Taking Down the Lion: The Rise and Fall of Tyco's Dennis Kozlowski (24 page)

Individuals who remained in the pool admittedly had knowledge of the case, had read newspaper articles published during the first trial, and stated that they were aware that the Defendants lived a “very high life.” They had heard about Kozlowski and the criminal charges on television, on Fox News and
The Daily Show;
had read articles in newspapers; and they had heard about the case “on the train” and in “water cooler talk.” The potential jurors referenced articles in the
New York Times
and the
Wall Street Journal
and had heard interviews on public radio. They were aware of articles, videos, and photos on the Internet and specifically recalled seeing video of the infamous birthday party on Sardinia. Many individuals mentioned Enron, WorldCom, Martha Stewart, and voiced feelings about pervasive corporate greed.

Kozlowski remembered his concern during both trials when he saw jurors arrive at the courthouse each morning “with newspapers tucked under their arms.”
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He knew those newspapers often contained articles about him and reports of the ongoing trial, and he feared jurors were influenced by biased and often inaccurate information found in the newspapers they carried into the courthouse. His fears were legitimate; there was no way to shield jurors from the media coverage of the case.

Isaac Rosenthal, who at the age of twenty-two served as the foreman of the jury during the second trial, said, “I was aware of the coverage, I saw the
New York Post
and people asked me about the trial, but I barely took notice.” Rosenthal said he was aware during the trial that there was a lot of media coverage of the case, but insisted that it didn’t influence him. “All I knew was what I saw between 9 am and 4 pm in the courtroom,” he explained.
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In
st
ru
ct
, Deceive, Conceal

Opening statements of the second trial began on January 26, 2005. ADA Heimer addressed the jury for the prosecution. He began by introducing the other Assistant District Attorneys at the table, all of whom participated in the first trial: Ann Donnelly, Connie Fernandez, Ken Chalifoux, and Mark Scholl.
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Heimer provided jurors with an overview of basic corporate governance. “The defendants answered to the Board of Directors,” he said. “The Board of Directors had the power to hire and fire these two executives. Most importantly for this case, the Board of Directors and only the Board of Directors, acting through its Compensation Committee, had the authority to decide the compensation, to decide the pay of these two executives.” Heimer didn’t mention to jurors that Tyco Directors had duties, were responsible for oversight, and had power over Kozlowski and Swartz, which was counter to the explanation provided to the jury.
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Some of the “facts” included in the prosecution’s opening statement were patently untrue. For example, Heimer told jurors that, other than Kozlowski and Swartz, the members of the Tyco Board “ . . . didn’t work at Tyco. They didn’t have offices at Tyco. They didn’t have a staff that worked for them at Tyco. Not even one secretary. They didn’t have any day to day access to the inner workings of Tyco.”
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But, Director John Fort maintained an office in Tyco’s Exeter, New Hampshire, location for years—after he was replaced as CEO and when his only connection to Tyco was as a Director. Likewise, Director Josh Berman maintained a full-time office in Tyco’s New York location and, according to testimony during the trial, Berman reviewed many of Tyco’s public filings over the years, he participated in drafting SEC filings, and “he reviewed the proxy materials on a regular basis.”
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Heimer also told the jury that Kozlowski and Swartz were actively engaged in running Tyco, “[b]ut apart from these defendants the members of the Board of
Directors of Tyco were strictly part-timers. In fact, they spent so little time on Tyco business, you could barely even call them part-timers.”
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According to the
Corporate Director’s Guidebook
of the American Bar Association (ABA), the role of director of a publicly traded corporation is not the passive, “part-time,” responsibility described during the prosecution’s opening statement. According to the ABA, “ . . . to be a ‘director’ is to ‘direct’—which means to become informed, to participate, to ask questions, and to apply considered business judgment to matters considered by the board,”—responsibilities that are a far cry from those ADA Heimer’s attributed to the barely part-time Tyco Directors.
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From the onset of the second trial, which in this respect was not dissimilar to the first trial, the prosecution portrayed Tyco Directors as an ardent yet vulnerable group of barely part-timers from whom information was actively concealed. However, the overwhelming weight of the evidence presented during the trials revealed a very different situation in Tyco’s boardroom. When Kozlowski was CEO, some Directors had offices at Tyco, they made use of administrative support, many Directors and their business organizations and firms transacted business with Tyco, a Director’s wife was a paid broker for the sales and purchases of real estate for Tyco and Tyco employees, a Director’s law firm was paid for years to represent the company, businesses owned in whole or in part by Directors purchased assets from or sold services to Tyco, and there was no reasonable doubt that Directors had access to any information they wanted about the inner workings of the company. No employee was ever told to hide or conceal anything, and no one was instructed to withhold any information from Directors. The testimony in both trials was uncontroverted on these issues.

In fact, Kozlowski himself made sure Directors had access to any information they wanted or needed. After he became CEO, he established the position of management liaison to the Board of Directors. The management liaison was directed to keep the Board informed, and was the primary contact for the Board’s Compensation Committee. Kozlowski was quite certain that “the Board knew they could ask Barbara Miller, the first management liaison, and her predecessor Patty Prue for any information at any time. Plus it was the liaison’s job to get information to them.”
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Kozlowski also insisted on having a lead director—a non-employee member of the Board who acted as a leader separate and apart from the Chairman of the Board. Because of those two roles—management liaison and lead director—Kozlowski and Swartz would not have been able to screen information from or filter information to Tyco Directors. But the prosecution and some of the Directors who testified during the trials painted a very different picture.

In addition to having access to information, Tyco Directors had a fiduciary duty to stay informed about how the company operated, including how executives were compensated. Kozlowski said, “I don’t know how they could get on the
stand and testify under oath that they didn’t know how much the chief executive was paid. When I sat on boards, I always knew how much the CEO was paid. I made a point of knowing. It was an important part of being a director.”
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Clearly, the DA’s office wanted to bolster the credibility of former Tyco Directors, many of whom would be called as prosecution witnesses and whose testimony was critical to the prosecution’s case. In his opening statement, ADA Heimer began telling the Directors’ side of the story. They were barely part-timers who were misled, kept in the dark, and restricted from information. They were vigilant in performing their duties yet still somehow duped by the CEO, the CFO, Chief Corporate Counsel, PricewaterhouseCoopers (PwC), external law firms that provided written legal opinions, and a no-action letter the company received at the end of an SEC investigation. Heimer portrayed them as innocents who were at the mercy of the powerful executive officers of Tyco.
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Heimer told jurors, “This case is the story of how two men, these two defendants, stole a 150 million dollars from a corporation named Tyco and from that corporation’s owners, its shareholders.”
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The ADA summarized for the jury the grand larceny charges against Kozlowski and Swartz:

In August of 1999 these two defendants stole 37 and a half million dollars from Tyco and they falsely called that a bonus. [August 1999 bonuses were tied to the Kendall acquisition]

In September of 2000 these two defendants stole more than 48 million dollars from Tyco and its shareholders and they falsely called that a bonus. [September 2000 bonuses were tied to the TyCom IPO]

A short time later, in November of 2000, they stole more than 24 million dollars from Tyco and its shareholders and they falsely called that a bonus. [November 2000 bonuses were tied to the sale of ADT Automotive]

In March of 2001 defendant Swartz stole 1.2 million dollars from Tyco to get himself out of a bad real estate deal.

In August 2001 these defendants stole 12 million dollars from Tyco and its shareholders and they called that a bonus. [August 2001 bonuses were tied to the FLAG transaction]

From August of 2001 until January of 2002 defendant Kozlowski individually, and assisted by defendant Swartz, stole 14 million dollars from Tyco so that defendant Kozlowski could buy paintings to put in his homes. [The paintings to which ADA Heimer referred were never in any of Kozlowski’s homes, and the prosecution produced no evidence to even suggest the paintings were in his homes.] This was Tyco’s money he used.

And in July of 2001 these two defendants stole 20 million dollars from Tyco and its shareholders so that they could secretly benefit another director that worked with them at Tyco, a man named Frank Walsh.
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ADA Heimer informed the jury that “[t]he evidence is going to show you that these defendants did not earn this 150 million dollars. The evidence will prove to you that they stole this 150 million dollars and that they knew exactly what they were doing when they did it.” The prosecution’s theory of the crimes was “instruct, conceal, deceive,” a slight variation from the “lying, cheating and stealing” mantra used during the first trial.
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Patty Prue, Senior Vice President of Human Resources and Management Liaison to the Board

ADA Heimer said the thefts he described to the jury required the involvement of Patty Prue, Tyco’s head of human resources (HR). However, Prue was not indicted by the Manhattan DA. Instead, she was granted immunity from prosecution.
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When asked why some individuals were indicted and others were not, former Manhattan DA Morgenthau explained that “you need an insider.” Of how he made the decision about who would receive immunity, Morgenthau said, “You look for people who are telling the truth. You ask ‘is she trustworthy?’” Asked if he considered giving Kozlowski immunity and using his testimony to prosecute others, Morgenthau said with certainty, “No.”
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When Prue was called as a witness for the prosecution, she explained to jurors her responsibilities as Senior Vice President (SVP) of HR. She told jurors that she worked with the Compensation Committee both in her role as the head of HR and as the management liaison. Prue stated that she, with the assistance of her staff, gathered financial and compensation information and provided it to the Committee, including performance targets, results, and payouts for the Incentive Compensation Plan. She said her duties included communicating with Committee members about executive pay as well as the compensation of operating division presidents.
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During his testimony, former Chair of the Compensation Committee Frank Walsh said the Committee relied on the compensation information received from Patty Prue and was dependent on the data she provided.
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Prue told jurors the Compensation Committee had four members who were non-employee Directors, and that the Committee usually met four times a year “a few minutes before Board meetings.” However, during the four years she worked with the Committee, Prue admitted that it met as infrequently as once a year. In addition to the brief official meetings that Prue said lasted only a few minutes and were usually held in Bermuda, where Tyco Board meetings generally took place, the Committee had “discussion sessions” in Tyco’s New York and Boca Raton offices where members reviewed packets of information Prue prepared and provided to them in advance of the official meetings. Prue spoke of working with a variety of
Directors who served on the Compensation Committee during the years she was management liaison. She mentioned specifically Frank Walsh, Phil Hampton, Peter Slusser, and Steve Foss, but indicated that there were others.
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Prue also revealed that Donna Sharpless, a member of her staff, drafted the minutes for Compensation Committee meetings
before
the actual meetings took place. Furthermore, Sharpless did not attend any of the meetings. Prue explained that even though Sharpless wrote the minutes without attending the meetings, the pre-prepared minutes were reviewed for accuracy by those who actually attended, but sometimes not for weeks or months after the meetings.
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When asked how much she was paid by Tyco for her work as head of HR, Prue said her compensation for 1999 was $2,664,971.97. For 2000, Prue told jurors she was paid $5,591,505.34, and in 2001, Tyco paid Prue $6,797,483.83.
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To be compensated at those levels, Prue must have been considered a highly capable HR professional.

The Bonuses

There were four bonuses in question. The prosecution called them unauthorized bonuses that Kozlowski and Swartz concealed from the Board of Directors and therefore, the two executives committed grand larceny. The Defendants called them earned bonuses paid pursuant to the company’s written Incentive Compensation Plan. The bonuses, all of which were very large amounts, were paid in connection with four very profitable transactions—extraordinary, one-time, nonrecurring events. In each case, Swartz’s bonus was exactly half of Kozlowski’s. According to their respective incentive pay agreements with the company, bonus calculations for Swartz always resulted in exactly half of what was due to Kozlowski. In addition to Kozlowski and Swartz, up to fifty other Tyco corporate employees received bonuses as a result of the same four transactions.