New York prosecutors have secured their first guilty plea in a mammoth securities fraud case against ousted Tyco ( TYC) insiders. Frank E. Walsh, Tyco's lead director until February, agreed Tuesday to pay $22.5 million to settle charges that he violated New York's general business law. Walsh pleaded guilty to the charges after he was arrested Tuesday by the Manhattan district attorney's office for collecting $20 million in undisclosed fees for his role in Tyco's $9.5 billion acquisition of the CIT financial services outfit last year. Tyco has since spun off CIT in an initial public offering that raised less than half the sum Tyco originally paid for the company. The company divested itself of CIT amid a perilous summer liquidity crisis, from which Tyco emerged only after a wholesale management change and a promise to revamp its governance setup. Even now, with the stock having doubled off its summer lows, investors have lost billions of dollars betting on Tyco stock in recent years. Walsh must now repay Tyco his entire acquisition fee -- half of which Tyco donated to a charity in Walsh's name -- in addition to a $2.5 million fine. Without a settlement, Walsh could have faced up to four years in prison or a $40 million fine. The spotlight in the Tyco case will now turn to the other executives at the top of the company at the time of the CIT deal. Walsh's conviction stems from actions that began nearly two years ago, when Walsh learned about Tyco's interest in purchasing CIT -- a company in which he personally held a 50,000-share stake. In early 2001, Walsh offered to assist with the acquisition by arranging a meeting between former Tyco CEO Dennis Kozlowski and the CEO of CIT. Afterwards, Kozlowski secretly promised Walsh an investment banking or finder's fee if the acquisition prevailed.
According to the D.A.'s complaint, Walsh actively submitted, discussed and voted for the CIT acquisition without ever disclosing to the full board that he would be compensated if the deal went through. Not until this January -- 10 months after the acquisition was approved, and seven months after Walsh pocketed his fee -- did the board learn that Tyco had paid Walsh for his role in the acquisition. "The defendant participated in the board's discussions and, along with all the other members of the board, voted in March 2001 in favor of the purchase of CIT," Manhattan D.A. Robert M. Morgenthau alleged in Tuesday's complaint. "The defendant, however, failed to disclose to other members of the board -- apart from L. Dennis Kozlowski and
former CFO Mark Swartz -- that he would receive a substantial fee from the transaction." Altogether, the D.A.'s office has accused former Tyco insiders of stealing $600 million from the company. Kozlowski and Swartz, as well as former general counsel Mark Belnick, have so far pleaded innocent to charges that they looted the company. Tyco's stock, hammered this year by relentless scandals, barely budged on news of Walsh's conviction. The stock slipped 17 cents to $16.96 Tuesday afternoon.