Taking Down the Lion: The Rise and Fall of Tyco's Dennis Kozlowski (29 page)

Kozlowski and Swartz were tried, convicted, and sentenced at the height of public outrage over the Enron-era scandals, amid concerns about outrageous executive compensation, and ongoing media coverage of widespread greed and malfeasance in corporate America. Had they been convicted three years earlier or three years later, their sentences may not have been as harsh. It’s also likely that, had the trial taken place anywhere other than New York, their sentences (if they were convicted) would have been less severe. However, in speaking about the severity of Kozlowski’s sentence, former DA Robert Morgenthau said he had “no reason to believe the sentence would have been different” if the timing had not connected Tyco to Enron, WorldCom, Martha Stewart, and other massive corporate scandals in the early 2000s.
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When asked about the sentences imposed on the former Tyco CEO and CFO, Isaac Rosenthal, the foreman of the jury that convicted Kozlowski and Swartz of a combined forty-five felony counts, said, “They got good sentences. The judge minimized the sentences. He could have imposed much harsher sentences based on the number of felony convictions.” Rosenthal said he thought the sentences were fair.
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Rosenthal also said that once the jury reached the first guilty verdict during deliberations, the rest of the guilty verdicts fell like dominos.

Bureau of Ju
st
ice Stati
st
ics

Kozlowski’s shock at the length of his prison term is understandable when the 100- to 300-month sentence imposed by Justice Obus is compared to Bureau of Justice Statistics. A look at state prison sentences, including the length of maximum sentences imposed and of the time actually served, reveals the severity of the sentence Dennis Kozlowski was ordered to serve.

All offenses for which state prison sentences were imposed:

Maximum sentence for the most serious offense:

Median 36 months

Mean 60 months

Kozlowski’s maximum sentence: 300 months

Time served in prison:

Median 16 months

Mean 28 months

Kozlowski will serve at least 100 months.

All violent offenses for which state prison sentences were imposed:

Maximum sentence for the most serious offense:

Median 60 months

Mean 81 months

Kozlowski’s maximum sentence for
nonviolent
crimes: 300 months

Time served in prison:

Median 28 months

Mean 50 months

Kozlowski will serve at least 100 months for
nonviolent
crimes.

For the offense of rape:

Maximum sentence for the most serious offense:

Median 108 months

Mean 132 months

Kozlowski’s maximum sentence for
nonviolent
crimes: 300 months

Time served in prison:

Median 74 months

Mean 92 months

Kozlowski will serve at least 100 months for
nonviolent
crimes.

For the offense of larceny:

Maximum sentence for the most serious offense:

Median 32 months

Mean 43 months

Kozlowski’s maximum sentence for larceny: 300 months

Time served in prison:

Median 11 months

Mean 17 months

Kozlowski will serve at least 100 months for larceny.

For all property offenses:

Maximum sentence for the most serious offense:

Median 36 months

Mean 51 months

Kozlowski’s maximum sentence for property offenses: 300 months

Time served in prison:

Median 13 months

Mean 20 months

Kozlowski will serve at least 100 months for property offenses.

Kozlowski’s maximum sentence of 300 months exceeded the state prison sentences for
all
of the crimes listed by the Bureau of Justice Statistics, including the most severely punished offense of murder, for which the median sentence is 240 months, and the mean is 232 months. Dennis Kozlowski’s maximum was five years longer than the sentence for murder.

At this writing, Kozlowski had served eight years in prison, and his next opportunity for parole was months in the future, meaning his minimum time served would be 100 months, if he is paroled at his next appearance before the parole board. According to Bureau of Justice Statistics, Kozlowski had already served more time—more than the median and more than the mean sentences—than those convicted of the following offenses:

Kidnapping (median sentence 30 months, mean sentence 56 months)

Rape (median sentence 74 months, mean sentence 92 months)

Robbery (median sentence 35 months, mean sentence 53 months)

DUI (median sentence 11 months, mean sentence 15 months)

Weapons offenses (median sentence 8 months, mean sentence 24 months)

Possession of drugs (median sentence 11 months, mean sentence 16 months)

Trafficking drugs (median sentence 16 months, mean sentence 23 months)

Burglary (median sentence 15 months, mean sentence 25 months)

Larceny (median sentence 11 months, mean sentence 17 months)

Grand theft auto (median sentence 11 months, mean sentence 18 months)

Fraud (median sentence 12 months, mean sentence 17 months)

Stolen property (median sentence 12 months, mean sentence 18 months)

Negligent Manslaughter (median sentence 37 months, mean sentence 52 months)

Kozlowski had already served more time than those convicted in state courts and incarcerated in state prisons for homicide. The median sentence for homicide is ninety-four months.
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His dramatically long sentence is indicative of the uniqueness of Kozlowski’s case in a state court and prison system. It is far more common for white-collar crimes like those for which the Tyco executives were charged to be prosecuted by federal prosecutors and sentenced in federal courts, with the sentences served in federal prisons. But federal prosecutors declined to bring charges against Kozlowski and Swartz. Despite that, the Manhattan DA found serious crimes in Tyco’s C-suite and prosecuted them under the laws of the State of New York.

Appeals

Not surprisingly, Kozlowski and Swartz appealed their convictions. The first level of review was in the First Department of the Appellate Division of the New York Supreme Court. This intermediate court of appeals found the lack of evidence that the four questioned bonuses were approved (there was no approval found in the Compensation Committee minutes and the testimony of Compensation Committee members, who swore under oath they had no knowledge of the bonuses) showed a “consistent pattern of documentary omission over a period of years [that] constituted powerful evidence of defendants’ intentional hiding of these payments from the directors and led inexorably to the jury’s conclusion that the defendants took these bonuses without permission.”
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In its opinion, the court devoted significant attention to one of the art purchases. Count 10 of the indictment, a charge of grand larceny in the first degree, was related to the $1.975 million payment for three paintings purchased at the Richard Green Gallery in London. Kozlowski selected the paintings to hang in the Tyco corporate apartment at 950 Fifth Avenue. The then CEO exercised the $200 million spending authority that had been granted to him by the Board of Directors, authority that was documented in a resolution in the Board’s meeting minutes and recognized by the court in its opinion. However, the court found that “[w]hile he had authority to make capital expenditures of up to $200 million without board approval, this authority was to make purchases for business purposes, not personal
use.” The court opined that “[t]here is no indication of a business purpose for the purchase of these paintings. . . .”
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Hundreds of corporations own thousands of pieces of art. The
International Directory of Corporate Art Collections
lists approximately 800 corporate art collections. According to the International Art Alliance, publisher of the directory, businesses and corporations around the world own several million pieces of art, nearly as many as are on display in art museums. The Art Alliance reported that the total value of the art is worth several billion dollars and that “corporations spend millions every year purchasing art.”
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In 1992, the year Dennis Kozlowski was named CEO of Tyco, the
New York Times
published an article titled “ART; When Corporations Become Collectors.” In the article, the author revealed that “[i]n the last decade, the number of companies acquiring art has gone from 300 to about 1,200, according to the Directory of Corporate Art Collections.” Among the corporations and art collections listed in the article were Prudential Insurance Company with more than 11,000 items, Chemical Bank with 2,000 pieces, AT&T with more than 3,500 pieces of art, and Ciba-Geigy with about 600 works of art.
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In a 2012 article,
Forbes
magazine listed the “World’s Best Corporate Art Col
lections.”
Forbes
identified Deutsche Bank with 57,000 pieces of artwork, UBS with
35,000 pieces of art, JPMorgan Chase with a 30,000 piece collection, Progressive Insurance with 7,800 works of art, Bank of America with collections that are sometimes loaned to museums, and Microsoft with 5,000 pieces of art.
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All of the named corporations owned pieces of art similar to and often far more costly than the $1.975 million Kozlowski authorized Tyco to spend on three paintings for a corporate apartment. The court’s finding that purchases of fine art could not be for “business purposes” is difficult to understand, considering it was and is common practice for corporations to own and invest in artwork. Will all of the executives of corporations that have purchased works of art face felony charges for authorizing the purchase of those pieces?

The court noted that the three paintings and the apartment in which they hung, the apartment to which the paintings were shipped and from which they were not moved, were reflected as assets on Tyco’s books and records. The court also stated that Tyco Directors “had no idea” the Tyco apartment existed. Yet Tyco Director Josh Berman wrote a letter to the co-op board at 950 Fifth Avenue when Kozlowski approved the purchase of the apartment, and many individuals from Tyco had frequented the apartment. The CIT acquisition, the AMP acquisition, and others were negotiated in the Tyco apartment at 950 Fifth Avenue. It was hardly a secret.

But the court decided that the evidence supported the finding that Kozlowski embezzled the $1.975 million spent on the art “for his personal use without any intention of ever repaying it.”
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After the jury’s verdict was upheld by the First Department of the Appellate Division of the Supreme Court, the case was reviewed by the New York Court of Appeals.
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One of the critical issues addressed on appeal was Justice Obus’s decision to quash a defense subpoena on January 14, 2005, before the second trial began. The subpoena requested the notes from interviews of Tyco Directors conducted by the Boies law firm as part of the internal investigation during June and August of 2002—after Kozlowski was gone but while Mark Swartz was still the CFO. Justice Obus did not require Tyco to turn over the interview notes because he found the subpoena was a “fishing expedition.” The appellate division found that the documents requested were not material and exculpatory, and that any error in Justice Obus’s decision was harmless.
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The defense, however, believed that the interview notes were critical. The most damning testimony during the trials was that of former Tyco Directors, some of whom claimed to have no recollection of approving the four questioned bonuses, while others swore definitively that they did not know about the bonuses. Kozlowski and Swartz believed the Directors were fully aware of the compensation in question and only “forgot” about the bonuses after Kozlowski and Swartz were indicted—the Directors feared their own indictments and the financial consequences of dozens of civil lawsuits that were filed as a result of the charges levied against Tyco’s former CEO and CFO. The Directors also admittedly wanted to avoid paying the outrageously large dollar amount due to Kozlowski under his Retention Agreement. The Directors were interviewed during June and in mid-August of 2002. The Boies team had already reviewed all of the executives’ compensation and loan information before those interviews, and in cooperation with the Manhattan DA, had turned over select records that were used to indict former Tyco executives.

Kozlowski and Swartz firmly believed the Directors knew about the bonuses before they were interviewed and that they were aware that two of the bonuses were used to pay down the executives’ KELP and relocation loan balances. The Directors had seen the way Kozlowski and Swartz used the loan programs. If they believed the compensation was in error, that the bonuses were not approved, or more relevantly, if they believed the bonuses or anything else Kozlowski and Swartz did were criminal acts, why did they allow Mark Swartz to remain in the second most powerful position in the company for months after they knew about the bonuses? Why did the Directors offer and then give Swartz a $50 million separation package in August of 2002 if they believed he and Kozlowski conspired to steal money from Tyco?

What did the Directors say during those interviews in August of 2002? If they said they knew Swartz to be a thief, shareholders, regulators, and law enforcement officials would have been up in arms because the Directors had allowed the thief to remain CFO and they gave him $50 million. If the Directors said they knew about the bonuses, that they were aware of how much the CEO and CFO were paid, the prosecution’s case would have been destroyed and the Directors would
have committed perjury when they testified otherwise during the criminal trials. The Directors would not win in either case, no matter what the interview notes revealed, so Tyco and prosecutors fought hard to keep critically important evidence from the Defendants.