Kozlowski Blames Accountants For Excesses and Oversights

Although they are free on bail for the moment, former Tyco International CEO Dennis Kozlowski and former CFO Mark Swartz have been convicted of looting their corporate cow of more than $150 million. Both men are awaiting sentencing tentatively scheduled for August 2nd. To remain free until sentencing, each paid $10 million bail.

Kozlowski and Swartz were convicted last week on 22 counts of conspiracy, falsifying business records, grand larceny, and securities fraud. After a trial lasting more than four months, the jury reached their decision in only eleven days. Their first trial ended in a mistrial in 2004. The two men plan to appeal their convictions after a review of the trial records.

The two former Tyco executives face maximum sentences of 15 to 30 years in a New York state prison. Legal specialists however expect their sentences to range between five and ten years. There is no possibility of these two men going to “resort” prisons after sentencing.

The strongest charge by the prosecution involved the payment and forgiveness of $37.5 million in loans. A $25 million loan made to Kozlowski and a $12.5 million loan paid to Swartz were not reported to shareholders and did not appear on either man’s personal tax return.

It did not help Kozlowski’s credibility on the stand when he could not explain why $25 million was missing from his tax return. His claim that he didn’t pay attention to his tax filings because he depended on his accountant did not sway the jury.

“I was just not thinking when I signed my tax return that I had a $25 million loan forgiveness,” Kozlowski is reported by the Miami Herald to have testified. “Year in and year out at Tyco, my tax returns for the most part had been correct. I didn’t pick up on it.”

Tyco’s faulty accounting practices were called into question beginning in 2002 and 2003 when the company restated their earnings numerous times, going as far back as 1998, in response to shareholder lawsuits. The basis of the lawsuits was that the company misled shareholders by using aggressive accounting practices and fraudulent performance reporting.

In addition to a Securities and Exchange Commission (SEC) probe, numerous lawsuits brought by shareholder remain active. Estimates of the company’s potential liability in light of this litigation is about $4 billion according David Bleustein, an analyst at UBS Securities speaking with the Wall Street Journal. Tyco has set aside $50 million, according to the most recent quarterly statement, in anticipation of fines and other penalties coming out of the SEC investigation.

In the wake of the criminal convictions of Kozlowski and Swartz, the company is in the process of preparing its own civil lawsuits to facilitate the return of an estimated $600 million including

  • pay and certain bonuses paid between 1999 and 2001 that were not board approved or recorded in corporate and federal filings,
  • the proceeds from secretly selling their restricted company stock at inflated prices after misstating their company’s performance,
  • reimbursement for lavish parties, costly real estate, jewelry, fine art, and extravagant furnishings, and philanthropy where Kozlowski was recognized as the contributor.

Company spokesman David Polk told the Palm Beach Post, “We look forward to receiving back the money that was improperly taken from Tyco.”

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