Taking Down the Lion: The Rise and Fall of Tyco's Dennis Kozlowski (33 page)

The second critical issue was how the loan program was administered. The use of KELP as a running balance of available funds, while not a clear violation of company policy, did not conform with the spirit of the loan program. I examined the records and the record keeping used by the Executive Treasury department. It’s possible to separate Kozlowski’s personal expenditures from Tyco’s. But the record keeping blurred the lines—or at least created the appearance of blurred lines. When Boies, Schiller investigators reviewed Kozlowski’s KELP records, I’m certain they were shocked at how the former CEO’s personal financial affairs were handled on a payment-by-payment basis using loan proceeds from KELP. I was shocked.
On its face, it was foolish. Kozlowski’s personal invoices and bills were routed to Executive Treasury with notations that they were to be paid through “KELP.” I don’t know whose idea it was to handle the executives’ personal finances and KELP loans in this manner, but it was one of the worst decisions among the dozens of poor decisions made at Tyco.

Kozlowski repaid his KELP loans—other than the amount outstanding on June 3, 2002, when he was indicted on sales tax charges and ousted from Tyco. In addition, his loan balances were audited by PwC and his KELP loan balances were disclosed annually. The sticking point was that two of the payments he used to reduce his loan balances were the questioned bonuses. The prosecution’s theory was that Kozlowski borrowed from Tyco and then later fabricated bonuses he used to pay off or pay down the loan balances. Executive Treasury employees used foolish record keeping and it made the executives vulnerable to criticism. Of course, the employees in Executive Treasury weren’t to blame. The executives were ultimately responsible and should have been more conscientious and less foolish about how their financial affairs were handled. There should never have been blurred lines between personal and company money.

7. Smoke and Mirrors

Somehow, the focus of the trials and of the media became how Kozlowski spent the proceeds of KELP loans—something that was
not
a crime. It is analogous to prosecuting someone for robbing a bank by presenting voluminous evidence of how he spent money that he borrowed from the bank—money he paid back to the bank.

Isaac Rosenthal, the foreman of the jury that convicted Kozlowski, said the jury read the Tyco bye-laws and based on the bye-laws and company policies, the jury understood how the loan programs were supposed to be used and believed, based on the evidence presented, that Kozlowski and Swartz abused the programs.
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I agree. I also believe the loan programs were used excessively and that the record keeping was foolish. Kozlowski and Swartz were not good stewards of the company’s assets—and they had a fiduciary duty to be good stewards. However, breach of fiduciary duty and the sloppy use of company loan programs are not crimes. The only connection of the loan programs to the crimes charged was that two of the questioned bonuses were used to pay off or pay down loan balances. Kozlowski and Swartz were charged with grand larceny—how the money was spent was irrelevant. The only relevant question was whether the bonuses received were earned, approved, and payable. However, the prosecution did a masterful job of making the case about how Kozlowski spent money to support his extravagant lifestyle. The months of evidence presented at trial about what Kozlowski bought, his expensive taste, how he spent money, and the grandness of his life redirected everyone’s attention away from the relevant issues—away from the elements of
the crimes of which he was accused and convicted. If Kozlowski had been more prudent about his personal financial matters and had kept them completely separate from the company’s, the trials could not have been muddied with irrelevant evidence about his lifestyle. The trials would have taken days or weeks instead of months, and the court and the jury would not have been distracted from the real issues in the case. Did the prosecution present evidence to prove beyond a reasonable doubt that Kozlowski and Swartz intentionally took money when they knew they had no right to have the money? That was the issue. Everything else was smoke and mirrors.

There were two counts of grand larceny for paintings Kozlowski purchased personally, for which he took loans from KELP, and then repaid the loans. These two counts are a complete mystery to me, as is the grand larceny count for the paintings purchased by Tyco. After two and a half years, I cannot grasp why these charges were included in the indictment, why they weren’t thrown out by the court, and how the jury came to a guilty verdict. I found no evidence to support the charges. I am equally baffled by the grand larceny charge and guilty verdict for the investment banking fee paid to Frank Walsh. The relevant facts were not in dispute. I found no basis in law to support the conviction on that charge.

I did not address a securities fraud charge, which was so vague in allegation and in evidence admitted (or omitted) at trial, I am unable to explain it in a rational way. There were also several charges that Kozlowski and Swartz falsified business documents—the documents were questionnaires used to collect information for annual reports. The executives followed the instructions on the forms. Again, there was absolutely no evidence of their intent to do anything wrong.

8. “The Law Is Not a Perfe
ct
Tool.”

As he passionately discussed
People v. Kozlowski
with me, former Manhattan DA Robert Morgenthau shared the wisdom of many decades when he said, “The law is not a perfect tool.”
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I agree.

Criminal Intent

There was plenty of evidence of extravagant spending, of overpaying employees, and of company benefits and perks that were far more generous than most of us ever see, and that were probably not in the best interests of Tyco shareholders. However, there was no evidence of criminal intent.

This is where the prosecution’s case fell apart for me. I found no evidence that Kozlowski and Swartz intended to take anything they did not believe they had a right to take. On the contrary, there seemed to be ample evidence to show there was no criminal intent.

The prosecution’s theme during the second trial was “instruct, conceal, deceive.” Instruct? I found no evidence that anyone was instructed to do anything wrong. Every Tyco employee who testified said they were never asked or ordered by the Defendents to do anything wrong or to hide anything. Conceal? If Kozlowski and Swartz intended to conceal anything, they failed miserably. Nearly all of the evidence introduced during the trials was found on the books and records of the company. I’ve seen the documents, the records, and the evidence. All of the transactions were there—processed in the ordinary course of business. Deceive? The Tyco Directors testified that they were deceived. I have considerable doubt about that.

Nearly a decade after being acquitted of all charges levied against him by the Manhattan DA, Mark Belnick could barely speak about the years of his life that were destroyed by false allegations and a criminal trial. It was a deeply painful time for him and for his family and he preferred to leave the memories unstirred. Despite his reticence, he shared an inside view of Tyco and of Dennis Kozlowski that looked nothing like the portrayal of the company and the CEO that the prosecution played for the jury. Belnick said, “I was never pressured to do anything wrong. Never! Dennis never once tried to get me to do anything wrong, illegal, unethical. Never! If he did, I would have quit.”
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At the time of this writing, Belnick and Kozlowski had not seen each other or spoken since they were indicted in September of 2002.
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Eleven years later, it would have been easy for Belnick to throw Kozlowski under the bus. It would be easy for him to say that Kozlowski and Swartz, behind his back and hidden from him and everyone else, did all of the illegal and unethical things of which they were accused and convicted. Why not jump on the bandwagon? He had no reason
not
to blame Kozlowski and Swartz for all of the horrible things he and his family endured as a result of his relationship with Tyco. But Mark Belnick was adamant—nothing illegal was happening in Tyco’s C-suite. What’s his motivation for sharing that information? It’s the truth.

I find it very difficult to believe that for ten years,
everyone
was wrong about Dennis Kozlowski and Tyco. Investors, analysts, PwC, law firms, the SEC, Tyco employees, and the Board of Directors. In April of 2001, analysts voted Tyco the company with the most transparent disclosures. The company was highly scrutinized. There were regulators, analysts, short-sellers, and journalists digging through Tyco’s financial reporting, disclosures, and accounting method—for years. None of those highly skilled agencies, firms, and individuals found anything wrong until David Boies and the Manhattan DA arrived on the scene. How did they find problems that no one else discovered?

I spoke with several fine, honorable, highly respected people who worked closely with Kozlowski day after day, year after year, and they all told me without reservation that nothing shady or illegal was happening in Tyco corporate operations during the years Kozlowski was the CEO. I believe them.

* * *

Like all people, Dennis Kozlowski is neither all good nor all bad. He is a complex, multidimensional person who since 2002 has been terribly mischaracterized. For two and a half years, I audited Dennis Kozlowski’s life. I ran a fine-tooth comb through his business dealings and I examined all the years he spent with Tyco International Ltd. I conducted hundreds of hours of interviews with Kozlowski, his former Tyco colleagues, his friends, his family members, the District Attorney who prosecuted him, the foreman of the jury who convicted him, and I spoke with a number of experts who helped me digest all of the information available to me so I could understand what happened to Dennis Kozlowski and to Tyco.

I spent scores of hours speaking with the man who is the subject of this book. Because he is controversial, I didn’t rely on Kozlowski’s telling of the story. I checked every fact that I could using independent, objective sources. To his credit, not one of the hundreds of facts Kozlowski provided to me proved to be inaccurate when verified through objective and reliable sources. Kozlowski’s memory proved to be accurate and I believe he was truthful. I found no evidence to the contrary. He did not ask me to include or to exclude anything when I was writing this book, and he had no control over or knowledge of the content. From my first contact with him, I expressed my desire to understand what happened, and he said “go for it, go through all of the evidence, and let the chips fall where they may.”
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Dennis Kozlowski made some bad decisions, but he made more good decisions than bad. There’s no question that he got caught up in the power and the outrageous sums of money, and he lost perspective. Another serious problem was that he too closely identified with Tyco; Kozlowski was Tyco and Tyco was Kozlowski. Kozlowski measured his success by Tyco’s success (something frequently used as an incentive for executives), and he measured his success by the amount of money he earned. He too literally evaluated his performance
by his pay.
It’s strange. It seemed Kozlowski didn’t want the money so he could spend it, or so he could accumulate it. Of course he had nice things, expensive toys, luxury homes, and for a while, he lived like a wealthy man. But the money represented something else to him. The amount of his compensation was the physical proof of his success. It was his equivalent of an Olympic medal or a Pulitzer Prize or an Oscar. It proved he was exceptionally good at running a company. It proved he was the best CEO. He wouldn’t have stolen money—it would have cheapened what he valued most. He didn’t want to
have
the money; he wanted to
earn
the money. For Kozlowski, that was the whole point.

Oczywi
st
a

After spending countless hours with my head in this case, all I can say is
oczywista.
Translated from Polish,
oczywista
means it’s obvious, unmistakable. The evidence
in this case speaks for itself. I do not believe Dennis Kozlowski committed any crimes. I do not believe he ever intended to commit any crimes. I believe the same is true of Mark Swartz, although I focused on Kozlowski’s decisions and actions, not those of Swartz. I asked Mark Swartz, through his attorneys, to talk to me as I researched this book, but he opted not to participate.

My research was meticulous and I am confident that I understand the facts and the law. I looked at the same evidence and laws as the Manhattan DA, the law firm of Boies, Schiller & Flexner, and the jury, and I respectfully but strongly disagree with their conclusions.

That being said, I have a difficult time assigning blame or attributing bad motives. After meeting with former Manhattan DA Robert Morgenthau, I think that he believed he was doing the right thing in 2002 when he indicted the Tyco executives. I assume the jurors did the best they could with the mountain of complex and often irrelevant evidence that was heaped on them over many months of trial. In retrospect, the defense attorneys could have put on a stronger case. However, at the time, I’m sure they believed the prosecution failed to prove anything beyond a reasonable doubt. I don’t think there was anywhere near enough evidence to convict Kozlowski and Swartz. I am also giving the benefit of the doubt to the attorneys of Boies, Schiller & Flexner, assuming they conducted an ethical investigation and did not knowingly watch individuals indicted, tried, and convicted of crimes they did not commit. Boies, Schiller attorneys were hired to do a job, and they did it.

And then there are the individuals who sat on the Tyco Board of Directors in 2002. After having reviewed thousands of company documents, speaking to many individuals who knew the Directors, and to Directors who were on the Board at the time, talking with individuals who were part of Tyco corporate operations when Kozlowski was CEO, and after having studied two criminal trials and mountains of evidence—I know the truth. I am also certain that the individuals who were Tyco Directors in 2002 know the truth.