Part 1- Facts of the Case
Prior to the Tyco scandal, the company was one of America's largest conglomerates, with operating revenues of 38 billion dollars and 240,000 employees, worldwide. Tyco Laboratories began operations in 1960, performing experimental work for the U.S. government. The firm went public in 1964 and quickly expanded, mostly by acquisition, to exploit the commercial applications of its work. Dennis Kozlowski joined the company in 1975 as an assistant controller. The company subsequently shifted its focus from growth to profits within its three primary divisions: fire protection, electronics, and packaging. Kozlowski joined Tyco's board in 1987 and became president and ...view middle of the document...
By the time the dust had settled, 220 of the 250 top managers had been replaced for either not catching the theft, or for allowing it to happen, openly. The remainder of the 250 top managers resigned shortly after.
C. How was the scandal uncovered and by whom?
The situation began to unfold when the Securities and Exchange Commission was probing into a restatement of the company's stock price. Kozlowski's business practices raised some eyebrows. In 1999, the Securities and Exchange Commission (SEC) initiated an inquiry into Tyco's practices that resulted in a restatement of the company's earnings. In January, 2002, questionable accounting practices came to light. Tyco had forgiven a $19 million, no-interest loan to Kozlowski in 1998 and had paid the CEO's income taxes on the loan. It was found that he company's stock price had been overrated, and that the CEO and CFO had sold 100 million dollars' worth of shares, and then stated to the public that he was holding them, which was a misrepresentation and misled the investors.
The major conspiracy was uncovered by Manhattan District Attorney, Robert Morgenthau, who was investigating Kozlowski for income tax evasion for some fine art work that he had purchased. As Morgenthau kept digging into the record keeping of Tyco and Kozlowski, it was determined that there were other situations that had occurred, such as a 10 million dollar loan that was totally forgiven by Tyco, and all interest was billed to the corporation. It became apparent on January 29th, of 2002, that there were some bad decisions taking place when it was uncovered that Director Frank Walsh received a 10 million dollar transaction for arranging a purchase of CIT group.
Probably the most disturbing thing of all this ordeal was that there was not an individual whistleblower. The scandal was caught by groups that were put in place to prevent dishonesty and to protect investors. The problem with this is that the SEC only caught this once it had already spread extensively. If someone would have blown the whistle sooner this would not have been allowed to spread like it did, and would have been caught much sooner.
D. What was done with the information retrieved?
When this information was uncovered, the company filed a lawsuit against the people that were involved. Kozlowski hired an attorney that defended his actions, citing his immense charitable donations, from money that he had acquired wrongly. Their defense was that they were corporately responsible people, who were shown as criminals by the media. Kozlowski claimed in court that he had acquired all of his perks and money honestly, and said that he had disclosed all of his actions to the company.
E. How did the company and the subject react?
The district attorney, Owen Heimer, asked the judge that no leniency be shown to Kozlowski, because of his excessive spending spree and disregard for the shareholders of the business. Kozlowski stated in his trial for the judge to be as...