In 2000, Tyco International’s chief executive, L. Dennis Kozlowski, told the company’s head of human resources to forgive the relocation loans of 51 employees, and to pay them enough extra to cover the taxes. The board, he told her, had approved the program.
She asked for documentation of the authorization. On September 11, 2000, he sent her and the chief financial officer a memo. It said that “a decision has been made to forgive the relocation loans” of the people on an attached list, as a reward for the public offering of a Tyco unit called TyCom.
The memo did not say who had made the decision. The employees who received the money were asked to sign confidentiality agreements; some were not allowed to keep a copy. The total gross wages paid in the program came to $95,962,000. Kozlowski’s share was $32,976,000.
This is how Tyco itself described the episode two years later, in a report it filed with the Securities and Exchange Commission after he had left. The benefits, the company wrote, “were not approved by, or disclosed to, the Compensation Committee or the Board of Directors.”
The filing listed more. In 2001 Tyco bought an apartment at 950 Fifth Avenue in New York for Kozlowski’s use, for $16.8 million, then spent $3 million on improvements and $11 million on furnishings. Among the items it said lacked “any legitimate business justification”: a shower curtain for $6,000 and a dog umbrella stand for $15,000.
The money belonged to the shareholders, and there were a great many of them. At the end of November 2001, Tyco had nearly two billion shares outstanding. Its proxy statement that winter named only two holders known to own more than 5 percent: AXA Financial at 6.7 and Putnam Investments at 5.1. All the directors and executive officers together held 1.5 percent. Kozlowski, counting more than 10 million shares he could buy through stock options, held less than 1 percent.
The board learned on June 1, 2002, that its chief executive was the target of a criminal investigation into state sales taxes. He resigned early on the morning of June 3. In September Tyco filed its report and wrote that the amount diverted was “very small in comparison with Tyco’s total revenues and profits, but it is very large by any other relevant comparison.”
Kozlowski and his chief financial officer, Mark Swartz, went on trial in New York. Kozlowski testified that the late chair of the compensation committee had been “fine with” the bonuses. Every committee member available to testify denied approving them. After a trial of nearly six months, a jury convicted both men of grand larceny and other charges centered on four bonuses paid between 1999 and 2001, including the loan forgiveness. Each was sentenced to 8 1/3 to 25 years in prison, and they were ordered to pay $134,351,397 in restitution. In October 2008, New York’s highest court upheld the convictions.