The cover-up included concealing Belnick's compensation and benefits from Tyco's Board of Directors and the Board's Compensation Committee, which Belnick knew were charged with compensation oversight for the company's senior executives; failing to disclose information on his compensation and loans in required public filings with the Securities and Exchange Commission; concealing the criminal investigation of Tyco's then-Chief Executive Officer, Dennis Kozlowski, from Tyco's Board; and Belnick's deletion of computer files and attempt to remove files when he knew an internal investigation of these and other matters was under way.
In a statement, Tyco said: "As the Company's Chief Corporate Counsel, and as a member of the Bar, Mark Belnick owed Tyco the highest standards of ethical and legal conduct. The broad and systematic pattern of misconduct detailed in the complaint is inexcusable and Belnick failed in his duties to the Board and the Company. Mr. Belnick abused the trust and confidence placed in him, and we want not only full repayment of funds he misappropriated, but punitive damages for the serious harm he did to Tyco and its shareholders."
Mr. Belnick served as Tyco's Chief Corporate Counsel from September 1998 until June 10, 2002. The complaint outlines the standards Belnick was expected to uphold: "More than any other person, Belnick was obligated to ensure that the Company and its personnel fulfilled their legal and ethical duties, and to ensure that any conflict of interest, self-dealing, or other potentially serious legal or ethical problem was promptly brought to the attention of the Company's Board of Directors."
The suit, filed in the U.S. District Court for the Southern District of New York, details how Belnick abused the confidence and trust placed in him, "repeatedly breaching his duties of care and loyalty to the Company." It seeks the recovery of the compensation and profits Belnick received as a result of his employment at Tyco, with interest, as well as damages for the harm caused Tyco as a result of Belnick's conduct, and punitive damages, among other forms of relief.
Among the specific actions through which Belnick breached his fiduciary duties to the company, according to the complaint, are:
· Soliciting and accepting large cash and restricted stock bonuses from the Company's Chief Executive Officer Dennis Kozlowski (valued at approximately $20 million in calendar year 2000 alone) without the approval or knowledge of the Board or its Compensation Committee. In total, Belnick made over $35 million, including over $25 million on sales of Tyco stock given him, under agreements that were not approved by the Board and its Compensation Committee. The complaint points out that although the original and subsequent grants of stocks and options to Belnick were to enable him to build significant equity in Tyco, "Belnick regularly abandoned his investment in the Company and sold his shares (or converted options and sold the underlying shares) within days after they vested, earning him millions of dollars";
· "From the inception of his employment, Belnick failed in his responsibilities and betrayed the Board's trust, choosing instead to conspire with Kozlowski to evade the Board's policies regarding compensation and conceal the extent of Belnick's compensation and benefits, as secretly agreed to by Belnick and Kozlowski, from the Company and the Board";
· Borrowing $14 million, interest-free, under the company's Relocation Program. This program was authorized by the Compensation Committee in 1995 to assist employees who were then relocating from Tyco's headquarters in New Hampshire to its then-new offices in New York; in about 1997, the Committee authorized a second program for employees asked to relocate to Tyco's facilities in Florida. When Belnick began work at Tyco in September 1998, he moved from another law firm a short walk from Tyco's New York offices, and he already lived in the Westchester County suburb of Harrison. Belnick therefore did not qualify for Tyco's New York relocation program. Nevertheless, Belnick, in clear violation of the policies of the loan program, solicited and accepted a "relocation loan," and used that loan, plus another Company loan, to pay $2.75 million for an apartment on Central Park West. Belnick's total improper borrowing for his New York residence now exceeds $4 million, all of which he still owes Tyco. Belnick also used $10 million in interest-free loans to finance a new resort home near the Deer Valley ski resort in Utah. Tyco never adopted a relocation program to Utah, and Tyco has no corporate offices in Utah to which Belnick could be said to be relocating;
· Drafting and executing a new "Retention Agreement" for himself that provided for Belnick to receive a further payment (in addition to all of his other compensation and stock, and his existing options) by October 1, 2003 of approximately $20 million, which was structured to assure him of $10.6 million after-tax. The agreement purported to pay him this additional compensation even if he was terminated for violating his duties to the Company. Belnick failed to seek prior Board or Compensation Committee approval for the agreement;
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· Failing to disclose his compensation in required SEC filings, and fabricating documents after the fact to re-characterize components of his compensation so that he could argue that he was not one of the four highest-paid officers other than the Company's CEO, each of whose compensation is required to be disclosed in proxy statements by SEC Regulation S-K Item 402;
· Failing to advise the Board that $20 million in payments made without Board approval to Frank Walsh, a now-former Tyco director, in connection with his role in the company's acquisition of The CIT Group, were improper, and that the company had a right to recover those payments. Earlier today, Tyco sued to recover those payments;
· Failing to advise the Board of the improper conduct of Dennis Kozlowski of which Belnick was aware, and failing to take any action to remedy or even stop the continuation of such conduct, thereby facilitating, aiding and abetting Kozlowski's breach of his own duties to Tyco; and
· Failing to advise the Board on May 3, 2002 that the company had received a subpoena in connection with a criminal investigation of CEO Kozlowski and concealing from the Board the fact of the investigation until the evening of May 31, 2002, when Kozlowski began informing the Board. "As the nature of Belnick's relationship with Kozlowksi, and his own lack of disclosures regarding his compensation indicate, Belnick chose to conceal the criminal investigation of Tyco's CEO from the Board for weeks, and until he had no choice but to do so, because Belnick was seeking to protect Kozlowski, and Belnick's own position with the company, rather than acting in good faith with regard to Tyco's interests."
The complaint also details Belnick's refusing to cooperate with the company's outside counsel on the internal investigation ordered by the Board related to Kozlowski's conduct, in spite of repeated instructions to cooperate, as well as his efforts to obstruct the investigation.
Further, the complaint states that early in the morning of Monday, June 10, "Belnick entered the New York offices of Tyco and directed Tyco and other personnel to commence packing boxes with numerous files maintained in the vicinity of his office." It notes: "Belnick also deleted folders, files and numerous documents from his computer relating to his compensation and employment matters, memoranda to Kozlowski, and other confidential Tyco documents." This occurred immediately prior to Belnick's termination as Tyco's chief legal officer.
In addition, on June 12, Belnick's legal counsel demanded that Tyco's counsel "delete the Quicken program and all of Belnick's financial data on the computer in his office." The complaint points out that at the time of this demand, Belnick and his counsel knew that authorities were conducting inquiries and had issued subpoenas demanding documents from Tyco.
"The Chief Corporate Counsel must be the principal protector of the Board and the Company against the kind of misconduct engaged in by the Company's former Chief Executive Officer. For a lawyer of Belnick's position and reputation to facilitate and conceal such conduct, and to engage in such conduct himself for personal gain, is inexplicable and inexcusable. Belnick failed in his duties to the Board and to the Company," the Complaint states.
The law firm of Boies, Schiller & Flexner LLP is representing Tyco.