SEC Files Enforcement Action Against Tyco

by Glen Shapiro, LawAndTax-News.com, New York

19 April 2006

The US Securities and Exchange Commission on Monday filed a settled civil injunctive action in the United States District Court for the Southern District of New York against Tyco International Ltd.

The Commission's complaint in that action alleges that, from 1996 through 2002, Tyco violated the federal securities laws by, among other things, utilizing various improper accounting practices and a scheme involving transactions with no economic substance to overstate its reported financial results by at least one billion dollars.

"This enforcement action shows that, in addition to looting the company, Tyco's Kozlowski-era management lied about the company's financial results," explained Linda Chatman Thomsen, the SEC's Director of Enforcement. "Tyco benefited from this fraud, as the penalty in this case reflects."

Scott W. Friestad, Associate SEC Enforcement Director, added:

"The Tyco accounting fraud was orchestrated at the highest levels of the company, but carried out at numerous operating units and management levels of the company. 'Push down' frauds like this are especially difficult to detect and investigate. Today's enforcement action shows that the Commission and its staff will pursue such misconduct and take appropriate action."

The Commission's complaint alleges that Bermuda-based 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. 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.

Without admitting or denying the allegations in the Commission's complaint, Tyco has consented to the entry of a final judgment permanently enjoining it from violating the antifraud, proxy disclosure, periodic reporting, corporate recordkeeping, and antibribery provisions of the federal securities laws.

The proposed final judgment also orders Tyco to pay $1 in disgorgement and a $50 million civil penalty.

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