It's incredible to see how low corporate executives can go. Investors thought Enron and Worldcom were bad enough, but recent charges made against former Tyco Chairman and Chief Executive Officer L. Dennis Kozlowski only show that one can never go too low.
Corporate scandals are progressively becoming worse. Before Enron, insider trading was always a major concern of management etiquette, but the hard fact is, it rarely damaged the company or investors. Insider trading is unethical, no doubt, but it never bankrupted the company. Then came Enron, which inflated profits and revenue to boost stock prices. But compared to Worldcom, they look innocent. While Enron at least tried to hide behind complex accounting and legal technicalities, Worldcom committed outright fraud. And then there's Kozlowski, who makes Worldcom executives look selfless. While executives at other companies were lying and deceiving, Kozlowski is accused of turning Tyco into his personal bank.
During the rapid selloff of Tyco stock of last year, Kozlowski was viewed as an incompetent executive who could no longer control or make sense of his numerous acquisitions that turned Tyco into a gigantic conglomerate. This was only re-enforced by his unpopular and unsuccessful attempt to split the company in four and by the SEC's investigation into Tyco's accounting. Tyco's problems, analysts believed, were like those at Enron and Worldcom: corporate accounting, acquisitions, and deception. According to recent charges made against Kozlowski, the problem at Tyco was not that Kozlowski was incompetent, but that he was a crook. Indeed, when Kozlowski resigned in June, he was already under investigation for tax evasion – a charge filed day after his resignation.
Considering fraudulent activities in personal finances, it's not surprising that Kozlowski took millions from the company. With the aide from his top deputy, former CFO Mark Swartz, he stole $170 million in the form of secret bonuses and unpaid loans. Furthermore, Kozlowski took advantage of the company's employee corporate loan program, which was meant to encourage investment in the company's stock. From this, he borrowed, then returned, $270 million to support his personal expenses, such as jewelry, yachts, and estates. He profited $430 million from selling 7.7 million shares of Tyco stock, a sale he never disclosed, while hyping the stock in public.
Meanwhile, he worked behind-the-scenes to secure a position secured for an analyst who would view the company's stock favorably at a brokerage firm. Charges indicate Kozlowski and the analyst exchanged gifts worth thousands of dollars. To hide his numerous criminal activities, Kozlowski had his deputies cook the books, had the auditors report to him, and kept the transactions secret from the board of directors. The accounting discrepancies at Tyco were not because of confusion relating to past acquisitions but because of deliberate attempt by its CEO to cover for the missing money.
In L. Dennis Kozlowski, American investors have seen how low executives would go not only for the company, but also for himself. In an attempt to distance itself from its former CEO, Tyco has filed lawsuits against Kozlowski and announced that its board, which oversaw Kozlowski, would not run for reelection. But little can alleviate the fears of investors who feel that there are more secrets at Tyco, and for that matter, other Kozlowski's in large corporations.
Joe Michael Sasanuma is a staff writer for The Heights. His column appears regularly in this space.
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