Tyco agrees to pay almost $3 billion settlement

May 16, 2007|By New York Times News Service

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 yesterday.

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 L. 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 Edward D. 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 drastically through acquisitions, and its stock price soared to a high of $63.21 in 2001. The company vigorously disputed claims that it used aggressive accounting for acquisitions to inflate profits. But the Securities and Exchange Commission later concluded it had done just that and had hid millions in executive compensation.

Kozlowski and Mark H. Swartz, the company's former chief financial officer, were convicted of grand larceny, falsification of business records and conspiracy and are now 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 came out that Kozlowski had used Tyco money for lavish parties, including one that featured an ice sculpture of Michaelangelo's David dispensing vodka, and for expensive furnishing for a Manhattan apartment, such as a $6,000 shower curtain.

In the settlement, Tyco will pay $2.975 billion to those who bought Tyco securities from Dec. 13, 1999, through June 7, 2002, a few days after Kozlowski was forced to resign when 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. The investors also will continue their lawsuit against the former auditing firm and will be able to assert accounting malpractice claims on behalf of the company.

The SEC later barred Richard P. Scalzo, PricewaterhouseCoopers' lead partner in the Tyco case, 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.

Richard S. Schiffrin of Schiffrin Barroway Topaz & Kessler LLP, one of the co-lead counsels in the class action suit, said he expected that the company would 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, 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, since that depends on how many claims are filed and the formula adopted to split 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 filed by the SEC.

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