Bonuses at Tyco no secret, aide says

Ex-CEO Kozlowski is accused of fraud

Concerns about morale arose

February 15, 2005|By BLOOMBERG NEWS

NEW YORK - Tyco International Ltd.'s auditors knew about millions of dollars in bonuses that former Chief Executive Officer L. Dennis Kozlowski was later accused of stealing, a witness at his fraud trial testified yesterday.

Patricia Prue, Tyco's former head of human resources, told jurors in a New York state court that the company's payroll and legal departments also knew about the payments, which were rewards to employees for their work on the public offering of shares in Tyco subsidiary TyCom Inc.

The testimony supports the contention of lawyers defending Kozlowski and former finance chief Mark H. Swartz that their clients didn't keep the bonuses secret and that the company's board knew of or could have learned about the payments.

"Our auditors did, at least that's what was told to me," Prue said when Kozlowski's attorney, Austin V. Campriello, asked her who in the company would have known about the bonuses. He displayed memos listing the recipients of the payments, Kozlowski and Swartz among them. Prue said all the memos were in company files.

Prosecutors charged Kozlowski, 58, and Swartz, 44, with 31 counts of larceny and fraud. They say the two stole their share of the TyCom bonuses, more than $48 million, along with more than $100 million in other allegedly unauthorized payments. The two men are being tried a second time after a mistrial in April.

Dozens of Tyco employees got TyCom bonuses, which were given out in the form of loan forgiveness and cash payments to cover tax liabilities. They were asked to sign letters pledging not to mention the payments to co-workers.

Prue said she told Kozlowski she was worried that "water-cooler talk" about the bonuses would hurt the morale of those who didn't get them. Prosecutors say the nondisclosure agreements were a way to hide the payments from directors.

Prue, who received a condominium under the TyCom bonus program, testified that Kozlowski never told her to hide the loan-forgiveness payments from the directors, only to forestall a morale problem.

"I told him that generally, this could be a major problem," Prue said, testifying for the third day. "He said, `Just make sure this benefit doesn't get spoiled,' " she recalled.

Prue, a government witness, repeated her testimony that Swartz told her that Kozlowski said the bonuses were approved by Philip Hampton, a director on the board's compensation committee. Hampton died in 2001.

The defense is hoping to show that Kozlowski had no reason to steal from the company, given the amount of his deferred compensation.

Defense lawyers told Judge Michael Obus that the deferred compensation covered any debts Kozlowski might have incurred in his alleged misuse of company loan programs.

Prosecutors say Kozlowski and Swartz weren't authorized to award themselves the bonus because they never had the permission of the board's compensation committee. The most serious charge against the men carries a possible 25-year prison term.

Kozlowski resigned from Tyco in June 2002, before he was indicted for evading sales taxes on $13.2 million in art purchases. He is to be tried separately on those charges. Swartz left the company in September 2002.

Prosecutors told jurors in their opening statement last month that the men sold as much as $575 million in Tyco stock and options while committing the fraud. Both deny wrongdoing.

Kozlowski presided over more than $64 billion in acquisitions in the last five years of his decade as chief executive, building the Bermuda-based conglomerate into the world's biggest maker of electronic connectors, industrial valves, plastic hangers and security systems.

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