A Medical Device Daily

The Securities and Exchange Commission (SEC) charged two former Tyco International (Pembroke, Bermuda) executives last week in connection with fraud that inflated the company’s operating income by hundreds of millions of dollars.

Richard Power, who reported to now-jailed CEO Dennis Kozlowski, and Edward Federman, who served as controller and later CFO of a Tyco division, were accused of using improper accounting and structuring sham transactions, among other things.

Kozlowski is serving an 8-to-25-year sentence in prison after he and CFO Mark Swartz were convicted last year of looting the Bermuda conglomerate (Medical Device Daily, Sept. 20, 2005). They’re appealing the sentences.

A third former executive, Richard “Skip” Heger, was accused of separate securities violations. He agreed to pay $450,000 to settle with the SEC. Heger had served as vice president for finance of Tyco’s fire and security services division until he retired in 2002. He settled without admitting or denying wrongdoing.

The SEC said that Power devised a sham transaction involving Tyco’s security-services business, ADT Securities Services. ADT sold alarm systems and services directly to customers and purchased security-monitoring contracts from independent security-alarm dealers.

In the sham transaction, Tyco imposed a $200 “dealer connection fee” that it purportedly required independent dealers to pay. Tyco simultaneously increased the price it paid each dealer by the same $200, the SEC said. The transaction had no economic substance, but boosted income because the connection fee was recognized immediately as income and the $200 dealer payment was treated as a capital expenditure that was amortized over 10 years, the SEC said.

The SEC said that PricewaterhouseCoopers, Tyco’s outside accountant, raised concerns about the $200 payment to dealers. In response, Tyco stopped calling the $200 payment a “growth bonus” and repackaged the payment as a $200 increase in the purchase price for each monitoring contract, the SEC said.

The SEC also accused Power and Federman of playing “significant” roles in the implementation of improper accounting for acquisitions.

Tyco International operates as a diversified manufacturing and service company worldwide. Its Healthcare (Mansfield, Massachusetts) division offers medical devices and supplies, such as laparoscopic instruments, sutures and surgical staplers, electro-surgical instruments, pulse oximeters, ventilators, needles and syringes, and wound care products.