Complaint: SEC v. L. Dennis Kozlowski, Mark H. Swartz, and Mark A. B...

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1 Complaint SEC v. L. Dennis Kozlowski, Mark H. Swartz, and Mark A. B... Page 1 of 15 Home Previous Page UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK SECURITIES AND EXCHANGE COMMISSION, v. Plaintiff, L. DENNIS KOZLOWSKI, MARK H. SWARTZ, and MARK A. BELNICK, Defendants. JURY DEMAND 02 Civ. ( ) Complaint Plaintiff Securities and Exchange Commission ("SEC" or the "Commission") alleges Summary 1. This is a looting case. It involves egregious, self-serving and clandestine misconduct by the three most senior executives at Tyco International Ltd. ("Tyco"). From at least 1996 until June of 2002, L. Dennis Kozlowski ("Kozlowski") (then Tyco's Chief Executive Officer) and Mark H. Swartz ("Swartz") (then Tyco's Chief Financial Officer) took hundreds of millions of dollars in secret, unauthorized and improper low interest or interest-free loans and compensation from Tyco. Kozlowski and Swartz concealed these transactions from Tyco's shareholders. Kozlowski and Swartz later pocketed tens of millions of dollars by causing Tyco to forgive repayment of many of their improper loans. They also concealed these transactions from Tyco's shareholders. Moreover, Kozlowski and Swartz engaged in numerous highly profitable related party transactions with Tyco and awarded themselves lavish perquisites without disclosing either the transactions or perquisites to Tyco shareholders. At the same time that Kozlowski and Swartz engaged in their massive covert defalcation of corporate funds, Kozlowski regularly assured investors that at Tyco "nothing was hidden behind the scenes," that Tyco's disclosures were "exceptional" and that Tyco's management "prided itself on having sharp focus with creating shareholder value." Similarly, Swartz regularly assured investors that "Tyco's disclosure practice remains second to none." The federal securities laws required disclosure of their loans, compensation and related party transactions. By failing to disclose these matters, Kozlowski and Swartz violated the

2 Complaint SEC v. L. Dennis Kozlowski, Mark H. Swartz, and Mark A. B... Page 2 of 15 antifraud provisions of the federal securities laws. 2. Kozlowski and Swartz also violated, or aided and abetted violations of, the proxy rules, reporting requirements and record keeping provisions of the federal securities laws, by (i) causing Tyco to file materially false annual reports and proxy statements with the Commission that allowed them to be elected and re-elected to Tyco's Board of Directors, (ii) lying to Tyco's auditors, and (iii) causing false entries to be made on the books and records of Tyco, in order to conceal and fund their secret compensation arrangements. Kozlowski and Swartz also engaged in fraudulent stock sales by selling hundreds of millions of dollars worth of Tyco stock while concealing from investors material information concerning their undisclosed self-dealing transactions, in breach of the duty they owed to Tyco and its shareholders. 3. During his tenure as Chief Corporate Counsel at Tyco, Mark A. Belnick ("Belnick") also defrauded Tyco shareholders of millions of dollars through egregious self-dealing transactions. From 1998 into early 2002, Belnick received approximately $14,000,000 in interest-free loans from Tyco to buy and renovate a $4,000,000 apartment on Central Park West and to buy and renovate a $10,000,000 ski chalet in Park City, Utah. By failing to disclose his self-dealing to investors, Belnick violated the antifraud provisions of the federal securities laws. Belnick also engaged in fraudulent stock sales by selling millions of dollars of Tyco stock while concealing from investors material information concerning his undisclosed self-dealing transactions, in breach of the duty he owed to Tyco and its shareholders. Moreover, Belnick's failure to disclose his loans caused Tyco to file materially false annual reports and proxy statements with the Commission, in violation of the proxy rules and reporting requirements of the federal securities laws. Jurisdiction and Venue 4. This Court has jurisdiction over this action pursuant to Section 20 of the Securities Act of 1933 ("Securities Act") [15 U.S.C. 77t] and Sections 21 (d), 21(e), 21A, and 27 of the Securities Exchange Act of 1934 ("Exchange Act") [15 U.S.C. 78u(d), 78u(e), 78u-1, and 78aa]. 5. Defendants Kozlowski, Swartz and Belnick, directly or indirectly, have made use of the means or instrumentalities of interstate commerce, or of the mails, or the facilities of a national securities exchange in connection with the transactions, acts, practices and courses of business alleged herein. 6. Certain of the acts, practices and courses of conduct constituting the violations of law alleged herein occurred within this judicial district. 7. Defendants Kozlowski, Swartz and Belnick will, unless restrained and enjoined, continue to engage in the acts, practices and courses of business alleged herein, or in transactions, acts, practices and courses of business of similar purport and object. The Defendants 8. Defendant L. Dennis Kozlowski, age 55, was Tyco's Chairman of the

3 Complaint SEC v. L. Dennis Kozlowski, Mark H. Swartz, and Mark A. B... Page 3 of 15 Board, President, and Chief Executive Officer from 1997 and an Executive Officer of Tyco from 1992, until his resignation in June of Kozlowski had been affiliated with the company since He resides in New York, New York, and Boca Raton, Florida. 9. Defendant Mark H. Swartz, age 42, was Tyco's Chief Financial Officer and an Executive Vice President from 1995 until September of Swartz was also a Tyco Director from 1995 until his resignation in August Swartz had been affiliated with the company since Swartz resides in New York, New York, and Boca Raton, Florida. 10. Defendant Mark A. Belnick, age 55, was Tyco's Chief Corporate Counsel and an Executive Vice President from 1998, until the company terminated his employment in June of Belnick resides in New York, New York, and Park City, Utah. When Tyco hired Belnick, the company issued a press release that stated, among other things, that, "Mr. Belnick has extensive corporate counseling experience, including M&A transactions, antitrust and other corporate matters." As Chief Corporate Counsel, Belnick supervised Tyco's SEC corporate disclosure. Other Relevent Entites 11. Tyco is a Bermuda corporation with its headquarters in Bermuda. The company is a manufacturing and service conglomerate involved in fire and security services, electronics, healthcare and specialty product and undersea telecommunications networks. Tyco's common stock is registered with the Commission pursuant to Section 12(b) of the Exchange Act and is traded on the New York Stock Exchange. 12. TME Management Corp. ("TME"), a subsidiary of Tyco, is a Delaware corporation with its principal headquarters in Mansfield, Massachusetts. TME is the corporate entity that administers employee and management compensation and related issues at Tyco. Facts Kozlowski's and Swartz's Secret Looting of Tyco The Illicit Receipt, Abuse and Concealment of Tyco Funds Abuse of KELP Loans 13. From 1996 through the first half of 2002, Kozlowski and Swartz granted themselves hundreds of millions of dollars of low interest and no-interest loans from Tyco. Most of Kozlowski's and Swartz's improper Tyco loans were taken through abuse of Tyco's Key Employee Corporate Loan Program (the "KELP"). 14. According to Tyco's proxy statements, the KELP, established by Tyco in 1983, and subsequently amended, was "designed to encourage ownership of Tyco common shares by executives and other key employees." The purpose of the KELP was to provide low interest loans to enable Tyco executives and employees to pay taxes due as a result of the vesting of ownership of shares granted under Tyco's restricted share ownership plan. The plan itself, as filed with the Commission, explicitly described its narrow

4 Complaint SEC v. L. Dennis Kozlowski, Mark H. Swartz, and Mark A. B... Page 4 of 15 purpose [U]nder the Program, loan proceeds may be used for the payment of federal income taxes due upon the vesting of Company common stock from time to time under the 1983 Restricted Stock Ownership Plans for Key Employees, and to refinance other existing outstanding loans for such purpose. 15. Kozlowski and Swartz bestowed upon themselves hundreds of millions of dollars in KELP loans which they used for purposes not legitimately authorized by the KELP. 16. From 1997 to 2002, Kozlowski took an aggregate of approximately $270 million from Tyco that he charged as KELP loans even though he only used approximately $29,000,000 of those funds to cover taxes due as a result of the vesting of his Tyco stock. 17. Kozlowski improperly took and used the remaining $242 million of supposed KELP loans or roughly ninety percent of the approximately $270 million he had taken from Tyco for impermissible and unauthorized purposes, including funding his extravagant lifestyle. For example, with his KELP loans, Kozlowski amassed millions of dollars in fine art, yachts, and estate jewelry, as well as an apartment on Park Avenue and a palatial estate in Nantucket. He also used the KELP to fund his personal investments and business ventures. 18. During that same time period, from 1997 to 2002, Swartz took an aggregate of approximately $85,000,000 dollars from Tyco that he charged as KELP loans even though he only used approximately $13,000,000 worth of those funds to cover taxes due from the vesting of his Tyco stock. 19. Swartz improperly took and used the remaining $72,000,000 of supposed KELP loans or roughly eighty-five percent for impermissible and unauthorized purposes. For example, Swartz funded millions of dollars of his personal investments, business ventures, real estate holdings and trusts. 20. Each year during the relevant time period, in order to obtain information necessary to prepare its annual report and proxy statement, Tyco submitted a Director & Officer Questionnaire ("D&O Questionnaire") to each of its senior executives. Each year, the D&O Questionnaire required that Kozlowski and Swartz disclose their improper KELP loans. Even though they knew that they had taken and used hundreds of millions of dollars in purported KELP loans from Tyco that they did not borrow to pay taxes, Kozlowski and Swartz failed to disclose those loans in their responses on their D&O Questionnaires or otherwise disclose their loans to investors. 21. Kozlowski and Swartz knew, or were reckless in not knowing, that they were obligated to disclose their improper KELP loans to investors in Tyco's annual reports on Form 10-K and proxy statements but they failed to do so. As a consequence, Tyco's shareholders were none the wiser about Kozlowski and Swartz's abuse of the KELP. Abuse of Tyco's Relocation Loan Program

5 Complaint SEC v. L. Dennis Kozlowski, Mark H. Swartz, and Mark A. B... Page 5 of Kozlowski and Swartz also abused Tyco's relocation loan program to enrich themselves improperly. This interest-free loan program, established by Tyco in 1995, was designed to assist Tyco employees who were required to relocate from New Hampshire to New York, when Tyco moved its corporate offices from New Hampshire to New York City, and, subsequently, to assist Tyco employees who were required to relocate to Boca Raton, Florida when Tyco moved its U.S. operations there. The program did not provide for relocation loans for moves to any other location. 23. From 1996 to 2002, Kozlowski received Tyco relocation loans aggregating approximately $46,000,000. Kozlowski used $18,000,000 of those loans to purchase a waterfront compound in Boca Raton. Kozlowski used the remaining $28,000,000 of purported "relocation loans" for purposes which were not within the scope of the relocation loan program. 24. For example, Kozlowski used approximately $21,000,000 of "relocation" loans for various other purposes, including the purchase of prestigious properties in New Hampshire, Nantucket and Connecticut. Kozlowski even used approximately $7,000,000 of Tyco's funds to purchase a Park Avenue apartment for his wife from whom he had been separated for many years and whom he subsequently divorced. 25. Swartz borrowed more than $32,000,000 under the relocation loan program. With those funds, he purchased a $6,500,000 apartment on New York City's Upper East Side and a $17,000,000 waterfront compound in Boca Raton. Swartz used the remaining $9,000,000 for purposes that were not authorized by the relocation loan program, including the purchase of a yacht and the funding of real estate investments. 26. On numerous occasions, Kozlowski and Swartz further displayed their propensity to treat Tyco like their own private bank by arbitrarily classifying and reclassifying their indebtedness to Tyco between the KELP and relocation loan program, without any regard for the legitimate and authorized purposes of the two programs. For example, Kozlowski initially funded his palatial estate in Nantucket under the relocation loan program and subsequently reclassified the entire amount of that indebtedness to the KELP. Similarly, Swartz initially funded the purchase of his New York City apartment under the KELP and subsequently reclassified the entire amount to the relocation loan program. 27. Each year, the Tyco D&O Questionnaire required that respondents disclose their indebtedness to Tyco, subject to certain exceptions not applicable under these circumstances. Kozlowski and Swartz, however, consistently failed to disclose any indebtedness to Tyco on their D&O Questionnaires. Knowing full well that they had taken millions of dollars in loans that were inconsistent with the authorized purposes of the relocation loan program, Kozlowski and Swartz knew, or were reckless in not knowing, that they were obligated to disclose these loans to investors in Tyco's annual reports on Form 10-K and proxy statements. As a result of their failure to make these disclosures, Tyco's shareholders never learned of the loans or of their misuse by the company's most senior executives. Kozlowski and Swartz Pocket Tens of Millions of Dollars Through Self- Engineered Forgiveness of Tyco Loans and Secret Bonus Plans

6 Complaint SEC v. L. Dennis Kozlowski, Mark H. Swartz, and Mark A. B... Page 6 of Kozlowski and Swartz did not stop there. Instead, they oversaw and authorized transactions by which tens of millions of dollars of their KELP loans and relocation loans were forgiven and written off Tyco's books. They also directed the acceleration of the vesting of Tyco common stock for their benefit. 29. In August of 1999, Kozlowski authorized, and Swartz caused to be recorded in Tyco's books and records, a $25,000,000 loan forgiveness against Kozlowski's outstanding KELP balance and a $12,500,000 credit against Swartz's outstanding KELP balance. Although the KELP loan forgiveness was tantamount to a $37,500,000 payment from Tyco to Kozlowski and Swartz, these transactions were never disclosed to investors as part of Kozlowski's or Swartz's executive compensation in Tyco's annual reports on Form 10-K and proxy statements. 30. In September of 2000, Kozlowski, through TME, engineered a program whereby Tyco covertly forgave tens of millions of dollars of "relocation loans" that he, Swartz, and others owed. To receive these benefits, all that each had to do was execute a letter agreement in which they promised not to disclose the loan forgiveness "to anyone other than [their] financial, tax or legal advisors." 31. Under the September 2000 relocation loan forgiveness program, Kozlowski received $32,976,068 in forgiven relocation loans and Swartz received $16,610,687 in forgiven relocation loans. Although the relocation loan forgiveness was tantamount to an additional $49,586,755 payment from Tyco to Kozlowski and Swartz, these transactions were never disclosed to investors as part of Kozlowski's or Swartz's executive compensation in Tyco's annual reports on Form 10-K and proxy statements. 32. In addition, Kozlowski, together with Swartz, directed others to falsify Tyco's books and records to bury this secret compensation by offsetting the cost of the relocation loan forgiveness program against the gain from an unrelated initial public offering of a Tyco subsidiary. 33. In December of 2000, Kozlowski and Swartz engineered another program whereby Tyco paid them (and certain other favored employees) bonuses comprised of cash, Tyco common stock, and/or forgiveness of relocation loans. 34. Pursuant to that program, Kozlowski received 148,000 shares of Tyco common stock, a cash bonus of $700,000, and $16,000,000 in relocation loan forgiveness. Swartz received 74,000 shares of Tyco common stock, a cash bonus of $350,000, and $8,000,000 in relocation loan forgiveness. None of these payments were disclosed as part of Kozlowski's and Swartz's executive compensation in Tyco's annual reports on Form 10-K and proxy statements. 35. In addition, Kozlowski and Swartz directed others to falsify Tyco's books and records to bury this secret compensation by offsetting the costs of the December 2000 program against an unrelated gain realized on the disposal of a Tyco subsidiary. 36. In June of 2001, Kozlowski and Swartz directed the acceleration of the

7 Complaint SEC v. L. Dennis Kozlowski, Mark H. Swartz, and Mark A. B... Page 7 of 15 vesting of Tyco common stock for the benefit of themselves and certain other favored employees. As a result, Kozlowski and Swartz realized profits of approximately $8,000,000 and $4,000,000, respectively. These profits were never disclosed as part of Kozlowski's and Swartz's executive compensation in Tyco's annual reports on Form 10-K and proxy statements. 37. Kozlowski and Swartz once again directed others to falsify Tyco's books and records to bury this secret compensation by offsetting the cost against an unrelated gain on the sale of common stock of a Tyco subsidiary. 38. Kozlowski and Swartz knew, or were reckless in not knowing, that they were obligated to disclose to Tyco investors the cash, stock and loan forgiveness they received pursuant to these programs as part of their executive compensation in Tyco's annual reports on Form 10-K and proxy statements but they failed to do so, in violation of the federal securities laws. Undisclosed Related Party Transactions with Tyco 39. Kozlowski and Swartz also engaged in additional self-serving, nonarms-length transactions with Tyco or its subsidiaries, which they knowingly or recklessly concealed from Tyco's shareholders. 40. In 1996, GV Realty Trust, of which Kozlowski was the sole beneficiary and of which Swartz was the trustee purchased a house in New Hampshire from a member of Tyco's Board of Directors. Although the purchase was financed through a wholly-owned Tyco subsidiary, charged to Kozlowski's KELP account and later paid by Tyco, Kozlowski knowingly or recklessly failed to disclose the real estate deal to investors as a related party transaction in the company's annual reports on Form 10-K and proxy statements. 41. In 2000, Kozlowski arranged for TME to purchase his house in New Hampshire for $4.5 million three times the property's apparent fair market value. Kozlowski also knowingly or recklessly failed to disclose this instance of self-dealing to investors. 42. In 2000, in the midst of soaring prices for residential real estate in New York City, Kozlowski purchased the Park Avenue apartment from Tyco for the same price that Tyco had paid for it eighteen months earlier, without a contemporaneous appraisal justifying the absence of any increase in market value. This related party transaction was also concealed from investors. 43. Swartz also engaged in undisclosed transactions with Tyco or its subsidiaries, which he knew, or was reckless in not knowing, were not disclosed to Tyco shareholders. For example, in 1995, Swartz sold his New Hampshire real estate to a Tyco subsidiary for $305,000. When Tyco sold that property to a third party in early 1997, the company obtained a far lower price for it than the company had paid to Swartz earlier. 44. Each year during the relevant time period, Tyco's D&O Questionnaire asked respondents to disclose any transactions with Tyco or its subsidiaries. Each year, Kozlowski and Swartz failed to disclose their related party

8 Complaint SEC v. L. Dennis Kozlowski, Mark H. Swartz, and Mark A. B... Page 8 of 15 transactions with Tyco on their D&O Questionnaires. 45. Kozlowski and Swartz knew, or were reckless in not knowing, that their related party transactions were not disclosed to investors in Tyco's annual reports filed on Form 10-K and proxy statements filed with the Commission, in violation of the federal securities laws. Undisclosed Perquisites from Tyco 46. Kozlowski enjoyed numerous and extensive perquisites from Tyco that he knowingly or recklessly concealed from investors. For example, in 2000, Kozlowski caused Tyco to purchase in Kozlowski's name (as nominee) an apartment on Fifth Avenue in New York City (for which Tyco paid over $31,000,000). In 2001, after a major renovation to that apartment, Kozlowski moved into the Fifth Avenue apartment and lived there rent-free. 47. Kozlowski also directed millions of dollars of charitable contributions in his own name using Tyco funds including contributions to Seton Hall University, Nantucket Historical Association, Berwick Academy, and Columbia University. Moreover, Kozlowski used Tyco corporate aircraft for personal use at little to no cost. 48. Swartz also received numerous perquisites from Tyco that he knew, or was reckless in not knowing, were not disclosed to investors. In 2000, for example, Swartz caused Tyco to purchase an apartment in Swartz's name on New York City's Upper East Side. Swartz then moved into the apartment and lived there rent-free a perquisite worth in excess of $18,000 a month. Swartz also used Tyco's corporate aircraft for his own personal use at little to no cost. 49. Kozlowski and Swartz knew, or were reckless in not knowing, that their rent-free apartments, personal use of company aircraft and other perquisites were not disclosed to investors as executive compensation in Tyco's annual reports on Form 10-K and proxy statements, as required by the federal securities laws. Fraudulent Stock Sales, Misrepresentations to Shareholders and Lying to Auditors 50. While concealing material information concerning his undisclosed loans, compensation and related party transactions from investors and while in possession of material information concerning the undisclosed self-dealing transactions of Swartz Kozlowski knowingly or recklessly sold hundreds of millions of dollars worth of Tyco securities, in breach of the duty he owed to Tyco and its shareholders. Kozlowski sold those securities back to Tyco offshore subsidiaries based in bank-secrecy jurisdictions such as the Jersey Islands and the Bahamas. 51. Kozlowski misled investors about the nature, purpose, and extent of his sales of Tyco common stock. 52. Similarly, while concealing material information concerning his undisclosed loans, compensation and related party transactions from investors and while in possession of material information concerning the

9 Complaint SEC v. L. Dennis Kozlowski, Mark H. Swartz, and Mark A. B... Page 9 of 15 undisclosed self-dealing transactions of Kozlowski Swartz knowingly or recklessly sold tens of millions of dollars worth of Tyco securities to Tyco offshore subsidiaries, and to investors through open market sales of Tyco stock through family partnerships. 53. Moreover, for each year between 1996 and 2001, and at the same time that they were concealing their self-dealing from shareholders, Kozlowski and Swartz signed Tyco's annual reports on Form 10-K, which Kozlowski and Swartz knew, or were reckless in not knowing, were false and misleading. 54. In addition, from at least 1998 through 2001, Kozlowski signed management representation letters to Tyco's auditors falsely representing, among other things, that "[t]here has been no Fraud involving management or employees who have significant roles in the Company's internal control." From at least 1998 through 2001, Swartz signed management representation letters to Tyco's auditors making the same false representations. Belnick's Undisclosed "Relocation" Loans Receipt and Concealment of Tyco Loans for Relocation to an "Office" in an Exclusive Ski Resort and to "Relocate" His Home When His Office Moved A Few Blocks Away 55. From 1998 to 2002, Belnick, then Tyco's principal legal officer, received Tyco relocation loans of over $14 million. 56. For years prior to his employment at Tyco, Belnick maintained his professional office in midtown Manhattan only blocks from Tyco's headquarters at the time. When Belnick joined Tyco he demanded and received a loan of approximately $4 million to "relocate" to New York City even though he was ineligible for the plan because he had not previously worked for Tyco (let alone worked for Tyco's New Hampshire headquarters, as required by the terms of the plan) and already owned a house in Westchester County, a suburb just outside of New York City. Belnick used the loan to buy and renovate a new apartment on Central Park West in Manhattan. 57. Belnick used the remaining $10,000,000 dollars in loans to purchase real estate in Park City, Utah. In September of 2001, Belnick received the vast majority of the loan, pursuant to a promissory note with TME, a Tyco subsidiary. Scheming with Kozlowski, the loan was ostensibly granted under Tyco's relocation loan program to assist Belnick with a "relocation" to Park City, Utah. Tyco never had a corporate presence in Utah let alone a loan program that paid for employees to relocate there. 58. In fact, at the time of his supposed relocation, Belnick already owned a $2 million home in Park City, Utah. After receiving the "relocation" loan, Belnick and Kozlowski agreed that Tyco should pay him a $19,200 annual allowance for the "dedicated Tyco office in [his] Utah home." Tyco agreed and Belnick pocketed the proceeds which Tyco prepaid through October of 2002.

10 Complaint SEC v. L. Dennis Kozlowski, Mark H. Swartz, and Mark A... Page 10 of Tyco's annual reports and proxy statements stated that Belnick was an "executive officer." As such, Belnick received Tyco's D&O Questionnaire for its fiscal years ended September 30, 1998 through September 30, In responding, Belnick consistently failed to disclose his "relocation" loans when he knew, or was reckless in not knowing, that Tyco was required to disclose them. Consequently, Tyco shareholders never learned these facts. Fraudulent Stock Sales 60. While concealing material information concerning his "relocation" loans from investors, Belnick knowingly or recklessly sold tens of millions of dollars in Tyco securities on the open market, in breach of the duty he owed to Tyco and its shareholders. Tyco's False Filings 61. From September 1996 to January 2002, as a result of the fraudulent misrepresentations and omissions discussed herein, Tyco filed false and misleading annual reports and proxy statements with the Commission that misrepresented or omitted to disclose certain executive compensation, executive indebtedness, and transactions between Tyco and its executives. First Claim for Relief Fraud Violations of Section 10(b) of the Exchange Act [15 U.S.C. 78j(b)] and Exchange Act Rule 10b-5 [17 C.F.R b-5] Against Defendants Kozlowski, Swartz and Belnick 62. Paragraphs 1 through 61 are realleged and incorporated herein by reference. 63. As set forth above, Kozlowski, Swartz and Belnick, directly or indirectly, by use of the means or instruments of transportation or communication in interstate commerce, or by the use of the mails and of the facilities of a national securities exchange, in connection with the offer, purchase, or sale of Tyco securities have (a) employed devices, schemes or artifices to defraud; (b) have made untrue statements of material fact, or have omitted to state material facts necessary in order to make statements made, in light of the circumstances under which they were made, not misleading; or (c) have engaged in transactions, acts, practices and courses of business which operated as a fraud or deceit upon purchasers of Tyco securities and upon other persons. 64. By reason of the foregoing, each of Defendants Kozlowski, Swartz, and Belnick, directly or indirectly, violated Section 10(b) of the Exchange Act [15 U.S.C. 78j(b)] and Exchange Act Rule 10b-5 [17 C.F.R b- 5]. Second Claim for Relief False and Misleading Proxy Statements

11 Complaint SEC v. L. Dennis Kozlowski, Mark H. Swartz, and Mark A... Page 11 of 15 Violations of Section 14(a) of the Exchange Act [15 U.S.C. 78n(a)] and Exchange Act Rule 14a-9 [17 C.F.R a-9] Against Defendants Kozlowski, Swartz and Belnick 65. Paragraphs 1 through 64 are realleged and incorporated herein by reference. 66. The Exchange Act and the rules promulgated thereunder prohibit any person from soliciting any proxy or consent, in respect of any registered security, by means of any proxy statement or other communication containing any untrue statement of material fact or omitting to state a material fact. 67. By reason of the foregoing, each of Defendants Kozlowski, Swartz, and Belnick, aided and abetted violations of Section 14(a) of the Exchange Act [15 U.S.C. 78n(a)] and Exchange Act Rule 14a-9 [17 C.F.R a- 9]. Third Claim for Relief Fraudulent Stock Sales Violations of Section 17(a) of the Securities Act [15 U.S.C. 77q(a)], Section 10(b) of the Exchange Act [15 U.S.C. 78j(b)] and Exchange Act Rule 10b-5 [17 C.F.R b-5] Against Defendants Kozlowski, Swartz and Belnick 68. Paragraphs 1 through 67 are realleged and incorporated herein by reference. 69. While concealing material information concerning their undisclosed selfdealing transactions from investors, Kozlowski, Swartz and Belnick knowingly or recklessly sold hundreds of millions of dollars in Tyco securities, in breach of the duty they owed to Tyco and its shareholders. 70. By reason of the foregoing, each of Defendants Kozlowski, Swartz and Belnick directly or indirectly, violated Section 17(a) of the Securities Act [15 U.S.C. 77q(a)], Section 10(b) of the Exchange Act [15 U.S.C. 78j(b)] and Exchange Act Rule 10b-5 [17 C.F.R b-5]. Fourth Claim for Relief Reporting Violations Violations of Section 13(a) of the Exchange Act [15 U.S.C. 78m(a)] and Exchange Act Rules 12b-20 and 13a-1 [17 C.F.R b-20 and a-1] Against Defendants Kozlowski, Swartz and Belnick 71. Paragraphs 1 through 70 are realleged and incorporated herein by reference.

12 Complaint SEC v. L. Dennis Kozlowski, Mark H. Swartz, and Mark A... Page 12 of The Exchange Act and rules promulgated thereunder require every issuer of a registered security to file reports with the Commission that accurately reflect the issuer's financial performance and provide other information to the public. Rule 12b-20 provides that in addition to the information expressly required to be included in a statement or report, there shall be added such further material information, if any, as may be necessary to make the required statements, in the light of the circumstances under which they are made not misleading. 73. As a consequence of the conduct of defendants Kozlowski and Swartz, as set forth above, Tyco's annual reports on Form 10-K for the years 1996 to 2001, violated Section 13(a) of the Exchange Act [15 U.S.C. 78m(a)] and Exchange Act Rules 12b-20 and 13a-1 [17 C.F.R b-20 and a-1]. As a consequence of the conduct of defendant Belnick, as set forth above, Tyco's annual reports on Form 10-K for the years 1998 to 2001, violated Section 13(a) of the Exchange Act [15 U.S.C. 78m(a)] and Exchange Act Rules 12b-20 and 13a-1 [17 C.F.R b-20 and a-1]. 74. By reason of the foregoing, each of Kozlowski, Swartz and Belnick aided and abetted Tyco's violations of Section 13(a) of the Exchange Act [15 U.S.C. 78m(a)] and Exchange Act Rules 12b-20 and 13a-1 [17 C.F.R b-20 and a-1]. Fifth Claim for Relief Record-Keeping Violations Violations of Section 13(b) of the Exchange Act [15 U.S.C. 78m(b)] and Exchange Act Rules 13b2-1 and 13b2-2 [17 C.F.R b2-1 and b2-2] Against Defendants Kozlowski and Swartz 75. Paragraphs 1 through 74 are realleged and incorporated herein by reference 76. The Exchange Act and rules promulgated thereunder require each issuer of registered securities to make and keep books, records, and accounts which, in reasonable detail, accurately and fairly reflect the business of the issuer and to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that, among other things, transactions are recorded as necessary to permit preparation of financial statements and to maintain the accountability of assets. The Exchange Act prohibits any person from knowingly falsifying such books, records, or accounts or from knowingly circumventing such a system of internal accounting controls. Rules promulgated under the Exchange Act also prohibit the making of misleading statements to an accountant, by an officer or director of such an issuer, in connection with an audit or in connection with the preparation or filing of any document or report required to be filed with the Commission. 77. By reason of the foregoing, each of Kozlowski and Swartz, directly and indirectly, violated Section 13(b)(5) of the Exchange Act [15 U.S.C. 78m (b)(5)] and Exchange Act Rules 13b2-1 and 13b2-2 [17 C.F.R.

13 Complaint SEC v. L. Dennis Kozlowski, Mark H. Swartz, and Mark A... Page 13 of b2-1 and b2-2]. 78. By reason of the foregoing, Kozlowski and Swartz aided and abetted Tyco's violations of Section 13(b)(2)(A) of the Exchange Act [15 U.S.C. 78m(b)(2)(A)]. Prayer for Relief WHEREFORE, the Commission respectfully requests that this Court I. Permanently restrain and enjoin each of Kozlowski and Swartz, and each of their officers, agents, servants, employees, and attorneys, and those persons in active concert or participation with each of them, from violating Section 17(a) of the Securities Act [15 U.S.C. 77q(a)], Sections 10(b) and 13(b)(5) of the Exchange Act [15 U.S.C. 78j(b) and 78m(b)(5)], and Exchange Act Rules 10b-5, 13b2-1, and 13b2-2 [17 C.F.R b-5, b2-1, and b2-2], and from aiding and abetting violations of Sections 13(a), 13(b)(2)(A), and 14(a) of the Exchange Act [15 U.S.C. 78m(a), 78m(b)(2)(A), and 78n(a)], and Exchange Act Rules 12b-20, 13a-1, and 14a-9 [17 C.F.R b-20, a-1, and a-9]. II. Permanently restrain and enjoin Belnick, and each of his officers, agents, servants, employees, and attorneys, and those persons in active concert or participation with him, and each of them, from violating Section 17(a) of the Securities Act [15 U.S.C. 77q(a)], Section 10(b) of the Exchange Act [15 U.S.C. 78j(b)], and Exchange Act Rule 10b-5 [17 C.F.R b- 5], and from aiding and abetting violations of Sections 13(a) and 14(a) of the Exchange Act [15 U.S.C. 78m(a) and 78n], and Exchange Act Rules 12b-20, 13a-1, and 14a-9 [17 C.F.R b-20, a-1, and a-9]. III. Order each of Kozlowski, Swartz and Belnick to disgorge the ill-gotten gains they received as a result of their violations of the federal securities laws, and to pay prejudgment interest on all such gains, which include, but are not limited to (a) all compensation received by Kozlowski and Swartz from Tyco subsequent to their fraudulent acts and omissions, including salary, bonuses, stock options and grants and any advances that have not been repaid; (b) all amounts by which Kozlowski, Swartz, and Belnick were unjustly enriched as a result of undisclosed instances of their self-dealing at the expense of Tyco and its shareholders, including all loans not properly repaid by them to Tyco; (c) interest imputed at market rates for all lowinterest and interest-free loans that they should have disclosed to investors; (d) all rent payments received by Belnick from Tyco for the home office he maintained in the Utah residence; and (e) all losses avoided by Kozlowski, Swartz and Belnick on their sales of Tyco securities subsequent to their fraudulent acts and omissions.

14 Complaint SEC v. L. Dennis Kozlowski, Mark H. Swartz, and Mark A... Page 14 of 15 IV. Order each of Kozlowski, Swartz and Belnick to pay a civil penalty under Section 20(d) of the Securities Act [15 U.S.C. 77t(d)] and Section 21(d) of the Exchange Act [15 U.S.C. 78u(d)(3)]. V. Order each of Kozlowski, Swartz and Belnick to pay a civil penalty pursuant to Section 21A of the Exchange Act [15 U.S.C. 78u-1]. VI. Permanently bar each of Kozlowski, Swartz and Belnick from serving as an officer or director of a publicly-held company, pursuant to Section 20(e) of the Securities Act [15 U.S.C. 77t(e)] and Section 21(d)(2) of the Exchange Act [15 U.S.C. 78u(d)(2)]. VII. Grant such other relief as this Court may deem just and appropriate. Dated Washington, D.C. September 11, 2002 Respectfully submitted, Thomas C. Newkirk (TN7271) James T. Coffman Robert B. Kaplan (RK2310)(Trial Attorney) David Frohlich Jessica M. Weiner Counsel for Plaintiff Securities and Exchange Commission Mail Stop Fifth Street, N.W. Washington, D.C (202) (Kaplan) (202) (fax) Local Counsel Robert B. Blackburn (RB1545) Securities and Exchange Commission The Woolworth Building 233 Broadway New York, NY (646) (646) (fax)

15 Complaint SEC v. L. Dennis Kozlowski, Mark H. Swartz, and Mark A... Page 15 of 15 Home Previous Page Modified 09/12/2002