Corporate Recidivism

September 27th, 2012 by Phil Mattera

The announcements by the Justice Department and the Securities and Exchange Commission that they had each charged Tyco International with engaging in foreign bribery was not just another all-too-familiar instance of corporate misconduct. It is an indicator of how a large corporation can be repeatedly drawn to illicit behavior even after being embroiled in a huge scandal that shook it to its core.

In the early 2000s, Tyco ranked with Enron and WorldCom as the leading symbols of the sleazy side of big business. In 2002 its chairman and CEO Dennis Kozlowski resigned amid reports that he was being investigated for evading more than $1 million in sales taxes due on artwork for his $18 million apartment on Park Avenue.

That was just the beginning. Kozlowski and Tyco’s former chief financial officer Mark Swartz were then indicted in a racketeering lawsuit charging them with looting the company of some $600 million through stock fraud, falsified expense accounts and other means. During their trial, details were revealed about Kozlowski’s lavish lifestyle—including what would become an infamous $6,000 shower curtain—based on what the prosecution called his misappropriation of company funds. In 2005, the two men were convicted of fraud, conspiracy and grand larceny; they were sentenced to 8-25 years in prison.

While the actions of Kozlowski and Swartz were meant to enrich themselves, Tyco benefited from other questionable maneuvers, such as the transfer of its corporate domicile offshore to Bermuda to avoid paying some $400 million a year in federal income taxes. In December 2002 the company, acknowledging what had long been suspected, admitted that for years it had engaged in financial gimmickry to inflate its reported earnings.

An internal investigation documented that Tyco managers had been openly encouraged to engage in creative accounting to give investors a misleadingly rosy view of how the company was performing. At the time, Tyco reduced its stated earnings by $382 million and later reported another $1 billion in accounting irregularities. In 2006 Tyco agreed to pay $50 million to settle SEC charges related to the accounting improprieties, and the following year it paid $3 billion to settle related class-action investor lawsuits.

In an effort to improve its reputation with shareholders, Tyco has undergone several restructurings and spinoffs. It also moved its legal headquarters from Bermuda to Switzerland, where the tax avoidance possibilities are apparently even more attractive.

Yet the one thing that should have been the top priority—ending its ethical shortcomings—apparently fell off the list, if the new SEC complaint is any indication.

According to the agency, Tyco repeatedly violated the Foreign Corrupt Practices Act through illicit payments to officials in more than a dozen countries during a period that began before 2006 and continued at least until 2009. After settling its earlier case with the SEC, Tyco allegedly continued to cook its books to disguise the bribes its subsidiaries were paying in places such as Turkey, China, Thailand, Malaysia, Egypt and Saudi Arabia.

At the same time the SEC and Justice Department revealed their actions against Tyco, the agencies announced that the company had settled the civil and criminal charges by agreeing to pay a total of $26 million—less than what it paid the SEC six years ago.

This comes across as a slap on the wrist for a company which had previously been accused of serious accounting fraud and which was supposed to cleaning up its act. The fact that Tyco could be granted a non-prosecution agreement for the criminal conspiracy charge is especially odious.

Both the SEC and Justice seemed to be trying to justify the light penalties by praising Tyco for cooperating in the investigation of the bribery. Yet this is the same company that was supposed to have rooted out its culture of corruption long ago.

It didn’t do a very good job of that, and the $26 million penalties—for a company with more than $17 billion in annual revenue and $1.7 billion in profits—does not create much pressure to end the profitable misconduct.

If there’s one thing that can be said for Kozlowski and the others who looted Tyco and cooked its books, it’s that they thought big. The prosecutors deciding on penalties for the company’s misdeeds should do the same.

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