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Tyco International, Ltd., and v. Mark H. Swartz

March 3, 2011

TYCO INTERNATIONAL, LTD., AND
TYCO INTERNATIONAL (US), INC., PLAINTIFFS,
v.
MARK H. SWARTZ,
DEFENDANT.



OPINION

Plaintiffs, Tyco International, Ltd. and Tyco International (US), Inc. ("Tyco"), bring eight causes of actions against their former Chief Financial Officer ("CFO"), Mark Swartz, including fraud and breach of fiduciary duty. Tyco moves for partial summary judgment as to liability on all causes of action and seeks a trial only on the issue of damages.

The motion is granted in part and denied in part.

FACTS

Swartz was CFO of Tyco beginning in 1995. Swartz left Tyco in September 2002, one day before he was indicted by the state of New York for his involvement in a scheme with Tyco's Chief Executive Officer, Dennis Kozlowski, to loot Tyco's treasury of tens of millions of dollars. Tyco's actions against Kozlowski have already been the subject of a similar summary judgment motion. Tyco Intern., Ltd. v. Kozkowski, slip. op., No. 02cv7317, 2010 WL 4903201 (S.D.N.Y. Dec. 1, 2010).

Swartz's exit from Tyco, however, was much more amicable than Kozlowski's. Whereas Kozlowski was forced out shortly after the scheme was uncovered, Swartz stayed and cooperated with Tyco's internal investigation of the looting scheme and was asked to remain as CFO of Tyco until a replacement could be found. In exchange for this, Swartz was awarded a severance package worth tens of millions of dollars.

This amicability between Tyco and Swartz ended in 2003 when Tyco brought the instant suit against Swartz seeking, among other things, to have Swartz disgorge all compensation earned during the period of his disloyalty.

The New York indictment referred to earlier charged Swartz and Kozlowski with numerous crimes relating to their activities at Tyco, including grand larceny in the first degree and falsifying business records in the first degree. Swartz and Kozlowski were convicted together by a jury in New York state court on 22 felony counts. All convictions were upheld on appeal. Swartz is currently serving his sentence.

This motion hinges on the application of collateral estoppel. In order to properly apply the doctrine of collateral estoppel it is necessary to determine the extent to which the allegations made by Tyco against Swartz in the civil complaint correspond to crimes of which Swartz was convicted.

The complaint in the civil action contains allegations of specific wrongdoing on the part of Swartz in a section of the complaint entitled "Facts Common to All Claims"--paragraphs 14-70. This section of the complaint is followed by the causes of action--breach of fiduciary duty, inducing breach of fiduciary duty, conversion, etc. These causes of action reallege all of the allegations of specific wrongdoing in paragraphs 14-70. However, there are allegations of specific wrongdoing in the civil complaint that correspond to crimes of which Swartz was convicted, and there are other allegations of wrongdoing that were not the basis of any criminal conviction. Collateral estoppel will not apply to the latter allegations.

The court will now describe allegations of wrongdoing in the civil complaint that do correspond to criminal convictions.

The New York Relocation Plan

Paragraphs 16-22 of the complaint allege wrongdoing in connection with Tyco's New York Relocation Plan. When Tyco began planning to relocate certain offices to New York City, it established a relocation plan to assist those who needed to move. Tyco alleges that Swartz and Kozlowski established their own shadow relocation plan and used the funds from that plan for unapproved, personal use. This unauthorized use of funds was then hidden from Tyco's Compensation Committee.

These same allegations underlie Swartz's criminal conviction of falsifying business records in the first degree (Count 16 on the verdict sheet). As the judge instructed the jury, for Swartz to be convicted of this count, the jury must find that "with intent to defraud . . . Swartz made or caused to be made a false entry in the business records of an ...


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