Why did Tyco's financial statements attract the SEC's attention in 2002?

By Andrew Beattie AAA
A:

Editor's Note: This information is accurate as of September 2008.

Hot on the heels of the Enron bankruptcy, ominous rumblings began around Tyco. A manufacturing conglomerate that produces almost everything, Tyco had such diverse product lines that it became a sturdy value investment. In 2002, however, Tyco's financial statements attracted a significant amount of scrutiny. In much the same way that Enron manipulated the majority of its debt to the footnotes, Tyco's statements suffered from a disproportionate amount of accounting noise. Investors and analysts started to question the accuracy of the financials and Tyco's stock price plummeted 19%.

To reassure investors, Tyco's CEO Dennis Kozlowski and CFO Mark Swartz announced that they would buy back half a million shares of Tyco stock on the open market. Usually, a high-level buyback is a signal to the market that the company thinks its stock is undervalued. What investors didn't know is that Swartz and Kozlowski had secretly sold millions of shares without announcing it. Kozlowski's attempt to reassure investors was short-lived.

In April, Kozlowski announced that Tyco would take a $0.96-per-share loss due to unusual costs. Two months later, he resigned for "personal reasons", which turned out to be a tax evasion indictment. Two more executives - CFO Mark Swartz and general counsel Mark Belnick - left Tyco over the summer and the company began to uncover the truth. In addition to secretly selling over $400 million worth of shares, the trio had taken out $170 million dollars worth of no/low interest personal loans from the company. None of the loans had been approved by Tyco's compensation committee. Further, the loans had been hidden from board members, shareholders and employees alike.

Tyco launched lawsuits against the former executives and the SEC filed charges in September 2002, making Tyco yet another example of how a company's executives can hurt the company, and the shareholders, they work for.

(For more on this subject, read Policing the Securities Market: An Overview of the SEC.)

This question was answered by Andrew Beattie.

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