Taking Down the Lion: The Rise and Fall of Tyco's Dennis Kozlowski (18 page)

Former Director Foss told the jury that the Board took no formal action as a result of Prue’s letter and request.
23
Josh Berman denied Prue’s accusations and said she misunderstood his request.
24
Notably, Berman was not a member of the Compensation Committee, and he was not one of the Directors whose decisions and knowledge were included in the meeting minutes in question. In other words, if he asked that the minutes be altered, it would have been to cover up for others, but not for himself.

* * *

On July 25, 2002, about eight weeks after the company announced Kozlowski’s departure, the Tyco Board appointed Edward D. Breen the company’s next Chairman and Chief Executive Officer. Breen was the former President and Chief Operating Officer of Motorola, Inc.
25
Kozlowski was out, Breen was in, and yet Tyco shareholders were far from happy. Investors had good reason to be upset. The day Breen was hired, Tyco stock closed at $11.63. A year earlier, on July 25, 2001, the stock had closed at $72.55.
26
How quickly things had changed for Tyco shareholders.

On Breen’s first day as CEO, angry representatives of the company’s largest institutional shareholders confronted him in Tyco’s New York offices and demanded that Kozlowski-era Directors be replaced.
27
Ralph Whitworth of Relational Investors LLC, then with ownership of seven million Tyco shares, threatened a proxy fight. Whitworth had the backing of other institutional shareholders. For example, Bill Miller of Legg Mason Funds Management told the
Wall Street
Journal
that
“[e]very one of those old board members should tender their resignations immediately.” Miller stated, “I am perfectly prepared . . . to vote for a different slate if that’s what it takes.”
28
Whitworth was quoted in an article that appeared in the
New York Daily News
in August of 2002 saying “[e]ither they knew what was going on or they were asleep at the switch—both are terminal.”
29

In 2011, former Director Wendy Lane told business researchers, “If you are under attack as a director you do not want to resign.” She explained further by stating that “. . . if you resign you lose control over not only the information flow but the information itself, the litigation process and settlement or adjudication proceedings. There is also an implication you were at fault.”
30

Dennis Kozlowski agreed completely with Lane’s assessment of what happens to an individual who isn’t present during a time of crisis. Once Kozlowski was out of the company, information about him seemed to procreate as quickly and prolifically as colonies of wild rabbits. After June 3, 2002, no one at Tyco would speak to the departed CEO. He had no access to the information that David Boies was accumulating and interpreting—all done without including Kozlowski in the investigation.
31

Kozlowski said, “I knew David Boies was hired to investigate the Frank Walsh payment. That was going on while I was still there and I didn’t object to the investigation.”
32
Kozlowski never spoke to David Boies—not before he left the company, and not after. “I was supposed to meet with him a couple of different times when I was still at Tyco, but I had to reschedule. I was trying to sell CIT. That was my priority at that time, so when I had to be at a meeting with Dick Fuld of Lehman Brothers or on a call with Warren Buffett, I canceled everything else and I was at the CIT meetings.” Kozlowski admitted that, at the time, he was consumed with selling CIT and had very little interest in the internal investigation. Kozlowski wondered over the years, as he sat in prison, if David Boies held those rescheduled meetings against him.
33

Being outside the company during the internal investigation put Kozlowski at a huge disadvantage. He had no ability to provide input, he wasn’t asked to explain anything—he had no idea what was happening at the company where he spent twenty-seven years of his life. And as Wendy Lane explained, “[T]here is also an implication you were at fault.”
34
Kozlowski said, “I didn’t know anything about the scope of the investigation being expanded—I didn’t know that I was part of the internal investigation until sometime in August [of 2002].”
35

Leaks and Spin

Throughout the summer of 2002, someone involved with the investigation (it had to be someone at Tyco, or someone with the Boies firm, or someone in the DA’s office) was feeding information from inside the company to the media. The $6,000 shower curtain, Kozlowski’s art purchases, the locations and sizes of his personal homes, charitable contributions Kozlowski authorized (reported by the media as if Tyco was the only large corporation to ever make sizable charitable contributions), the Directors’ questionable financial dealings with the company—many details allegedly found during the investigation were leaked to and reported by the media. At the time, the only criminal allegations against Kozlowski were for failing to pay sales taxes. Because he was the first consumer ever charged in New York, it seems the media could have given Kozlowski the benefit of the doubt until the charges were adjudicated. But the media isn’t restricted by the constitutional right to due
process. The media can make allegations, prosecute, and convict without an indictment, arraignment, or trial.

A scathing article appeared on the front page of the
Wall Street Journal
on August 7, 2002. In a sensational account of spending and looting, Tyco-phile reporter Mark Maremont and his co-author Laurie Cohen reported and ridiculed Kozlowski’s lavish lifestyle. Maremont and Cohen cited as their sources “people investigating the company” and “people familiar with the company.”
36
There were no named sources.

The
Wall Street Journal
’s compelling headline—“Executive Privilege: How Tyco’s CEO Enriched Himself—Mr. Kozlowski, Ex-Chief, Got Secret Loans, Spent Firm’s Cash as His Own—A $6,000 Shower Curtain”—drew readers into a tale of Enron-era excess and extravagance. Maremont and Cohen claimed that Kozlowski “regularly reached into Tyco coffers to finance his extravagant lifestyle and polish his image.” Interestingly, the unnamed sources cited in the August 2002 article—the “people investigating the company”—told Maremont and Cohen that “Tyco paid for the Fifth Avenue duplex,” that Tyco “bought the Fifth Avenue duplex,” and that 950 Fifth Avenue was what “Tyco considered a corporate apartment.”
37
At some point, those “people” must have forgotten because repeated testimony during the criminal trials was that the Fifth Avenue apartment was a secret about which only Kozlowski and Swartz had knowledge.

Maremont and Cohen wrote that “[t]he allegations against Mr. Kozlowski follow a wave of disclosures of CEO hubris and greed. Like other top executives who have come under fire in recent weeks, Mr. Kozlowski allegedly took advantage of the 1990s boom to help himself to a smorgasbord of financial rewards.”
38

“The allegations? What allegations?” Kozlowski recalled thinking when he saw the
Wall Street Journal
article. “Whose allegations?” According to Kozlowski, he didn’t know he was being investigated when the article appeared in the
Wall Street Journal
in August of 2002. Kozlowski had been in Nantucket all summer crafting plans for a private equity fund. He had no knowledge of anything going on at Tyco; he didn’t know there were problems inside the company.
39
But according to the
Wall Street Journal,
and unbeknownst to Kozlowski, there were already “allegations” of serious wrongdoing. In fact, Maremont and Cohen stated that “Mr. Kozlowski’s brazen use of a public company as his personal cash machine looms as a particularly egregious case [of CEO hubris and greed].”
40

Maremont and Cohen’s word choices appeared to unnecessarily and inaccurately imply wrongdoing—they transformed innocuous information into a scandal they seemingly uncovered through investigative reporting. For example, they wrote of Kozlowski that “ . . . he
quietly
put
his
doctor and fitness trainer on the Tyco payroll . . .”
41
The Tyco employees in question weren’t
his
doctor and
his
trainer. According to a company spokesperson, the doctor and the fitness trainer to whom the article referred were hired as part of Tyco’s corporate wellness program.
42

In a 2013 article titled “Your Company Wants to Make You Healthy” written by
Wall Street Journal
reporter Jen Wieczner, the newspaper reported that “[n]early 90% of employers offer wellness incentives, or financial rewards or prizes to employees who work toward getting healthier, according to a recent survey from Fidelity Investments and the National Business Group on Health.”
43
Wieczner wrote about corporate wellness programs at Caterpillar Inc., JetBlue Airways Corp., and Johnson & Johnson. All were cast in a positive light. None of the three were accused of
quietly
hiring individuals to run their wellness programs, as if it was scandalous or criminal to do so.

The Maremont and Cohen article mentioned that the U.S. Attorney in New Hampshire investigated the claims made about Kozlowski and Tyco. However, the U.S. Attorney did not pursue any criminal charges as a result of that investigation. Maremont and Cohen also disclosed Kozlowski’s assertion that Tyco owed him “tens of millions” of dollars in deferred compensation—money Kozlowski had earned but that was held by Tyco at the time he was ousted in June of 2002.
44
However, the journalists didn’t chastise Tyco for keeping Kozlowski’s earnings and they didn’t investigate Kozlowski’s claims.

On the evening of August 7, 2002, the day Maremont and Cohen’s article appeared on the front page of the
Wall Street Journal,
Maremont gave an interview that was broadcast by NPR’s
All Things Considered
during which he talked on the air about Kozlowski’s spending and his lavish lifestyle: birthday parties, mansions, and fine art. Maremont once again used words like”quietly” and “secretly” as he told listeners that Kozlowski wrongfully took more than $100 million from Tyco.
45

More than ever before, his status as a public figure caused problems for Dennis Kozlowski in 2002. The magazine covers, press interviews, and newspaper articles that had been written about him over the prior several years came back to hurt him. The whale had surfaced, and the media threw many harpoons.

Just like the February 2002
Wall Street Journal
article about hundreds of “undisclosed acquisitions”—a story Tyco and others quickly and vehemently refuted—Maremont and Cohen’s August 7, 2002 article had an immediate negative effect on the value of Tyco stock. TYC dropped five percent and the volume of trading increased by around a million shares on the day the article ran.
46
The “people investigating the company” weren’t acting in the best interest of Tyco shareholders when they leaked sensational information, some of which was untrue, some of which was unrelated to any criminal charges that were or would be alleged, most of which was spun by the media, and all of which was used to portray Dennis Kozlowski as a thief, a liar, a scoundrel, and a criminal.

Kozlowski was tried in the court of public opinion based on selective information leaked by nameless “people investigating the company” and then spun onto the front page long before he was afforded any type of due process. The leaks
weren’t good for Tyco, they weren’t good for Tyco shareholders, and they hurt Dennis Kozlowski, which begs the question: Who benefited from the smear campaign?

* * *

After he was named CEO, Ed Breen began ridding Tyco of Kozlowski-era Directors and employees. One of the first to go was CFO Mark Swartz. By all accounts, Swartz played a significant role in assisting David Boies and his team with the internal investigation during the summer of 2002. However, on August 1st, he was presented with a severance package and a request for his resignation.
47

When he took the stand in his own defense during his second criminal trial in 2005, the former CFO recounted the day he was asked to leave. Swartz said, “David Boies told [me and the other Directors] in the meeting on August first due to all the focus on the company and press attention, the most they could pay out at that point was 50 million dollars and his hope was that the balance of 25 million, once things quieted down in a few months would be paid to me.”
48
That day, Swartz signed an agreement with Tyco in which he waived his right to enforce the 2001 Retention Agreement, and in which the company, among other things, agreed to give Swartz all amounts due him under the company’s deferred compensation program, the value of his 401(k), the value of his executive life insurance policy, and amounts due under the senior executive retirement program. In total, the Directors, as advised by David Boies, agreed to pay Swartz $50 million in severance. Mark Swartz signed that agreement on August 1, 2002. Signing on behalf of Tyco: an attorney from Boies, Schiller & Flexner.
49

The agreement included Swartz’s resignation from the Board, but he continued in his role as CFO for another month and a half, until September 11, 2002. Over those weeks, he fulfilled all of his normal duties; he handled SEC filings, he worked on Sarbanes-Oxley requirements with the new CEO, he spoke with shareholders—he did everything he had done as CFO for many years. During his trials, Swartz told the juries that when he left work on his last day with Tyco, it was to fly “to New York . . . to be arrested the following day in connection with my job as CFO of Tyco.” Swartz then told the juries that “Ed Breen and David Boies had offered a Tyco provided airplane for [my wife] Karen and me to fly home from New York.” When asked if he took them up on their offer, Swartz said, “We did.”
50
It was an interesting and pricey perk offered to a man the company and the Manhattan DA just accused of stealing from the company, in concert with Dennis Kozlowski, more than $170 million.