Kozlowski of TYCO found guilty

["Miklos A. Vasarhelyi" <miklosv@andromeda.rutgers.edu>]

Tycos ExChief and Top Aide Are Convicted of Grand Larceny
June 17, 2005
By

ANDREW ROSS SORKIN 
L. Dennis Kozlowski, the former chairman of

Tyco International, and his top lieutenant were convicted today on
fraud, conspiracy and grand larceny charges, bringing an end to a
three-year case that came to symbolize an era of corporate greed and
scandal.
The
verdict

, which came after three weeks of deliberations by a jury of six men and
six women, is the latest conviction in a string of rulings against
high-profile corporate executives in recent years. The verdict is also
vindication for the Manhattan district attorney's office, and its chief,
Robert M. Morgenthau, who is up for re-election this fall.
The four-month-long trial was the second time Mr. Kozlowski and Tyco's
chief financial officer, Mark H. Swartz, were tried on charges of
stealing $150 million from Tyco - a conglomerate whose products range
from security systems to health care products - and reaping $430 million
more by covertly selling company shares while '"artificially
inflating" the value of the stock. 
The first case against them was declared a mistrial last April when a
juror holding out for an acquittal famously made what appeared to be an
"O.K." signal to the defense and subsequently received a
threatening letter from a stranger, upending the trial.
The retrial of Mr. Kozlowski, 58, and Mr. Swartz, 44, was markedly
different from the first trial. Prosecutors, who had been criticized by
jurors from the first trial for presenting an often meandering and
disorganized case, refocused its arguments and trimmed its witness list.
Prosecutors also limited much of the most salacious testimony about Mr.
Kozlowski's conspicuous consumption that had made the first trial fodder
for the tabloids and entertainment television news programs, but had
backfired badly with the jury.
Instead of days of testimony about Mr. Kozlowski's now infamous $6,000
shower curtain or a $2 million birthday party for his wife that was
partially paid for by the company, prosecutors spent most of the trial
drilling into the complex accounting issues surrounding the $150 million
that Mr. Kozlowski and Mr. Swartz were accused of stealing.
The case turned on whether the jury believed that several giant payments
both men received had been authorized by Tyco's board as part of a preset
bonus formula or had been secretly siphoned by the men and dishonestly
classified as bonuses. Several members of Tyco's board and the company's
lawyer, Davis Boies, testified that the payments were never
authorized.
The backgrounds of the jurors were also quite different from the first
trial. While many of the jurors in the first trial had backgrounds in
accounting or the law and were college-educated, many on this jury never
received a high school diploma. 
But the biggest difference between the first trial and the retrial was
the defense's decision to put Mr. Kozlowski on the witness stand. His
testimony, which at times became heated during cross-examination, offered
the most drama and levity in the often-tedious case.
In what may have been the most damning piece of evidence against him, his
own lawyer and the prosecutor quizzed him about why he signed his tax
return when his W-2 form was missing $25 million that he was said to have
taken. "I cannot explain why," he told the court. "I was
not thinking when I signed my tax return." 
Mr. Kozlowski portrayed himself as a self-made entrepreneur who has
become the victim of an overzealous prosecutor interested in sensational
headlines and a board trying to protect itself from shareholder lawsuits.
He described himself on the stand as an overworked executive who often
delegated details to others. He called some of the expensive decorations
used to remodel a $18 million apartment on Fifth Avenue that he had the
company buy "'god-awful" and told jurors that "I stuffed
some of it in the closet." He acknowledged, "I did not oversee
this in the manner in which I should have overseen that
apartment."
Throughout his testimony, however, he proclaimed his innocence and said
that he never tried to steal anything from the company. "I'm here so
I can explain to them why I'm innocent of all the charges against
me," he said.
Mr. Swartz also took the stand, as he did in the first trial. Much of his
defense was based on his contention that he took orders from Mr.
Kozlowski and believed the payments were authorized. 
The trial opened a window into how sloppily Tyco - and perhaps other
large corporations - operated during the 1990's boom and even earlier.
Evidence showed that the management used loan programs designated for tax
purposes as personal accounts for years, long before Mr. Kozlowski was
even the chief executive. And other evidence was presented that the board
rarely took accurate minutes of its meetings. Indeed, several executives
testified that the minutes were typically drafted before the meetings
ever took place.
Over the course of the trial, the courtroom on the 13th floor of the New
York State Supreme Courthouse in Manhattan, often had the feel of a
reunion. Lawyers, witnesses, jurors and family members from the first
trial dropped in from time to time to sit in the gallery. Ruth B. Jordan,
Juror No. 4 from the first trial, was a frequent spectator. She would sit
in the back of the courtroom and often received as much attention from
cameramen as she left the courthouse as Mr. Kozlowski and Mr. Swartz. She
said she came to court as an "interested citizen" and may write
a book.
Tyco still faces a sea of shareholder lawsuits stemming from bookkeeping
irregularities during the reign of Mr. Kozlowski and the former board.
Some analysts predict that it may cost Tyco about $1.25 billion to settle
the remaining litigation. Tyco's current management, led by Edward D.
Breen, a former

Motorola president, said it would pursue separate civil actions
against the former executives.

Miklos A. Vasarhelyi
KPMG Professor of AIS
Director RARC / CARLAB
Rutgers University
315 Ackerson Hall
180 University Avenue
Newark, NJ 07102
(973) 353 5002
(201) 454 4377 (cell)
http://raw.rutgers.edu/mik los