Term Paper on "Tyco Scandal Tyco International"

Term Paper 5 pages (1778 words) Sources: 6 Style: APA

[EXCERPT] . . . .

Tyco Scandal

Tyco International was a very successful electronics company, with operations in over 100 countries. Tyco claimed to be "world's largest maker and servicer of electrical and electronic components; the largest designer and maker of undersea telecommunications systems; the larger maker of fire protection systems and electronic security services; the largest maker of specialty valves; and a major player in the disposable medical products, plastics, and adhesives markets." (Obringer, 2008).

However, when one mentions Tyco, one no longer thinks of a successful electronics company, but of a major company wracked by financial scandal.

Of course, the company maintains that it was not corrupt, only its executives were. In fact, "according to the Tyco Fraud Information Center, an internal investigation concluded that there were accounting errors, but that there was no systematic fraud problem at Tyco." (Obringer, 2008). Instead, two of Tyco's former executives, Dennis Koslowski and Mark Swartz, and its general counsel, Mark Belnick, were accused of diverting funds to themselves. They did this by misusing an employee benefit programs, to give themselves loans or bonuses. The loans and bonuses were not approved by Tyco's board, and the loans were never repaid. Furthermore, "they were also accused of selling their company stock without telling investors, which is a requirement under SEC rules." (Obringer, 2008). Through their various schemes, the three of them managed to steal approximately $600 million dollars. However, the wrongdoing went beyond Koslowski, Swartz, and Belnick; "as many as 40 Tyco executives took loans that were later "forgiven" as part of Tyco's loan-forgiveness program, although it was said that many did not know they were doing anything wrong. Hush money was also paid to those the company feared would 'rat out' Kozlowski." (Obringer, 2008).

While Koslowski, Swartz, and Belnick managed to keep the majority of their activities hidden from Tyco's board and its shareholders, in 1999 the Securities Exchange Commission (SEC) began investigating Tyco's accounting practices; though the SEC did not take any action at the conclusion of that investigation. In January 2002, the SEC received a tip that led them to Tyco director Frank Walsh, Jr. This led to a broader investigation of Tyco's accounting practices.

To understand the entire scandal, one must understand that Koslowski and Swartz were, at one time, very beneficial to Tyco. In March of 2001, Tyco purchased the CIT Group, a commercial finance company. On December 5, 2001, Tyco shares closed at a $59.76 high on the New York Stock Exchange. This success leads Business Week to name Kozlowski as "one of the top 25 corporate managers of 2001" in January 2002. (USA Today, 2005). Later that month, "Kozlowski announces plans to split Tyco into four independent, publicly traded companies. The announcement starts a slide in the price of Tyco shares." (USA Today, 2005). That slide continues, and on January 28, 2002, Tyco files "a proxy report with the Securities and Exchange Commission disclosing that Walsh got a $10 million fee on the CIT Group deal, and that another $10 million went to a charity where he was a director." (USA Today, 2005). By the end of January, the New York Times is reporting that Swartz and Kozlowski "sold more than $100 million of their Tyco stock the previous fiscal year despite public statements that they rarely sold their stock. Kozlowski and Swartz say they will buy 1 million shares with their own money." (USA Today, 2002).

In addition, Koslowski faced a personal investigation for tax evasion, based on his misappropriation of Tyco's funds. "Kozlowski's rapid fall began on June 3, 2002, when he abruptly resigned after telling members of Tyco's board that he was the subject of a tax evasion investigation by the New York City district attorney's office. He was indicted the next day on charges of dodging more than $1 million in sales taxes on valuable works of art, including paintings by Renoir and Monet." (White, 2005).

Later that year, Kozlowski, Swartz, and Belnick faced charges related to the misappropriation of corporate funds. Kozlowski and Swartz are charged with "enterprise corruption for allegedly stealing more than $170 million from Tyco and obtaining $430 million by fraud in the sale of company shares. Former Tyco corporate counsel Mark Belnick is charged separately with falsifying records to conceal more than $14 million in company loans." (USA Today, 2005). On December 17, 2002, "former Tyco board member Frank Walsh pleads guilty in an alleged scheme to hide the $20 million in fees for the CIT Group deal." (USA Today, 2005). Belnick was acquitted of charges that he received undisclosed loans from the company.

In 2005, Kozlowski and Swartz, after 11 days of jury deliberations, both received criminal convictions, for taking bonuses without the board's approval, abusing the employee benefit programs, and "misrepresenting the company's financial condition to investors to boost the stock price, while selling $575 million in stock." (Obringer, 2008). The guilty convictions were for "criminal counts of grand larceny, conspiracy, securities fraud, and...falsifying business records." (White, 2005).

However, these convictions did not come easily, but were the result of a "legal drama that stretched across two trials and three years." (White, 2005). In fact, their first mistrial ended in April 2004, "after several news organizations published a juror's name during deliberations and the juror [said]...that she had received a threatening letter and phone call. After the first trial, jurors said in interviews that the juror, Ruth Jordan, was the lone holdout for acquitting both men on a number of charges." (White, 2005). This threatening letter supposedly pressured her to find them guilty. Furthermore, "some observers said the juror...had previously appeared to make an 'O.K.' sign to defense lawyers. She subsequently denied making any gesture toward the defense team." (USA Today, 2005). Furthermore, the first trial also focused on Kozlowski's personal spending excess. For example, the jury saw video of a $2 million birthday party for Kozlowski's wife, paid for partially by Tyco, and videos of a $6,000 shower curtain and other expensive furnishings in Kozlowski's Tyco-owned apartment. The prosecution did not mention the personal excess in the second trial.

However, despite the company's protests, it does appear that the corporate culture encouraged financial mishandling. For example, the CIT financials provided insigt into how Tyco operated, presenting "a rare glimpse into how Tyco has managed to 'spring-load' its results -- producing a huge pop in profits right after an acquisition closes. Alone among Tyco's major acquisitions, CIT continues to file financial reports with the U.S. Securities & Exchange Commission because of its reliance on the public debt markets. Those reports disclose that in its first four months under the Tyco umbrella -- from June 2 to Sept. 30, 2001 -- CIT generated $252.5 million in net income. That's more than three times the $81.3 million CIT earned in its last five months as an independent public company, from Jan. 1 to June 1." (Symonds, 2002). This suggests that it was the corporate environment that was corrupt, not simply individual corporate officers.

The entire Tyco scandal brought up some serious ethical issues. The first ethical issue is that Tyco, as a corporation, created an environment of greed. This environment meant that the board of directors and most of the major shareholders were focused on the bottom line, which led to them lauding the very executives that were actually stealing for them, instead of investigating profits that simply did not appear realistic. In fact, ethics expert Stuart Gillman, discussing ethics changes, notices that "many of the recent measures go beyond fixing lists of right and wrong. Cultural change has become an imperitive. Organizations are being forced to move from a position in which they maximize their profits at any cost to one in which they protect the interests of stockholders, employees, and others." (Gillman, 2004). For example, changing that corporate environment would reduce the incentives for misrepresenting profits in order to influence stock prices.

The next ethical issue was permitting executives to access major amounts of money and other assets without involvement by the board. Obviously, Tyco's rules stated that the executives were to receive board approval, but they could access the money without it. What that makes clear is that even a company's CFO cannot have unfettered access to a company's finances. In addition, the insider trading allegations, in which the executives sold substantial portions of their stock without correctly informing shareholders, were only possible because the executives were given exorbitant stock argeements. Likewise, the misuse of corporate funds for living expenses was only possible because executives were able to have the company pay for their living expenses. The last two situations could be remedied by simplifying the corporate compensation structure; supplying executives with the same basic compensation package as other employees, such as health care, but then making compensation strictly-monetary.

In fact, Tyco itself, took steps to ensure that it would be protected from further ethical scandals; and these steps seem like a reasonable way to help avoid future ethical issues. First, it got rid of those who were in… READ MORE

How to Reference "Tyco Scandal Tyco International" Term Paper in a Bibliography

Related Term Papers:

Business Ethics This Is a Guideline Thesis

Business Ethics

This is a guideline and template. Please do not use as a final turn-in paper.

In today's world, anyone in business who doesn't live in a cave knows… read more

Thesis 7 pages (2140 words) Sources: 6 Style: APA Topic: Ethics / Morality

---

Corporate Governance Research Proposal

Corporate Governance

Much has been made of the debate between stewardship theory and agency theory as it relates to corporate government. Many say that agency-style theory is necessary because it's… read more

Research Proposal 12 pages (3011 words) Sources: 20 Topic: Government / Politics

---

Empirical Study on Business Ethics Development of International Trade Personnel in Taiwanese Industries Term Paper

Business Ethics Development of International Trade Personnel in Taiwanese Industries

Criteria for Coding Data

The survey data that is analyzed in this chapter relied on the Likert scaling methodology for… read more

Term Paper 35 pages (9586 words) Sources: 50 Style: APA Topic: Ethics / Morality

---

Ethics Question 1 Pareto-Optimal State Term Paper

Ethics

Question 1 pareto-optimal state means that essentially no person is being needlessly left behind. For example, if a particular person's utility or usefulness to the economy or quality of… read more

Term Paper 3 pages (952 words) Sources: 0 Topic: Economics / Finance / Banking

---

Code of Conduct Term Paper

Code of Conduct

In the past few years, several well-publicized scandals involving the improper management of ethics and values within large business organizations have emerged, bolstering the importance of business… read more

Term Paper 6 pages (1882 words) Sources: 7 Style: APA Topic: Business / Corporations / E-commerce

---

View 100+ more related papers  >>