The Blueprint for Corporate Fraud in America

Business.com / Finances / Last Modified: February 22, 2017

What a great world it would be if “cheat” only meant what people do on their diets. Unfortunately, it happens in the dark side of business.

What a great world it would be if “cheat” only meant what most people do on their diet; “steal” meant a great bargain; and “lie” meant to get on your back. But these words are often in the same sentence as “money.” Oh, there’s one more word: “forget,” as in keep forgetting to pay a friend back the money they lent you.

From friends to the investment and corporate world, we can’t let our guard down. Just like a friend can screw you, so can a company. And conversely, a company can be screwed by an employee and even its attorney. A most fascinating case of corporate fraud in America involved Tyco International.

Related Aritcle: 6 Lessons in Corporate Ethics from the GM Recall

This company operates in over a hundred nations and is a leader in electrical and electronic components. Tyco International also manufactures security services and fire protection systems, plus a myriad of other products including plastics and undersea telecommunications.

Meet the former Tyco CEO, Dennis Koslowski. And we need to mention also Mark Swartz, the former CFO, and Mark Belnick, former general counsel. The trio was accused of serving themselves up with very low interest, and even interest-free, loans—unauthorized by Tyco. The “loans” were never paid back.

The trio also allegedly sold Tyco stock to shareholders, again unauthorized. They ripped off $600 million via unauthorized loans, bonuses and other so-called company expenditures, blowing money exorbitantly on frivolous items like a $2,000 trash can. Employees were paid money to keep quiet about the trio’s illegal activities, that for a time, they were keeping well-hidden from board members and shareholders.

However, an employee one day reported suspicious activity, prompting the Securities Exchange Commission to investigate, from 1999 to 2000. The investigation focused on accounting practices. One such practice is called spring-loading, which creates the illusion of a greater amount of earnings. The SEC turned up nothing from this particular investigation.

However, at the start of 2002, suspicions again arose regarding Tyco’s accounting. A payment of $20 million went to Frank Walsh, Jr., Tyco’s director. This payment was justified as a reward for Tyco’s acquisition of CIT, a commercial finance firm. Six months later found Koslowski under scrutiny for tax evasion. This leech failed to pay sales taxes on $13 million worth of artwork that he bought with Tyco funds.

Related Article: Some of the World's Biggest Business Blunders

Coincidentally, he resigned from the company for undisclosed reasons, and John Fort took his place. By September of the same year, the trio was charged for their failure to reveal information about their fraudulent loans (totaling millions) to shareholders. The threesome was requested by the SEC to refund the money.

In 2005, Koslowski and Swartz were both found guilty of stealing over $120 million in unauthorized bonuses. They were also found guilty of misrepresenting Tyco’s financial status in order to boost the stock price from investors. They were also guilty of selling stocks without company approval and abusing the loan program for the employees.

Both are now in the can facing a sentence of between eight and 25 years. The third crook, Belnick, was made to pay $100,000 for his part.

Despite all of this criminal activity, Tyco International continues to be a leading force in its specialties of industry, which also include that of adhesives, and disposable medical products, and the company is the largest manufacturer of specialty valves. The company stood solid through the hurricane.

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