Dennis Kozlowski, who made more than US$300 million as head of Tyco International Ltd before being ousted, was indicted for evading US$1 million in New York sales taxes on purchases of impressionist paintings.
Kozlowski, 55, conspired with art dealers to avoid taxes on US$13.2 million of art he bought for his Fifth Avenue apartment, Manhattan District Attorney Robert Morgenthau said. Kozlowski, who faces up to four years in prison on each of 11 counts, pleaded not guilty and was released on a US$3 million bond.
The case, which triggered Kozlowski's resignation yesterday, raised concern about oversight of a company he built into a US$100 billion conglomerate with about 1,000 acquisitions.
PHOTO: AP
Tyco's shares have plunged 75 percent this year amid questions about its accounting. Some investors say Kozlowski is a symbol of CEOs who enriched themselves at shareholders' expense even as the 1990s boom faded.
"This was an aggressive manager that I think was too aggressive in growing this company," said David Tice, manager of the Prudent Bear Fund, who suggested in October 1999 that Tyco's charges for acquisitions allowed the company to report increased earnings growth. "A lot of time those guys flame out."
Kozlowski, chief executive officer of Tyco for 10 years, received US$62.4 million in compensation from the company last year and got US$110.6 million, his highest annual pay, in 1999.
The indictment marks the first time a CEO has been accused of state tax fraud, said Charles Elson, director of the Center for Corporate Governance at the University of Delaware.
After the collapse of energy trader Enron Corp in the biggest bankruptcy in history, scrutiny of publicly traded companies and their leaders has intensified. Arthur Andersen LLP is on trial in a federal court in Houston, accused of obstructing justice by destroying Enron documents.
Among the paintings Kozlowski purchased was Monte Carlo, Vue de Cap Martin by the impressionist Claude Monet, for US$3.9 million, Morgenthau said.
Kozlowski was accused of having a painting by John LaFarge, a 19th Century American artist, taken from his New York apartment and shipped in December with four empty boxes to Tyco headquarters in Exeter, New Hampshire, to avoid paying New York sales taxes.
The LaFarge was later sent back to Kozlowski's apartment, Morgenthau said.
"We take these kinds of cases extremely seriously" at a time of fiscal crisis in New York, Morgenthau said. "Over the years there has been too much winking at this kind of activity."
It's legal to purchase goods in New York and ship them elsewhere without paying taxes in the state as long as the merchandise is for use outside New York.
"Here is a list of the five paintings to go to New Hampshire (wink, wink)," said a memo from an unidentified art consultant involved in the sales, according to Morgenthau.
Morgenthau said Kozlowski's purchases came to light as part of an investigation into companies that use offshore accounts to launder money and evade taxes. Tyco is a Bermuda-based company with operating headquarters in Exeter.
No art dealers were identified in the indictment, and Morgenthau said major auction houses weren't involved.
He also said Kozlowski is not the only person involved. A 12-count indictment, including one conspiracy charge, accuses Kozlowski of falsifying invoices and other records.
"A jury or a court will find these [charges] to be lacking substance," said Kozlowski's lawyer, Stephen E. Kaufman.
Kozlowski had Tyco pay for some of the paintings and then reimbursed the company without interest, Morgenthau said. The Tyco money came from a fund reserved for executives to exercise stock options, he said. One of the six paintings Kozlowski had at his Fifth Avenue apartment was bought in Tyco's name.
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