Fraud Unraveled: Following the Money from Art to Indictment

On June fourth, 2002, Manhattan's district attorney unsealed an indictment against Dennis Kozlowski for sales tax evasion. It was a charge for just over one million dollars on thirteen million dollars worth of art he'd bought and had shipped to an empty office to dodge the tax. Now, this wasn't the eleven-billion-dollar accounting fraud we unpacked with WorldCom last week. This was personal. And that personal charge, you see, was the loose thread that unraveled a four-hundred-million-dollar corporate looting scheme at Tyco International. The investigation started small, with the art. Kozlowski had paintings by Monet and Renoir sent to Tyco's New Hampshire headquarters on paper, to avoid New York sales tax.

In reality, they were hanging on the walls of his thirty-million-dollar apartment on Fifth Avenue. When the D.A.'s office started looking at the shipping records, they pulled the thread. And it led them straight into the heart of Tyco's executive suite. What they found there was a program called KELP. The Key Employee Loan Program. Officially, it was designed to help executives pay taxes on their stock options, so they wouldn't have to sell shares and dilute the company's value. A perfectly reasonable idea. But Kozlowski and his chief financial officer, Mark Swartz, saw a different use for it. They saw a bank.

A personal bank with no tellers, no guards, and no one asking questions. Here's how the scheme worked. Kozlowski would take out a "loan" from the company. Say, twenty-five million dollars for his apartment. Swartz would take out twelve and a half million for his. Then, instead of paying it back, they would use their power as CEO and CFO to have the company... forgive the loan. Just like that. It would be reclassified as a bonus, or simply written off the books in a complex shell game of accounting. They did this over, and over, and over again. To the tune of hundreds of millions of dollars. So who benefits? The answer is obvious.

Kozlowski got his apartment. He got a one-hundred-and-thirty-five-foot yacht. He got his family a sprawling estate in Nantucket. And who loses? The shareholders, who owned the money that was being siphoned out. The employees, whose company was being treated as a private piggy bank. What were the people in power willing to do about it? The board of directors? They were paid handsomely to look the other way. One director who approved a fifty-fifty split with the company on a two-million-dollar party was paid a twenty-million-dollar "finder's fee" for an acquisition. That was his incentive. This brings us to the spending.

Because you have to ask yourself, what do you DO with that much money? For Dennis Kozlowski, the answer was to live a life so lavish it bordered on parody. The thirty-million-dollar apartment wasn't just an apartment. It came with a six-thousand-dollar shower curtain. A two-thousand-dollar wastebasket. A forty-thousand-dollar dog umbrella stand. Every object was a monument to wealth. But the true masterpiece of this era was a birthday party. A two-million-dollar, week-long celebration for his wife's fortieth birthday, held on the island of Sardinia. The theme was ancient Rome. Guests were flown in on private jets.

Jimmy Buffett was paid two-hundred-and-fifty-thousand dollars to play a set. And here's the turn. Kozlowski billed the company for HALF the cost. One million dollars. The justification he gave to the board was that a few Tyco employees were there, so it was a business event. A team-building exercise. The centerpiece of the party was an ice sculpture of Michelangelo's David. Except this version had a tube running through it, connected to a bottle of Stolichnaya vodka. So the statue was, for the entire night, urinating vodka into crystal glasses for the guests. So what does it all add up to? When you can convince your board of directors that a vodka-pissing statue is a legitimate business expense...

you're not running a company anymore. You're ruling a kingdom built on someone else's money. The first trial, incredibly, ended in a mistrial. A juror was accused of making a favorable gesture to the defense, and the public outcry was deafening. But in the second trial, in 2005, the evidence was overwhelming. Kozlowski and Swartz were convicted of grand larceny and securities fraud. They were ordered to pay one-hundred-and-thirty-four million dollars in restitution. It wasn't a single, brilliant accounting trick that brought Tyco to its knees. It was a thousand tiny, greedy decisions. A thousand moments where someone could have spoken up, but didn't.

The system wasn't just broken; it was actively working FOR them. The bill for the party always comes due. The only question is who gets stuck paying it.