Dennis The Menace

By Daniel Eisenberg

Dennis Kozlowski is fond of saying that "money is the only way to keep score." And by that measure, as CEO of the conglomerate Tyco, he often came out on top. He took home more than $300 million in total compensation in the past three years. He amassed an impressive collection of toys: three Harley-Davidson motorcycles; a 130-ft. classic 1930s sailing yacht; a private plane; lavish homes in New York City, coastal New Hampshire, Nantucket and Boca Raton, Fla.; and a small stake in the New Jersey Devils and the New Jersey Nets. Most important, in the past decade, he paid more than $60 billion for 200 major corporate acquisitions and hundreds of smaller ones--a frenzied shopping spree that helped turn Tyco, once a sleepy, industrial-parts manufacturer with $3 billion in annual sales, into a global colossus that pulled in $36 billion last year, selling items as diverse as diapers and fire alarms.

Unfortunately for Kozlowski, government watchdogs and prosecutors have started keeping score in much the same way he does. They are looking hard at his and Tyco's finances to determine if the game has been rigged. Kozlowski, 55, resigned last week from the helm of Tyco just before the Manhattan district attorney charged him with evading $1 million in sales taxes on more than $13 million in art, including paintings by Renoir and Monet, that he bought in the past 10 months. Kozlowski pleaded not guilty, and neither he nor his attorney would comment on the charges. "He sounded like a man under siege," says a business acquaintance who spoke briefly to Kozlowski.

It would be no small irony if a dispute over such a relatively minor sum should turn out to be Kozlowski's, and his company's, undoing. (It was tax evasion, after all, that finally put Al Capone away.) Prosecutors claim that Kozlowski and his art dealers, who are cooperating with the investigation, had paintings shipped to Tyco's modest U.S. headquarters in Exeter, N.H., and then immediately returned to Kozlowski's apartment on New York City's Fifth Avenue--and in some cases shipped empty boxes to New Hampshire--to claim an exemption from New York sales tax. But those allegations look like just the starting point for a broader criminal probe into Kozlowski's reign at Tyco. Investigators at the D.A.'s office believe Kozlowski was using Tyco money to buy not only the artwork but also the $18 million duplex it was supposed to adorn, according to a source close to the investigation.

That source tells TIME that the D.A. and the U.S. Treasury Department are separately probing and exchanging information on firms like Tyco that have slashed their taxes by incorporating in Bermuda and other offshore havens. Last Tuesday Manhattan district attorney Robert Morgenthau journeyed to Washington to dine with David Aufhauser, general counsel of the Treasury Department, where they discussed offshore companies and possible money laundering.

Tyco, of course, is only one of many corporations--Enron, Global Crossing, Adelphia, Dynegy--that have recently been tainted by scandal, visibly damaging the confidence of investors and weighing on the stock market. "People have real fears and concerns about the integrity of the marketplace," says Patrick McGurn, vice president of Institutional Shareholder Services, a firm that advises big investors like pension funds.

It was concerns about possible money laundering that got regulators so interested in Tyco. In January the New York State banking department alerted the Manhattan D.A.'s office that a wire transfer of almost $4 million had been made from a Tyco bank account in Pittsburgh, Pa., to the New York City bank account of art dealer Alexander Apsis, who in turn moved much of the money to an account in the Bahamas. The D.A. had briefly investigated Tyco three years ago, looking into whether a Tyco director had fraudulently sold his $2.5 million Florida home to the company's general counsel. The D.A.'s office dropped that inquiry, but has reopened it as part of its wider Tyco investigation. Apsis' lawyer, Robert Katzberg, says his client "did nothing wrong and is cooperating completely with the D.A.'s investigation." Tyco says it is conducting an internal probe into allegations of misused funds.

Last week's revelations, which helped push down Tyco's already-sinking stock, only added to a cloud of suspicion that has been hanging over the conglomerate. For years, critics like Prudent Bear Fund manager David Tice have alleged that Kozlowski was using aggressive, although not illegal, accounting methods to overstate the earnings of a collection of slow-growth businesses. By encouraging a company to depress its earnings just before it was acquired, usually in the form of large write-offs of intangible assets, the critics assert, Tyco made its subsequent growth appear that much stronger.

After looking for accounting irregularities, the Securities and Exchange Commission gave Tyco a clean bill of health two years ago. But in the wake of the Enron scandal, the company's complex books--filled with footnotes about thousands of offshore subsidiaries--sent a lot of shareholders to the exits. In February, company filings revealed that Kozlowski and his top deputy, chief financial officer Mark Swartz, had between them sold more than $500 million in stock back to Tyco since 1999, even as they publicly declared that they rarely, if ever, unloaded their shares. Around the same time, Tyco disclosed that it had made some 700 small acquisitions worth $8 billion in the previous three years without informing shareholders. Then in April, the company backed away from a previously announced breakup plan that was supposed to simplify matters, which destroyed any remaining credibility.

Since Jan. 1, Tyco shares have fallen some 80%, hitting a six-year low of $10.10 on Friday. Late last week the debt-rating agencies S&P and Moody's downgraded Tyco's debt, fueling worries that the company, which is trying to trim its $27 billion in debt--$12.8 billion of it coming due in the next 18 months--could be caught in a cash squeeze. Tyco announced last week that it may have to delay the IPO of its CIT financial division--which was expected to raise $5 billion in cash--because of concerns by the SEC.

For much of the 1990s, investors didn't want to let Tyco's improbably high reported growth rate of nearly 40% spoil their fun. Before last week's free fall, Tyco shares (with dividends reinvested) had still gained almost 400% in the decade since Kozlowski took over and turned the company into a merger machine, according to Harvard Business School associate professor Robert Kennedy. Along the way, Kozlowski snapped up electronics manufacturer AMP, security firm ADT and medical-products maker U.S. Surgical.

The son of a police detective, Kozlowski grew up in Newark, N.J., where he played basketball in high school. He majored in accounting at nearby Seton Hall University, living at home to save money, and worked his way through college playing guitar in a wedding band and occasionally waiting tables. At one of his first restaurant jobs, the staff pooled tips, which didn't seem fair to a hard worker like him. Within a month, he had moved to another restaurant, where he got to keep every cent he earned. "There seems to have been a fanaticism about getting every last nickel. That was his Achilles' heel," says Marc Feigen, managing partner of Katzenbach Partners, a consulting firm in New York City, who got to know Kozlowski through a business-school leadership program.

Kozlowski landed at Tyco in 1976, hired by legendary hostile-takeover-artist Joseph Gaziano to fix some floundering acquisitions. At the time, Tyco Laboratories was a small manufacturer of everything from undersea cables to fire sprinklers. (It is unrelated to Mattel's Tyco line of toys.) But when Kozlowski took over in 1992, he re-created Tyco in his spirited image.

Hostile takeovers, for starters, weren't an option under his regime. To get a detailed look at his target's finances and pick up the best talent, the deal had to be friendly. And it had to be fast, finished in a matter of weeks, not months. Going after underperforming firms that were "fat, dumb and happy," in the words of a former Tyco employee, Kozlowski would move in quickly to slash costs and consolidate and close factories; top executives were usually shown the door in favor of eager, young middle managers willing to work long hours. To make sure his charges made their numbers, Kozlowski dangled rich performance bonuses. And he insisted on running a lean, decentralized operation. Memos are practically forbidden, as are lengthy meetings. Only about 150 employees--mainly top executives, lawyers, accountants and bankers--work at headquarters in Exeter.

Kozlowski liked to think of himself as a budding Jack Welch, but unlike Welch, he never developed a set of business practices that brought real synergy to his disparate businesses. He had little patience for GE's vaunted Six Sigma quality-control doctrine, nor did he make enough investments in information technology. And he apparently didn't do a good job of nurturing a new generation of managers: retired chairman John Fort had to return as interim CEO last week. Some analysts think that in his passion for quick deals, Kozlowski often overpaid, most notably for CIT, which may fetch just half the $10 billion Tyco paid for it in 2001.

Though he has been celebrated on the covers of Forbes and Business Week, Kozlowski is, by most accounts, a relatively shy, unassuming guy, more content to ride his Harley, fly the company helicopter or sail his boat than work the room at a cocktail party. If you didn't have a deal to talk to him about, the conversation probably wasn't going to last long. "Dennis looked like he was always restless," says a business acquaintance. "I wonder if he was close to anybody, including his board."

Apparently not. Late last week Tyco's interim CEO, Fort, emphasized that "Dennis is gone." Then he repeated it: "Dennis is gone." --With reporting by Daren Fonda/New York and Adam Zagorin/Washington

With reporting by Daren Fonda/New York and Adam Zagorin/ Washington