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Introduction: Raw Greed and Red Flags

Introduction: Raw Greed and Red Flags

“Two gladiators are standing next to the door.... We have a lion or horse with a chariot for the shock value.... Big ice sculpture of David, lots of shellfish and caviar at his feet. A waiter is pouring Stoli vodka into his back so it comes out his penis into a crystal glass.... Everyone is nicely buzzed, LDK gets up and has a toast for K.... A huge cake is brought out with the waiters in togas singing.... HBK (Happy Birthday Karen) is displayed on a mountain, fireworks coming from both ends of the golf course in sync with music....”

—from an outline by event planners for the 40th birthday party of Karen Kozlowski, second wife of Tyco International’s then CEO Dennis Kozlowski (LDK in the above), in June 2001 in Sardinia

When Tyco’s then Chief Executive Officer Dennis Kozlowski held this $2.1 million soiree for his wife and a few dozen friends, it typified an era of corporate greed that had turned many executives into modern-day emperors. The Internet bust had only been the trailer for the main movie featuring business leaders who allegedly used large companies as their personal piggy banks to be looted at will. Many investors were ruined by a combination of hype, deception, and ignorance—their lives destroyed when they lost pension funds and other investments. This book will show you more than 170 ways to avoid the CEOs who cheat and deceive, the Wall Street bankers who promote investments they know are bad, the boards who have been bought off, the see-no-evil accountants, and those members of the media who seem to be in on everything but may know nothing.

If the corporate scandals of 2001–2002 needed a poster boy, then Kozlowski fit the bill. He had everything. His company had grown phenomenally, mainly through acquisitions. Big investors, Wall Street bankers, and award-winning analysts were fawning all over him. He had earned the nickname Deal-a-Day-Dennis, and at the time of the party he had just completed perhaps his most audacious takeover, the $9.5 billion acquisition of finance company CIT Group, a deal that promised to turn Tyco into a true conglomerate along the lines of General Electric Co. (GE). BusinessWeek named Tyco as the best performing company in the spring of 2001, and a Reuters survey of analysts at brokerages conducted by Tempest Consultants put the company first in 7 out of 15 categories, including transparency and quality of financial reporting and disclosure. And, if that wasn’t enough, his philanthropic work was earning him widespread recognition, including awards and honorary degrees. Life was sweet for the son of a second-generation Polish-American from New Jersey. If anyone might have felt entitled to host a lavish party in the summer of 2001, it was Dennis Kozlowski.

But it was the shareholders of his company, which makes everything from coat hangers to fire alarms to undersea cables, who were paying. Kozlowski had been systematically looting the company’s coffers, in addition to pocketing hundreds of millions of dollars of compensation, while he was CEO, according to indictments and lawsuits in September 2002 by the Manhattan district attorney’s office, the Securities and Exchange Commission (SEC), and Tyco itself. He allegedly used the company as his personal cash dispenser and got it to pay for everything from a $6,000 shower curtain to a $2,200 wastebasket as part of a $14 million furnishings and improvements bill for his $16.8 million New York apartment, which was also paid for by the company, regulators said. There were also yachts, fine art, jewelery, and vacation estates. Kozlowski and Tyco’s former chief financial officer, Mark Swartz, pleaded not guilty to charges that they stole $170 million from the company and obtained a further $430 million through fraudulent stock sales. Kozlowski is due to go to trial in the autumn of 2003, with up to 30 years in prison and potentially massive fines awaiting him if convicted.

While the Enron collapse grabbed more headlines, its roots were more complicated. If there was plundering at the Houston-based energy trader, it was done through Byzantine financial vehicles and transactions, and unraveling those has already taken prosecutors, regulators, the company itself, and bankruptcy court investigators many months. At Tyco, if the prosecution’s case is correct, Kozlowski put his snout straight into the trough without the need for complex financial structures. Tyco apparently typified an era when deal-junkie CEOs rode the wave of easy money to drive their profits and share prices to new highs whatever the longer-term costs, receiving a rapturous reception from many major investors and Wall Street securities analysts.

But, with both Enron and Tyco, there were some lonely voices expressing concern about the way the two companies were managed and their financial health. In this book, a number of those voices share their views, suggesting ways in which mainstream investors can spot trouble ahead and avoid losing their shirts.

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