Tyco to pay billions to settle shareholders suit / Investors’ fraud litigation still pending against former officials, auditing firm
(05-16) 04:00 PDT New York — Tyco International, whose top two officers were imprisoned for fraud, has agreed to pay almost $3 billion to settle class-action suits brought by investors, the company said Tuesday.
The settlement, described as the largest payment ever by a company in such a suit, seeks to help put to rest one of the nation’s most notorious cases of fraud. Tyco investors might be in a position to recover even more money because they would also share in any proceeds from litigation that is still outstanding against Dennis Kozlowski, the former Tyco chief executive, and two other former company officials, and against the company’s former auditor, PricewaterhouseCoopers.
The settlement came as the company is seeking to split into three parts and is involved in separate litigation with bondholders who contend they are not being offered sufficient compensation for the change in corporate structure.
“With this settlement we are taking an important step to resolve our most significant remaining legacy legal matter,” said Ed Breen, Tyco’s chief executive. “Our balance sheet and cash flow remain strong and will allow us to readily absorb these costs while removing much of the uncertainty around legacy legal matters.”
Under Kozlowski, Tyco grew rapidly through acquisitions and its stock price soared to a high of $63.21 in 2001. It vigorously disputed claims that it used aggressive accounting for acquisitions to inflate profits, but the Securities and Exchange Commission later concluded that it had done just that, and that it also hid millions in executive compensation.
Kozlowski and Mark Swartz, the company’s former chief financial officer, were convicted of grand larceny, falsification of business records and conspiracy and are serving sentences of up to 25 years in New York state prisons. A former director, Frank Walsh, who received a secret $20 million payment for arranging a merger, pleaded guilty to securities fraud, but was not sentenced to prison.
The case became synonymous with corporate excess after it was revealed that Kozlowski had used Tyco money for lavish parties, including one that featured an ice sculpture of Michelangelo’s David dispensing vodka, and for furnishings for a Manhattan apartment, including a $6,000 shower curtain.
Under the settlement, Tyco will pay $2.975 billion to those who purchased Tyco securities from Dec. 13, 1999, through June 7, 2002, a few days after Kozlowski was forced to resign after he was indicted on charges of sales tax fraud in New York, in connection with avoiding taxes on purchases of paintings.
In addition, the investors will receive half of whatever the company manages to obtain from Kozlowski, Swartz and Walsh. And the investors will continue their suit against the former auditing firm, and will also be able to assert accounting malpractice claims on behalf of the company.
PricewaterhouseCoopers’ lead partner on the Tyco case, Richard Scalzo, was later barred by the SEC from auditing public companies. The commission said that from 1999 on, Scalzo had good reason to doubt the honesty of Kozlowski and Swartz, but did not pursue proper auditing procedures that could have uncovered the fraud.
If Tyco does manage to recover more money from the former officials, it will go to Tyco International, not to either of the companies that are being spun off, which will contain Tyco’s health care and electronics businesses.
“This is a settlement of historic proportions for the investors who suffered significant financial losses, and it also sends a strong message to those who would engage in this type of misconduct in the future,” said Richard Schiffrin of Schiffrin Barroway Topaz & Kessler, one of the lead counsels in the class-action suit.
In an interview, Schiffrin said he expects that the company will be able to recover “tens of millions” from the former executives. “It should be in the hundreds of millions,” he said, but there is some question how much money they have left.
As part of their sentences on the criminal charges, Kozlowski previously paid $98 million in restitution to Tyco, and Swartz paid $35 million. That money will be kept by the company, but any future payments will be split with the plaintiffs.
It is not clear how much money any investor would recover, because that depends on how many claims are filed and the formula adopted to divide the money among the plaintiffs. In addition, the lawyers are likely to seek a substantial percentage of the settlement as compensation for their work.
While the Tyco settlement appears to be the largest ever by a company, it ranks fourth in terms of total payments to investors. The other cases, all involving multiple defendants, concerned the frauds at Enron, WorldCom and Cendant. Tyco earlier paid $50 million to settle a suit brought by the SEC.
