Taking Down the Lion: The Rise and Fall of Tyco's Dennis Kozlowski (30 page)

The court of appeals reached a different conclusion about the subpoena than did Justice Obus or the appellate division. The state’s high court found that the Defendants met the burden of identifying specific evidence, in this case, the director-witness statements, and had presented facts to show that the interview notes were reasonably likely to contain evidence that could contradict the statements of key witness for the prosecution. However, the court upheld Justice Obus’s decision to quash the subpoena based on an argument that had not yet been raised. The court of appeals held that the Defendants could not have access to what were likely exculpatory interview notes of key prosecution witnesses because the Defendants didn’t try to interview the Directors themselves during the summer of 2002.
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In effect, the court of appeals said Kozlowski and Swartz should have interviewed the Directors before they were indicted, before they knew there were going to be indicted, at a time when no one in the company would even speak to Kozlowski, let alone grant him an interview, and when Mark Swartz was still the CFO. It’s difficult to comprehend why either man would have thought about collecting evidence during the summer of 2002. What if they had no idea anything they did at Tyco would ever be labeled a crime? (They didn’t.) How would they have known what type of evidence to collect
before
they were charged?

Using the reasoning of the court of appeals, Kozlowski and Swartz should have anticipated that someday they might be accused of some type of criminal activity and should have collected evidence to defend themselves against some unknown future charges. The reasoning seems to ignore completely the presumption of innocence. In this case, the court of appeals assumed that Kozlowski and Swartz were guilty and that they knew they were guilty months before they were charged. The court shifted to the Defendants the burden of performing pre-indictment interviews with Tyco Directors who, unbeknownst to Kozlowski and Swartz, would someday testify against them. The court had to assume that Kozlowski and Swartz knew what crimes the DA would accuse them of committing. The court of appeals did not review the issue through the lens of presumed innocence. If Kozlowski and Swartz were innocent, and they may very likely be innocent, how could they have collected anticipatory evidence to protect themselves against allegations of crimes they did not commit?

In an article that appeared in the
New York Times
on September 23, 2002, journalists Andrew Ross Sorkin and Jonathan D. Glater revealed that “[t]hough the board of Tyco International has said that it was unaware of the extravagant pay packages and loans given to the company’s top executives, minutes of the board’s compensation committee show that group knew of many of the payments for
months before the board took steps to disclose them.” The article also reported that Patricia Prue, the former SVP of human resources who received immunity from prosecution, told a state grand jury and Mr. Boies’s investigative team that then Tyco Director Josh Berman, who was a member of the Nominating and Governance Committee that oversaw the internal investigation, pressured her to change Compensation Committee meetings minutes—to alter records that reflected the Board’s knowledge of executive compensation. In response, Berman said that Prue misunderstood his instructions.
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Either way, there was plenty of doubt and many questions about who knew what about the bonuses.

It would be interesting to read those well-protected interview notes.

On October 16, 2008, the New York Court of Appeals affirmed the appellate division’s decision. Kozlowski and Swartz had exhausted their appeals in the State of New York.

The Ripple Effect

As soon as the executives were indicted, and with sensational details of wealth and extravagant spending reported in hundreds of media outlets, along with the official disclosures the Board opted to include in its September 2002 Form 8-K, civil actions by the dozens were filed by the Securities and Exchange Commission and by shareholders against Kozlowski, Swartz, Belnick, PricewaterhouseCoopers, the Directors, and Tyco International Ltd. David Boies and his law firm represented Tyco and the Board in actions filed against the company—the proliferation of lawsuits meant years of legal work for Boies, Schiller & Flexner.

Criminal law expert Professor Christo Lassiter said, “With indictments like the ones in this case, the ripple effect is unbelievable and the magnitude of damage is incalculable. Prosecutors are given great power, and with that power comes great responsibility. A prosecutor must exercise good judgment and prudence. Sometimes, prosecution does more harm than good.”
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On behalf of Tyco, Boies, Schiller & Flexner filed an action against Kozlowski under the State of New York’s faithless servant doctrine. In the massive civil action, the company asked for damages that included all of the compensation Kozlowski earned from Tyco between 1997 and 2002, forfeiture and repayment of benefits, and other damages that amounted to about half a billion dollars. In addition to paying restitution of $100 million to Tyco, Kozlowski was stripped of his earnings by the company for which he worked for twenty-seven years.

No Accounting Fraud

In addition to representing Tyco in numerous civil actions, Boies, Schiller also conducted what was called “Phase 2” of the investigation at Tyco to which,
according to David Boies’s biographer, the law firm assigned about twenty-five lawyers who collectively billed more than 15,000 hours. In addition, the law firm used more than 50,000 accountant hours in the second phase of the investigation. In the Boies biography
v. Goliath,
author Karen Donovan revealed the results of the investigation, which was said to find a “pattern of aggressive accounting.” However, the Boies report noted that “[a]ggressive accounting is not necessarily improper accounting.” The report also stated that in the instances of “questionable” accounting, there was no credible evidence of fraud, and the report concluded there was “no significant or systematic fraud affecting the Company’s prior financial statements.” The Boies report opined that “[f]ew, if any, major companies have ever been subjected to the corporate governance and accounting review entailed in Phase 2.”
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After all of the rumors, reports, questions, and allegations that the accounting methods and financial statements at Tyco were fraudulent, misleading, and that disclosures were improper, there was never any definitive finding of such—even after numerous reviews and investigations. It seems the results of the 1999–2000 SEC investigation were accurate. There were no problems with Tyco’s accounting. Yet more than a decade after the scandal began, reports, rumors, innuendo, and irresponsible journalism continued to inaccurately portray Tyco as one of the large corporate scandals that happened because of accounting fraud. It is simply not true.

Writ of
Habeas Corpus

Having exhausted their appeals in the courts of the State of New York, Kozlowski and Swartz asked a federal court to throw out their convictions because they were denied access to potentially exculpatory evidence when the judge quashed the subpoena issued for notes taken by Boies, Schiller attorneys during interviews of Tyco Directors in the summer of 2002. Kozlowski and Swartz filed a petition for a writ of
habeas corpus
arguing that they were denied the right to present a defense—a right guaranteed by the U.S. Constitution.

When the U.S. District Court for the Southern District of New York heard oral arguments in the
habeas
action in December of 2011, more than six years after Kozlowski and Swartz entered prison, the Manhattan DA’s office continued its fight to keep the evidence from the Defendants, based on the argument that defense attorneys did not follow the correct procedures to preserve the Defendants’ rights. The DA’s office relied on procedural default. A technicality. The court, the defense attorneys, and even Assistant DA Amyjane Rettew, who for years approved and disapproved expenditures from Kozlowski’s frozen assets, all agreed that the content of the documents in question (the interview notes) was material and potentially exculpatory.

In oral arguments before the district court, ADA Rettew didn’t argue that the requested evidence was irrelevant, or that the interview notes wouldn’t change the outcome of the trial, or that Kozlowski and Swartz were guilty and deserved to be in prison. She didn’t even argue that the documents were protected by privilege. Instead, her argument was that defense attorneys didn’t meet a technical standard when they argued about the subpoena before Justice Obus, and therefore the defendants forfeited their constitutional rights.
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Alan Lewis of Carter, Ledyard & Milburn appeared on behalf of Kozlowski. In opposing the court of appeals’ finding that the Defendants should have collected interviews of the Directors during the summer of 2002, Lewis stated, “So, in other words, what the court of appeals is . . . saying is that defendants in a criminal case lost their right to get evidence that is reasonably likely to contradict the statements of key witnesses for the People on the key issue of the case because they didn’t do something to investigate the charges against them before those charges existed. And in that fashion the court of appeals turned our criminal justice system upside down.” Lewis said, “In the history of our jurisprudence I don’t think there’s ever been a case in which any court has said a defendant loses his right to get something that’s really important to his defense because he didn’t defend the case before there was a case.”
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Nathaniel Marmur, who represented Swartz, reasoned with the court by sharing an analogous case. Marmur said:

Your Honor may remember the
Grasso
case where Dick Grasso was accused, very similar in the civil context, of getting I think a hundred million or some crazy number in compensation for running the New York Stock Exchange. And the directors there, all very important people, all said essentially we didn’t approve this, we didn’t know about this. There was an internal investigation that encountered these comments. And unfortunately in the world we live in, sometimes civil discovery, for reasons I’ve never been able to understand, is broader than criminal discovery. And the underlying statements came out and of course what we saw the directors absolutely knew about and had endorsed it. But the pressures demanded that they say otherwise. And of course that was our theory at trial.”

Marmur told the court that “ . . . [I]t is beyond my comprehension that it takes three levels of courts, including the New York Court of Appeals, for someone to say you actually can issue a subpoena for these documents.”
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Marmur got to the heart of the matter when he stated, “ . . . [W]e have out there documents that we firmly believe will show that Dennis Kozlowski and Mark Swartz did not steal money from Tyco, that these directors were on board the entire time. We would love the opportunity to present them to a jury.”
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On February 7, 2012, the U.S. District Court for the Southern District of New York denied the petitions for writs of
habeas corpus.
Almost exactly one year later,
the U.S. Court of Appeals for the Second Circuit upheld the district court’s decision—denying the petitions for
habeas
because the trial attorneys of Kozlowski and Swartz failed to raise a constitutional issue regarding the ruling on the subpoena at the time of Justice Obus’s decision—the attorneys did not use the word “constitutional” when they objected to the ruling.
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In October of 2013, the U.S. Supreme Court denied Kozlowski and Swartz a review by the highest court in the country; their appeals were finally exhausted.

* * *

The
habeas
decisions were counter to the basic ideology of our criminal justice system—that individuals accused of crimes should have access to exculpatory evidence if it exists. There are many good reasons for the procedural rules used in our court systems, but should a procedural technicality be the basis for keeping innocent men in prison? Why would prosecutors want to deprive individuals of evidence that might prove their innocence? Why wouldn’t Tyco willingly turn over the notes taken during interviews with Directors? Why the secrecy? Surely individuals in the DA’s office and at Tyco would not watch two men condemned to prison for many years if they knew there was evidence to prove they did not commit the crimes for which they were convicted. So why not just turn over the interview notes?

This case highlights the questionable process through which a private practice attorney performing a corporate internal investigation can filter select evidence to a prosecutor and thereby initiate criminal proceedings against corporate insiders. The process allows prosecutors to skirt evidentiary requirements. A prosecutor is required to provide to defendants evidence that is in the prosecutor’s possession. If a private practice attorney performing a corporate internal investigation withholds exculpatory evidence from prosecutors while supplying evidence that tends to incriminate, the prosecutor can honestly argue that he or she is not in possession of the exculpatory evidence and therefore not in violation of rules of evidence. And the private practice attorney can be called as a witness for the prosecution, testify about evidence that was allegedly found during the internal investigation, and yet shield any evidence that the company, the prosecutor, or the attorney does not want to disclose. It is a very dangerous loophole.

The Manhattan DA did not have possession of the evidence subpoenaed by Kozlowski and Swartz. Although Tyco supplied voluminous evidence to the DA, the company did not turn over everything. The documents withheld, which likely contained evidence that could exonerate Kozlowski and Swartz, could not be obtained by subpoena, through two levels of appeal in the New York State court system, or in the U.S. District Court, the U.S. Court of Appeals, or the U.S. Supreme Court. The evidence exists, but Kozlowski and Swartz were not permitted to use it to defend themselves.