Ex-Chiefs Convicted of Looting Tyco
A state jury Friday convicted former Tyco International Ltd. Chief Executive L. Dennis Kozlowski and a top deputy of stealing tens of millions of dollars from the company, scoring a victory for government prosecutors in their assault on corporate crime.
The two men, once two of America’s highest-paid executives, were accused of bankrolling lavish personal lifestyles with money from industrial conglomerate Tyco, whose diverse products include sprinklers and security systems.
Kozlowski became an icon for corporate excess after throwing a Roman-themed birthday party for his wife on the Mediterranean isle of Sardinia in 2001 -- and sticking Tyco with half of the $2-million bill.
He and former Chief Financial Officer Mark Swartz face up to 30 years in prison, although legal experts said their terms could be as short as six years. A presentencing hearing is set for Aug. 2.
After a four-month trial and 11 days of deliberations, a Manhattan jury convicted each man on 22 of 23 counts of grand larceny, conspiracy, securities fraud and falsifying business records. Each was found not guilty on one count of falsifying records.
“The verdict is an endorsement of the principle of equal justice under the law,” said Manhattan Dist. Atty. Robert Morgenthau. “Crimes committed in corporate offices will be treated according to the same standards as other crimes. No one is above the law.”
Defense lawyers expressed disappointment and vowed an appeal, but they declined to discuss grounds for a challenge. The two defendants, whose first trial ended in a mistrial last year, remain free on $10-million bail each pending sentencing.
The conviction follows government victories against several other business figures accused of financial crimes, including former WorldCom Inc. Chief Executive Bernard J. Ebbers, lifestyle entrepreneur Martha Stewart and Silicon Valley investment banker Frank Quattrone.
As in those cases, the Tyco convictions will send ripples through executive suites around the country, said Georgetown University finance professor James Angel.
“Every time there is a successful prosecution of a high-profile white-collar criminal case, it sends a strong message to other would-be white-collar criminals that they could wind up in jail,” Angel said.
Kozlowski, 58, and Swartz, 44, built Tyco International into a diversified industrial company through a series of acquisitions, generating rich rewards for the executives. The two took home legitimate compensation of almost $300 million from 1999 to 2001.
But Morgenthau alleged that they stole an additional $150 million to finance lifestyles that were sumptuous even by the outsized standards of corporate titans. Kozlowski and Swartz were accused of awarding themselves bonuses not approved by corporate directors and forgiving, without permission, their obligation to repay company-financed loans.
The men maintained that their actions had been authorized. A linchpin of their defense was that the now-deceased head of Tyco’s compensation committee had told them that the board had approved their extra pay.
The most notorious aspects of the case revolved around Kozlowski’s expenditures. His New York apartment was outfitted with a now-infamous $6,000 shower curtain and a $15,000 umbrella stand -- both paid for with Tyco’s money.
A first trial against Kozlowski and Swartz was declared a mistrial last year after juror Ruth B. Jordan became a center of controversy during deliberations. Jordan made a gesture to the defendants that some observers interpreted as an “OK” sign, and subsequently received a threatening letter.
After the mistrial, several other jurors indicated they had problems with the length of the prosecution’s case and its focus on the defendants’ lifestyles. At the same time, some jurors said that they had been nearing a consensus on convictions on several counts before the mistrial was declared.
Even so, experts noted, the second trial was shorter, and more tightly focused on the executives’ financial dealings.
Defense lawyers argued that Kozlowski and Swartz did not have the necessary “criminal intent” to be convicted. They argued that the defendants made no effort to hide the questionable payments from other Tyco executives or the company’s outside auditor.
David Gourevitch, a white-collar criminal defense lawyer in New York, said the government did a poor job of proving intent, contending that there was in fact scant evidence to show that the defendants sought to conceal their actions.
Prosecutors, however, contended that tax returns provided a smoking gun. In 1999, Kozlowski had $25 million in loans forgiven, and Swartz had $12.5 million. But neither man reported the income on W-2 forms -- proof, prosecutors said, that the men were trying to conceal their theft.
The government also introduced testimony from former Tyco directors who claimed they never approved the payments collected by Kozlowski and Swartz.
Taking the stand in his own defense -- which he did not do in his first trial -- Kozlowski claimed that not declaring the income on his taxes was an oversight. He also sought to distance himself from some of the expensive accouterments in his apartment, saying they were chosen by a decorator. Some were so “god-awful” that he hid them away in a closet, he said.
The case against Kozlowski and Swartz grew out of an investigation by the New York state Banking Department, which was examining whether buyers of high-priced paintings were evading state taxes. That trail led to Tyco and Kozlowski -- and when other unrelated allegations of corporate wrongdoing at Tyco came to light, the prosecutors stayed with the case. Kozlowski still faces tax-fraud charges connected with the art probe.
Although state and federal prosecutors have scored wins in recent corporate crime cases, there have been several defeats, noted attorney Steven Kobre, a former state and federal prosecutor in New York.
Former Tyco corporate attorney Mark A. Belnick was acquitted by a state jury last year on charges that he stole millions of dollars from the company and falsified business records.
And last week, New York Atty. Gen. Eliot Spitzer lost his case against former Bank of America Corp. broker Theodore Sihpol, who was acquitted of 29 counts of illegal trading of mutual funds.
Other major cases are pending.
A federal jury in Birmingham, Ala., is deliberating in the fraud case against former HealthSouth Corp. chief Richard Scrushy, and former Enron Corp. executives Kenneth L. Lay and Jeffrey K. Skilling are scheduled to go on trial in Houston on fraud charges early next year.
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(BEGIN TEXT OF INFOBOX)
The Tyco case
A timeline of events in the scandal at Tyco International Ltd.:
1960: Tyco is founded as a research laboratory.
1992: L. Dennis Kozlowski, employed by Tyco since 1976, is named chief executive.
1997: The company merges with Bermuda-based security systems provider ADT.
June 3, 2002: Kozlowski, citing “personal reasons,” resigns unexpectedly amid reports that he is being investigated on suspicion of failure to pay sales taxes.
June 4, 2002: Kozlowski is charged with illegally avoiding more than $1 million in sales taxes on paintings, including works by Renoir and Monet.
Sept. 12, 2002: Kozlowski and former finance chief Mark Swartz are charged with looting the company of millions of dollars. They plead not guilty. They are also accused by the Securities and Exchange Commission of failing to disclose huge sweetheart loans and other money taken out of the company.
Sept. 17, 2002: Tyco, in an SEC filing, details a pattern of improper and illegal activities by its former management.
Sept. 29, 2003: Jury selection begins in the first trial of Swartz and Kozlowski in New York.
March 22, 2004: Jury deliberations begin.
April 2, 2004: Judge declares a mistrial after controversy surrounding a juror. Prosecutors say they will seek a new trial.
Jan. 18: Jury selection begins for the second trial of Swartz and Kozlowski in New York.
Jan. 26: Opening statements begin.
April 27: Kozlowski takes the witness stand and denies he ever abused company loan programs or received a bonus to which he was not entitled.
May 3: Kozlowski finishes four days of testimony, insisting he left it to lawyers and accountants to decide what to tell shareholders about his compensation.
June 2: Jury deliberations begin.
Friday: Kozlowski and Swartz are convicted of looting Tyco of $150 million in corporate bonuses and loans. Their lawyers say they will appeal.
Source: Associated Press
Los Angeles Times
