Taking Down the Lion: The Rise and Fall of Tyco's Dennis Kozlowski (19 page)

David Boies and the Manhattan DA

In an article that appeared in the
American Lawyer
in 2005, Andrew Longstreth explored the increasingly common arrangement in which an attorney who is
hired to conduct a corporate internal investigation coordinates the investigation with a prosecutor. Longstreth described this type of private attorney as “a fact-finder with a badge—the newest (and highest paid) government agent.” The article noted that corporations have been known to enter agreements with the government in which both sides share information related to their investigations. Prosecutors get what they want—access to the findings of the law firm that conducts the internal investigation—and the corporation is able to claim privilege for any evidence discovered during the investigation that the company doesn’t want to reveal or that doesn’t advance the prosecutor’s case.
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For the corporation and the prosecutor, it’s like having your cake and eating it too. Unfortunately, it denies anyone charged with crimes as a result of the investigation access to evidence that would be available but for the arrangement between the prosecutor and the private attorney.

David Boies testified that from the first day his firm was engaged by Tyco’s Nominating and Governance Committee, he cooperated fully with the Manhattan DA. Boies said he began sharing information with the DA on June 3, 2002 (the day Kozlowski was ousted from Tyco in anticipation of his imminent indictment on sales tax charges) and his cooperation continued up to and including the day Boies was on the stand, which was April 11, 2005. Of working with prosecutors during a corporate internal investigation, Boies said, “You want to work closely with them and you identify them early and you bring them into the investigation.”
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Boies told the jury that over the nearly three year time period, he provided all documents the DA requested and he consulted with the DA’s office regularly before, during, and after the Manhattan DA indicted former Tyco CEO Dennis Kozlowski, former CFO Mark Swartz, and former Chief Corporate Counsel Mark Belnick on September 12, 2002. Boies also confirmed that his law firm received from Tyco $45 million in legal fees in less than three years.
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That’s an average of more than $1.3 million per month.

The most serious problem created by the triangular corporation-private attorney-prosecutor cooperative relationship is that it creates an evidentiary loophole. Prosecutors are required to provide anyone accused of a crime any and all exculpatory evidence that the prosecutor possesses. However, when evidence of alleged wrongdoing is filtered through an investigating private attorney, any evidence that tends to incriminate the accused may be turned over to the prosecutor, and the corporation may withhold from the prosecutor and from the defendant any evidence that tends to disprove guilt. Prosecutors have no duty or ability to turn over to the defendant evidence they do not possess. And the private attorney who conducted the internal investigation along with the corporation may claim the evidence is privileged or work product, the work of an attorney prepared in anticipation of litigation; both are protected. The attorney may choose not to turn over the evidence, even if he or she knows it will prove the accused is not guilty.

In this scenario, exculpatory evidence exists, but the person accused of a serious crime has no opportunity to see it, or to present to a jury evidence that would prove he or she is not guilty.

The Indictment

Internal investigations like the one conducted at Tyco during the summer of 2002 generally take federal investigators and regulators many months or even years to complete. However, the Manhattan DA, with the full cooperation of David Boies and Tyco, put together a massive indictment in about three months. On September 12, 2002, Dennis Kozlowski and Mark Swartz were jointly indicted in ninety pages of dramatic allegations that read like a script from
Law & Order
or
The Sopranos.

The first thirty-five felony counts included in
People v. Kozlowski and Swartz
were charges typically reserved for the prosecution of organized crime figures. The Manhattan DA charged the former CEO and CFO with enterprise corruption, the New York State equivalent of charges under the federal Racketeer Influenced and Corrupt Organizations Act (RICO). The DA accused Kozlowski and Swartz of running a criminal enterprise out of Tyco corporate offices. The indictment labeled it the “Top Executives Criminal Enterprise” or “TEXCE.” According to the indictment, “Defendant Kozlowski was the boss of the criminal enterprise,” and “Swartz was chief of operations of TEXCE.” The indictment claimed TEXCE was created and operated for the purpose of obtaining money by theft, fraud in the sale of securities, and other frauds, and was operated from January 1, 1995 through, on, or about September 9, 2002. The DA named eighty separate acts of enterprise corruption that covered the first fifty-eight pages of the indictment.
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It is worth noting that the former executives were charged by a local district attorney. Considering the scope, seriousness, and nature of the allegations, this type of prosecution is far more common in federal court, not a state court. Professor Christo Lassiter of the University of Cincinnati College of Law, a criminal law scholar and expert on white-collar crime, said it was “very usual—even rare that Kozlowski was criminally prosecuted by a local DA but not by a U.S. Attorney.”
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In an article that appeared in the journal of the American Bar Association in 2010, criminal defense attorney Roger L. Stavis, of the New York firm Gallet, Dreyer & Berkey, was quoted as saying “There have been many instances over his long tenure as DA where [Morgenthau] creatively applied our state criminal statutes to bring cases which the U.S. attorney could have and would have brought under the broader federal criminal statutes—if they fit.”
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Morgenthau was known throughout his career for aggressively prosecuting white-collar crime. If he could make charges fit against Kozlowski and Swartz in 2002, charging the high-profile, wealthy corporate executives was consistent with his
modus operandi.

If there was evidence of the magnitude alleged in the Manhattan DA’s indictment, federal prosecutors almost certainly would have charged the Tyco executives. They did not. But with Morgenthau’s history of going after those in positions of power and trust, and considering the post-Enron environment where most every elected official, like the Manhattan DA, wanted to be seen as tough on white-collar crime, the aggressive prosecution of Kozlowski and Swartz in the State and City of New York was for Morgenthau the right time, the right defendants, and the right place.

All eighty enterprise corruption charges were thrown out before Kozlowski and Swartz went to trial. There was no evidence to support those charges. However the remaining felony counts were serious crimes for which the former executives would face a judge and jury. Twice.

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People v. Kozlowski I

Sometime during August of 2002, Dennis Kozlowski learned that the Tyco Board of Directors had expanded the scope of the internal investigation beyond the Frank Walsh investment banking fee, and that David Boies and his legal team were looking into Kozlowski’s activities as the head of the company. Kozlowski said, “I wasn’t concerned. I hadn’t done anything wrong or secretively—everything was done properly, as far as I knew, and everything was documented.” He added, “I wasn’t concerned because I had nothing to hide.” He was aware that Mark Swartz was still at Tyco and that John Fort was the interim CEO. “I heard that everyone at Tyco was told not to talk to me,” he said. “I hadn’t spoken to anyone since the beginning of June. I tried to contact many people, but no one would speak to me. Not even Mark.”
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On September 11, 2002, Mark Swartz wrapped up his final day as Tyco’s CFO and boarded a plane to New York City. Dennis Kozlowski would soon be reunited with his former colleague.

The Indictment

“I was in Nantucket,” Kozlowski recalled. “I had gone out to dinner on September the 11th and just after I got home, I received a call from my attorney Stephen Kaufman. He told me that I had to be in New York the next morning—I had to go to New York to turn myself in. I was being indicted.” He said, “I was completely taken by surprise. I had no idea what the charges could be. The thought of grand larceny never crossed my mind.”
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Kozlowski made the trip to Manhattan the following morning. He had only twelve hours to process the devastating news. “It was horrible,” he recalled. According to reporters who were there, Kozlowski, Swartz, and former Tyco Chief Corporate Counsel Mark Belnick were led into the courtroom—in handcuffs. All
three former Tyco executives pleaded not guilty to the extraordinary list of felony charges alleged in the Manhattan DA’s indictments against them.
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Belnick was indicted separately. He was charged with several counts of falsifying business records—crimes that could send him to prison for up to four years. When the arraignment concluded on September 12, 2002, Belnick was released on a $1 million bond.
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The news for Belnick was bad, but Kozlowski and Swartz found themselves in far more dire straits. All of the felonies in the September 12th indictment in which they were jointly charged carried harsh penalties—several could send the former executives to prison for up to thirty years.

In addition to the criminal charges, the Manhattan DA requested and was granted a restraining order that froze both men’s assets. Kozlowski said, “When I was at the arraignment, [Assistant Manhattan District Attorney John] Moscow handed me a court order freezing my assets. I couldn’t spend any money and I no longer had control over any of my assets.”
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The DA ensured that the vast resources of the men remained intact until the case was decided. If either or both were found guilty, the sentences for the crimes charged would undoubtedly include restitution to Tyco as well as significant criminal fines. Even so, it seemed a harsh and punitive order—considering they were innocent until proven guilty. Or they were supposed to be.

Kozlowski explained of the unexpected restraining order, “My checks bounced. Anything that was outstanding, anything that had just been paid—the checks bounced.”
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“After that,” Kozlowski said, “any money I needed, to pay bills or to live on, had to be approved through a lengthy process. The request went from my attorneys to the judge for a stipulation and then to the DA’s office, to [Assistant District Attorney] Amyjane Rettew who could agree or disagree to the stipulation. I spent $6 in legal fees to get approval for every dollar I needed to pay bills.”
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“I could no longer make any changes to my investments,” he complained. “I was stuck if any investment went bad.” Kozlowski said there was only one expense that was easy to pay: “They allowed fast and easy expenditures of my money for legal fees.”
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Kozlowski was in shock. He didn’t once consider the internal investigation at Tyco would lead to a criminal indictment of anyone, least of all himself. And the restraining order triggered a sudden and extreme lifestyle change for the former CEO—a change that was not temporary. At this writing, eleven years after Assistant DA John Moscow handed him the court order in September of 2002, Kozlowski’s assets remained frozen. Kozlowski had no access to or control over his finances for eleven years—and counting.
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During his arraignment, the judge set Kozlowski’s bail at $100 million. With his assets frozen, he could not access his own money to post the required bond.
Surprisingly, it was Kozlowski’s first wife Angie who posted the $10 million bond that allowed him to leave the courthouse that day. “My first wife of 27 years is the Mother Teresa of ex wives,” he said. “She posted my bail when I was indicted in 2002.”
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In the dozens of articles that appeared in the media on the day the three former Tyco executives were indicted, Tyco was already being compared to Enron, WorldCom, and Adelphia—all enveloped at the time in high-profile scandals. For example,
CNNMoney
reported that “Tyco is one of several large corporations whose books are being scrutinized by prosecutors and federal regulators; Enron Corp., WorldCom Inc. and Adelphia Communications also among them. The latter three firms have filed for Chapter 11 bankruptcy protection from creditors.”
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Even though it would forever be classified as one of the large Enron-era corporate scandals, one very important difference set Tyco apart from the others: Enron, WorldCom, Adelphia, and Global Crossing declared bankruptcy. Tyco did not.

After Kozlowski and Swartz were ousted, there were rumors that Tyco might suffer the same end as Enron,
et al.
However, according to Kozlowski, Tyco was never in jeopardy. Others who were at Tyco during 2002 and 2003 confirmed his assessment of the company’s soundness.
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As a witness for the prosecution, Tyco’s Treasurer Michael Robinson was asked under oath during the second criminal trial about Tyco’s financial condition in 2002. He explained that the CIT acquisition was not well received by the market and that the price of Tyco stock was down. He also made clear that, as the company’s Treasurer during and after the years Kozlowski headed the company, he had specific knowledge of the company’s financial condition. Robinson confirmed that in 2002, Tyco was fundamentally sound. Robinson was asked:

Q. Was there any realistic chance [at] the end of May of 2002 that Tyco would go bankrupt?

[Assistant District Attorney]
Mr. Scholl:
Objection.

The Court:
If you can answer I’ll permit it.

A. No, there were rumors to that affect, but we were a viable company.
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Robinson’s assessment was accurate. Tyco did not become insolvent; the company bounced back and thrived as a large multinational conglomerate until 2011 when, under the leadership of CEO Edward Breen, the company was split into three separate publicly traded corporations.

* * *

When he was indicted, Kozlowski could not have imagined it would be years before the charges against him would be resolved. His first trial began on September 29, 2003, more than a year after the arraignment. He was convicted at the conclusion
of a second trial that began in January of 2005, after which he was sentenced on September 19, 2005, more than three years after he was indicted.

Kozlowski’s life as he knew it ended on September 12, 2002. After that, he was a criminal defendant living in legal limbo. He had no access to his assets and he was the target of frequent, often erroneous, and sometimes vicious media attention. Former CEO Dennis Kozlowski was a criminal defendant for 1,104 days. Of that time, he spent 432 days in two trials that consumed over eleven months of his life. His legal defense cost tens of millions of dollars of his money, which was closely guarded by the Manhattan DA.

September 12, 2002 was a watershed day for Dennis Kozlowski. After that, his life would never be the same.

People v. Kozlowski I

Supreme Court, New York County

Manhattan Criminal Courthouse, 13th Floor

100 Centre Street

New York City, New York

September 29, 2003

The first trial commenced on September 29, 2003. The high-profile case was assigned to the Honorable Michael J. Obus, Justice of the Supreme Court of New York. The proceedings were held on the thirteenth floor of 100 Centre Street in Manhattan—the Criminal Branch of the New York Supreme Court. It was just like an episode of
Law & Order
—except it wasn’t a drama that would be resolved in sixty minutes.

At the table for the Manhattan DA were Assistant District Attorneys Marc Scholl, Kenneth Chalifoux, Ann Donnelly, Gerard Murphy, and Connie Fernandez.
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Kozlowski’s lead defense attorney was Steven Kaufman, whom Kozlowski hired when he learned of the sales tax investigation in the spring of 2002. Kaufman added to the defense team by bringing in Austin Campriello and Jim DeVita. Representing Mark Swartz was lead defense counsel Charles Stillman along with James Mitchell and Michael Grudberg. On trial were two highly paid former executives who would sit through months of the Manhattan DA’s presentation of the evidence used against them.
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The Charges

By the time the trial began, many of the charges alleged in the September 12, 2002 indictment had been dismissed because there wasn’t enough evidence to support them. What remained were fourteen counts of grand larceny in the first degree,
sixteen counts of falsifying business records, a charge of conspiracy to commit larceny and possession of stolen property, and one count of securities fraud.
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“Lying, Cheating and Stealing”

After days of jury selection were completed, the prosecution gave its opening statement on October 7, 2003. Assistant District Attorney (ADA) Chalifoux addressed the twelve newly seated jurors and laid out the prosecution’s “lying, cheating and stealing”–themed case. ADA Chalifoux began by saying:

This case is about lying, cheating and stealing. It’s about two employees who were entrusted with the money and the assets of a company. And they abused that trust. They were entrusted with the assets that belonged to other people, to the shareholders and the owners of Tyco. It’s about these two defendants, defendant Kozlowski and defendant Swartz, who shamelessly violated that trust by treating the company’s bank accounts as if they were their own. They raided the company’s assets, the assets again that belonged to the shareholders. And they used them on themselves. They used them on other employees. And they used them for things such as gifts to themselves, money that they took and gifts to other people. You will find that the defendants used the money of Tyco not for their own—not for Tyco’s benefit, but for their own benefit and the detriment of Tyco. That’s the stealing.

Defendants had an obligation to tell the owners of the company what they were doing with those assets. They had an obligation to tell the board of directors and its committee and the public as well. They had an obligation to tell them that they were using it for themselves. But instead of revealing that information, defendants lied. They lied to the people whose interests they were hired to protect. They created false company documents. And they used those documents to help themselves commit and conceal their crimes. That’s the lying.

By stealing from the company and lying about it, they manipulated the price of the company’s stock. They falsely represented that they were careful in the management of Tyco funds, when in fact they were spending millions of dollars on themselves for things like apartments, and yachts and art work. The lies and false impressions that they created kept the stock price higher than it would have been had investors known the truth. Defendants then sold shares of Tyco stock, hundreds of thousands of shares of stock at that inflated price. And they took the money for themselves. And they misrepresented the risks that the shareholders faced. By doing that, they lined their pockets with millions of dollars in proceeds from fraudulent stock sales. That’s the cheating.

This is a calculated scheme that lasted for years. It was designed by the defendants to steal money and to cover it up. And it was very successful. They stole a hundred and 70 million dollars. Think about that for a moment. Get an idea of
how much money that is when the power ball or the Lotto hits a hundred million. It makes primes. You will see it on TV. You will see it in the paper. People lining up to buy tickets. These two didn’t win the jackpot. They stole it. And jackpot winners, sometimes they can hold press conferences. It’s up to them. They can announce their winnings. But the defendants had an obligation to hold essentially what is the same thing as a press conference. They had an obligation to tell the owners of the company and the board of directors what they were doing with the money. It’s mandatory, not optional. But they didn’t do it. They hid it from the directors and from the [shareholders] (another one of their goals). And they successfully kept the shareholders and the public in the dark for years.

ADA Chalifoux also explained to jurors that, “[d]uring the course of their conduct, during the course of their crimes, these defendants were the gatekeepers of information. They had absolute power. If you remember when we talked in jury selection about power versus authority. They had the power to take this money. But they didn’t have the authority.”
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Criminals Act in Criminal Ways

After the jury heard the prosecution’s theory of the crimes, the defense presented a summary of the other side of the story. Lead defense counsel Stephen Kaufman spoke to the jury on Kozlowski’s behalf. Kaufman said, “I come before you and tell you that my client Dennis Kozlowski is neither a liar . . . a cheat nor a thief. What he has done is come to this courtroom to protect that which is the most important thing in his life, apart from his family, and that is his liberty.”
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