Ex-Tyco Chief, Free Spender, Going to Court
The New York Times
By ANDREW ROSS SORKIN
Dennis Kozlowski spent Saturday at a lavish wedding party for his
daughter on Nantucket, where he owns a beachfront estate.
Today, Mr. Kozlowski, the former chairman and chief executive
of Tyco International, will spend the day sitting in courtroom No. 1324 at State
Supreme Court in Manhattan, accused of looting the company and
investors of $600 million. But Mr. Kozlowski, who has become a symbol for the
corporate excesses that cloud the boom years of the 1990's, is likely
to find as much attention paid in court to the kind of opulent lifestyle he
packed into the last days before his trial as for his actions at Tyco.
While running the company, Mr. Kozlowski liked to depict himself as
a hard-nose businessman. But another side emerged after he was fired,
including his champagne taste - among other things, he decorated his
New York apartment with a $6,000 shower curtain and a $17,000 umbrella
stand, apparently all paid for by Tyco - and his largess, at least
toward his own family.
And of course, there was a now-infamous multimillion-dollar birthday
party that Mr. Kozlowski gave for his second wife - again
on Tyco's bill - on the island of Sardinia, featuring waiters in
togas and an ice sculpture of Michelangelo's "David,"
from which Stolichnaya vodka
flowed into crystal glasses.
The prosecutors have indicated that they intend to make much
of those extravagances, painting Mr. Kozlowski as the Ivan F. Boesky of his day.
They are sure to play the videotape of his wife's birthday party and
to show slides of his many expensive homes to a jury that can hardly be
expected to consist of his financial peers. A mention of the party for
Mr. Kozlowski's daughter this weekend might just slip through prosecutors' lips,
as well.
Mr. Kozlowski is the first big-name executive from the financial scandals
in recent years that have devastated companies like Enron, WorldCom
and Adelphia to face his accusers in open court. The trial, which could
last more than three months, is being watched as an indicator of how state
and federal prosecutors might pursue scores of other executives accused
of corporate malfeasance.
"This is the big test; this is the first corporate greed case," said
John J. Fahy, a former federal and New Jersey prosecutor. "They can't afford to
lose. If they don't win here, they will be much more reluctant to go after more."
By coincidence, two blocks away in Federal District Court, another
trial of a market-bubble figure is scheduled to begin: Frank P. Quattrone, a star
Silicon Valley investment banker charged with obstructing justice during
an investigation into how his firm allocated highflying stock offerings.
The case against Mr. Quattrone, who helped take companies public
during the boom, hinges on whether an e-mail message he endorsed, directing
department members at Credit Suisse First Boston to clean up their files,
constituted an effort to obstruct a government investigation.
But other prominent executives enmeshed in scandals, like
Kenneth L. Lay of Enron and Richard M. Scrushy of HealthSouth, may never have to
appear in court because of the complexity of the suspected frauds
and the difficulty in prosecuting white-collar crimes.
The accusations against Mr. Kozlowski, on the other hand,
are relatively straightforward: he and a co-defendant, Mark H. Swartz, Tyco's former
chief financial officer, are accused of reaching into the corporate
cookie jar to pay for everything from Mr. Kozlowski's apartment on Park Avenue
and homes in Boca Raton, Fla., to jewelry from Harry Winston and Tiffany.
In particular, they are charged with stealing $170 million from the
company itself and reaping $430 million more by covertly selling shares of Tyco
while "artificially inflating" the value of the stock, according to the
indictment. They are also accused of "enterprise corruption," a charge often
used in organized-crime prosecutions.
If convicted, Mr. Kozlowski and Mr. Swartz could each face up
to 25 years in prison.
Mr. Kozlowski joined Tyco in 1975 when it was a New Hampshire-based
manufacturer and took the reins in 1992. In the decade he ran it, Tyco,
through thousands of acquisitions, was transformed into a Bermuda-based
conglomerate that owned dozens of companies making products ranging
from surgical instruments to security systems. Its stock price rose 15-fold
from 1992 to 1999.
But it crashed when the charges against Mr. Kozlowski surfaced, exposing
both a "pattern of using aggressive accounting" that inflated its earnings
for years, according to the an internal Tyco investigation, and his own high
living on the company's wealth.
"This is not Les Misérables," Stanley S. Arkin, a prominent defense lawyer
not involved in the case, said of the magnitude of the charges against
Mr. Kozlowski and Mr. Swartz. "The question is whether a jury can get beyond the honey pot."
Defense lawyers are hoping to steer the jury away from all the extravagances,
contending that payments were never secret and that they were all
approved by the board and by the company's outside auditor, PricewaterhouseCoopers.
"Embezzlement can't succeed without stealth, without concealment,"
Austin V. Campriello, one of Mr. Kozlowski's lawyers, said at a pretrial
hearing last week.
It is unclear how convincing the "all-the-right-people-knew" defense
will be, but prosecutors, led by Gerald Murphy, were worried enough about it to
try to block the defense from introducing evidence that Pricewaterhouse
Coopers approved the payments. Mark Scholl, an assistant district attorney,
asserted that defense lawyers would try to "draw a circumstantial inference
that is unfair, deceptive and misleading." The judge, Michael J. Obus,
rejected the prosecution's request, but did offer a note of caution.
"The fact that a loan was submitted to auditors is not a complete
defense," he said. "We are not here to have a jury decide whether the auditors did
a good job."
An important witness in the case is likely to be Richard Scalzo,
the PricewaterhouseCoopers partner in charge of Tyco's audit, who was recently
barred for life from the profession by the Securities and Exchange
Commission because he ignored evidence of fraud at Tyco. His testimony and his
credibility could have a big impact on the trial.
Mr. Kozlowksi and Mr. Swartz are not expected to take the witness stand.
Mr. Kozlowski's defense may have gained a slight break because
tax-evasion charges, which set off the larger investigation resulting in the other
charges, will not be heard until after this trial. In the tax-evasion case,
which many legal experts suggest is a far more straightforward one, he is
accused of having evaded more than $1 million in New York sales taxes
on six paintings, which included a Renoir and a Monet, by buying them for
his New York apartment but contending that they were going to
New Hampshire. He is said to have had empty crates shipped to Tyco's operating
headquarters in Exeter, N.H.
Of course, a crucial component in the outcome of the case will be
the makeup of the jury. "Bluntly, they are going to have a hard time getting
jurors," Mr. Fahy said, explaining that because the trial is expected
to last several months, many potential jurors will be given the chance to
decline to serve.
And Mr. Arkin suggested that it would be almost impossible to find
jurors who had not already formed opinions about the corporate scandals of the
last couple of years. "Can you find 12 people and 6 alternates that are
sufficiently ignorant?" he asked. "I don't think so."
Mr. Kozlowski and Mr. Swartz are taking a big chance in going to trial
that not many indicted executives take. Samuel D. Waksal, the former chief
executive of ImClone Systems, pleaded guilty before his trial in the same
way that the cadre of 1980's corporate miscreants, like Mr. Milken, did.
Ira Lee Sorkin, a New York defense lawyer and former prosecutor, said
that one of the biggest challenges Mr. Kozlowski faces in court is not looking
like a wealthy executive. "I'd tell him to wear a suit that had been marked
down at Syms, a button-down shirt without cufflinks and a $49.95 Timex
watch instead of your Rolex," Mr. Sorkin said.
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