Taking Down the Lion: The Rise and Fall of Tyco's Dennis Kozlowski (5 page)

Kozlowski hired Seldom Scene Interiors of Nantucket to decorate the apartment.
21
The firm was owned by Wendy Valliere, a friend of Kozlowski’s second wife
Karen. According to the testimony of several witnesses during Kozlowski’s trials, Kozlowski and his wife were very friendly with Valliere, and the witnesses noted that Kozlowski used Valliere’s firm for many decorating and renovation projects in several states over a number of years. When questioned about the expensive redecorating project during his second trial, Kozlowski insisted that renovations were necessary before he was able to use the apartment.
22
About hiring Valliere, Kozlowski said, “I hired someone I knew—someone from Nantucket,” and he emphasized (about someone he once considered a friend), “I have not spoken to [Valliere] since.”
23

Cognitive psychologists have studied how a seemingly intelligent person like Dennis Kozlowski could misjudge the potential problems of hiring his wife’s friend for a multi-million dollar project. Research has shown that risk-perception systems are affected by trust, and even intelligent people tend to minimize the assessed risk when dealing with those they trust. When the same people deal with individuals with whom no level of trust has been established, they tend to assess the risk as greater than it is in reality—they exaggerate the risk.
24
If Dennis Kozlowski had insisted on a more arm’s-length relationship, if he had hired an unknown decorator, a decorator he didn’t trust, perhaps he would have been more diligent in overseeing the project. Kozlowski’s ability to accurately assess and manage the risks was clouded because he hired his wife’s friend, because he hired someone he trusted. His use of Valliere in the Fifth Avenue redecorating project was one of many relationships of trust that became problematic for Kozlowski.

In retrospect, Kozlowski admitted that he made mistakes with the renovation. He said, “There were purchases that I would never have made, one of which was that damn shower curtain. No one in their right mind would pay $6,000 for a shower curtain.” Kozlowski said he wanted a “corporate looking” apartment suitable for business meetings. “The apartment was off the beaten path. We were going to use it for meetings. We were going to buy companies there,” he insisted.
25

During his second trial, Kozlowski recounted the instructions he gave Valliere about the apartment. He said, “My instructions were to work with Tyco’s facilities manager, a fellow by the name of John [Taylor], to coordinate with him and to call me when the apartment was habitable, when I could move in and use the apartment when I was in New York.”
26
Neither Kozlowski nor his then wife Karen selected anything for the apartment during the renovation—not one piece of furniture, not one fixture. He left all of the decision-making to the decorator. In one of the hundreds of articles written in criticism of the adornment of the Tyco corporate apartment, a journalist coined as “Mogul style” the practice of providing CEOs with extravagant homes. In the same article, a New York interior designer who worked with high-end clients like Kozlowski said it was not unusual and in fact quite feasible for the rich to spend the kind of money that Tyco, at Kozlowski’s direction, spent on the 950 Fifth Avenue apartment.
27

Among the Mogul style design choices for the duplex were a $15,000 dog-shaped umbrella stand, a $6,300 sewing basket, a $17,000 traveling toilette box, a $2,200 gold-plated wastebasket, $2,900 worth of coat hangers, a $1,650 appointment book, a set of sheets that cost $5,900, a $445 pincushion, and the $6,000 shower curtain.
28
In the end, Tyco spent $11 million to redecorate the Fifth Avenue apartment—a budget-blowing expenditure approved by CEO Dennis Kozlowski.
29
He expressed strong feelings about the lavishly decorated duplex. “I could live comfortably on a 30-foot sailboat. That’s how I’d like to live,” Kozlowski explained. “I couldn’t give a shit about the redecorating. I had no interest. I was busy running the company.”
30

He should have given a shit about the redecorating. His failure to oversee the project proved a costly mistake, ultimately far more detrimental to him than the $11,173,927 price tag.
31
The extravagant purchases for the Fifth Avenue apartment became public knowledge when unnamed sources revealed the list to
Wall Street Journal
reporters in August of 2002. In the resultant article, reporters Mark Maremont and Laurie P. Cohen cited as their sources “people investigating the company” and revealed the list of expensive furnishings purchased for the corporate apartment. In the same article, interior designer Wendy Valliere described the furnishings as “so mid-range compared to what a lot of people do.”
32

More than a month later, on September 10, 2002, Tyco filed a Form 8-K with the SEC in which the company chose to officially disclose the list of furnishings for the Fifth Avenue apartment.
33
Publicly traded corporations like Tyco use a Form 8-K to report to the SEC unscheduled or unexpected material events. Tyco’s September 2002 8-K disclosed to the SEC, to shareholders, and to the public details of a corporate scandal unfolding inside the company—events that resulted in indictments that month of the company’s former CEO Dennis Kozlowski, its then CFO Mark Swartz, and former Chief Corporate Counsel Mark Belnick. Tyco disclosed that “[t]he improper and unlawful conduct of Tyco’s former CEO, CFO and Chief Corporate Counsel in enriching themselves at the expense of the Company with no colorable benefit to the Company has damaged Tyco. The amount of money improperly diverted by Tyco’s former executives from the Company to themselves is very small in comparison with Tyco’s total revenues and profits, but it is very large by any other relevant comparison; and the extent of the former executives’ misconduct has harmed Tyco’s reputation and credibility with investors, lenders, and others.”
34

The Board opted to disclose the list of purchases, noting that “in the interest of restoring confidence in the Company, the extent of the Company’s disclosures in this filing will go beyond what the law requires, or what might ordinarily be disclosed in other circumstances.”
35
The disclosures of what were non-material amounts—a $6,000 expenditure by a company with nearly $40 billion in annual revenue, an expenditure that was .00000015 percent of the company’s income—was
questionable. Perhaps the extraordinary transparency, the disclosure of information not required of Tyco, caused an avoidable negative reaction. It may have caused a damaging and intentionally induced overreaction in the market, which is one of the reasons the SEC does not require disclosure of such items. Would Tyco shareholders have been better served if the company didn’t disclose those sensational but non-material expenditures in the September 2002 8-K? Or was absolute transparency the right decision, especially after the information had been leaked to the media a month earlier? Were Tyco shareholders entitled to know the types of expenses CEO Dennis Kozlowski approved with the authority he was given by the Tyco Board of Directors? Why didn’t the 8-K disclose the $200 million spending authority the Board had granted the CEO? Weren’t Tyco shareholders entitled to that information as well? Surely the Board, “in the interest of restoring confidence in the Company,” would not have
selectively
disclosed information in the 8-K.

Although the outrageous details disclosed in the 8-K temporarily affected the value of Tyco stock, were embraced by the media, and used by Tyco, the Board of Directors, and the Manhattan District Attorney to initiate assaults on Kozlowski, Swartz, and Belnick, the opulent furnishings in the Fifth Avenue apartment were of little concern in comparison to the other problems that snowballed out of control after the 8-K was filed with the SEC.

Five

Behind the Elephant

Dennis Kozlowski began his business career in 1969 as an internal auditor with the SCM Corporation, first in New York City and then in Syracuse, New York. With more than three years of internal audit experience under his belt, Kozlowski left SCM and moved to Boston and into a second audit position with the Cabot Corporation. He spent the entirety of his career in what would be considered unglamorous businesses: SCM, Cabot, Nashua Corporation, and Tyco—no dot-coms, no sexy consumer goods, no Apples or Microsofts or hedge funds or investment banks.

The years Dennis Kozlowski worked for the Cabot Corporation were also the years he and first wife Angie became a family. They had two daughters; Cheryl was born in 1974 and Sandy in 1977. When Cheryl was born, the couple was living in Atkinson, a small town in New Hampshire near the Massachusetts state line. Kozlowski said he was traveling frequently, including several trips to Europe, which at the time were rare and very expensive. When he wasn’t traveling, Kozlowski made the ninety-minute commute from Atkinson to Boston in a yellow 1973 Volkswagen Beetle. “A Super Beetle,” he clarified. “This was during the years of the oil crisis,” he said, explaining his rationale for purchasing the tiny vehicle, “when Ford and Carter were in the White House.” Before he traded it, Kozlowski folded his six-foot two-inch frame into the yellow Super Beetle for more than 100,000 miles.
1

On top of the three years he spent honing his auditing skills at SCM, Kozlowski earned another three years of internal audit experience at Cabot Corporation before he left the company in 1975.
2
Feeling the relatively new responsibility of supporting his young family, Kozlowski decided to make a move when he had the opportunity to become the Director of Internal Audit at Nashua Corporation in Nashua, New Hampshire.
3
He stayed with Nashua Corporation for less than a year and said, “I knew the day I started that it was a mistake.” Kozlowski was manager of administration, which in reality was the job of cost-cutter; he was the ax man. “It was a financially difficult time for the company,” he said, “and nobody liked to see me coming.”
4
Kozlowski was dissatisfied with his role at Nashua Corporation so
when a Massachusetts headhunting firm contacted him about an opportunity with a company called Tyco, he was more than willing to take a look.

In 1975, Tyco was a small company in Exeter, New Hampshire with between $15 and $20 million in annual revenue; it was smaller than any of the other organizations for which Kozlowski had worked since he graduated from Seton Hall University with a Bachelor’s degree in accounting in 1968.
5
When during his second trial he was asked to describe the type of company Tyco was in 1975, Kozlowski said, “Tyco was a smaller company than Nashua, but had a far greater potential from what I saw.”
6
Tyco was in search of an Assistant Comptroller, a position that, if offered and accepted, would have the internal audit function at Tyco reporting to Dennis Kozlowski. It was a position similar to the one he held at Nashua Corporation. During his Tyco interviews, Kozlowski met with Howard Hull, who was Vice President and Comptroller, with the Vice President of Finance, and Kozlowski met with Tyco’s CEO Joe Gaziano. “In fact, we had a few meetings,” Kozlowski recalled, “and subsequently they offered me a job as Assistant Comptroller and Director of Internal Audit at Tyco.”
7
Dennis Kozlowski became a Tyco employee when he was twenty-eight years old. He noted that “[m]y starting salary because of my age was $28,000 a year.”
8

Kozlowski’s career at Tyco began under the leadership of Joseph Gaziano, who was the company’s third CEO. The company was founded in 1960 by Harvard PhD Arthur J. Rosenburg. In the beginning, the company operated as a research laboratory in Waltham, Massachusetts where Rosenburg did experimental work primarily in fulfillment of government contracts.
9
In 1962, two years after Rosenburg opened shop, Tyco was incorporated as Tyco, Inc. and two years later, in 1964, became a publicly traded corporation. The progress continued in 1965 when the company’s name was changed to Tyco Laboratories, Inc. and in the same year, it acquired Mule Battery Manufacturing Company, the first of hundreds of companies it would acquire over the next several decades.
10
Seemingly setting the tone for his successors, Rosenburg began to aggressively grow the company through numerous acquisitions during the 1960s. By 1970, the company had grown significantly and was in need of restructuring, which is why the Tyco Board of Directors made a change in management, replacing the company’s founder with Joshua M. Berman.
11

At the time, Josh Berman was a member of the Tyco Board. He was also a practicing attorney; Berman was a partner in the Boston law firm Goodwin, Proctor & Hoar. Berman headed Tyco as both Chairman and CEO until April 1973, when Joseph P. Gaziano was named Tyco’s President, CEO, and Chairman of the Board.
12

Gaziano was a Massachusetts Institute of Technology graduate—a member of the class of 1956. Before heading Tyco, Gaziano was a Vice President at the Raytheon Company. He left Raytheon in 1967 to run Prelude Corporation, a Westport Point, Massachusetts company that operated deep-sea lobster boats. Gaziano became a legend in the commercial fishing industry when in 1971, he almost started a war with Russia over the destruction of equipment caused by Russian trawlers
fishing in the same waters on the continental shelf where large Prelude ships operated. Gaziano was beyond frustrated with the ongoing damage to the company’s gear, so he instructed captains of Prelude ships to keep logs of the Russians’ destructive actions. Once he collected the captains’ logs along with Coast Guard surveillance of the Russian ships, Prelude filed an action in a United States District Court in which the company sued the Russian government to recover damages to Prelude equipment. According to Carlton “Cukie” Macomber, a company insider in 1971, once the legal action was filed, the U.S. State Department immediately told Gaziano, “We are in the middle of a Cold War and you are going to start a real one.” The Russian government did not respond immediately to Prelude’s legal action, so with an aggressive move that exemplified Gaziano’s style, the company took a second jab by placing a lien on the
Suleyman Stalskiy,
a Russian freighter that had entered San Francisco Harbor. On June 9, 1971, U.S. Marshals seized the vessel and held it in the harbor for six days—days during which, Macomber reported, “the State Department became very frustrated with us.”
13

The seizure had the desired effect. Within days, limousines carrying Russian delegates arrived in Westport Point; the Russian government came knocking at Joe Gaziano’s door. In its lawsuit, Prelude asked for $300,000 in damages. After days of negotiations, the parties reached a settlement under which the Russian government paid Prelude in excess of $80,000 for the damage caused to the company’s equipment. After the international incident was peaceably concluded, Gaziano contacted President Richard Nixon and began an effort that would become his legacy to the fishing industry: work that resulted in a 200-mile zone around domestic shores that protects U.S. commercial fishing vessels from encroachment by foreign fishing operations.
14

Of his predecessor’s face-off with the Russians, Dennis Kozlowski said, “That’s classic Joe.”
15

Gaziano’s arrival at Tyco in 1973 triggered a decade of significant growth and change for the company. Soon after Gaziano became CEO, Tyco stock was listed on the New York Stock Exchange in early 1974 under the ticker symbol TYC.
16
Later that same year, Gaziano followed Rosenburg’s lead by growing Tyco through mergers and acquisitions, but he upped the stakes. Gaziano became known as one of the first corporate raiders as he pursued hostile takeovers of several companies during his tenure as Tyco’s CEO.

Kozlowski said he accepted the position offered by Tyco in 1975 because of the company’s dynamic CEO.
17
He was impressed with Gaziano—his background heading the missile program at Raytheon, his commanding presence, and his plans to grow Tyco. “Joe Gaziano was a ballsy guy,” he said, “and I liked him. I don’t know how well he could read a financial statement, but he was smart and he had great instincts.”
18
Gaziano’s plan to grow Tyco to a $1 billion company primarily through acquisitions also drew Kozlowski to the company. During his criminal trial in 2005, Kozlowski was asked to describe Tyco at the time he joined the company. He provided a vivid picture:

Well, way back then Tyco was a very small company. It did about 20 million dollars in sales and had about ten or 15 different businesses. And the businesses did anything from using nuclear technology to measure stress on helicopter rotor blades to making [quartz] chips for old time radios before you had transfusers [
sic
] and other products. It made honing [
sic
] devices for submarine torpedoes. It was a solar energy company. It was really the spin-off of some really bright people that had more of a scientific background and they would start-up some of these businesses and try to create them into commercial businesses. Joe Gaziano, who was the new CEO at the time, had a focus to develop some of these businesses into good long-term businesses which would be able to sustain worldwide competition. So he had a big time vision. It was an exciting time and he asked me to sign up and be part of that team.
19

Kozlowski described an organization of approximately 2,000 employees that operated almost exclusively in the United States. He noted that the company’s name was Tyco Laboratories, even though the company neither owned nor operated any laboratories at that time.
20

Not long after he joined Tyco, Kozlowski was moved from internal audit to operations, a path that one former Director said placed Kozlowski “in the bowels of the operating businesses for many years” as he worked his way up the corporate ladder.
21
Kozlowski became a Tyco loyalist and by all accounts, he knew every business the company operated. The depth and breadth of his knowledge of Tyco operations was one of the reasons Dennis Kozlowski was widely respected by customers, suppliers, and the management of companies he acquired.
22
Kozlowski said it would have been impossible for him to lead Tyco and successfully acquire hundreds of companies had he not understood the businesses.
23

During his second trial, Kozlowski described the twenty-seven years he spent with Tyco and the path that ultimately led to the chief executive’s position. He spent four years at Grinnell in Tyco’s fire protection and prevention division, beginning in 1977. He was first an Assistant Comptroller, after which he was promoted to Comptroller, and then Kozlowski was named CFO of Grinnell.
24
From there, Kozlowski was moved to Ludlow, a $27 million acquisition Joe Gaziano closed in 1981. Ludlow Corporation manufactured packaging materials and was not operating efficiently when Tyco added it to the growing conglomerate. Ludlow was the second acquisition that moved Tyco into the packaging business. Two years earlier, Gaziano arranged the acquisition of Armin Corporation, a company that manufactured polyethylene films used in packaging. Armin was immediately accretive to earnings, but Ludlow needed help. So Gaziano moved Kozlowski from Grinnell and named him CFO of Ludlow in 1981, where and when Kozlowski inherited the job of managing the messy integration of Gaziano’s hostile takeover.
25

The year after Kozlowski began his work at Ludlow, Tyco suffered a significant loss. After a decade of bold, aggressive leadership as the company’s CEO, Joseph
Gaziano died suddenly on December 17, 1982 after being diagnosed with a rare cancer of the heart. He was only forty-seven years old at the time of his death. In response to the unexpected circumstances, the Tyco Board of Directors chose Gaziano’s successor; the Board tapped John Fort III to serve as Tyco’s fourth CEO. Fort had been with Tyco since 1974. At the time of Gaziano’s death in 1982, Fort was Senior Vice President of Operations, a position Gaziano had placed him in two years earlier.
26

By all accounts, Joe Gaziano was a big personality. He was a manager known for engaging in hostile takeovers, he was outspoken and aggressive, and in a move that typified his bravado, Gaziano sued the Russian government during the Cold War. He was bold, fearless, and as Kozlowski described him, “ballsy.” As part of his total compensation as CEO, Gaziano reportedly enjoyed a number of lavish executive perquisites; he had access to company cars and planes, and he lived in expensive corporate homes and apartments.
27
He was said to have an extravagant and luxurious lifestyle. That’s how Tyco’s Board of Directors compensated the Chief Executive Officer when Dennis Kozlowski joined the company.

As compared to Gaziano’s swing-for-the-fences style, John Fort was staid. Fort was known as a cost cutter and he did not insist on or negotiate as part of his compensation package the executive perks his predecessor enjoyed. Soon after he was named CEO, Fort reportedly disposed of Joe Gaziano’s perks; he sold the corporate planes, houses, and apartments, and reduced the size of corporate operations.
28
Under Fort’s leadership, Tyco made more deliberate and often smaller acquisitions. However, not all of the acquisitive growth during the decade John Fort was CEO was accomplished via small deals. In 1987, Tyco acquired Allied Pipe & Tube Corporation, and the following year, the company acquired for the sizeable cost of $350 million the Mueller Company, a well-established water and gas pipe manufacturing company.
29

Kozlowski said that during the 1980s, Tyco was buying a lot of pipe and he believed the company would profit from vertical integration of the supply chain.
30
For that reason, he spearheaded the acquisitions of Allied Pipe & Tube and Mueller during Fort’s tenure as CEO. In 1987, after Kozlowski became a member of the Board of Directors, he became even more involved in the company’s corporate operations and strategic decision-making.