SEC Charges Former Tyco Officers With Fraud
The U.S. Securities and Exchange Commission (SEC) has filed fraud charges against three former officers of Tyco International. Due to the nature of some of the violations cited, the enforcement action became known as "a looting case." Other charges include financial reporting violations and lying to the company's auditor, PicewaterhouseCoopers.
The former officers named in the complaint are the CEO, CFO and general counsel. The SEC says all three received from Tyco millions of dollars of low interest and interest-free loans and used the loans for personal purposes without disclosing the facts to investors. Other reporting violations include failure to disclose related party transactions and executive compensation resulting from the forgiveness of loans.
As punishment, the SEC is seeking disgorgement of ill-gotten gains, including all compensation received subsequent to the fraudulent acts and omissions, as well as civil monetary penalties and barring the former officers from ever again serving as officers or directors of a publicly-traded company.
All three former officers pleaded not guilty to both the civil charges brought by the SEC and criminal charges brought by the Manhattan District Attorney's office. The former CEO and CFO were charged by the DA with enterprise corruption and grand larceny, and the former general counsel was charged with falsifying business records. If convicted, the former executives could face lengthy prison terms.
Prosecutors said the former CEO, (who was trained in accounting and began his career at Tyco as an internal auditor), covered his tracks by paying off Tyco executives and some directors, limiting the scope of internal audits and having the auditors report directly to him. The SEC noted that both the ex-CEO and the ex-CFO lied to Tyco's auditors when they signed management representation letters that falsely represented there was "no fraud involving management or employees who have significant roles in the company’s internal control."
Court documents indicate the fraud unraveled when Tyco directors discovered an unauthorized $20 million payment to a company director. The board demanded repayment and hired a law firm to investigate other payments.