Taking Down the Lion: The Rise and Fall of Tyco's Dennis Kozlowski (31 page)

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U.S. Supreme Court Justice Hugo Black said, “There can be no equal justice where the kind of trial a man gets depends on the amount of money he has.”
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Similarly, U.S. Supreme Court Justice Lewis Powell said, “Equal justice under law is not merely a caption on the facade of the Supreme Court building, it is perhaps the most inspiring ideal of our society. It is one of the ends for which our entire legal system exists . . . it is fundamental that justice should be the same, in substance and availability, without regard to economic status.”
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When these esteemed jurists opined about the importance of fair treatment by our legal system for every individual, without regard for economic status, do you think they meant Dennis Kozlowski?

Since the creation of our legal system, there has been an ongoing discussion about the fundamental right of every individual to a fair trial without regard for his or her financial status. Of course, the discussions always happen in the context of ensuring that those of lesser economic means are protected. It’s difficult to muster concern for the fate of the wealthy. With money comes the ability to hire the most capable, well-educated attorneys. Financial resources often allow an individual to gain the upper hand in our justice system, with the economically advantaged party able to clear more easily the hurdles that arise in all legal proceedings.

Is it possible that Kozlowski and Swartz were treated differently because of their economic status?

There is an assumption that the wealthy have the best lawyers, and perhaps the benefit of the doubt is denied them. There is little concern for the constitutional rights of people with money. Their fancy legal teams should have presented the best defense money can buy; therefore, if a wealthy individual is in prison, he or she must be guilty. Granted, Dennis Kozlowski is not a sympathetic victim. His extraordinary financial success impedes our ability to feel sympathy for him. However, the most fundamental ideals of our justice system require that he be treated fairly—without regard for his economic status. If there is evidence that may prove Kozlowski and Swartz are innocent of the crimes for which they were convicted, and for which they are serving lengthy prison sentences, shouldn’t we all want that evidence to be considered? Should they be denied that evidence because of a procedural technicality? Has our legal system devolved to the point where procedural rules trump the goal of finding the truth? Even the rich and successful are entitled to the truth.

Parole

Dennis Kozlowski first became eligible for parole in April of 2012. He was hopeful about his chances; under the state’s criteria, he was an ideal candidate. He had been
a model prisoner and had a spotless discipline record. Years earlier, he paid in full $97 million in court-ordered restitution to Tyco and a $70 million criminal fine to the Manhattan DA. He had no prior criminal record and after years in prison, he was clearly remorseful when he appeared before the parole board. In addition, Kozlowski had a strong support network of family members and friends—all available to him during his transition from prison to normal life.

But, the New York State Board of Parole denied parole soon after Kozlowski’s hearing ended on April 4, 2012. In its written decision, the board cited two reasons for its decision not to release Kozlowski: “concern for the public safety and welfare,” and parole would “tend to deprecate the seriousness” of Kozlowski’s offenses. Kozlowski had no record of violent or dangerous behavior, and there was no chance he could repeat his crimes—he could never again work for a publicly traded corporation. It’s difficult to understand how he could be perceived as a danger to the public. As for the second reason, state parole guidelines consider the seriousness of crimes and factor in the inmate’s criminal history. New York State’s guidelines suggested a sentence of six to thirty months for the offenses for which Kozlowski was convicted, if the inmate had no other criminal history (the crimes of which Kozlowski was convicted in 2005 were his first brush with the criminal justice system). At the time of the hearing, Kozlowski was in his eightieth month of imprisonment; he had served more than twice the recommended maximum. How could granting parole after twice the suggested sentence had been served tend to deprecate the seriousness of the crimes?

Among the many people who wrote to the parole board on Kozlowski’s behalf was Justice Obus, who informed the board that, should they “conclude that Mr. Kozlowski is an appropriate candidate for parole supervision at this time, I would not find that to be inconsistent with the Court’s intentions when the indeterminate sentence was imposed.”
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New York regularly releases violent offenders. Murderers, rapists, and child molesters are paroled, and usually after less time behind bars than Kozlowski had served. At the time of his hearing in April of 2012, Kozlowski was a sixty-five-year-old first-time offender who had been convicted of nonviolent crimes. And yet he was denied parole.

Believing it was in error, Kozlowski appealed the decision of the parole board. On February 5, 2013, New York Supreme Court Justice Carol Huff overturned the board’s decision. Justice Huff found that the board would have “extraordinary difficulty identifying a factual basis to support the decision to deny release.” Upon receiving the court’s ruling, Kozlowski’s attorney Alan Lewis said in a statement to the media, “We are enormously gratified by the Court’s decision. In our view, it is unlikely that there is a more deserving candidate for parole in New York than Dennis Kozlowski.”
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In a segment on Neil Cavuto’s Fox Business Network progam
Cavuto,
that aired on February 14, 2013, former New York parole board Chair Edward Hammock discussed Justice Huff’s decision. Hammock, who reviewed the facts, who clearly knew the criteria for parole in New York, and who had no connection to Kozlowski, unequivocally concluded that Kozlowski should have been paroled. Hammock also noted that, based on the instrument for risk assessment mandated by the New York legislature, the results of which were part of the record in the April 4, 2012 parole hearing, Kozlowski’s risk assessment “guaranteed he’s a minimal risk to reoffend.” There was no lower risk assessment rating. Hammock said, “My opinion, and what would be the opinion of any right-thinking person, is that he should have been released.”
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Instead of providing Kozlowski with a new parole hearing, as ordered by the supreme court, the state opted to appeal the court order. On July 2, 2013, the appellate division in a very brief ruling overturned the decision of Justice Huff and summarily reasoned that the parole board acted properly when it denied parole to Kozlowski. When the appellate division released its opinion, Kozlowski’s attorney Alan Lewis said, “We respectfully, but strongly, disagree with the appellate division’s decision and instead think that the lower court was entirely correct about the flaws in the Parole Board’s decision.”
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At this writing, Kozlowski remained in prison and was participating in the state’s temporary work release program. Kozlowski had been in prison for more than eight years . . . and counting.

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Observations

In his opening statements to the jury at the beginning of the first trial in September of 2003, Dennis Kozlowski’s lead defense attorney Stephen Kaufman said, “ . . .
[Y]ou will not find proof that Dennis Kozlowski is a cheat, a liar or a thief,” after which Kaufman asked, “Who then is this man? What is his background? What has he done in his life time? How can we better understand who this man is?”
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I spent two and a half years trying to answer the questions Kaufman posed to jurors. My objective was to understand Dennis Kozlowski and to figure out what happened at Tyco that sent him to prison. I immersed myself in the businesses of Tyco International Ltd. I studied how Kozlowski developed as a manager, rose through the ranks, and became CEO, and I learned how he ran the rapidly growing diversified conglomerate that made a lot of money making and selling anything from home security systems, to fire sprinklers, to undersea telecommunications cable, to medical devices. I reviewed thousands of documents and spoke to those who worked in Tyco corporate operations when Kozlowski headed the company. I examined the corporation’s structure, culture, accounting, financial statements, compensation policies, and governance. I became well versed in all things Tyco.

Looking back with the advantage of ten years’ perspective and access to a mass of information, I envisioned what it was like to be at Tyco as Kozlowski built his career, and when he was CEO. I became a fly on the wall in Tyco corporate offices in 2002—when Kozlowski’s world imploded and the company became ensnared in a very public scandal.

After processing everything I found and learned and saw, I have some observations that may be helpful to individuals who don’t want to find themselves in the same dire circumstances that befell Dennis Kozlowski. At the time of this writing, Kozlowski had spent more than eleven of his sixty-six years dealing with legal issues related to being the CEO of Tyco International, and he remained a prisoner of the State of New York. He paid nearly $100 million in restitution to the company
and $70 million in criminal fines to the Manhattan DA, and had spent well over $60 million in legal fees since his first indictment in June of 2002.
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(It’s presumed that the wealthy have the ability to buy their way out of trouble. Kozlowski certainly disproved that notion.)

In addition to the lengthy prison sentence, the restitution, the fines, and the legal fees, Kozlowski had to repay Tyco for all compensation and benefits he received from the date of what was determined to be his first act of disloyalty—which in effect means he worked seventy hours a week or more for many years and found himself without anything to show for his labors.

Kozlowski’s career is a cautionary tale—it shines a bright light on the risks inherent in the executive suites of publicly traded corporations. The Tyco scandal was unforeseen, unlikely, and unexpected; it resulted from the convergence of many factors, some of which were in Kozlowski’s control, others of which were not.

The problems at Tyco have often been attributed almost entirely to Dennis Kozlowski; he has been characterized as a “pig” and “the greedy boss.” People said and wrote and published that Kozlowski was “evil” and had a “lack of moral direction.” Analysis of the Tyco scandal was simplified to attacks on Kozlowski’s character. It seemed few spent the time and effort required to understand the complex transactions and the compound problems at Tyco as well as the legal and business environments at that time. If we simplify the Tyco scandal, if we reduce the explanation to the moral failings of a single individual, we leave the door open for the tragedy to happen again.
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Since the scandal, journalists and others seemed shocked when Kozlowski’s former colleagues had favorable and complimentary things to say about the former CEO. Richard Meelia headed Tyco’s healthcare division for six years while Kozlowski was CEO. In a 2010
Forbes
article, writer Daniel Fisher noted that Meelia learned how to “run a company the Dennis Kozlowski way.” Fisher wrote that “Meelia has surprisingly kind things to say about Kozlowski, who now languishes in a prison in New York”
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After he was convicted, Kozlowski often heard from former Tyco colleagues; some of whom he knew, some of whom he didn’t know personally. He continued to receive letters and visits from them, even after he had been in prison for several years. Many of Kozlowski’s former colleagues remained supportive throughout his prosecution and imprisonment, as did his friends and family members. I had the opportunity to meet and speak with several of them.

Everyone else, it seems, forgot entirely the many years during which Kozlowski was admired for his business success, his work ethic, his charitable works, his many fine qualities, and for his ascent to the top of Tyco. Those who don’t know him only remember his fall. In an interview from prison in 2008, Kozlowski was quoted as saying “I hate my legacy to be a Sardinia party and an umbrella stand and a shower curtain.”
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What Went Wrong?

Many complex factors contributed to the Tyco scandal and the tragic end of Kozlowski’s career. Following are some of the most significant:

1. It was an extraordinary time.

• Enron, WorldCom, and other scandals heightened scrutiny, suspicions, and fear of bankruptcies in the market.
  
• The economy was troubled after 9/11.
  
• The CIT acquisition quickly became a problem for Tyco.
  
• The price of Tyco stock declined quickly and significantly after a decade of sustained growth.
  
• The Manhattan DA, who was long known for his aggressive pursuit of white-collar criminals, was at the ready. Like many prosecutors in the post-Enron environment, Robert Morgenthau was ready to investigate and prosecute highly compensated, high-profile executives he believed were abusing their positions of power.
  
• Old rumors about Tyco’s accounting methods that were quelled by the positive outcome of the1999–2000 Securities and Exchange Commission investigation were revived in the precarious post-Enron environment.
  
• Some Tyco Directors were angered by the payment of a $20 million investment banking fee to their fellow Board member Frank Walsh.
  
• Kozlowski and the Board announced a plan to split up the company, then backpedaled—and the market did not react favorably to the indecisiveness. The price of Tyco stock continued to drop.
  
• Tyco shareholders filed derivative actions because of the Frank Walsh investment banking fee—no doubt unhappy with the company’s performance during the first few months of 2002, nervous because of rumors and comparisons to Enron, and alarmed by the heightened scrutiny of Tyco that appeared frequently in various media outlets.
  
• The sales tax indictment, charges that were ultimately dropped, removed Kozlowski from Tyco. He had no input during the internal investigation, was never interviewed by anyone from Boies, Schiller or the Manhattan DA’s office, and as former Director Wendy Lane said in her interview for a Harvard Business School case study, once you leave the company, “. . .
  [Y]ou lose control over not only the information flow, but the information itself, the litigation process and settlement or adjudication proceedings. There is also an implication that you were at fault.”
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• Exposure of poor record keeping, sloppy governance, and a pattern of inaccurate and incomplete meeting minutes, missing meeting minutes,
  or failure to ever create minutes when Directors met became a serious problem when Kozlowski needed documentation of decisions that were made by Tyco Directors.
  
• Tyco grew very quickly into a large company, but Tyco corporate remained a mom-and-pop shop. Company loan programs had been loosely administered for decades. In addition, there was far too much informality and familiarity in Tyco corporate offices—they lived with an “it has always been done this way” mentality.
  
• The Board of Directors gave Kozlowski increasingly more spending authority—it had increased to $200 million by 2001. It was the imperfect combination of a Board that was willing to grant inappropriate levels of authority and a CEO who was happy to have almost unlimited authority.
  
• Directors had entered into, on behalf of Tyco, what was by my calculations a nearly half-billion dollar Retention Agreement with Kozlowski less than a year before all of the problems began. However, if Kozlowski was terminated for cause, the company would have had no financial obligation to him. “Cause” was defined as Kozlowski’s “ . . . conviction of a felony that is materially and demonstrably injurious to the Company.”
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If any of the foregoing had not happened, it is likely that Tyco would never have been caught in a costly scandal and Dennis Kozlowski would not have been indicted and convicted. It was a perfect storm.

2. The Dire
ct
ors

In my assessment of what went wrong at Tyco, the weak, dysfunctional Board of Directors is at the top of the list. The problems are too numerous to name, but following are some of the most troubling:

• Why was the testimony of Directors who said they could not recall approving or did not approve bonuses meaningful, or at all credible? They didn’t recall or record many of their decisions.
  
• A Director testified that he didn’t even read the half-billion dollar Retention Agreement until he wanted to figure out how to get rid of Kozlowski.
  
• Directors had “huddles” where no minutes were recorded—it’s impossible to know what was and wasn’t decided or approved during many undocumented gatherings.
  
• The Directors gave Kozlowski $200 million spending authority and for years allowed him to run the company based on his business judgment, which they applauded, encouraged, and rewarded. Meeting minutes were filled with resolutions empowering Kozlowski to act based on his judgment.
  Then when things got rough, when there were civil lawsuits and the Directors faced possible criminal charges, they attacked Kozlowski’s judgment—the same judgment he had exercised for years. He was accused of concealing information that was recorded on the books and records of the company in the ordinary course of business, and audited by PricewaterhouseCoopers. I’ve seen volumes of records. They exist. I found no evidence that anything was concealed or that anyone even attempted to conceal any information about compensation, bonuses, loans, or anything else.
  
• There were many conflicts of interest and unreported related-party transactions that involved and financially benefited Directors.
  

Robert Morgenthau was asked by the
Wall Street Journal
at the end of his thirty-five-year tenure as Manhattan DA whether he should have indicted Tyco Directors along with Kozlowski and Swartz. Morgenthau responded “probably.”
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Jury foreman Isaac Rosenthal said that over the years, he thought about the case and wondered why the Directors weren’t charged along with Kozlowski and Swartz. It seemed to Rosenthal that the Directors may also be culpable, and it appeared to him that Kozlowski and Swartz were scapegoats—the Directors pointed the finger at them when things got rough. When considering why the executives were charged and not the Directors, Rosenthal assumed it was politically advantageous for the DA to prosecute the top dogs. “I saved Morgenthau’s job,” he said.
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Former Director Joshua Berman, who was a member of the Nominating and Governance Committee that spearheaded the investigation of executive compensation, disputed his own compensation from Tyco when he was no longer a member of the Board.
Reuters
reported in 2007 that Berman filed an action against Tyco in which he claimed that “the company owed him at least $870,000 for consulting work he did during a five-month period following Kozlowski’s resignation.” Berman asserted in the complaint that he “agreed to leave his job at Kramer Levin Naftalis & Frankel LLP in 2000 to work at Tyco full-time at Kozlowski’s request.” Between July and November of 2002, he worked on “legacy matters” that had taken place during Kozlowski’s tenure as CEO and that were then under investigation, according to the complaint.
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It’s an interesting revelation because prosecutors very clearly told jurors that Tyco Directors were barely part-timers who had access to nothing other than what Kozlowski and Swartz filtered to them. The stories are incongruous.

Dennis Kozlowski said of the Board’s issues with him in 2002: “It was a dispute over compensation. It should have been resolved through negotiations or a civil action, if necessary.” He also shared, “My biggest mistake was not being more proactive and insistent about having a better Board. If I could go back and do anything differently, I would have worked with a different Board. I had no tolerance for managers who didn’t perform, but I tolerated bad Directors for a lot of years.”
Kozlowski said of the Tyco Directors with whom he worked for many years, “It was the ultimate betrayal.”
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3. Kozlowski’s Personal Failings

Kozlowski’s weaknesses, his personal failings, and some bad decisions also contributed to the problems at Tyco.

• Kozlowski’s unwillingness to pay attention to details, and the delegation of responsibility for the details in his life left him vulnerable.
  
• Kozlowski lost perspective. He was caught up in the amount of money Tyco was earning, in the size of his own compensation, and the possibilities of the bull market of the 1990s. In a 2009
  Fortune
  magazine article, contributor David Kaplan opined that Kozlowski was “ . . . the embodiment of an earlier epoch of corporate greed and personal profligacy, circa a decade ago. Yet . . . Kozlowski now looks like small fry in the sea of financial shenanigans.”
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  Kaplan was referring to the many unindicted individuals involved in the financial crisis of 2008, where the dollar amounts were far greater than those involved in the Tyco scandal.
  
• We all normalize the things in our lives. For Dennis Kozlowski, it became normal to see lots of zeros at the end of every dollar amount.
  
• Kozlowski’s ambition blinded him. He grew the company very quickly—he was named “The Most Aggressive CEO” by
  Businessweek
  in May of 2001.
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  His pace was unwise. He wanted to achieve too much too fast.