Empty trucks hid tax fraud by former Tyco chief

 

It was a simple scheme. A wealthy Manhattan tycoon buys art work worth several millions of dollars. He arranges for it to be conveyed to his company's offices in New Hampshire, which has no purchase tax, thus avoiding payment of 8.25 per cent purchase tax in New York.

However, the crates carefully trucked up Interstate 91 to New Hampshire are empty and the paintings, including a Renoir and a Monet, are secretly hung in the tycoon's Fifth Avenue apartment for his own amusement.

Breath-taking in its audacity, the alleged scheme fell apart when the New York district attorney was tipped off that Mr Dennis Kozlowski, head of Tyco International, had conspired with art dealers and employees to avoid paying more than $1 million (€1.06 million) in tax on art purchases worth more than $13 million.

Yesterday, Mr Kozlowski, who was forced on Monday to resign as chief executive of Tyco, the company which he built into a massive conglomerate, was indicted on charges of evading taxes and surrendered himself for arraignment to Manhattan district attorney Mr Robert Morgenthau.

At a press conference, Mr Morgenthau displayed copies of the paintings involved, including Old Masters and Impressionists, some valued at as much as $4 million. He said the executive used different ruses to avoid tax. He cited one case where an art consultant for Mr Kozlowski handed a note to a trucker that said: "Here is a list of the five paintings to go to New Hampshire, wink, wink."

The 55-year-old executive was dubbed the most aggressive chief executive a year ago by BusinessWeek magazine. He has attracted criticism for the almost $350 million he amassed in stock and option rewards from Tyco in the last three years alone. He used his great wealth to purchase palatial homes in New Hampshire, Nantucket Island and Florida, and an $18 million Manhattan duplex, as well as expensive yachts.

Mr Kozlowski is the latest in a series of wealthy chief executives to fall into disgrace, damaging the credibility of corporate America and of their own companies. Tyco had already lost $86 billion in share value since concerns about aggressive accounting and erratic strategy under Mr Kozlowski surfaced this year. His credibility fell further when he abandoned a plan to break up Tyco into four companies in April.

Mr Kozlowski has been under investigation for accounting schemes at Tyco, which seemed to show profits grew faster than they actually did. The over-extended conglomerate with 227,000 employees is having problems paying off heavy debts and is struggling to retrench after failing to sell off its plastics section. Tyco shares fell 27 per cent to $16.05 when news of his resignation was announced. In December they traded at more than $60.

Public scepticism about transparency and ethics in corporate America has already been sharpened by accounting scandals, counterfeit trading and huge compensation payments taken by executives. Other top chief executives to fall in the last few months include Mr Kenneth Lay at Enron, Mr John Rigas at Adelphia, Mr Bernard Ebbers at WorldCom, Mr Chuck Watson at Dynegy and Mr William McCormick of CMS Energy.

Mr Morgenthau said that charges would also be levelled against unnamed co-conspirators in the New York art world, which is just recovering from a huge scandal involving price-fixing by Sotheby's and Christies auction houses which resulted in a 366-day jail sentence for Sotheby's former chairman Mr Philip Taubman.

Mr Kozlowski was charged with conspiracy, tampering with physical evidence, falsifying business records and sales tax violations, Mr Morgenthau said. He accused Mr Kozlowski and unnamed others of agreeing to create false documents, including trucking documents and invoices.

This was to make it appear "as though the art work was to be shipped out of state and therefore not covered by New York state sales tax provisions". He said that Tyco employees were "directed to sign false documents reflecting the receipt in New Hampshire of art work, in an effort to thwart tax auditors".

Mr Kozlowski, known as "Deal-a-Month" Dennis, transformed Tyco from a modest company in 1992 into a corporate behemoth producing products ranging from electronic connectors and undersea fibre-optic cable, to security alarms, medical supplies and coat hangers and generating revenue of $36 billion a year. Mr Morgenthau said that all of the money for the art work was provided by Tyco and some was repaid without interest.

"We take these kinds of cases extremely seriously at a time the city is in a state of fiscal crisis," he said. "Somebody was highly paid to fail to pay over a million dollars in sales tax." The vendor was obliged to charge such tax to the buyer, he said.

The charge carries a jail sentence of up to four years. The vendor can get one year for conspiracy.