with which) I have been charged” (USA Today). Despite his claims that he had the approval of the board for all actions, Kozlowski was never able to supply evidence. In an interview in 2007 he explained the juror’s perception as, “I was a guy sitting in a courtroom making $100 million a year and I think a juror sitting there just would have to say, ‘All that money? He must have done something wrong.’ I think it’s as simple as that.” Whether he intended to defraud the company or not, or whether he felt he was a victim of jury confusion or contempt, he could not escape a guilty conviction.
In the end Kozlowski was convicted of the following: grand larceny (guilty on all twelve counts), conspiracy (guilty on one count), securities fraud (guilty on one count), and falsifying business records (guilty on 8/9 counts). The total verdict was guilty on 22 of 23 counts and a prison term of 8.33 to 30 years. Currently his earliest possible release date is January of 2014.
It should also be noted that Dennis Kozlowski had personal traits about him that contributed to the fraud committed, such as a seeming willingness to lie or exaggerate about anything related to him. In interviews Kozlowski would refer to his father a police officer, when in fact he was not, and he would mention on a fairly regular basis that he had a Master’s Degree in business administration (MBA) when he actually never completed the program. It is the willingness to tell small lies that lead to stories being formed that just build upon themselves and create an entirely new reality per say for an individual that allows the fraud like the one Dennis Kozlowski to be perpetrated and rationalized by the perpetrator.
Dennis Kozlowski’s story is the story of a man who rose from an entry level accountant to the head of a multi-national conglomerate. Kozlowski started at Tyco International Ltd making $28 thousand a year in 1975 and reached a peak salary of $170 million in 1999. Having a $170 million board approved salary, Mister Kozlowski seemed to be on top of the business world and have near everything. Many commentators just cannot help but to ask, “What possible motivation did he have to steal when he already made so much money?” A common explanation comes from Harvard professor Abraham Zeleznik. Professor Zeleznkik suggested that Kozlowski was undone by a sense of entitlement: “by entitlement I mean an aspect of a narcissistic personality who comes to believe that he and the institution are one” and thus “that he can take what he wants when he wants it” (BW). The Tyco International Ltd/ Kozlowski fraud case serves as a constant reminder to all businessmen and women in positions of power to manage responsibly and never allow personal ambitions or desires to stand in the way of proper business practices.