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Posted on: Thursday, October 30, 2003

Former Tyco executive 'surprised' by rewards

By Carrie Johnson
Washington Post

NEW YORK — Tyco International Ltd.'s former personnel chief testified yesterday that she was surprised when company leaders told her about a plan to forgive some $96 million in home loans for themselves and key employees, calling it a "huge" benefit.

The testimony by Patricia Prue, who headed the company's human resources division from 1998 to 2002, came near the end of the third week of the corporate looting trial of former Tyco Chief Executive L. Dennis Kozlowski and former Chief Financial Officer Mark Swartz.

The men are accused of larceny, conspiracy, and securities fraud for allegedly siphoning more than $600 million to themselves and loyal insiders, in part by using loan programs of the sort Prue described. Kozlowski and Swartz deny wrongdoing and argue through attorneys that outside accountants and Tyco's board members approved the payments.

Prosecutors in the Manhattan District Attorney's office guided Prue through a maze of cash, stock and loan-forgiveness rewards that Tyco executives reaped. The first one Prue discussed came in 2000, when the company agreed to buy out mortgages for 50 employees who moved to Boca Raton, Fla. from Tyco's old headquarters near Exeter, N.H.

Prue said she was so "surprised" by the idea that she repeatedly asked Swartz if board members and auditors at PricewaterhouseCoopers had approved it. Prue said she was told that the auditors had signed off, as had Phil Hampton, then head of the board's compensation committee. Hampton has since died, and the defense team maintained in its opening statements that what he said and did will play a central role in the case.

Prosecutors questioned Prue in detail about conversations and memos she exchanged with Swartz and Kozlowski over the Florida mortgages and an accelerated stock-vesting program in fall 2000 that brought the two executives alone some $24 million more. Prue said she learned two years later, after being questioned by internal investigators working for the board, that Swartz never developed documents to back up the stock-vesting reward plan.

From the beginning of her tenure at Tyco, Prue said, she had attempted to convince corporate leaders to develop an orderly formula for doling out rewards. But she testified that Swartz and Kozlowski batted back her efforts, with Kozlowski ruling out her "bureaucratic" idea and instead preferring a "trust me plan, where if people did well and the company did well, they'd receive bonuses."

That is exactly what prosecutors contend went awry at Tyco, where the company doctor, the fitness director, the head chef and the chief flight attendant on the corporate jet — each of whom had close personal ties to Kozlowski — occupied company apartments in Manhattan for free.

What's more, the Manhattan district attorney contends, Kozlowski rewarded his British interior designer — the woman who selected a $6,000 shower curtain for Kozlowski's New York apartment — with a job as an administrative assistant and an apartment in London after Prue told Kozlowski that Tyco could not put the designer on its U.S. payroll because she lacked work papers and "special skills" required for a work visa.

Prue's testimony was not uniformly helpful to the prosecution. Under questioning by Assistant District Attorney Kenneth Chalifoux, she said she believed the company did not need authorization from the board for the Florida loan forgiveness plan. And she added: "I never thought what Mark was doing or what Dennis was doing was illegal. I thought they had the authority to give me whatever."

Prue is likely to remain on the witness stand for at least another day. In all, the trial could last as long as four months, according to lawyers participating in the case.