Tyco International Ltd. will pay the Securities and Exchange Commission a $50 million civil penalty to settle allegations the high-tech conglomerate’s prior management violated securities laws, cooked the books and overstated financial results by at least $1 billion.
Under the proposed settlement, filed Monday in U.S. District Court for the Southern District of New York, the SEC’s enforcement division will decide how to distribute the $50 million to harmed investors, rather than the government keeping it all, said James Coffman, assistant director of the division. He said his division is still investigating other people who may have been involved in the fraud.
The SEC’s civil complaint states the accounting fraud and other violations occurred from 1996 through mid-2002. That’s when former CEO L. Dennis Kozlowski snapped up more than 700 companies, trying to turn little-known Tyco into a global manufacturing and services powerhouse with perpetual earnings growth.
“In addition to looting the company, Tyco’s Kozlowski-era management lied about the company’s financial results,” Linda Chatman Thomsen, SEC’s enforcement director, said in a statement.
The penalty was expected. In afternoon trading on the New York Stock Exchange, Tyco shares fell 15 cents to $25.86. At its 2001 peak, the stock was worth about $62.
Tyco, which has about 250,000 employees and $40 billion in annual revenues, makes electronics, medical supplies, engineered products and fire and security products.
The SEC’s civil complaint states that from 1996 through 2002, the company filed with the SEC annual and quarterly reports, proxy statements and other documents that misrepresented the company’s financial results, including not disclosing some compensation and loans worth tens of millions of dollars — much of it later forgiven — given to top executives.
Over that corporate buying spree, Tyco inflated its operating income by at least $500 million by undervaluing assets and overvaluing liabilities of its acquisitions. Tyco also inflated operating income by about $567 million by improperly deducting connection fees for new customers of its ADT Security Services Inc., according to the complaint.
The company used various reserve accounts “to enhance and smooth its reported financial results and to meet earnings projections,” the complaint states. In addition, Tyco officials violated U.S. law by bribing officials in Brazil to obtain or retain business there.
Kozlowski and former Chief Financial Officer Mark Swartz resigned in 2002 and were indicted for looting about $600 million from company coffers. Last June, they were convicted of grand larceny, conspiracy, securities fraud and falsifying business records. Both are appealing their convictions.
“This is a result of something we inherited, and we’re glad it’s behind us,” company spokeswoman Sheri Woodruff told The Associated Press.
Current Chairman and Chief Executive Officer Ed Breen, along with a new senior management team and board of directors, took over in mid-2002. The manufacturing conglomerate moved its operating headquarters to West Windsor, N.J., in 2003 but has its official headquarters in Bermuda.
“We have cooperated fully with the SEC and are pleased to be able to close this chapter in Tyco’s history,” Breen said, noting that Tyco said a year ago that it expected to pay about $50 million to resolve the probe.
Meanwhile, the SEC has civil cases pending against Kozlowski and Swartz, still on hold while they appeal their criminal convictions, according to Coffman.