Taking Down the Lion: The Rise and Fall of Tyco's Dennis Kozlowski (16 page)

Dennis Kozlowski was indicted on Tuesday June 4, 2002 by Manhattan DA Robert Morgenthau on charges that he made an agreement with Christina Berry to evade the sales tax Berry was obligated to collect and submit for his art purchases.
20
It was clear the DA knew who Kozlowski was and what he did for a living. The sales tax indictment, which had nothing to do with Tyco, stated that “[t]hroughout the period of the conspiracy defendant Kozlowski was the Chairman of the Board, President, and Chief Executive Officer of Tyco International Ltd. (“Tyco”) a publicly traded multinational corporation with reported sales of more than $36 billion in the fiscal year ending September 30, 2001.”
21

Kozlowski pleaded not guilty at a brief court hearing in New York on June 4, 2002; he was freed pending trial after posting a $3 million bond. The indictment included eleven felony counts, each punishable by up to four years in prison, and alleged that Kozlowski evaded around $1 million in sales tax on purchases of fine art. In an article published by
Tax-News
two days after the indictment, the writer
observed that “[t]he authorities have decided to make a high-profile example of Mr. Kozlowski ‘
pour encourager les autres. . . .’
”
22
The reference is to Voltaire’s
Candide.
“
Dans ce pays-ci il est bon de tuer de temps en temps un amiral pour encourager les autres
” translated means “in this country we find it pays to shoot an admiral from time to time to encourage the others.”
23

Considering the applicable New York State tax laws, it’s clear Christina Berry and the galleries had the primary obligation to collect and submit sales tax on the art purchases. In fact, the Manhattan DA’s indictment of Dennis Kozlowski was the first time a prosecutor in the State of New York ever charged a retail consumer with a crime for failing to pay sales tax. Berry seemed the obvious party to charge when sales taxes weren’t collected and remitted. But instead of charging her, the Manhattan DA granted Berry immunity from prosecution.
24

He didn’t want Christina Berry. Morgenthau wanted the lion.

* * *

The Manhattan DA’s office never interviewed Kozlowski—either before he was indicted or afterward. He wasn’t asked about the art purchases or what he believed Christina Berry handled in her role as his agent.
25
In an interview in 2008, Kozlowski explained why the sales taxes were not paid at the time of purchase. He said, “I didn’t know a whole lot about art when I was trying to collect some nice pieces of art. And I hired an agent to help me with the art. It was the agent’s responsibility to negotiate the price of the painting, and to cover all the taxes and transportation. And then I just see the art hanging on the wall. That was my next step in this process. I wasn’t consciously thinking about sales taxes.” Kozlowski said that some of the evidence the DA used against him was found in email messages allegedly written by Christina Berry. He said, “I never used email. One would assume that this agent is the person messing up. However, nobody wants to prosecute an agent. Everyone wants to bring down a Chairman and CEO of a company.”
26

More than a decade after he charged Kozlowski with evading sales taxes, former Manhattan DA Robert Morgenthau explained why he indicted Kozlowski, the consumer, instead of charging the art agent who or the galleries that sold the paintings. “Kozlowski was too central to the case,” he said. When asked how he was certain at the time that Kozlowski had any knowledge of whether the sales tax for the paintings had been paid, the former Manhattan DA said definitively, “Kozlowski knew those paintings were in New York, so he knew he was evading taxes. That’s why I indicted him.”
27

Interestingly, one of the art purchases included in the indictment took place in January of 2002. Under New York law, sales tax on that purchase would not have been due from Kozlowski until April 15, 2003, ten and a half months
after
he was indicted.
28

During Kozlowski’s criminal trial (a trial on other charges) three years after the sales tax indictment, the Assistant DA solicited from Christina Berry sworn testimony that Kozlowski didn’t negotiate the lowest price possible when he purchased pieces of art in 2001 and 2002. Berry said Kozlowski was always willing to buy without concern for the cost.
29
Berry’s testimony is incongruent with the prosecution’s theory that Kozlowski was trying to avoid $1 million in sales tax. Why would he be willing to pay top dollar for art, forego negotiating a lower price, and then try to evade the related sales tax?

Berry provided an example of Kozlowski’s disregard for the amount of money he spent by telling the jury about pieces he viewed in a gallery in London. After Kozlowski and his wife decided on three paintings, Berry said, “ . . . [W]e talked about it and Dennis said ‘we should pay two million. I’ll pay two million for these.’ And I stopped and I said I think we can get it lower than two million. Let me try to get it lower for you.” Berry said Kozlowski didn’t want to wait for her to do comparison studies or to price shop at other galleries. She testified that “[h]e wanted to go forward with the purchase.”
30
Kozlowski didn’t haggle over the price of any of the pieces he purchased through Berry. It’s difficult to understand why he’d willingly pay asking price for a painting and then try to save money by purposefully evading sales taxes.

After he was arraigned on the sales tax charges in New York, Kozlowski returned to Florida. At the time, Kozlowski lived in Boca Raton and worked primarily out of Tyco’s offices there. Tyco moved many of the company’s corporate functions to Florida after the ADT merger in 1997. When he arrived home after the arraignment, Kozlowski was unpleasantly surprised—Tyco had confiscated the company car he left parked at the airport. He was also prohibited from entering any Tyco facility; he was not allowed to retrieve personal items or personal records from company offices and he was prohibited from gathering his clothing, jewelry, or any other personal property from the Tyco apartment. On June 3, 2002, Tyco seized family photographs, artwork, and other valuable property that belonged to Kozlowski. The company also took possession of his personal financial records. More than a decade after that fateful summer weekend, Kozlowski still didn’t know under whose authority personal property was taken from him. “I tried to get in touch with someone inside the company,” he recalled. “But no one would talk to me.
No one.
I tried to call Mark [Swartz], Bodman, Fort, I tried to call everyone. But no one would talk to me. I didn’t even have a personal checkbook. All of my personal financial records were in Tyco Executive Treasury. I didn’t know where my money was and I had no way to find out. I couldn’t pay for anything.”
31

Kozlowski never recovered any of his personal property. Not the multi-million-dollar paintings, not his personal income tax records, not his checkbooks, not his shirts that hung in the Tyco apartment, and not the pictures his daughters had drawn for him when they were little girls. As far as he knew, Tyco kept everything.
32

* * *

The sales tax charges were ultimately dismissed and Kozlowski paid in full the sales tax due. When dismissing the sales tax charges in June of 2004—charges the Manhattan DA levied against Kozlowski two years earlier, charges that cost him the positions of CEO and Chairman of the Board and irreparably damaged his reputation—New York Supreme Court Justice Michael Obus ruled that in New York, the failure to
collect
sales tax is a crime but failure to
pay
sales tax is not a crime.
33

An article about the decision that appeared in the
New York Law Journal
explained that Section 1817(c)(2)(a) of New York State Tax Law criminalizes “only a vendor’s failure to collect sales tax. . . .” Justice Obus observed that the Manhattan DA’s charges against Kozlowski involved a “unique application” of the statute and noted that the charges were not based on Kozlowski’s actions as a principal, a charge that would clearly exceed the scope of the statute, but instead were based on the theory that Kozlowski acted in concert with the vendors in a plan that resulted in failure of the vendors to collect and submit sales tax.
34

The media was merciless and prolific in its coverage of Kozlowski’s indictment on sales tax charges in June of 2002 but showed little interest when those charges were dismissed in June of 2004. Numerous articles, books, textbooks, and case studies erroneously report or imply that Kozlowski was convicted on tax evasion charges. He wasn’t.

* * *

The Tyco Board of Directors didn’t wait for Kozlowski to be adjudicated on the sales tax charges. Upon receiving news from their longtime CEO and Chairman that he was facing personal legal issues, the Directors summarily and immediately ousted Kozlowski. Wendy Lane, the junior-most Tyco Director in June of 2002, explained the Board’s actions in an interview she provided for a 2011 Harvard Business School case study. Lane said after Kozlowski called each of the Directors during the first weekend of June in 2002 and informed them of the sales tax indictment, “[t]he board met telephonically about the matter and how to reorganize management. Some of the directors suggested a leave of absence until ultimate guilt was established; others of us were firm that [Kozlowski] be asked in no uncertain terms to resign.”
35

Lane shared concerns the Board considered beyond the sales tax charges. She said, “ . . . [T]he employment agreements were an impediment since substantial severance payments would have been triggered without an ultimate conviction of guilt.”
36

Late on the night of June 2, or early in the morning of June 3, 2002, the Tyco Board, over the phone through the Board’s attorney David Boies, fired Dennis Kozlowski a day before he was indicted on sales tax charges.
37
The twenty-seven years
Kozlowski devoted to Tyco and the tremendous growth the company experienced under his leadership weren’t enough for the Directors to give their CEO the benefit of the doubt or a scintilla of support, or to show him enough respect to meet with him in person or address him directly. They simply cut him loose.
38

Interestingly, when former Tyco Director John Fort was on the stand during Kozlowski’s second criminal trial, he was asked why, if the Directors knew it was wrong, they didn’t fire Kozlowski immediately in January of 2002 when they learned of the investment banking fee Kozlowski approved for Frank Walsh in the CIT deal. Fort told the jury, “Well, here we had a situation where we have a CEO with a fantastic track record . . . [y]ou got to hope that your boss doesn’t take action that fast if a situation like that comes up. It was—it was not immediate grounds for dismissal. We hadn’t had a chance to really discuss it, but I don’t think most boards react that way in any—I don’t think any manager should act that way in an employee situation. We think first you should find out what is behind it, whether it was a genuine mistake. Find out what the consequences were to the company before they take action.”
39
Apparently the Board’s philosophy changed between January and June because by June, the Directors had more of a “shoot first, ask questions later” philosophy when it came to getting rid of their CEO.

Kozlowski said the Tyco Board of Directors was never “his board.”
40
“The only director I brought to the Nominating Committee was Frank Walsh,” he explained. “That’s why allegations that I could do whatever I wanted without any oversight are ridiculous. Fort had a full-time office in the Exeter location while I was CEO. Josh Berman had a full-time office in New York. They all had access to anyone and anything they wanted.” Kozlowski said, “Fort knew everyone and everyone knew him. He was CEO immediately before me. If Irving Gutin thought something wasn’t right, he would have told Fort. There’s no doubt about it. They weren’t loyal to me and if I was doing anything even slightly questionable, they were right there and they could and would have called me on it. If there was anything they didn’t know about, it was because they were willfully blind.”
41
Kozlowski’s assessment seemed to be accurate. When he faced personal legal issues for the first time in his life, not one Director was supportive or displayed even a hint of loyalty.

Perhaps the Board felt the only way to protect Tyco shareholders was to get rid of Kozlowski as soon as he told them he was going to be indicted. But what if the charges turned out to be erroneous? What if he was never convicted of the sales tax charges?

He wasn’t.

If Tyco hadn’t been struggling in 2002, if the Directors hadn’t been angered by the Frank Walsh investment banking fee, if they hadn’t recently been sued in a shareholder derivative action, if TYC price was up instead of down, it’s interesting to consider whether the Tyco Board would have reacted in the same way.

* * *

Once he was charged by the Manhattan DA and ousted from Tyco, Kozlowski faced a number of humiliating and difficult tasks. To save them from any fallout related to his criminal charges, Kozlowski resigned from the boards on which he held seats. On June 3, 2002, Kozlowski resigned from Raytheon’s Board of Directors, where he had served since 1995. Daniel P. Burnham, then Raytheon Chairman and CEO, said of the resignation, “Dennis Kozlowski has been an effective member of the board. We respect his decision and appreciate his many years of valuable service to Raytheon and its shareholders.”
42
Eventually, Kozlowski stepped down from his seat on the Middlebury College Board of Trustees. Both of Kozlowski’s daughters completed their undergraduate education at Middlebury, and he had been involved with the institution for many years.
43
He also left the Board of Regents at his alma mater, Seton Hall University, where Kozlowski Hall was renamed Jubilee Hall.