Tyco Scandal Business Case Analysis

Part 1- Facts of the Case

A. Description of the company before the scandal.
Prior to the Tyco scandal, the company was one of America's largest conglomerates, with operating
revenues of 38 billion dollars and 240,000 employees, worldwide. Tyco Laboratories began
operations in 1960, performing experimental work for the U.S. government. The firm went public in
1964 and quickly expanded, mostly by acquisition, to exploit the commercial applications of its work.
Dennis Kozlowski joined the company in 1975 as an assistant controller. The company subsequently
shifted its focus from growth to profits within its three primary divisions: fire protection, electronics,
and packaging. Kozlowski joined Tyco's board in 1987 and became president and chief operating
officer two years later. Kozlowski engineered a coup to become Tyco's chief executive officer (CEO) in
1992 and the chair of the board in 1993. He diversified the company, branching into health care.
Tyco eventually became the second largest producer of medical devices in the United States. On
December 5, 2001, the Tyco shares were trading for 59.76 on the NYSE.
B. Identification of all individuals or firms who knew about, participated in, or
condoned the behavior.
The primary people that were identified for responsibility of the scandal were Dennis Kozlowski and
finance chief, Mark Swartz. Kozlowski joined the company in 1975 as an assistant controller at Tyco.
He worked in the company during a time of rapid expansion and moved to the board of directors in
1987, become CEO in 1992, and became chairman of the board in 1993. Kozlowski was known for his
vicious acquisitions, and gained a lot of attention by his extremely lavish lifestyle.
Mark Swartz was the Chief Finance Officer of the company and worked under Kozlowski. It was
determined during trial that the two had worked synonymously in committing fraud, and working
against the shareholders. Both of them ended up receiving the same punishment for their dual
efforts in committing the crimes. By the time the dust had settled, 220 of the 250 top managers had
been replaced for either not catching the theft, or for allowing it to happen, openly. The remainder of
the 250 top managers resigned shortly after.
C. How was the scandal uncovered and by whom?
The situation began to unfold when the Securities and Exchange Commission was probing into a
restatement of the company's stock price. Kozlowski's business practices raised some eyebrows. In
1999, the Securities and Exchange Commission (SEC) initiated an inquiry into Tyco's practices that
resulted in a restatement of the company's earnings. In January, 2002, questionable accounting
practices came to light. Tyco had forgiven a $19 million, no-interest loan to Kozlowski in 1998 and
had paid the CEO's income taxes on the loan. It was found that he company's stock price had been
overrated, and that the CEO and CFO had sold 100 million dollars' worth of shares, and then stated
to the public that he was holding them, which was a misrepresentation and misled the investors.
The major conspiracy was uncovered by Manhattan District Attorney, Robert Morgenthau, who was
investigating Kozlowski for income tax evasion for some fine art work that he had purchased. As
Morgenthau kept digging into the record keeping of Tyco and Kozlowski, it was determined that
there were other situations that had occurred, such as a 10 million dollar loan that was totally
forgiven by Tyco, and all interest was billed to the corporation. It became apparent on January 29th,
of 2002, that there were some bad decisions taking place when it was uncovered that Director Frank
Walsh received a 10 million dollar transaction for arranging a purchase of CIT group.
Probably the most disturbing thing of all this ordeal was that there was not an individual
whistleblower. The scandal was caught by groups that were put in place to prevent dishonesty and to
protect investors. The problem with this is that the SEC only caught this once it had already spread
extensively. If someone would have blown the whistle sooner this would not have been allowed to
spread like it did, and would have been caught much sooner.
D. What was done with the information retrieved?
When this information was uncovered, the company filed a lawsuit against the people that were
involved. Kozlowski hired an attorney that defended his actions, citing his immense charitable
donations, from money that he had acquired wrongly. Their defense was that they were corporately
responsible people, who were shown as criminals by the media. Kozlowski claimed in court that he
had acquired all of his perks and money honestly, and said that he had disclosed all of his actions to
the company.
E. How did the company and the subject react?
The district attorney, Owen Heimer, asked the judge that no leniency be shown to Kozlowski,
because of his excessive spending spree and disregard for the shareholders of the business.
Kozlowski stated in his trial for the judge to be as "lenient as possible" and to consider "all the
positive things I have done in my life." His lawyer, Stephen E. Kaufman, read from letters written on
his client's behalf and said, "He's a good man. He's a decent person and his reputation has been
tarnished but his life should not be destroyed."
F. Additional facts and analysis of the case.
During the trial, it was discovered that Kozlowski was living an extremely lavish lifestyle. In one
testimony, it was noted that Kozlowski owned an 18 million dollar Manhattan apartment, with a
6,000 dollar shower curtain. In addition to this information, it was also noted during trial that his
wife's 40th birthday party cost 2.1 million dollars, at Tyco's expense, including a life sized statue of
"David", and a performance by Jimmy Buffett on a Mediterranean island.
Part 2- Civil Trial
A. Provide key details about the trial and provide a timeline of key trial events.
The entire trial occurred based on finding from the SEC. Dennis Kozlowski was right at the peak of
his career, during the events that led up to this conviction. On January 14, 2002, Dennis Kozlowski
was named as one of the top 25 managers of 2001. By January 22, 2002 Kozlowski planned to split
the company into four independently traded companies. This caused a rapid slide in the stock price
of the company. On January 29, 2002 the stock price falls again, sharply, due to the SEC disclosing
that one of the directors, Frank Walsh, had made a 10 million dollar profit off of deal between CIT
and Tyco. On January 30, 2002, it is further discovered that both Kozlowski and CFO, Mark Swartz
sold 100 million dollars' worth of stock despite telling investors that they rarely sell their stock. On
June 3, 2002 Kozlowski resigns his position as CEO as news surfaces that he is under investigation
for sales tax evasion by the Manhattan District Attorney. One day later the district attorney issues a
criminal indictment against Kozlowski for evading more than 1 million dollars in taxes for fine art
purchases. By September 12, 2002 the entire plot had unfolded and the District attorney issues
another criminal indictment that accuses the defendant of enterprise corruption by stealing over 170
million dollars from Tyco and obtaining 430 million dollars by committing fraud against the
company. By December 17, 2002 Frank Walsh had plead guilty to trying to hide 20 million dollars in
funds from the CIT transaction with Tyco.
On October 7, 2003 the trial of Kozlowski and Swartz begins. The trial began with a statement from
the defense team, in which Kozlowski and Swartz were portrayed as crime bosses who looted the
business, with no regard for anyone but themselves. The defense opened with statements that they
were good and honest men that were being portrayed as criminals by the media. On October 28,
2003 the jury was shown video tape of Kozlowski at his wife's birthday party, where he spent 2.1
million dollars for one night, billed to Tyco. Another hit to the defense was when the jury was shown
a picture of his 6,000 dollar shower curtain. This occurred on November 25, 2003. The trial dragged
on into April of 2004, when the judge declared a mistrial when juror, Ruth Jordan, appeared to make
an "ok" sign to the defense team. It was never determined what this sign meant, but nevertheless,
justified the mistrial.
The next trial for Kozlowski and Swartz began on January 26, 2005 with a new twist from the
prosecution. In the first trial they had focused on how the two spent the money that they had stolen
from Tyco, rather than focusing on the fact that the two did steal the money. This time, there was no
mention of the expensive birthday party, or the expensive shower curtain. On April 27, 2005
Kozlowski takes the stand, and testifies that all the money he had obtained had been done so legally
and that he was fully entitled to. This was a twist as well, because Kozlowski had not taken the stand
in the first trial. Finally, on June 17, 2005, Kozlowski and Swartz were found guilty of all charges
minus one.
B. Description of the victims and how they were injured
There was one victim in this case, the company, Tyco. This victim consisted of the employees, the
shareholders and everyone who had a stake in the company at the company. When this theft
occurred, the whole company suffered immensely, the stock prices fell sharply, and the people
involved are the ones that experience problems.
C. Analysis of claims that were brought by the plaintiffs against the defendant(s)?
The defendants were found guilty on 12 counts of grand larceny, eight counts of first degree falsifying
business records, one count of fourth degree conspiracy and one Martin Act count of securities fraud.
The principal charges concerned defendants' theft of four multi-million dollar "bonuses" between
1999 and 2001.
These charges arose primarily out of abuse of the key employee loan program (KELP) and the
relocation loan program. The defendants took out several loans and then forgave them by calling
them "bonuses", but none of the forgiven loans were approved by the board of directors. The loans
that they were taking advantage of were to be used for relocation expenses, and the KELP was a loan
program that was designed to help key employees pay taxes on stock options. Rather than using the
loans for these purposes, the loans were used for living an extravagant life, by purchasing expensive
paintings, ownership in a professional baseball team and a plethora of other living expenses.
D. Analysis of settlement agreement and trial
The subjects did not enter into a settlement agreement, but decided to go to trial. They claimed
throughout the trial that they were entitled to all the bonuses and loan forgiveness that they received
from the company. They defended their actions to the end, and even at the end of the trial, when they
were being sentenced; they asked the judge for leniency, due to the amount of money that they gave
to charities, even though the money that they donated was stolen from the company and the
shareholders. Then never did seem to understand that what they did was wrong and believed that
they were entitled to everything that they received.
E. Verdict and justification thereof
The subjects were found guilty on all, but one of the charges that were brought against them. I
believe that it was fair, but what I don't understand is how it happened without anyone blowing the
whistle on the organization. Even though they did this and got away, there were a handful of other
names that came up that knew that this whole thing was going on and didn't do anything at all about
it.
When I read about all the different things that these people were doing with the money it was enough
to make me sick. For example, buying your dog a 6,000 dollar umbrella holder, and putting a 6,000
dollar shower curtain in your bathroom is so wasteful. Not to mention the birthday party that he
threw for his wife for her fortieth birthday. The party cost 2.1 million dollars, and included a life size
ice statue of "David" urinating vodka, and an appearance by Jimmy Buffett, all paid for by Tyco.
When I was reading the court hearing where it was said that Tyco authorized this I was really
surprised. This seemed like such a poor defense to me, based on the lineup of silly things that he had
spent the money on. It seemed very unlikely that the board would have approved of those expenses.
The case that the prosecutor brought against them was very solid, and the defense supplied by the
defendants was weak, and unsupported by documentation. I was convinced that they were guilty,
and believe that they got what they deserved.
F. Analysis of appeal/mistrial
The first trial was declared a mistrial, because one of the jurors was saw giving an "ok" signal to the
defense table. There was a write up in the New York Times, with a caption drawn by an artist
showing the image. The juror later received death threats from all over the nation, but it was not
determined what was meant by the signal.
The subjects in this trial appealed the first decision of "guilty". They based their appeal on
information that was obtained by Boies Schiller & Flexnor LLP, a company retained by Tyco to
represent the case against the defendants. Some of the information that Boies submitted at the trial
was not made known to the defense team and was forced by the court to make it available. The
defendants based their appeal on this testimony and the case was granted appeal to the New York
Court of Appeals.
Part 3- Ethics
A. Description of the illegal or unethical behavior.
The illegal and unethical behavior occurred when the CEO and CFO were taking transactions that
were not approved by the board of directors. The board of directors was to approve every bonus, or
loan forgiveness, as a bonus reward. The loan programs that were used by the CEO and CFO were
also abused. They were to be for relocation expenses and such, but were used to buy lavish items for
general living.
B. Occurences of defendant's defense
The defendants were charged for one count for each occurrence that they had committed. In all, they
were charged with 12 counts of first degree grand larceny, eight counts of first degree falsifying
business records, one count of first degree conspiracy, and one Martin Act count of securities fraud.
By the time it was done, they had been charged with 22 occurrences. Many of these could have
occurred at the same time, but in the end 22 offenses had been made and accounted for.
The subjects would have likely continued on living like this forever had they not been caught. This
seems to be the reason that the court had no leniency with them, and the prosecution asked that no
leniency be shown. The defense tried to argue that the company remained intact, which it did, but
things were getting ready to spiral out of control and it could have been far worse, very quickly, had
someone not caught them.
C. Ethics and social responsibility
The defendant's actions were ethically irresponsible because they were stealing money that they were
not entitled to from the board of directors and the shareholders of the company. This is something
that they were found guilty of, and a normal human being would understand that this is not
something that is ethically responsible.
Their actions were not socially responsible because there were people, investors, which had trusted
the words of the CEO and CFO, believing that they had not sold their shares as they had indicated.
When the truth had emerged, they had both sold 100 million dollars of their stock, because they
knew that the decisions that they were making were going to cause the stock price to fall and they
didn't want to be invested in it. When the stock price did fall, these investors had made bad
decisions, based on the information that they were given by the defendants, which was false to begin
with. Their actions were not only ethically irresponsible, but socially irresponsible as well.
D. Consequential, deontological and humanist theories analysis Consequentialism is the
ethics of consequence. Basically, it means that every action will have a consequence to it and that
good consequences are worth the struggle, or the opposition. If a bad consequence occurs then it is
the payment for the action, because the person has to live with that decision. The outcome of the
ethics is based on the consequence. Kozlowski didn't seem to care about the consequences of his
actions, however, on some level it could be argued that he used his money to help non-profit groups,
but he still benefitted from this by creating a tax shield.
Deontological ethics focuses on a deity, or a divine entity guiding the actions of the person that is
creating the ethical judgment. I see no indication that there was any higher power involved in the
case of Dennis Kozlowski. He operated on his own merit, by laws that he had created and then
excused himself, because he did not violate those laws.
Humanism, on the other hand does seem to fit with Kozlowski and the choices that he made. Morals
are based on human reason, intuition, or other human characteristics. There is not a responsibility to
a higher power and therefore the subject is open to do things at their own discretion. I believe this is
what Kozlowski did. He created his own rules, based on his own understanding and did not violate
them because they were corrupt at their very core.
E. Case theory subscription
I believe that the best fit is the Humanist Ethics in this case. Kozlowski showed no remorse for his
actions, which tells me that in the core of his conscience he had not violated his ethical beliefs. Even
though the law convicted him, he did not believe that he was wrong and was confident in the bad
choices that he had made. His thoughts were directed in the wrong direction and leveraging the
wrong base points and therefore failed on every level. He never even realized that anything was
amiss, because he was flawed from the root of his foundation.
F. Violations of ethical codes
One of the worst ethical violations that were made in this case was the fact that Kozlowski was telling
the shareholders that he rarely, if ever sells his stock. He was doing this so that investors would
pump money into the company, but wasn't holding his stock, because he knew that his actions were
risky and reckless. By doing this, he led the investors to believe that he was confident in the
investment, with all of his inside information, but then turned around and placed his money
elsewhere. This made his numbers look good, as investments flowed in, but put all the risk of his bad
decisions into the hands of the shareholders who had trusted his word; a lie.
Another ethical violation that he made was his donations to charity. I thought that this was the most
disgusting part of the whole trial. He kept pleading for leniency based on the amount of money that
he had given to charities. No one seemed to take the time to point out that the money he was
donating was stolen from others, and that the donations were really only tax shields for his
fraudulent operations. He was acting on the boards of the non-profits that he donated to and was
making money from that as well. His intentions were totally unethical and he played with people for
his own personal gain.
G. Five schools of social responsibility anaysis
From the perspective of ethical fundamentalism Kozlowski's actions do not even fit into this model.
He had no central figure that he was looking to for guidance. He seemed to be looking to himself to
make the decisions and wanted to make more for himself and those that he favored. If his values had
been formed by a central figure, such as Jesus Christ, he would have likely acted in accordance with
that figure and his actions could have been different. A focus on a figure like Jesus would have forced
him to think about others rather than himself, which is probably why he didn't have that figure in his
life.
From what I see in studying Kozlowski, it seems that Unitarianism is more the school of ethics that
he favored. The reason that I say this is that on some level, he actually thought that he was doing
good because of all the money that he had given to charities. This continually strikes me as a strange
way to look at things, because the money was stolen to begin with. No amount of good that a person
does with stolen money changes the fact that is was stolen.
I don't really see Kozlowski as following a Kantian ethics model either, with one strange twist; I
believe that it is possible that he believed that others would have done the same to him had they been
given the opportunity, and therefore he acted in advance of what he perceived others doing to him.
To those that were close to him and internal into the business, he believed that they would do him
good, so he pulled them into the system of theft as well.
Rawl's Social Justice Theory has no application with Kozlowski. He cared about no one but himself
and what he could achieve. It is possible that he respected those lower than him because he gave to
charities, but I believe he only donated to charities as a tax shield based on what I read of him.
Ethical Relativism is the number one model of ethics for Dennis Kozlowski. He created his own rules
and governed his own ethics. I believe that this is why he never saw anything wrong with the things
that he was doing. Even until the end he maintained that he didn't do anything wrong. I believe that
because he was judging himself by his own standard, which was created by him, and realizing that he
had not broken any of the pre-established rules, he felt innocent. He had no stakeholder interest in
mind when doing the things that he did, and only cared for himself.
H. Ethical theory analysis
I was reading up on Kantian ethics, where it is said that people should do unto others as you would
have them do unto yourself. When thinking about this, even if the law would have supported the
actions of Dennis Kozlowski, he was ethically doing things that were incorrect. He was acting in a
manner that was not in the best benefit of the common man. On the same principle with Kantian
ethics, if a person makes an exception to a rule, then that rule applies to everyone else. In this
situation, Kozlowski made rules that applied to him, and an elite few that were within his group. By
doing this, the principle of Kantian ethics, he was binding himself to an agreement that he was
willing to be treated that way as well. When the judge ordered him to pay restitution, and sentenced
him to jail time it was to pay a fee to humanity to do unto them the way that they needed to be
treated.
Part 4- Criminal Activity and Results
A. Description of illegal behavior
The illegal behavior occurred when the defendants lied. Their lies were tied to theft of money and or
loan programs. This caused the fraud to become larceny. They used their positions to authorize
payments that they were not entitled to. They used these payments to purchase parties, fine art
paintings, and other extravagant items. The defendants also used special loan programs that were
designed for key employees that were to be used in the event of relocation and other needs that may
be incurred, such as taxes on bonus payments. Once the employees had maxed out the total amount
that they could take, they sought to forgive the loans, through fraud. Once the loans were forgiven
they began to rack up the loans again. They were using the loan programs as an ATM machine
essentially, without informing the board of their actions. There was a specified process that they were
required to go through to obtain the funds, but they were not using it. The times that they did use the
process, they were forging signatures and using false information.
B. Trial court
The trial was first tried in the New York State Supreme Court and the second was tried in the New
York Appeals Court. The reason that they were tried in the New York Supreme Court first was
because of the location of the crimes. Manhattan was where most of the crimes were committed and
the
C. Original indictment charges
The defendants were charged with larceny, falsifying business records, conspiracy, and securities
fraud. In all, they were charged with 12 counts of first degree grand larceny, eight counts of first
degree falsifying business records, one count of first degree conspiracy, and one Martin Act count of
securities fraud. By the time it was done, they had been charged with 22 occurrences.
Each of these charges was based on an action that the defendants had committed. The evidence
weighed heavily against them and from what I can tell, they easily could have been charged with
more than they were. It seems as if the prosecution went forward with the information that they
knew they could pin on them because they wanted a conviction. They were probably guilty of far
more than they were charged with.
D. Key details and timeline analysis
The entire trial occurred based on finding from the SEC. Dennis Kozlowski was right at the peak of
his career, during the events that led up to this conviction. On January 14, 2002, Dennis Kozlowski
was named as one of the top 25 managers of 2001. By January 22, 2002 Kozlowski planned to split
the company into four independently traded companies. This caused a rapid slide in the stock price
of the company. On January 29, 2002 the stock price falls again, sharply, due to the SEC disclosing
that one of the directors, Frank Walsh, had made a 10 million dollar profit off of deal between CIT
and Tyco. On January 30, 2002, it is further discovered that both Kozlowski and CFO, Mark Swartz
sold 100 million dollars' worth of stock despite telling investors that they rarely sell their stock. On
June 3, 2002 Kozlowski resigns his position as CEO as news surfaces that he is under investigation
for sales tax evasion by the Manhattan District Attorney. One day later the district attorney issues a
criminal indictment against Kozlowski for evading more than 1 million dollars in taxes for fine art
purchases. By September 12, 2002 the entire plot had unfolded and the District attorney issues
another criminal indictment that accuses the defendant of enterprise corruption by stealing over 170
million dollars from Tyco and obtaining 430 million dollars by committing fraud against the
company. By December 17, 2002 Frank Walsh had plead guilty to trying to hide 20 million dollars in
funds from the CIT transaction with Tyco.
On October 7, 2003 the trial of Kozlowski and Swartz begins. The trial began with a statement from
the defense team, in which Kozlowski and Swartz were portrayed as crime bosses who looted the
business, with no regard for anyone but themselves. The defense opened with statements that they
were good and honest men that were being portrayed as criminals by the media. On October 28,
2003 the jury was shown video tape of Kozlowski at his wife's birthday party, where he spent 2.1
million dollars for one night, billed to Tyco. Another hit to the defense was when the jury was shown
a picture of his 6,000 dollar shower curtain. This occurred on November 25, 2003. The trial dragged
on into April of 2004, when the judge declared a mistrial when juror, Ruth Jordan, appeared to make
an "ok" sign to the defense team. It was never determined what this sign meant, but nevertheless,
justified the mistrial.
The next trial for Kozlowski and Swartz began on January 26, 2005 with a new twist from the
prosecution. In the first trial they had focused on how the two spent the money that they had stolen
from Tyco, rather than focusing on the fact that the two did steal the money. This time, there was no
mention of the expensive birthday party, or the expensive shower curtain. On April 27, 2005
Kozlowski takes the stand, and testifies that all the money he had obtained had been done so legally
and that he was fully entitled to. This was a twist as well, because Kozlowski had not taken the stand
in the first trial. Finally, on June 17, 2005, Kozlowski and Swartz were found guilty of all charges
minus one.
E. Plea entry and charges filed
Both the defendants plead not guilty to all of the charges. They proceed to trial, never admitting that
they ever did anything wrong. The proclaimed their innocence to the end, where they are found
guilty on all charges except one. Had they entered a plea deal, I am not sure that they would have
been shown leniency, because they were already defined by the actions that they had taken part in.
The entire trial was pretty chaotic, and it seemed that the general feel of the news media was that
corporate executives have to be shown a clear message so that this doesn't happen again. I don't see
that this was communicated to the jurors, or the court, but the media was certainly portraying it this
way.
On the other hand, had the subjects never went to trial, and then much of the evidence about their
lavish lifestyles would have been kept from going public. In all honesty, had I done the things that
these people did, and had to rely on the mercy of the court to determine my fate, I likely would have
fought it too, because they had done some pretty shady things and the mercy of the court seemed to
be pretty thin.
F. Sentencing and fairness analysis
The sentence that was passed on to Kozlowski was 8.33 years to 25 years. Given the sentence that he
was given he would be eligible for parole as early as 2014. In addition to the prison sentence, both
Kozlowski and Swartz were ordered to pay 134 million dollars in restitution for their actions. The
settlement was divided up where Kozlowski is to pay 70 million dollars and Swartz is to pay 35
million dollars.
In addition to the sentence, the punishment that was not handed down by the court is that his wife
visited him only once in prison and that was to tell him that she is suing him and filing for divorce.
She remarried shortly after she placed a lien on his mansion.
I believe that the sentence is fair. The company did not collapse. Yes, his actions are appalling, and
he acted like a pig, but the company remained intact, and they left a paperwork trail, discarding of
absolutely no evidence. This leads me to believe that they probably actually thought that they were
doing something that was allowable and legal. In addition to this, Kozlowski is ruined. He owes more
restitution than he is worth, he is old, his wife has a lawsuit against him and no one will ever trust
him to manage anything ever again. Whether he gets out on parole, or dies in prison, he will not be
able to return back to the lifestyle that he once had, and will have to face the world as a common
man. I think that this is the correct punishment for him, because it will force him to see the damage
that he caused to the common man, those that he betrayed, and become vulnerable like they are, and
be a product of the society that he helped to create. Many workers lost their retirement and their jobs
as a product of his actions and he should have none as well. The restitution will help the company
replace those jobs and retirement plans.
G. Appeals and Mistrial
The first trial was declared a mistrial, because one of the jurors was saw giving an "ok" signal to the
defense table. There was a write up in the New York Times, with a caption drawn by an artist
showing the image. The juror later received death threats from all over the nation, but it was not
determined what was meant by the signal.
The subjects in this trial appealed the first decision of "guilty". They based their appeal on
information that was obtained by Boies Schiller & Flexnor LLP, a company retained by Tyco to
represent the case against the defendants. Some of the information that Boies submitted at the trial
was not made known to the defense team and was forced by the court to make it available. The
defendants based their appeal on this testimony and the case was granted appeal to the New York
Court of Appeals.
H. Mens rea and actus reus
Kozlowski had both mens rea, and actus reus. The actus reus was because he committed the guilty
act. He was responsible for committing the crime of theft from Tyco. The Mens rea was committed as
the prosecution began uncovering the paperwork trail that showed that he was forgiving loans and
abusing the programs so that he could enjoy his wild lifestyle. There was not only a performance of
the prohibited act, but criminal intent to do so as well. With both of these present, it showed that
there was an intent to do harm, and he was convicted as such. He claimed during the entire trial that
the mens rea was not applicable because he didn't know what he was doing was wrong. He
maintained throughout the duration that he believed he was doing something that he was entitled to.
Most likely this was in an effort to offset being stuck with a crime of intent. The actus reus, was never
disputed by Kozlowski. He claimed diligently that he left the paper trails in place to support the mens
rea that he knew not what he was doing.
I. Constitutional protection analysis
The constitution granted the subject the Fifth Amendment which is the opportunity to not
incriminate them, or to have to testify against them. Dennis Kozlowski took advantage of this right
during the first trial and waived it in the second trial. His defense team never indicated why this was
done, but it was his right to not take the stand if he didn't want to do so. The other protection that he
had was the right to due process. This right was given to him, and the first time it appeared that one
of the jurors had been bought off so the court worked in favor of having a fair trial and declared a
mistrial and moved forward again with new jurors and a new attempt to build a case in favor of
defense. The constitution was honored during the proceedings and was legal and fair.
Part 5- Leadership
A. Leadership success analysis
Dennis Kozlowski delivered an entire decade of profits and expansions to the business. He acquired
CIT Group for 10 billion dollars, which expanded Tyco into the financial sector. He increased sales by
25%, up to 36 billion dollars in 2002. Perhaps his greatest accomplishment was how he made the
business recession proof, by investing into industries like healthcare, which was not a market that
Tyco was previously involved in. He also cut 11,500 jobs, reducing overhead by 350 million,
preventing the electronics industry from collapsing the company. He was greatly criticized for his
decision to invest in fields of business that had not been ventured into before. By doing so, he was
able to create growth and expand the business into realms that had never been seen before at Tyco.
B. Cultural contribution of the company to the scandal
Tyco's culture had quite a bit to do with contributing to Kozlowski's failures. When the SEC began
investigating Tyco, during the first investigation it was found that Tyco used questionable accounting
practices. Employees were told to push the envelope to create earnings for the company. These
earnings were largely overstated, and it was a known fact to upper management, and even
encouraged by them.
A 33 page report, written by David Boies, a lawyer who represented Tyco in the midst of the SEC
investigation stated that Tyco "suffered from a pattern of accounting that, even when not erroneous,
was undertaken with the purpose and effect of increasing reported results above what they would
have been." In addition to these findings, it was also uncovered that the company "suffered from
poor documentation; inadequate policies and procedures to prevent the misconduct of senior
professionals that occurred; inadequate procedures for proper corporate authorizations; inadequate
procedures for corporate authorizations; inadequate approval procedures and documentation." In
one noted instance in the 33 page report, David reveals that one of the managers had a memo to
another manager that stated, "I would strongly recommend never putting this into writing."
The report of the company is geared toward the success of numbers, in any manner possible. Ethical
decisions were not rewarded, only inflated numbers were. People who knew how to play the number
games were the ones that were rewarded, with company cars, and then car allowances on top of that,
with relocation bonuses awarded to people who never relocated. The company was rotten to the core,
and in order to be a player the numbers had to be twisted significantly.
C. Schein's organizational analysis
Edgar Schein defines organizational culture as a pattern of basic assumptions, invented, discovered
or developed by a given group as it learns to cope with problems of external adaptation and internal
integration. When it has been deemed to work successfully, it is considered valid and therefore
should be taught to new members coming into the organization as the correct way to perceive, think
and feel in relationship to the solutions used to solve the organization's problems
What I see in looking at this definition of organizational culture is that the culture is invented,
discovered, or developed by a given group, as that group learns to cope with problems of external
adaptation and internal integration. What this tells me is that the given group in this case is the
senior and executive management of the organization. They developed different ways to deal with the
problems that they encountered, such as partying, committing fraud, strong arming others into
acquisitions and such.
Schein indicates from his definition that the culture of a business is defined as the group moves
through tough circumstances and reacts to tough situations. The definition seems to say that the way
that the officers react to these challenges in order to win, will define the culture of the company. With
this being said, I believe that it did. When executive management responded to the situations in an
unethical manner, everyone else did as well.
D. Cultural manifestation analysis
I get a great deal of information from the PowerPoint presentations. What I see that stands out is the
Autocratic style of Dennis Kozlowski. Based on the presentation, there are two types of autocratic
leadership, the reward, or the punishment. The reward style is the one that I see Kozlowski using
throughout his reign in management. He used rewards and recognition, but did it in a way that
supported wrong behaviors. This allowed everyone to be rewarded for doing what the upper level
managers wanted them to do, appearing that the subordinates are the ones pulling the strings, when,
in fact, it is the senior management that is pulling all of the strings. From the outside it appears that
everyone is working diligently and in charge of their own destiny, when they are not.
I also agree with the culture of the company being determined by the senior management. The
decisions of senior management have a lot to do with the way that people perceive the company
should behave like. If senior management is doing the right things, then people will want to do so as
well. If they are doing the wrong things then people feel as if they have a "get out of jail free card",
because it is the culture of the company to behave in this manner. They were part of a group culture
created by Kozlowski and it was wrong.
E. 7 dimensions of organization analysis
The first of the seven dimensions is innovation and risk taking. This was definitely present in the
organization. All of the managers were persuaded to take risks, by becoming "creative" with their
accounting practices, and the way that they reported the numbers. In one of the instances reported,
they would charge more to their salesmen for ADT security services and then have them refund a
portion, and charge that amount as income to the business. They inflated the numbers up drastically
by doing this sort of thing.
Secondly is their attention to detail. I do not see this as much as the prior dimension. Their attention
to detail was somewhat poor. They did not document correctly, they did not go through the proper
channels to approve benefits or bonuses, and the board of directors was nearly clueless that anything
was going on, as the Chairman and the CFO were cleaning the company's resources up, and going on
massive spending sprees.
Third is the outcome orientation, which was not demonstrated effectively either. The orientation of
the outcome was to be short lived. They were living in the short term, inflating the business with
numbers that could not be sustained in the long term. They were doing things that would be revealed
in due time, and could not be concealed for the long term duration of the company. The outcome was
always failure from the start. If something like this would have gone unnoticed, the company could
have been driven all the way into the ground.
Fourth is people orientation. The orientation of the people was to serve the senior executives. I
attribute this to the fact that there was an autocratic form of governance in the business. There were
bonuses and other forms of compensation that were given to employees that did what senior
management wanted them to do, but there was also a fear in the company of what would, or could,
happen to someone who went against the grain. This is why there was no whistleblower in the ordeal.
The team orientation was a smaller group of mid managers and upper level managers that were
working toward making themselves very rich. There was no regard for what their decisions would do
to subordinates that reported to them. They didn't care that the company could not sustain pensions
and payroll for the people that were doing the real work, when the company collapsed. There was
only a small group of people that were on the team, and Dennis Kozlowski was pulling the strings of
these people to become very wealthy.
The sixth orientation is aggressiveness. This orientation was saturated into the very being of the
company. The name of the game was to win at all costs. They didn't want to hear that the numbers
were down. If they were down, then they wanted them up, whatever it takes to do so. It was probably
a very tough company to work for, and the internal competition was likely very fierce.
The final orientation is stability. This had a short run presence in the business. The actions that they
were taking were not sustainable in the long run. They propped up numbers with false transactions
and took money that they had not earned, all the while, spending it excessively. It was only a matter
of time until the company would have collapsed had they not been caught for what they were doing.
They cared nothing for the investors and the long term investment that many of them had made,
trusting that the company was being honest.
F. Influencing factors of behavior
One of the biggest challenges that he faced was being compared to Jack Welsh. When he began to
expand the company into other regions and the numbers were going up a person can see the
temptation to want to keep the numbers rolling in. The temptation to become the next Jack Welsh
was too much for him to handle and he wanted to do it at any cost. The only problem with his plan is
that it had a hole in it. The numbers could only sustain themselves for some time, before they began
to implode, because they were fake numbers to begin with. There was no full asset tied to the
numbers, because they were based on a lie, or some form of manipulation.
I wonder if the pressure to succeed in the ventures that he had extended himself to had not been so
great if he would have made the same choices. I tend to think that he would have, because he had the
internal drive to be a winner by the company's standards, but I don't know if the scale would have
been as great. It is hard to tell what would have been, but I believe that he had an ethical
misperception from the start that caused his failures.
G. Leader/manager comparison
From what I can tell, based on the research that I did, Kozlowski was more of a leader than a
manager. I think that is why the hurt to the company went so deep. He was able to lead in a manner
that built loyalty from the people that followed him. He knew how to form teams and create groups
and make sure that everyone felt like a family. For this reason, he was able to gain loyalty and got
away with far more than if he were only a manager. I do not believe that he qualifies to be a
transformational leader, as described below. He did have a strong vision of where the company was
headed and caused others to follow that vision. Although at some point, that vision became corrupt,
but nevertheless it was a vision and he had a strong following.
H. Trait and style analysis
Dennis Kozlowski seemed to be more of a trait leader. He had what people would have thought
would make a great leader, similar to King Saul in the Bible. He was out front, bold, adventurous,
and willing to take risks. He challenged conventional ways of doing things and was not afraid of
change. He would have been seen by the majority of shareholders to be a trait style leader.
The style approach to leadership seems to reveal Dennis Kozlowski a bit more. By breaking down the
leadership style of Dennis, and applying the five styles of leadership given in the slides, I can point to
either Country Club, or Team management approach. Most of the people that worked for Kozlowski
were treated very well, which would seem to feed back into the Country Club style of management.
He once made a comment at a 2 million dollar party, thrown by him, that this would show the key
growth trait of Tyco, the ability to party hard. Then, on the other hand of leadership styles, I can see
that he had leaned on his management team pretty hard to make good decisions, based on their own
expertise in their fields, and as a reward, they were overcompensated. This almost leads me to see a
team approach as well. The only thing that deters me from calling his strategy a team approach is
that teams have a shared stake in the outcome, and I see a special interest section of the group, with
a disregard for those below that level, which is why I lean more toward the country club management
style.
I. Analysis of transformational leadership
Dennis Kozlowski had many of the traits of a transformational leader, but did not have all of the
traits. What I see is a man that had the potential to be a transformational leader, but failed in doing
so. He had an attributed charisma, which was shown in his ability to talk to people and gain favor
with others. He demonstrated this ability when he was written up in Business Week Magazine as one
of the 25 most influential managers of 2001. He had all the abilities to do the job that was set before
him, and did it well. He did not seem to have a good grasp on idealized influence. He did what
needed to be done to succeed, both in the corporate world, and his own life, disregarding how that
affected others, or if it was ethically and morally responsible. This was demonstrated in his total
disregard for the company as he funneled millions of dollars of corporate money into his personal
bank accounts. He was also proficient in intellectual stimulation. He encouraged others to reach out
and find solutions to problems that the company was experiencing. The senior managers responded
well, coming up with ideas for mergers and implementing these ideas successfully. He had a trend of
inspirational actions, by generating millions of dollars to charity groups and various non-profits.
This seemed to send a sense of hope to the organizational members that they were doing the right
thing. In addition to all of this, he had a sense of individualized consideration, which mostly
consisted of financial rewards to the top leadership, but it was enough to inspire people to keep doing
things that had good consequences and made people feel like they were important to the business.
Par 6- Conclusion
A. Post scandal Tyco
The company is still operating, mostly because it was a legitimate business to begin with. It wasn't a
pyramid scheme or something like that, but was a viable conglomerate that functioned in a real
business environment, driven by dedicated people on the operations level.
The company's stock price dropped when the news of the scandal first broke. When the money was
reported missing, it was obvious that there was a problem, so investors sold the stock and the
uncertainty caused the price to declined. Once the money was noticed missing, the company
downsized and reformed to a much smaller, faster responding company. Many of the workers were
laid off during the reformation process. The new company is now ran by Bill Lytton, and legal is a
critical part of the company, which was not the case before.