Taking Down the Lion: The Rise and Fall of Tyco's Dennis Kozlowski (20 page)

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Kaufman mentioned something almost in passing during his opening statement. He told jurors that Kozlowski “was not a detail person. He was very much a concept individual and a very hard working person.”
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Kozlowski’s work ethic was incontrovertible. Anyone in or around Dennis Kozlowski’s life, even when he was a child, knew he was a workaholic.

But the observation that he was not a detail person was something about Kozlowski that people didn’t notice, or if they recognized it in him, they didn’t assign much importance to it. Kaufman’s observation, although somewhat difficult to believe considering Kozlowski’s background as an internal auditor, appeared to be accurate. There was ample evidence that Kozlowski did not pay attention to details. The nitty-gritty, nuts-and-bolts, annoying, time-consuming details that every adult must manage seemed to bore him or to elude him, and often he seemed unwilling to grasp, remember, deal with, or even consider details.

His younger sister Joyce described her brother precisely. She wrote of her brother: “For someone with a business/accounting educational background, a meteoric rise to power in the world of mergers and acquisitions, and a remarkable ‘head for numbers,’ Dennis never remembers birthdays, anniversaries, etc. It would be sad if it weren’t so comical! I actually made a calendar for him when he was in prison so he could remember significant events in people’s lives—you would think with all that time on his hands it wouldn’t have been an issue to keep a few dates straight—but not our Dennis!”
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Perhaps this deficit explains why he wasn’t an internal auditor for long. He gravitated to positions that required vision and the capacity to analyze the big picture, and in which the ability to deal with details was far less critical. Unfortunately for Kozlowski, his inattention to detail, his inability to appreciate the importance of details, and his pattern of delegating responsibility for many of the details in his life to others left him vulnerable—especially when he needed to prove how the details in his life had been handled. Because he had no idea. He had left the details to others.

Granted, he was in a demanding chief executive position and his time was at a premium, but perhaps he was too trusting when he allowed others to take care of things for which he would be held accountable. Perhaps he willingly and intentionally delegated responsibility for the details of his life because he didn’t like those tasks. Maybe he felt his time was too valuable to spend any of it dealing with the mundane. Throughout his life, Kozlowski tended to participate in activities at which he excelled. Maybe he didn’t want to deal with details because he wasn’t good at it.

Kozlowski, an extremely high-functioning person, lacked some of the basic skills that are common in most adults. It seems implausible, but Dennis Kozlowski was naïve—even as he spent many years immersed in very sophisticated business transactions. During the same years he worked on hundreds of multi-million and multi-billion dollar acquisitions, he had very little knowledge of or concern for what was happening with his personal finances. A Tyco employee in the company’s Executive Treasury department controlled his bank accounts, paid his bills, managed his investment accounts, handled the paperwork necessary when his restricted shares vested and taxes were due, she processed and signed his name on the promissory notes required when he used the company’s loan programs, and she wired money from his accounts when he needed to pay for large purchases like jewelry, boats, and parties. Kozlowski said, “I didn’t have time to keep up with those things. My electricity was turned off because I didn’t take time to pay the bill. I needed someone to make sure that didn’t happen again.”

Kozlowski said to solve this problem, “Mark [Swartz] suggested the Executive Treasury department, and I just turned everything over to them.”
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It proved to
be a costly decision. This arrangement made it appear as if Kozlowski used Tyco’s money for himself.

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During his opening statement, Kaufman explained to the jury how Kozlowski came to know, value, and promote Mark Swartz to the position of CFO. Kozlowski first became aware of Swartz while working on the Kendall acquisition in 1994. On nights when he was working at midnight trying to close the deal, he could always find Swartz still at work whenever he needed to speak with someone from finance. Mark Swartz had a work ethic much like Kozlowski’s. He was also impressed with Swartz’s focus, attention to detail, and the quality of his work. Kaufman told the jury that “[t]hey became a team, to put it simply. Dennis was the outside man and Mark Swartz was the inside man . . . they both had talents in all areas, but it gave Dennis what he needed, the comfort of knowing that there was a person who could look after the details certainly much better than Dennis could do because he was working so hard on the growth of the company.” The Kozlowski-Swartz team did great things for Tyco for a long time. But after the 2002 indictment, what was seen for years as a successful combination of complementary talents was re-characterized as a criminal conspiracy.

In addition to telling the jury a little bit about Dennis Kozlowski during his opening statement, Kaufman countered the prosecution’s “lying, cheating and stealing” contentions: “There [is] no second set of books. There’s no insider that’s going to come to that witness stand and talk in hush hush terms about secret conversations with my client about corrupt and criminal acts.”

“Criminals act in criminal ways,” Kaufman explained to the jury, “and [Kozlowski and Swartz] did not act in any way which was unlawful, which was corrupt, which was done with an intention to be willfully violating laws.”
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Pay-for-Performance Compensation

Most of the charges against Kozlowski and Swartz centered on their compensation between the years 1995 and 2002. Basically, the prosecution alleged that bonuses Tyco paid to Kozlowski, Swartz, and to dozens of other people were unauthorized and therefore, the amounts of those bonuses were stolen. The crime: grand larceny in the first degree. The sentence if convicted: an indeterminate sentence of one to twenty-five years.

New York Penal Law Section 155.42. Grand larceny in the first degree.

A person is guilty of grand larceny in the first degree when he steals property and when the value of the property exceeds one million dollars. Grand larceny in the first degree is a class B felony.

New York Penal Law Section 70.00. Sentence of imprisonment for felony.

(1) The sentence of imprisonment for a felony . . . shall be an indeterminate sentence.

(2)(b) For a class B felony, the term shall be fixed by the court, and shall not exceed twenty-five years;

(3)(b) The minimum period shall be fixed by the court and specified in the sentence and shall be not less than one year nor more than one-third of the maximum term imposed.

Related to the prosecution’s claims that they stole their bonuses, Kozlowski and Swartz were charged with using company loan programs to further their larcenous activities. The CEO and CFO borrowed large sums of money through Tyco’s KELP and relocation loan programs. Although they repaid most of those loans with what was indisputably their money, they paid down or paid off other loans with what the prosecution claimed and the defense refuted were unauthorized bonuses. The prosecution’s theory was that the executives took multi-million dollar loans, signed promissory notes documenting their indebtedness to the company, and then a few months later, declared bonuses that were unknown to and unauthorized by the Board of Directors. Instead of receiving those bonuses in the form of cash, the amounts were used to pay off or pay down outstanding loan balances that were on the books and records of the company.

In simple terms, Kozlowski and Swartz were charged with grand larceny in the first degree for taking millions of dollars when they received four bonuses two of which were used to pay down or pay off balances of outstanding loans owed to Tyco.

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Tyco’s “Compensation Committee Benefit Plans” included several different plans and company policies.
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Among the company-provided benefits were the 1994 Restricted Stock Plan, the Board of Directors’ Deferred Compensation Plan, the Key Employee Loan Program, and the Incentive Compensation Plan, which was the company policy under which the questioned bonuses were paid to Kozlowski and Swartz.

Tyco International Ltd. Incentive Compensation Plan

The stated purpose of the Incentive Compensation Plan (the Plan) was “to attract and retain senior executives who will contribute to the long-term success and growth of Tyco, to reward the executives for increased profitability of Tyco with resulting increased stockholder value, to establish performance goals based on the growth of Tyco and to motivate executives to achieve company objectives.” The policy required the Compensation Committee to annually “ . . . determine and
define the specific targets and goals . . . within the first ninety days of each fiscal year for which the incentive compensation is being earned. Such determination shall be documented in the Committee minutes.”
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The Plan provided the process through which earned compensation was to be paid: “Awards under the Incentive Plan shall be payable annually, after the completion of the Company’s annual audit and acceptance of the final financial results by the Company’s Board of Directors (generally within three months of the end of the fiscal year). Prior to any payments from the Incentive Plan, the Committee will certify that the performance goals have been satisfied.”
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During his opening statement, Stephen Kaufman explained to the jury the process used to administer Tyco’s pay-for-performance incentive compensation plan:

So what is the system? Compensation Committee meets, they fix a target, everyone knows what the target is, you review it at the end of the year and you see how well you’ve done. And Dennis received, if they exceeded the target, a portion of the benefits which incur to the company and obviously to the shareholders. The price of the stock [increased tremendously] during the nine years he was running the company. And that’s what I mean by pay for performance. There’s no chance here. There’s no luck here . . . It’s all according to [a] formula.
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Kaufman then informed the jury that Tyco’s books and records were audited by PricewaterhouseCoopers (PwC). He explained how the auditors reviewed the results of the company’s financial performance every year, including the numbers used to calculate incentive pay. Kaufman explained it like this:

They go to their accountants [PwC], whose presence was not noted this morning [by the prosecution], but you know what outside auditors do for a company? They’re giving you the Good Housekeeping Seal, they want to see if everything is kosher. They go to [PwC] and say, you know, the Compensation Committee met at the beginning of the year, the year is over now, we figured it out, and these are the targets and this is how much they exceeded the target. Would you please certify our report? And the accountants, the outside auditors did that. Open and visible.

Let’s not kid each other. If [Kozlowski and Swartz] wanted to cheat on making money, if they wanted to steal from the company that I’ve described to you, would they do it openly and visibly? Would they create records which anyone can come in and look at?
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Charles Stillman, head of the Swartz defense team, addressed jurors after they heard from the prosecution and from Kozlowski’s attorney. Stillman began by referencing an analogy he had used earlier, during jury selection. He said:

I told you about pancakes. I told you about making pancakes. And I talked about how it’s not a pancake until you turn it over. Well, you’ve heard the district attorney’s version of what he thinks the evidence is going to show. And I suggest to you most respectfully that some of the things you will hear are going to surprise you. Why would you be surprised? Not because the evidence is going to show you that Mark Swartz took something he did not earn. Quite the opposite. The evidence is going to show you the completely open manner in which the supposedly criminal transactions there . . . on another [of the prosecution’s] colorful chart[s] . . . [t]he evidence is going to show you the openness which Mark conducted himself as he did his job. Mark Swartz did not hide anything because he had nothing to hide.”
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* * *

The first witness in the first trial took the stand on October 8, 2003. Over the next six months, the prosecution called nearly fifty witnesses. The testimony and evidence was inconceivably voluminous and covered a wide range of topics. Some witnesses were asked to explain, line by line, information and numbers contained in a variety of company documents; some witnesses were asked to tell the jury about accounting methods and mechanics, like how and why entries were made to the general ledger; there were lists of loan balances and payments, questions about whether PwC audited certain transactions, explanations of how company policies were administered, and lots of questions about who told whom to do what and why. There were scores of form names, policy provisions, contract clauses, and an alphabet soup of acronyms: KELP, SEC, PwC, CEO, CFO, W-2, SCM, S-1, TME, 10-K, MBA, GAAP, 8-K, CIT, IPO, HR, CPA, IRS, EBIT, LDK, MHS, S-K, TME, AMP, BOD, ADT, F-3, EDGAR, EPS, S-4, COO, KFT, TGN.

OMG!

The jury heard about annotations, adjustments, allocations, appendices, gross-ups, remuneration, commercial paper, vestings, loan forgiveness, short-sellers, spreadsheets, credits, footnotes, calculations, columns, derivative transactions, nonrecurring gains and losses, institutional investors, schedules, reconciliations, letters of credit, and the financial and procedural ins and outs of many fiscal years of the vast conglomerate. There were countless references to the Board and to the Directors and to the Board’s Committees—all of the terms and references were used as if jurors had extensive backgrounds in business, corporate governance, securities and tax law, and an understanding of fiduciary duties.