The criminal cases against Tyco International's former top executives took an unusual turn on Friday when prosecutors acknowledged in court that the company's auditors, PricewaterhouseCoopers, had approved many of the transactions that are now in question.
Tyco's former chief executive, L. Dennis Kozlowski, and its former chief financial officer, Mark Swartz, have been accused of looting the company of hundreds of millions of dollars, mostly through unauthorized bonuses and loans that were later forgiven. They have long denied any wrongdoing, and one of their central defenses has been that PricewaterhouseCoopers approved the loans and the company's decision not to disclose them.
The prosecution's acknowledgment, which came during a state Supreme Court hearing to set a trial date, stunned Swartz's lawyer, Charles Stillman, who said, "It is very startling that the district attorney is acknowledging that Pricewaterhouse knew of actions for which the DA wants to send my client to prison."
Some legal experts suggested that the acknowledgment could be a breakthrough for the defendants but that it was more likely to intensify pressure on PricewaterhouseCoopers to defend its actions regarding the transactions. Indeed, if the accountant knew about the transactions, some legal experts said, it would have had a duty to investigate them and report its findings to the board.
Responding to Stillman, the lead prosecutor in the case, John Moscow, an assistant district attorney, said that although Pricewaterhouse knew about the defendants' financial arrangements with the company, "I didn't say they fully knew about the transactions."
He said the accountants had "met with Mr. Swartz and Mr. Kozlowski and were told that million-dollar transactions were not material and were not relevant and didn't need to be disclosed."
But Stillman contended that the fact that Pricewaterhouse approved the loans and the decision not to disclose them "eliminates the notion of someone acting with a bad intent."
Kozlowski's lawyer, Stephen Kaufman, added: "This case depends on the knowledge of people at the time of the events."
A spokesman for Pricewaterhouse said after the court hearing, "We do not disagree with ADA Moscow's assertion that PWC was aware of some of the loans, but we had no knowledge that any of the loans or bonuses at issue were unauthorized or unknown to the company and its board of directors.
"PricewaterhouseCoopers has been and continues to cooperate with the Manhattan district attorney's Tyco investigation," he added.
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