agreed to pay a $50 million fine to settle
Securities and Exchange Commission
charges that it pumped up its numbers through phony accounting.
The agency said the bookkeeping missteps took place under the leadership of former CEO Dennis Kozlowski, who last year was convicted of looting the company and was sentenced to eight to 24 years in prison. The SEC says that between 1996 and 2002 the company used "improper accounting practices and a scheme involving transactions with no economic substance to overstate its reported financial results by at least one billion dollars."
Tyco had previously reported the $50 million charge in its public filings as the company's best estimate of the amount that Tyco would likely pay to resolve the matter with the SEC.
"This investigation was one of several legacy matters inherited by the current management team as a result of alleged wrongdoing on the part of previous management," said CEO Ed Breen. "We have cooperated fully with the SEC and are pleased to be able to close this chapter in Tyco's history. The settlement amount is consistent with our expectations and that of our shareholders -- so the resolution of this investigation will have no financial impact on the company beyond that which we announced nearly a year ago."
Tyco said its corporate governance rating from GovernanceMetrics International, an independent global corporate governance ratings agency, has improved from 1.5 to 9.0 on a 10-point scale in less than three years.
"This enforcement action shows that, in addition to looting the company, Tyco's Kozlowski-era management lied about the company's financial results," said Linda Chatman Thomsen, the SEC's director of enforcement. "Tyco benefited from this fraud, as the penalty in this case reflects."
The complaint alleges that Tyco inflated its operating income by at least $500 million as a result of improper accounting practices related to some of the many acquisitions that Tyco engaged in during that time.
The SEC says Tyco's improper acquisition accounting included undervaluing acquired assets, overvaluing acquired liabilities, and misusing accounting rules concerning the establishment and utilization of purchase accounting reserves. The complaint further alleges that, apart from its acquisition activities, Tyco improperly established and used various kinds of reserves to make adjustments at the end of reporting periods to enhance and smooth its publicly reported results and to meet earnings forecasts.
The complaint alleges that Tyco inflated its operating income by $567 million from its fiscal year 1998 through its fiscal quarter ended Dec. 31, 2002, by means of connection fees that Tyco's ADT Security Services subsidiary charged to dealers from whom it purchased security-monitoring contracts. Because the connection fee was fully offset by a simultaneous increase in the purchase price ADT allocated to the dealers' security-monitoring contracts, the connection-fee transaction lacked economic substance and should not have been recorded in Tyco's income statement. In 2003, Tyco restated its operating income and cash flow relating to the connection fees.
The complaint further alleges that, from September 1996 through early 2002, Tyco failed to disclose in its proxy statements and annual reports certain executive compensation, executive indebtedness, and related-party transactions of its former senior management. Tyco also incorrectly accounted for certain executive bonuses it paid in its fiscal years 2000 and 2001, thereby excluding from its operating expenses the costs associated with those bonuses. Finally, the complaint alleges that Tyco violated the antibribery provisions of the Foreign Corrupt Practices Act when employees or agents of its Earth Tech Brasil subsidiary made payments to Brazilian officials for the purpose of obtaining or retaining business for Tyco.