SEC sues ex-Tyco executives for allegedly cooking the books

NEW YORK — The Securities and Exchange Commission is suing three former high-ranking Tyco International executives, charging that they designed and used a series of fraudulent accounting schemes that falsely boosted the company’s bottom line by hundreds of million of dollars.

Named in the suit are: Richard D. Power, 58, of Palm Beach County; Edward Federman, 53, of Boca Raton; and Richard J. “Skip” Heger, 61, of Boca Raton.

Heger, who is charged with aiding and abetting Power and Federman, agreed to settle with the SEC without admitting or denying any wrongdoing. He has agreed to pay to the court $300,000 in illegal profits from the scheme, pay interest of $100,000 and a civil fine of $50,000.

According to the suit, filed Thursday in federal district court in New York, the Tyco executives concocted a “fix” to a financial problem that occurred after Tyco bought ADT Ltd., the security company that had its U.S. headquarters in Boca Raton, in 1997.

To boost the books, Power and Federman began requiring the ADT’s authorized dealers to pay a $200 dealer connection fee on security monitoring contracts they sold to the company. They also created an offsetting $200 “growth bonus” that Tyco would pay to the dealers for the same contracts.

Although no money actually changed hands, Tyco booked the dealer connection fee as revenue, while amortizing the growth bonus. The scheme inflated Tyco’s operating income by $567 million and cash flow by $719 million from Sept. 30, 1998, through Dec. 31, 2002.

The SEC also alleges that Power, who reported directly to then-CEO Dennis Kozlowski, and Federman routinely cooked the books of companies that Tyco had bought in order to improve Tyco’s bottom line. In one instance, they also manipulated accounting reserves to offset $40 million in unexpected compensation expenses.

The suit seeks to impose unstated financial penalties against Power and Federman and have both men barred from serving as officers or directors of any public company.