Taking Down the Lion: The Rise and Fall of Tyco's Dennis Kozlowski (32 page)

4. The Jury

After spending two and a half years reviewing and studying the evidence presented during both criminal trials, I do not believe jurors in either understood the vast majority of the evidence. The corporate finance, accounting methods, compensation plans, and employment contracts at issue in the case were as complex as those used by any business organization in the world. Between the volume, the detail, the complexity, the length of the trials, and the experience and background needed to understand the information presented, I don’t believe jurors could have understood much of what was presented. Jury foreman Isaac Rosenthal confirmed that some jurors slept through parts of the trial.
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I asked former Tyco Executive Vice President Brad McGee, who testified during both trials, if he thought the jury understood his testimony. He said, “No.”
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I asked Robert Morgenthau if our jury system is equipped to fairly adjudicate a complex case like
People v. Kozlowski.
Mr. Morgenthau, with a razor-sharp legal mind at the age of ninety-three, told me a story about a case he tried in the
1960s. He told me about a jury on which there were five businessmen who became a “clique”; they felt they were more qualified than the rest of the jurors to understand the evidence. Mr. Morgenthau said there were two African American women on the jury, which he described as very unusual in the 1960s. Morgenthau said he heard a conversation between jurors in which the five businessmen were opining about the complexity of the evidence when one of the African American women said to them, “Don’t you know what this case is about?” Morgenthau’s point was that if jurors get the gist, if they have “a general sense of what the case is about, that’s sometimes more important than understanding the details.”
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With all due respect to Mr. Morgenthau—if I was on trial, I would want the jury to understand the details. And I feel strongly that our legal system is not capable of fairly adjudicating complex cases like Kozlowski’s. Our system just doesn’t work in its current form and with the rules in place.

What Did the Jury Have to Believe in Order to Find Kozlowski Guilty of 22 Felony Charges?

The jury in Kozlowski’s second trial, the one in which he was convicted, had to believe beyond a reasonable doubt some things that I don’t find reasonable.

1. The jury had to believe beyond a reasonable doubt that Kozlowski stole money during the same time period that he declined an offer of significant additional compensation from the Board of Directors. The jury had to believe beyond a reasonable doubt that Kozlowski stole money instead of accepting a grant of 1,500,000 options for Tyco stock.
   

When he was questioned during the second criminal trial, former Director Frank Walsh, who was also a former Chairman of the Compensation Committee, was asked if Dennis Kozlowski or Mark Swartz ever turned down offers of additional compensation, to which he responded, “[Y]es, they did.”
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Kozlowski turned down 1,500,000 stock options offered to him by the Board at the very time he was allegedly stealing money from the company. Mark Swartz turned down 750,000 options. At the suggestion of Towers Perrin, a consulting firm hired by the Compensation Committee, the Committee voted to grant large numbers of stock options to both men to provide additional motivation for them to increase the value of Tyco stock. At the time, Kozlowski and Swartz did not have employment contracts with the company, so the substantial stock options were also viewed as an inducement for them to remain at Tyco. In its October 13, 1999 meeting minutes, the Compensation Committee: “RESOLVED, that Messrs Kozlowski and Swartz are granted performance-based option grants of 1,500,000 and 750,000 options respectively as of October 18,
1999. However, Messrs. Kozlowski and Swartz decided to decline the grant at this time.”
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Kozlowski and Swartz were accused and convicted of stealing bonuses in August of 1999 and September of 2000, both within a year of when they turned down a total of 2,250,000 options.

Why would Dennis Kozlowski and Mark Swartz conspire and steal from Tyco? The Compensation Committee and the Board—they opened the door to the company’s vault and threw money at the CEO and CFO in order to get them to stay. It’s obvious. All one has to do is read their Retention Agreements. They didn’t have to steal anything.

1. The jury had to believe beyond a reasonable doubt that the Board of Directors and the Compensation Committee would have had accurate minutes that documented the Directors’ decisions to approve the questioned bonuses if the bonuses were approved. The jury had to believe beyond a reasonable doubt that because approvals for the four bonuses were not found in meeting minutes, the bonuses were not approved.
   

The overwhelming weight of evidence showed that the recording and retention of minutes from Tyco Board and Committee meetings was completely unreliable. There were numerous instances when there were no minutes. Many events, approvals, and decisions weren’t reflected in meeting minutes—yet those decisions and actions of the Board clearly happened, even though there was no record found in the Board’s minutes. The Audit Committee didn’t begin recording or retaining minutes until the spring of 2002. Compensation Committee minutes were drafted before meetings by someone who never attended the meetings. The jury had to believe that despite overwhelming evidence that Tyco meeting minutes were unreliable, and often nonexistent, that the absence of approval of the bonuses in meeting minutes meant the bonuses weren’t approved.

1. The jury had to believe beyond a reasonable doubt that Kozlowski intended to conceal the receipt of the four bonuses even though they were recorded on the books and records of the company, included in management representation letters provided to PwC, and handled by several Tyco corporate employees in a number of different departments.
   

Although not evidence that the bonuses were approved, the management representation letter is certainly evidence that Kozlowski and Swart
believed
the bonuses were approved. Why else would they point them out to PwC? The act of providing the information to auditors is evidence that they weren’t concealing the bonuses, as alleged by the prosecution. The management representation letter seems convincing evidence that Kozlowski and Swartz did not intend to take the money wrongfully; it is convincing evidence that they believed they had a right to receive the bonuses.

1. The jury had to believe beyond a reasonable doubt that Kozlowski would steal amounts that were calculated according to the Incentive Compensation Plan formula. No more. No less. And Swartz always stole exactly half of what Kozlowski stole (also in amounts that would have been due him under the Plan—had the bonuses been approved).
   
2. The jury had to believe beyond a reasonable doubt that Dennis Kozlowski did not receive approval for the bonuses from Philip Hampton, then Chair of the Compensation Committee.
   

Kozlowski told Swartz and Patricia Prue that Hampton took care of approval for the bonuses—and he gave them that information when Phil Hampton was still alive, when Swartz, Prue, and all of the other Tyco employees who processed and/or received bonuses as part of the same transactions could have (and may have) discussed the bonuses with Hampton. No Tyco employees testified that they were instructed or pressured to hide, conceal, or withhold information of any kind. The jury had to believe beyond a reasonable doubt that Kozlowski lied to people in Tyco corporate offices when he told them that Phil Hampton gave him approval for the bonuses—and Kozlowski just hoped against hope that no one would spill the beans to Hampton.

1. The jury had to believe beyond a reasonable doubt that Hampton did not have those conversations with Kozlowski and that Kozlowski lied under oath about his mentor, friend, and trusted colleague.
   
2. The jury had to believe beyond a reasonable doubt that former Tyco Directors who testified during the trial were telling the truth.
   

Jurors had to believe that the clause of the Retention Agreement (the one that defined firing Kozlowski “for cause” and released Directors from performing their obligations to Kozlowski under the terms of the agreement) didn’t bias the Directors, and that their own possible criminal indictments and dozens of civil lawsuits didn’t influence their testimony. Jurors had to believe the Directors who testified were completely honest and not protecting their own interests.

1. The jury had to believe beyond a reasonable doubt that Dennis Kozlowski intended to steal three paintings that were purchased with Tyco funds, even though the invoice for the paintings was sent to Tyco, the paintings were shipped to a Tyco apartment (an apartment that was reflected as an asset on the company’s books and records), the paintings hung in the Tyco apartment and were never moved by Kozlowski or anyone else, and the paintings were reflected as assets of Tyco on the company’s audited books and records.
   

Because jurors believed Kozlowski stole those paintings, they would also by necessity, using the exact same reasoning, have to believe the following:

My supervisor told me I was authorized to make purchases for my office in an amount not to exceed $10,000. I ordered furniture that cost $500. The furniture was shipped to the office, the invoice was sent to my employer, and my employer paid for the furniture. The furniture was reflected as an asset on my employer’s books and records. I was suddenly fired and not allowed to return to my office, not even to collect my personal belongings. Three months later, I was indicted for stealing $500 worth of furniture (which remained in what used to be my office).

The jury believed Kozlowski committed grand larceny with regard to the paintings, so the jury would also have to believe I committed larceny with regard to that office furniture.

5. The Media

Mandi Woodruff said it all in her
Business Insider
article entitled “This Is What Everyone’s Afraid to Say about the Rich.” She wrote, “Americans love a good rags-to-riches fairytale, but here’s a story people are far more interested in reading: Riches-to-rags.”
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Kozlowski was crucified by the media. The media turned Kozlowski into the CEO everyone loved to hate. However, not all of the coverage was biased and inaccurate. As I read hundreds of articles during my research, I found that Andrew Ross Sorkin of the
New York Times
and Dan Ackman of
Forbes
understood the facts and did a far better job than most of discounting the irrelevant, sensational hype. Other than Sorkin and Ackman, the media coverage was largely unreliable and the information reported had to be fact checked before it could be used.

Kozlowski was for years shocked and appalled by the media’s coverage of his story. “I’ve read things about myself that were complete fiction,” he said. “I’ve been called names, ridiculed, and blamed for things that simply never happened. Everything in my life has been exploited by people in the media.”
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He added, “Whoever orchestrated the spin was masterful.”
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6. Blurred Lines

The compensation of key employees was complicated by the use of restricted shares of stock that had various vesting schedules. Vesting was a taxable event for employees, which triggered use of the Key Employee Loan Program—a loan program that was administered far too loosely. Because of the way KELP was administered, all of Kozlowski’s personal purchases were reflected on records that were housed inside the company. It’s this process that fueled allegations that Kozlowski used Tyco as his personal piggy bank.

It is my understanding from reviewing the plan documents, reading the testimony given during the trials, and going through the loans and expenditures (invoice by invoice) processed through KELP, that Kozlowski did not borrow more than permitted by company policy. What prosecutors and the media objected to was not that he borrowed more than allowable; it was how he spent the money that he borrowed.

The primary purpose of the loan program was to encourage key employees to retain ownership of Tyco stock—to give them an option other than selling shares to pay taxes due when restricted shares vested. Kozlowski used the proceeds of KELP loans to pay many different types of obligations, not just to pay taxes. Kozlowski did not find it necessary or even important that he used the proceeds of the loans to pay taxes because money is fungible. Kozlowski had to pay his taxes. What did it matter which dollars he sent to taxing authorities? In his mind, it didn’t matter if he paid the taxes due with the money in his wallet, or in his bank account, or from an investment account, or from amounts available to him through KELP. Money is money. Kozlowski believed that so long as he didn’t borrow more than was permitted under the terms of the loan program, he was using KELP appropriately and could spend the loan proceeds as he wanted.

There were two important problems with KELP. First, the price of Tyco stock grew so dramatically, the value of the restricted shares that vested became huge, with correspondingly huge tax bills, and correspondingly huge amounts available through KELP. What was once a plan that allowed key employees to borrow modest amounts of money became a vehicle for borrowing tens of millions of dollars from the company. So, the plan in and of itself became problematic. Was it still in the best interest of Tyco shareholders for key employees to borrow from the company instead of selling shares of Tyco stock to pay their tax bills? Or had the amounts available under the terms of the policy grown too large? The plan should have been amended or discontinued by the Board of Directors. This type of oversight and judgment is the duty of corporate directors. The Tyco Board failed in its direction and oversight of company loan programs.

The Sarbanes-Oxley Act usurped the Tyco Board’s options regarding loan offerings available from the company when in 2002 the federal law prohibited publicly traded corporations from making loans to employees.