Taking Down the Lion: The Rise and Fall of Tyco's Dennis Kozlowski (17 page)

The year from hell continued. With every month that passed in 2002, Kozlowski’s life had become more troubled. Shortly after the June 4th indictment, he retreated to his home in Nantucket. “I spent the summer thinking about what I was going to do next,” he recalled. “I started putting together a private equity fund with a few other people. We met that summer at my house in Nantucket. I was going to do my own thing and keep a low profile. I was tired from all of the stress and negative publicity. I was planning a private, quiet life.”
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Unfortunately for Kozlowski, a private, quiet life was not in the cards.

Fourteen

Internal Investigation

There’s an ancient African proverb that considers the encounter between a hunter and his prey. In the Ewe-mina, Igbo, Togo, and other cultures, hunters were considered powerful and respected members of their communities and were even believed to possess supernatural powers. They were also known to tell great stories of their kills and were praised and admired for their conquests. But even as villagers celebrated the hunter, it was with awareness that they would never know all that happened during the hunt.
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A young boy questioned his grandfather, “Is it true that the lion is the king of the jungle?”

The old man looked at his grandson curiously and said, “Yes, my son, that is true, why do you ask?”

“Well, Grandfather,” said the boy, “if this is true, then why is it that in all the stories I read and all the ones I hear, the hunter defeats the lion. How can this be true?”

The old man looked at his grandson and said, “And it will always be that way, my son, until the lion tells the story. Until then, tales of the hunt shall always glorify the hunter.”
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* * *

The large majority of reports about Dennis Kozlowski’s departure from Tyco state that Kozlowski resigned. But Kozlowski said he was fired over the phone at around midnight on the first Sunday in June of 2002.
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In the end, the words spoken and heard that night through the chain of people who relayed information between the Tyco Board and Kozlowski don’t really matter. Even if Kozlowski wasn’t expressly fired, there’s no doubt that he was constructively discharged—the Board made it
impossible for him to continue as CEO and Chairman, which was the same as firing him.

If a severance agreement was negotiated between Tyco and Kozlowski over the phone that Sunday evening in June—and the Directors claimed there was a verbal agreement—it was very quickly breached because Tyco did not perform. The company where he worked for twenty-seven years didn’t provide Dennis Kozlowski any severance or any of the benefits promised in his employment contract. In addition, the Directors did not comply with several provisions of that contract, the January 2001 Retention Agreement, which detailed the processes by which Kozlowski could resign and through which he could be fired.
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Anything that occurred outside of the contractually defined process was presumably unenforceable or a breach of the agreement.

On June 3, 2002, Tyco issued a press release announcing “ . . . that L. Dennis Kozlowski resigned as Chairman and Chief Executive Officer for personal reasons. Mr. Kozlowski also stepped down from the Board of Directors.” In the same press release, the company announced that “[a]t the request of Tyco’s Board, John F. Fort has agreed to assume primary executive responsibilities during an interim period while a search for a permanent replacement is completed.” In his newly assumed role of interim CEO, Fort made his priorities known when he said, “We plan to complete the IPO [initial public offering] of CIT by the end of June.” Fort also confirmed his support of a long-term operating strategy to focus more on organic growth. Of Kozlowski’s sudden departure, Fort said that “[d]uring his tenure, Dennis Kozlowski grew Tyco to a $36 billion manufacturer and service provider operating in over 100 countries. We wish him well and thank him for his contributions.”
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* * *

Tyco faced ongoing difficulties. Already dealing with a litany of serious challenges, the Directors’ problems were compounded when legal actions were filed against them in April of 2002 over the Frank Walsh payment, breathing new life into an issue that appeared to have been put to rest. As external pressures intensified, tensions among Tyco insiders grew. In her interview for the Harvard Business School case study, former Director Wendy Lane said, “We didn’t know what we didn’t know, so we started to investigate a number of things.” Lane explained that the Audit Committee, of which she was a member in 2002, asked for a review of accounting methods, which eventually were found to be compliant with Generally Accepted Accounting Principles (GAAP).
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Lane said when the Board learned that a senior manager was building a house that was “too expensive for his compensation level,” the Compensation Committee asked for additional information on executive compensation and requested records of executives’ use of company loan programs. She described an environment of suspicion and doubt, noted that prominent attorney David Boies had
been retained by the Board, and said that as investigations unfolded, “certain inter-relationships were surfacing between various board members and management, such as investments and sales of houses.” The case study quoted Lane as saying that she “did not know what to think or whom to trust.” She also explained how the Audit Committee reviewed the details of corporate expenses, corporate expense accounts, and activity in the loan programs after which Lane interviewed both internal and external auditors who were fully aware of the payments and loans the committee questioned.
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In a similar description of the atmosphere and the mind-set of the Board in the late spring and early summer of 2002, John Fort testified that “the company was almost daily under siege in the press with rumors and accusations. The stock continued to fall. Then we reconsidered the break up, announced that we changed our mind on the break up. This was probably in April. The stock continued to fall. The press continued to be just very difficult on us.” He recalled that “[i]n February, I believe, we changed the composition of the Nominating [and] Governance Committee and shortly after that I became lead director [to replace Frank Walsh]. I was already on [the Nominating and Governance Committee], Richard Bodman was on it, we added Michael Ashcroft and Joshua Berman, and we had four people on that, and one of the things was what to do—how should we pursue getting our money back [from Frank Walsh] and how we should do it.” That’s why the Board, through its Nominating and Governance Committee, initiated the 2002 internal investigation at Tyco.
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When the Board decided to launch the investigation, the scope was limited to the Frank Walsh investment banking fee. Interestingly, the Nominating and Governance Committee decided not to use the law firm Tyco’s top lawyer Mark Belnick hired to conduct the investigation. Belnick had engaged Washington, DC-based Wilmer Cutler & Pickering, where William McLucas, the former head of enforcement at the SEC, practiced. McLucas was Tyco’s outside counsel during the successfully concluded SEC investigation in 1999–2000. But instead of using Wilmer Cutler, the Committee decided to bring in David Boies.
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David Boies

In the findings of fact in
Tyco v. Walsh,
the U.S. District Court for the Southern District of New York detailed how Tyco came to hire David Boies to conduct the internal investigation into the Walsh payment. Three and a half months after the January 2002 Board of Directors’ huddle, the four members of the Nominating and Governance Committee—Ashcroft, Berman, Bodman, and Fort—met via telephone on April 29, 2002 and decided to recommend to the full Board that action be taken to recover the investment banking fee paid to Frank Walsh. As part of that discussion, the four Committee members made it known to the full Board that
they expected to supervise any legal action that was initiated, and the Committee promptly retained Boies, Schiller & Flexner. The Committee asked the law firm to complete the internal investigation in about six weeks.
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As a well-known and successful litigator, David Boies accumulated a long list of impressive accomplishments and awards—and a great deal of media attention. He is best known for his work in some very high-profile cases. In the late 1990s, Boies served as Special Trial Counsel for the U.S. Department of Justice during the Microsoft antitrust case. In perhaps his most high-profile performance, Boies argued before the U.S. Supreme Court on behalf of former Vice President Al Gore in the case that determined the outcome of the 2000 presidential election. In addition, Boies was instrumental in litigation that expanded marriage rights to same-sex couples.
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The Tyco Compensation Committee unexpectedly hired a ‘big gun’ when they brought in David Boies to handle the Walsh investigation. Former Tyco CEO and Director Josh Berman explained the choice: “We were determined to get the $20 million back from Frank Walsh. It was wrong, dead wrong of him to take that money, and it was our responsibility to get it back.” Berman said, “I brought in Boies. By reason of his reputation, I believed our decision to hire him would convince Walsh that we were serious. Boies had credibility with the Board and with Walsh.”
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It was also somewhat surprising that Boies took the job; it didn’t seem the kind of work that was in the prominent litigator’s wheelhouse. According to Boies biographer Karen Donovan, Boies and the members of his firm did not have the “depth of experience” to handle the Tyco matter compared to the ousted law firm Wilmer Cutler. Donovan wrote that despite the case being outside his
forte,
“ . . . Boies could not pass up Tyco, or, for that matter, most cases in the spotlight.” She also explained that “Boies’s representation of Tyco spawned a new crop of Boies headlines, like the one that appeared in a profile of him in the Sunday edition of the
New York Times
in June 2002, under the headline ‘Company in Trouble? Just Let Him Loose.’”
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That’s exactly what the Directors did after they hired David Boies.

In May of 2002, Tyco Chief Corporate Counsel Mark Belnick advised Boies that he didn’t believe a lawsuit against Frank Walsh, which Boies had advised the Board to initiate, was in the company’s best interest.
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There seemed to be growing tension between Belnick and Boies, and by extension, between Belnick and the Board. Mark Belnick was fired on June 10, 2002, a few weeks after voicing his opinion to David Boies.
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As it did with Kozlowski, the Board fired Belnick with no warning and no opportunity to discuss the rationale for the termination. Belnick recalled that a Tyco Director came to his office in New York and said, “You’re fired, and you’ve got two minutes to get out,” after which two large security guards physically removed Belnick by grabbing his shoulders and escorting him out; the company’s top lawyer was paraded past his colleagues as he was led from the building.
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After he was acquitted in 2004 of charges brought by the Manhattan DA as a result of the Boies internal investigation, Belnick gave an interview to
New York Magazine.
“I was trying to do the right thing all the time at Tyco,” he explained, “[t]hat’s all I ever wanted to do. My end was to make Tyco a model of corporate governance.”
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With Kozlowski and Belnick gone and David Boies advising them, the Directors seemed to become more engaged and significantly more aggressive. On June 17, 2002, a week after Belnick was fired, Tyco filed an action against Frank Walsh. The Board had waited more than five months to sue the former Director, and the timing of their delayed action appeared to be related to shareholder lawsuits filed against them. (Tyco’s claims against Walsh were dismissed eight years later.)
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In its new and more aggressive form, the Board also expanded the internal investigation that was originally focused on Walsh into a probe of Tyco’s top management—two of whom (Kozlowski and Belnick) were no longer with the company.

Not long after the Board expanded the scope of the Boies investigation, and in the unavoidable spotlight focused on Tyco as a result of Kozlowski’s sales tax indictment and sudden departure from the company, the Directors found themselves under attack. During the summer of 2002, information surfaced about many questionable financial transactions between individual Directors and Tyco—the conflicts of interest that were commonplace at the company for many years suddenly became serious problems. In addition to what was portrayed as self-dealing by some of the Directors, the media reported details of company loan programs and of the total compensation the Board paid and executive perquisites it provided to Tyco executives. There were implications that the Board failed to provide proper oversight and that the Directors might be civilly and even criminally liable for neglect of their duties. Multiple sources reported that the Manhattan DA might charge the Directors with securities fraud, racketeering, and other serious crimes.
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Years later during the executives’ criminal trials, former Director Stephen Foss was asked about some of the tensions that affected the Board at that time.
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Foss told the jury about a letter written by Patty Prue. Patricia “Patty” Prue was the head of human resources. In June of 2002, she wrote a letter to the Board of Directors that read: “As you know, I plan as always to assist you and the Board with whatever requests you have in conjunction with my role as head of Human Resources. However, as a result of the fact that I was recently pressured by Josh Berman to engage in conduct which I regarded as dishonest, and which I refused to do, I will decline to have any personal contact with him in the future. In addition, I ask that Josh not go to my staff with any requests for information or directions.”
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According to a September 2002 article in the
New York Times,
Prue told a grand jury that the company’s attorneys and Berman “put pressure on her, unsuccessfully, to get her to doctor the minutes of a compensation committee meeting.” The article reported that those minutes proved that all three members of the
Compensation Committee knew about loans the company made to Kozlowski, Swartz, and Belnick, even though the Boies investigation had reported that the three executives concealed those loans. The Directors’ knowledge of executive pay and perks was the key issue in the criminal trials of Kozlowski, Swartz, and Belnick.
New York Times
journalists Andrew Ross Sorkin and Jonathan Glater wrote, “ . . . [T]he compensation committee minutes and the accusations from [Prue] may undermine the credibility of the board and the Boies report, which makes no mention of either.”
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