Online Extra: The Hunch That Led to Tyco's Tumble

N.Y. Banking Dept. investigator Irwin Nack saw something odd: Tyco was moving huge sums of money offshore through art dealers. Why?

Perhaps the most remarkable thing about the fall of former Tyco CEO Dennis Kozlowski is the unlikely string of events that brought him to Manhattan criminal court for the first time on June 4, 2002. The discovery that set off a subsequent cascade of indictments, firings, and frozen bank accounts, seems nearly a fluke in retrospect. Here's what happened, based on numerous interviews with people close to the case.

Kozlowski's downfall started in early January, 2002, when Irwin Nack, an investigative counsel to the superintendent of the New York State Banking Dept., came across a series of bank transfers that struck him as highly unusual. Over a period of just a few days, a number of seven-figure wire transfers had moved into the bank account of high-end Manhattan art dealer Alexander Apsis. From there, they were quickly moved to offshore accounts.

Nack suspected money laundering. He was particularly intrigued by one transfer in the sum of $3.95 million. It came from a Tyco bank account in Pittsburgh. What gives, he thought? He knew layering transactions often pointed to laundered money. So he did a little research and found that the company in question was Tyco International (TYC ), a major conglomerate.


  Nack, a former prosecutor, found this curious. So he called John Moscow, one of the attorneys working for Manhattan District Attorney Robert Morgenthau and someone Nack knew very well. Nack told him of his suspicions, but Moscow immediately thought of something else: possible tax evasion.

The DA's office started to dig deeper and by subpoenaing bank and transfer records, established that Tyco was paying for paintings and, they contend in their indictment, that more than $1 million in sales tax had not been paid.

The office then began to investigate Kozlowski's art dealings and uncovered what Morgenthau's office now contends was a massive ruse to avoid New York taxes. Building their case in part through the cross-examination of people working in the art world, the DA drew a picture of Kozlowski as a man determined to avoid taxes.


  So determined, they contend, that he was doing everything from shipping empty boxes out of state to having an art consultant remove a $425,000 painting from his $17 million duplex apartment at the corner of 76th Street and Fifth Avenue and ship it to Tyco offices in New Hampshire. There, an employee allegedly signed for it before it was immediately returned to Manhattan and reinstalled in the apartment.

By the time of the initial indictment on June 4, however, the investigation was getting much broader. Morgenthau had put six to eight people on the Kozlowski case full-time, including investigators, analysts who specialize in economic transactions and financial records, lawyers, and paralegals.

The team worked all summer examining subpoenaed documents, e-mail, and financial statements -- and built a much larger case against Kozlowski and other Tyco executives. It accuses the former CEO and CFO Mark Swartz of taking $170 million out of the company and pocketing $430 million more in tainted stock sales. From one small suspicion had grown one of the biggest white-collar cases in history.

By Nanette Byrnes in New York

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