Tyco Case Study

During the 20th century there have been a series of infamous corporate frauds - e. g. the Ponzi scheme (and its latter-day variants), the McKesson & Robbins' fraud, Michael Milken's junk bond schemes, etc. Describe how one of these schemes operated and also describe (and critique) the mechanisms that are now in place, in Ireland, to prevent a repeat occurrence. The example I chose was that of Tyco international as it is topical and it epitomises what I believe is a question at the heart of investigating Corporate Fraud: Is it still ethically wrong if everyone gains? Tyco International Tyco International, Ltd.

, a corporation that makes a diversity of products, from healthcare supplies to alarm systems, has recently accused three former high-level executives of fraud. The three accused managers, former CEO L. Dennis Kozlowski, former Chief Financial Officer Mark Schwartz, and former general counsel Mark Belnick, have been indicted for fraud and theft by the Securities and Exchange Commission (SEC) as well as their former employer. They have all pleaded innocent. Tyco's financial accounting first came under review in January 2002 after a tip suggested that a less-than-legal transaction might be taking place.

In June of the same year, Kozlowski resigned just before he was accused of tax evasion on some expensive art purchases, allegedly made with company funds. On September 12, 2002, the SEC formally charged Kozlowski, Schwartz, and Belnick of civil fraud. The SEC and Tyco International have indicted the former executives on charges of civil fraud and theft. They are accused of giving themselves interest-free or low interest loans for personal purchases of property, jewellery, and other frivolities. According to the SEC, these loans were never approved on occasion never repaid.

Kozlowski and Schwartz are also accused of issuing bonuses to themselves and other employees without approval of Tyco's board of directors. It is alleged that these bonuses acted as de facto loan forgiveness for employees who had borrowed company money or were used to buy the silence of those who suspected the former CEO and CFO of fraud. According to Tyco, the individuals who received loan forgiveness were not aware that they were participating in anything illegal; they were told the program had the board's approval. Tyco and the SEC say it did not.

Kozlowski, Schwartz, and Belnick are also being indicted on charges of selling their company stock without telling investors, despite their obligation to do so under SEC rules. In sum, the three are accused of stealing $600 million dollars from Tyco International. The individuals' case was not helped when their frivolous expenditures became public knowledge. Some of Kozlowski's more extravagant purchases (with company money) included a $6,000 shower curtain, a $14,000 umbrella stand and $6,000,000 decorating a New York Apartment.

Kozlowski, Schwartz, and Belnick have been indicted, and all three have pleaded innocent. All three former Tyco executives have been released on bail bonds for the time being. Although a judge froze the assets of Kozlowski and Schwartz in September, Kozlowski has since been given a monthly living expense of over $14,000. He was also allowed to pay over 3 million dollars in state taxes. The trial for the three began on June 1, 2003 and is ongoing at the present time. As for Tyco, an internal investigation has concluded that, although accounting errors have occurred, there is no systemic fraud problem.

As a show of good faith and in effort to restore confidence in the company, Tyco has spent the past several months replacing its top board members. "Messrs. Kozlowski, Swartz and Belnick treated Tyco as their private bank, taking out hundreds of millions of dollars of loans and compensation without ever telling investors. These men put their own interests above those of Tyco's shareholders. Those shareholders deserve better than to be betrayed by the management of the company they own. " - Stephen Cutler, Director of Enforcement, The Securities and Exchange Commission.

The SEC complaint, filed in the Southern District of New York, seeks a final judgment ordering the defendants to disgorge all their ill-gotten gains. From Kozlowski and Swartz, these include: *all compensation they received subsequent to their fraudulent acts and omissions, including salary, bonuses, stock options and grants and any advances that have not been repaid; *all loans not properly repaid by them to Tyco with interest imputed on all interest-free loans; *all losses avoided from their sales of Tyco securities subsequent to their fraudulent acts and omissions;

*prejudgment interest on the amounts disgorged; and *civil money penalties. From Belnick, the Commission seeks: *all loans not properly repaid by him to Tyco with interest imputed on such interest-free loans; *all losses avoided from his sales of Tyco securities subsequent to his fraudulent acts and omissions; *all rent payments that he received from Tyco for the home office he maintained in his Utah residence; *prejudgment interest on the amounts disgorged; and *civil money penalties.

The complaint also seeks court orders to bar all three from ever again serving as officers or directors of a publicly traded company and enjoin them from further violating the antifraud, proxy and reporting provisions of the federal securities laws. In an article called "Corporate Obligations should reflect Shareholders Best Interests", Samuel Gregg states "Once a business corporation loses sight of its corporate objective, or forgets that its primary responsibility is maximization of shareholder value then it has betrayed its telos (fundamental aim) ........

This commitment to maximizing shareholder value is not of course a mandate for, say, want-on ecological destruction. It does, however, mean that shareholder value must be the priority for directors, managers and other employees. To do otherwise would be to betray the primary responsibility with which they have been entrusted. " When I first read this case I was of the opinion that there was no way the Tyco executives could claim that they had acted ethically. After studying the case more closely, the situation is not as clear-cut as it initially appears to be.

Utilitarianism is a moral theory that says that what is moral right is whatever produces the greatest overall amount of pleasure (hedonistic utilitarianism) or happiness (eudemonistic utilitarianism). Some utilitarians (act utilitarians) claim that we should weigh the consequences of each individual action, while others (rule utilitarians) maintain that we should look at the consequences of adopting particular rules of conduct. If the basic principle of utility was applied to the Tyco case, each of the moral agents would first predict the consequences of their possible actions.

Next, they would weight the alternatives together and act upon their best assessment. The main consequence each of the three executives would probably consider to be top priority would be the protection and maintenance of the company. However, it is clear that the actions they took were definitely not in the best interests of the Tyco. Utilitarians would conclude that they acted unethically. Immanuel Kant used the term Universalisability when discussing the maxims, or subjective rules, that guide our actions.

A maxim is universalisable if it can consistently be willed as a law that everyone ought to obey. The only maxims which are morally good are those which can be universalized. The test of universalisability ensures that everyone has the same moral obligations in morally similar situations. If everyone employee defrauded the company to the extent that the three executives did Tyco would have filed for bankruptcy long ago. There is no way that universal maxim can be made of their actions.

Therefore they acted unethically in the eyes of Kantists also. Rights are entitlements to do something without interference from other people (negative rights) or entitlements that obligate others to do something positive to assist you (positive rights). Some rights (natural rights, human rights) belong to everyone by nature or simply by virtue of being human; some rights (legal rights) belong to people by virtue of their membership in a particular political state; other rights (moral rights) are based in acceptance of a particular moral theory.

The main right to have been abused here is the positive right of the shareholders to be represented by the company employees to the best of their ability and to do so truthfully. Obviously this right has been violated and the three executives acted unethically. Similarly to the above example, if the theory of paternalism was applied, with Kozlowski and co acting as the father figure and Tyco as the defenceless child ( defenceless as they were not privy to all the facts unlike the executives) They have acted unethically be failing to uphold their authority and their responsibilities.

All three of the individuals involved acquired the positions they occupied in the company, until their resignations, between 1994 and 1995. As you can see from the above graph they had a very positive effect on Tyco's share price. They revolutionized and modernized the company and Dennis Kozlowski has been described as a "financial genius" by the Wall Street Journal (obviously before this story broke). The actions of these men made Tyco's shareholders millionaires.

These same people are now portrayed by the media as being victims, whose life savings were squandered on various frivolous expenditures such as $6000 shower curtains and $450 pin cushions. The way I see it is if Kozlowski & Co. had rewarded themselves to a lesser extent the shareholders may have received marginally larger dividends. However, if it wasn't for such impressive performances by the accused in their jobs these shareholders would probably still be losing money, like they were in 1994, before these three men took the reins.

As I stated earlier, it is generally acknowledged that the primary responsibility of Kozlowski, Swartz and Belnick to ensure the maximization of shareholder value. I think it is fair to say that they did this. Their behaviour may have been unethical when held under the fine scrutiny of strict theories and rules, but for every crime there must be a victim and my question is, who is the victim here? Tyco performed exceptionally well up to the time of the removal of Kozlowski et al from power. The shareholders have seen their investment increase significantly and three men became very wealthy in the process.

It will be up to the jury to decide whether or not the law was broken but the main question I see is whether or not there is a difference between acting ethically and acting in the shareholders best interests. Before reading about Tyco I didn't think there was a difference but now I am not so sure. The American government have led the charge to ensure that these to activities become synonymous and I have outlined some of the actions they have taken below: The US Senate has approved the most sweeping changes in corporate accountability since the Depression, creating stiff penalties and jail terms

for company fraud and tightening oversight of the accounting industry. The Senate voted 97-0 in July of this year to pass the bipartisan bill after nearly a week of debate and votes on amendments as a string of corporate accounting scandals shattered confidence in business and the markets and threatened the fragile economic recovery. Charlie McGreevy, Minister for Finance in Ireland is on record as stating that he is working on similar measures and that he hoped we could begin to pass them into law some time in the New Year.

I feel that the American measures would be very effective if put in place in Ireland. In a speech, President George Bush told business leaders: "We intend to hold people accountable. We can't pass a law that says, 'You will be honest, but we can pass laws that say, 'If you're not honest we'll get you. ' We owe it to America's workers and shareholders to crack down on wrongdoing and fix the system to prevent future abuses. " In rare shows of unanimity, U. S. senators voted to add a series of new penalties, including 10-year prison terms for securities fraud.

Chief executive officers and chief financial officers who certified false company financial reports will be slapped with prison terms of five to 10 years and fines of $500,000 to $1 million. Some of the activities mentioned included document shredding, imposing restrictions on accounting firms that do consulting work for corporations whose books they audit, requiring top company executives to vouch personally for the accuracy of their companies' reports, and creating new rules for financial analysts designed to prevent conflicts of interest.

The measure also establishes an independent board, with subpoena power, to oversee the accounting industry. US President George Bush hoped to restore investor confidence, when he signed into law the most far-reaching government crackdown on business fraud to date. "No more easy money for corporate criminals. Just hard time," Mr Bush said before signing the bill. The new bill bans personal loans from firms to their top officials and directors, and requires company insiders to notify the SEC more promptly when they buy or sell stock. Had this been in place ten years ago, it would be much clearer whether the Tyco executives had broken the law.

"Free markets are not a jungle in which only the unscrupulous survive, or a financial free-for-all guided only by greed," said Mr Bush. "This law says to every dishonest corporate leader, you'll be exposed and punished. The era of low standards and false profits are over. " References: Ethics and the conduct of business by John R. Boatright The Best Deomocracy Money Can Buy by Greg Plast The SEC (USA) Archives The International Fraud Infocenter Archives Corporate Obligations should reflect Shareholders Best Interests by Samuel Gregg Irish Examiner Article - Samuel Maull, 8 October 2003 Ethics Update Website Word Count: 2324