Kozlowski Could Do Jail Time If Convicted on Tax Charges

Tyco's(TYC Quote) former CEO Dennis Kozlowski could go to jail for four years if convicted of evading more than $1 million in personal sales taxes in New York. Kozlowski was indicted on the charges Tuesday, according to Manhattan district attorney Robert Morgenthau.

Kozlowski bought six paintings worth $13.2 million and had them shipped to Tyco's headquarters in New Hampshire allegedly to avoid paying New York sales tax. The paintings, which include Old Masters and Impressionists, were later returned to his home on Fifth Avenue.

The practice enabled Kozlowski to avoid paying $1.087 million in taxes between Aug. 11, 2001 and June 3, 2002, the district attorney said.

Kozlowski was charged with falsifying and tampering with business records as well as conspiring with the seller of the art to evade city and state sales tax.

Later in the day, Kozlowski is scheduled to be arraigned before a Manhattan Supreme Court judge.

News of a criminal investigation into Kozlowski's tax evasion sent shares of Tyco plummeting Monday, in part because the revelation lent credence to other allegations surrounding the firm's dubious accounting practices.

Tyco has come under intense scrutiny this year for the way it has accounted for and disclosed a series of acquisitions that fueled the firm's rapid growth and built it into one of the biggest conglomerates in the world.

In a statement Monday, Tyco said Kozlowski resigned "for personal reasons" but news reports suggested that the board of directors had demanded his resignation. By not directly firing him, Tyco was able to avoid a severance payout of some $120 million, according to The New York Times.

"Clearly Tyco's future direction is up for grabs," said Carol Levenson, an analyst at Gimme Credit. "It's unseemly to extrapolate from the CEO's alleged tax evasion to Tyco's complicated and disparaged accounting practices, but the SEC might be tempted to use this as an excuse to launch an investigation."

Levenson added that the events are "bound to increase investor wariness" and unnerve potential buyers of Tyco's CIT unit. Although Tyco has maintained that it doesn't need cash from the sale of CIT, Levenson believes it does.

"Maturities over the next 12-18 months are considerable and bankers are likely to be miffed about the credit line drawdowns," she said.

In addition, she noted that "distraction costs," which she calculates amounted to some $600 million in the second quarter, are likely to increase.

"Tyco is not in dire straits," she said, noting that the company continues to generate "plentiful free cash flow," but access to the capital markets have been "impaired to the point of being dysfunctional."

Shares of Tyco were virtually unchanged at $16.03 by midday.