What's up guys and welcome back to wall street millennial on this channel, we talk about everything related to stocks and investing in today's video we're going to talk about one of the biggest cases of abusive authority among corporate executives in the u.s from the past 20 years. It involves the company tyco, which is a premier security solutions, company that was acquired by johnson controls in 2016.. Taiko made things like camera security systems, fire alarm systems, circuit protection and more. They were a huge company with 40 billion dollars of annual revenue at the peak.

In the early 2000s, but unfortunately, their legacy is overshadowed by a fraud carried out by two executives at the company. This fraud was a classic case of greed and looting, but on a massive scale of hundreds of millions of dollars, taiko was founded in the 1960s and quickly expanded in the 70s from the beginning, taigo had an aggressive strategy of acquiring other companies. This worked very well for taiko for decades, and its stock price steadily increased throughout the 70s and 80s through the acquisitions. The business became increasingly diversified, although it originally was a high-tech semiconductors and materials investment holding company it gradually pivoted to the highly profitable security systems industry.

They acquired various other smaller companies to inject their security business into industries like construction, healthcare and even deep sea cabling. In 1992, tygo brought in a new ceo dennis kozlowski under kozlowski tycho continued its strategy of aggressive acquisitions. During his time as ceo taiko acquired thousands of other companies, taiko also gained a significant international presence. The strategy was working and taiko's business was booming.

They were added to the s p 500 index. They also moved their corporate offices from new york to florida. As part of the move, many taiko employees had to relocate as a result of the large number of relocations, taiko initiated a program whereby employees could take out low interest or no interest loans from the company in order to help move. These loans were made available to many taiko employees, including ceo kozlowski and the cfo mark swartz, it's safe to say that these two individuals took ample advantage of the program.

But there was also another separate program by tycho that allowed for high up executives to take out low interest and interest-free loans from the company. This was called the taiko key employee corporate loan program or kelp. For short, this program was meant for corporate executives, who had significant compensation in the form of stock options. Whenever an employee receives stock that is vested, they have to pay taxes on the value of the stock.

If it's a large amount of stock, the tax bill can be steep also because the stock sometimes has a lock-up period. The employees might not be able to sell any of the stock to pay the taxes. The kelp program was meant for executives to be able to take stock compensation and use a load to no interest loans to pay the federal taxes associated with it. The loans could then be paid back when the executives get enough liquidity in the future.

The kelp program was explicitly described in sec filings to be utilized only for that specific purpose. The loan proceeds could only be used to pay federal income taxes due upon the vesting of company stock under the company's compensation plans or to repay other loans that were used for that same cause. Kozlowski and swartz gave themselves hundreds of millions of dollars worth of these loans. Of course, the vast majority of these hundreds of millions of dollars did not go towards a stated purpose.

Ceo kozlowski used a quarter billion dollars of loans from the kelp program to fund an extravagant lifestyle. He bought everything that you'd expect someone with hundreds of millions of dollars to buy fine art yachts, jewelry park avenue real estate in luxury summer homes, in addition to lavish consumption. He even used the loan proceeds to fund his own personal business ventures and investments. Cfo schwartz also took out an obscene amount of money from the loan program.

He spent about 75 million dollars of it on its personal expenses like kozlowski, he used some of the money to make his own personal investments in businesses real estate and trusts. Both executives lied to the company and to the company's investors by concealing this inappropriate spending, but the kelp program was not enough for those two. They also rated the company's relocation loan program in a similar way, because the relocation program was meant for a larger portion of the company's employees. They weren't able to get away with as much as from the kelp program, but they still spend tens of millions of dollars from the program on illegitimate consumption.

Each, for example, kozlowski bought an 18 million luxury waterfront compound in boca raton, although this could technically be considered fair use of the relocation benefits, since it was a residence in boca raton that only accounted for about a third of the total loans that he took out. He also spent a total of 21 million dollars of relocation, loans to purchase luxury properties in new hampshire, nantucket and connecticut. There's no way that these can be claimed to be relocation, residences to boca raton. Even more shamelessly, he bought a prestigious 7 million apartment in new york city not for himself, but for his ex-wife, from whom he had been separated.

For many years. Cfo swartz bought an even more extravagant 17 million dollar boca raton waterfront mansion, but he also spent six and a half million dollars on a new york upper east side apartment with the remaining nine million dollars of lone say, took out. He bought things like a yacht and made personal investments in things like real estate. To make matters worse, the two executives took steps to turn those loans into gifts to themselves.

In 1999, the two colluded to wipe 37 and a half million dollars off the loans collectively owed to tycho those loans were forgiven and thus added up to a 37.5 million dollar payment from tycho to kozlowski and schwartz. Of course, none of those loan forgivenesses were disclosed on any financial reports or announcements, but 37 and a half million dollars was only a small fraction of the hundreds of millions of dollars that the two executives had borrowed from the company. So in 2000, kozlowski initiated a program for relocation, loan forgiveness for multiple employees. In the program, people who received relocation, loans had to sign an agreement stating that they would not disclose the loan forgiveness to anyone besides their financial, legal or tax advisors.

This program resulted in kozlowski having another 33 million dollars in loans forgiven and sports having 16 and a half million dollars forgiven. In total, this added up to a 50 million dollar payment from tycho to the ceo and cfo to cover up the loan forgiveness program, which was a significant expense to the company kozlowski and schwartz buried the cost with the public offering of the company. The scheme largely worked. The two executives realized that the system of having the company forgive their relocation loans worked flawlessly.

They then proceeded to do another one which then resulted in another tens of millions of dollars of loans being forgiven. This program was concealed by another corporate action, specifically the gain on divestiture by the company, countless other individual schemes were also carried out by kozlowski and swartz that were somewhat smaller. For example, kozlowski arranged for the company to buy one of his older, less valuable houses in new hampshire. That house was worth about one and a half million dollars, but he had the company purchase it for three times that price swords similarly sold property to taiko.

For artificially inflated prices, also, both kozlowski and swartz lived in luxury manhattan apartments, worth tens of millions of dollars which tycho had paid for they lived in the apartments without paying any rent virtually owning the apartments. They also both used the company's private jets for leisure travel and other personal consumption, incurring large costs to the company without ever paying for it. Finally, koslowski and swartz illegally sold hundreds of millions of dollars worth of taiko stock. Much of this stock was restricted or otherwise not allowed to be sold by the executives.

They hid the sale of this talk by selling them to offshore subsidiaries of taiko in bank secrecy jurisdictions. These stock sales enriched the two executives and allowed them to avoid losses. When the scandal was uncovered and taiko stock tanked, when the scandal was finally uncovered taiko's stock lost, more than half of its value about 70 billion dollars of shareholder value was lost in total, kozlowski ended up serving six and a half years in prison for his crimes. Shortly after going to prison his wife who he once spent two million dollars on a birthday party for left him for a successful property developer after doing his time, he now lives an upper middle class.

Lifestyle in a two-bedroom apartment in new york. Swartz also spent a few years in prison, but is now free as a middle class. Working man taiko lasted another 15 years after the scandal, but eventually was acquired by johnson controls. Now the remains of taiko can finally leave behind all associations with the insatiable greet of those two executives, alright guys that wraps it up for this video.

If you enjoyed this content, make sure to smash that like button and subscribe for future videos also leave a comment. Saying what you think about these two cases of american greed in the meantime? Thank you so much for watching and we'll see in the next video wall street millennial signing out.