Manhattan court inquiry into Kozlowski's Tyco loan

Dennis Kozlowski, the former chief of Tyco International, paid for expensive artwork to decorate his New York apartment with loans from a fund set up by the Bermuda-based conglomerate to help "key executives" exercise share options, the Manhattan District Attorney alleged yesterday.

Robert Morgenthau, Manhattan's prosecutor, said he was looking into how Mr Kozlowski spent $36m (about £25m) of interest-free loans from the fund, recorded in regulatory filings.

If he did not use the funds to buy Tyco shares, investigators will want to find out whether the company's compensation committee ­ which approves loans ­ knew what he planned to spend the money on. Approving the loan for any purpose other than exercising options would be a breach of Federal law. Mr Morgenthau said he believed Mr Kozlowski used the loans to finance the purchase of six paintings for $13.2m. The inquiries remain at a preliminary stage and it is unclear whether they will lead to any fresh charges against the former Tyco chief.

Mr Kozlowski was indicted on Tuesday of evading $1m in New York sales taxes due on the paintings by artists including Renoir and Monet. Prosecutors allege he made it appear as if the works were shipped out of the state and not eligible for sales tax. The pictures were, however, hanging in his Fifth Avenue apartment.

New York prosecutors are also looking into whether Mr Kozlowski improperly used company funds to buy his $18m apartment. America's financial watchdog, the Securities and Exchange Commission, turned up the heat further on Mr Kozlowski by starting its own investigation into the conduct of the once high-flying executive.

He resigned from his joint roles as chairman and chief executive of Tyco, one of the world's largest conglomerates, on Monday. Mr Kozlowski, dubbed "the most aggressive CEO" by Business Week, ran Tyco for nearly a decade and was instrumental in building it from a little-known company into an international conglomerate worth $62bn through hundreds of acquisitions. He denies any wrong doing.

Tyco has already begun an internal inquiry to investigate the claims that Mr Kozlowski used company money to pay for the upkeep of his Manhattan home.

The extent to which the troubled conglomerate is embroiled in the saga is being keenly watched in business and financial circles. Many fear another corporate scandal ­ so soon after the collapse of Enron ­ would only serve to further damage the image of corporate America and could lead to new heavy regulations on corporate governance.

Mr Kozlowski, 55, has pleaded innocent to the charges that he avoided paying sales tax on the paintings. He was released on bail on Tuesday and will return to court on 26 June. Mr Kozlowski earned almost $300m as head of Tyco between 1998 and 2001.

Tyco, which makes everything from coathangers to underwater fibre-optic cable, is best known in the UK for the ADT security business it bought from the Tory peer Lord Ashcroft five years ago.