Dennis Kozlowski & Tyco: Villain or Victim of Post-Enron Climate

Dennis Kozlowski, the former CEO of Tyco, had become a symbol of corporate greed and excess by the time the company's scandal erupted in the early 2000s, coinciding with the notorious Enron and WorldCom debacles. Tales of Kozlowski's alleged misdeeds, including misappropriating millions to fund lavish apartments, art purchases, and even a $6,000 shower curtain, had captured the public's attention. However, a closer examination of the case, particularly through two Forbes articles published during the trials, as well as a book by Catherine Neal published in 2014 paints a more nuanced picture.

At the heart of the matter were four substantial bonuses received by Kozlowski and Tyco's CFO, Mark Swartz. Crucially, these bonuses were paid in accordance with pre-existing compensation agreements, and the amounts aligned with the terms of their contracts. Moreover, all the funds labelled as "stolen" were properly accounted for in Tyco's financial records. The key point of contention was whether the Tyco compensation committee had formally approved these specific bonuses, and the case essentially hinged on whose account one found more credible – Kozlowski and Swartz's or the Tyco board's.

Unlike the other high-profile corporate scandals of the era, Tyco did not face significant accounting irregularities. Apart from a single instance of profit restatement, the company's financial records remained largely unblemished, although Tyco was known for pushing the limits of acceptable accounting and tax strategies. Consequently, Tyco never faced the imminent threat of bankruptcy that plagued its scandal-ridden contemporaries.

Dennis Kozlowski's journey began in 1946 in a working-class family in New Jersey. Consistently described as a brilliant student and voracious reader, he worked 30 to 40 hours a week to finance his accounting degree at Seton Hall University. After a stint as an auditor, Kozlowski joined Tyco in 1975 at the age of 28, when the company was a modest enterprise with annual revenues of around $20 million, engaged in diverse businesses ranging from manufacturing radio chips to developing helicopter blade stress-measuring technology.

Under the stewardship of its new CEO, Joe Gaziona, Tyco embarked on an ambitious plan to become a billion-dollar company through aggressive acquisitions, often via hostile takeovers. Kozlowski quickly proved his mettle in operations, becoming the go-to person for integrating acquired companies into Tyco – a role that demanded a deep understanding of the businesses and the ability to efficiently streamline costs.

Following Gaziona's premature death in 1982, John Fort, a more conservative director, took the reins as CEO. Despite Fort's cautious approach, Tyco's growth persisted, with Kozlowski playing a pivotal role in propelling revenues to $3 billion by 1992. Recognized as the engine behind Tyco's expansion throughout the 1980s, Kozlowski was made CEO and Chairman in 1992 at the age of 45.

By this juncture, Tyco had established four primary divisions: electrical components, specialty products, fire services, and flow control products. Cognizant of the inherent cyclicality of the construction industry, which accounted for 81% of Tyco's revenue, Kozlowski sought to diversify by acquiring companies in the more stable health and security sectors.

Kozlowski adhered to two cardinal principles in his acquisition strategy: only target companies that aligned with Tyco's expertise and core businesses, and eschew hostile takeovers. His aversion to hostile acquisitions stemmed from a desire to retain top talent, recognizing that such contentious deals often precipitated an exodus of valuable employees.

Under Kozlowski's leadership, Tyco acquired over 1,000 companies, crystallising his success formula: recruit and retain the right people, incentivize top performers with pay-for-performance compensation, and foster a decentralised control structure with minimal bureaucracy.

Within ten years, from 1992 to 2001, Kozlowski grew the company's revenues from $3 billion to $30 billion. At the height of its success in 2001, Tyco had a market capitalization of $130 billion. Kozlowski's relentless pursuit of growth earned him widespread acclaim as America's most aggressive CEO, earning the nickname "Deal-a-Day-Dennis," a nod to the company's breakneck pace of averaging 200 acquisitions per year by 2001.

However, such extraordinary success often demands significant sacrifices, and Kozlowski's devotion to Tyco's business ultimately took a toll on his personal life, leading to the dissolution of his first marriage. By 2001, after 27-year tenure at Tyco, during which he had been the driving force behind the company's growth for two decades, the board recognized the pivotal role Kozlowski played and was keen to retain his services.

To incentivize Kozlowski's continued commitment, the board extended an eye-catching retention deal that bound him to Tyco until 2008. The terms of this lucrative agreement guaranteed Kozlowski a staggering three times his 2000 salary of $137 million, coupled with 800,000 restricted shares potentially worth up to $70 million. Remarkably, regardless of Tyco's performance over the intervening years, Kozlowski was assured a minimum payout of $412 million, with the potential to amass nearly half a billion dollars. Even in the event of his termination by the board, this compensation was guaranteed, with the sole exception being a felony conviction, which would nullify the retention deal.

It is crucial to underscore the significance of this retention agreement, as it lies at the heart of the subsequent scandal that engulfed Kozlowski and Tyco.

Kozlowski and Tyco's leadership had always looked up to and also tried to emulate the success of General Electric, widely regarded as the epitome of corporate excellence under the stewardship of Jack Welch. By 2000, GE Capital, the company's financial services arm, was generating over half of General Electric's profits.

Emboldened by their accomplishments and overflowing with confidence, Kozlowski and Tyco made a daring move in 2001, embarking on their most significant acquisition to date – the $9.2 billion purchase of CIT Group, a prominent financial services company. However, in doing so, Kozlowski violated his long-standing golden rule: he acquired a company about which Tyco had scant knowledge and, crucially, one that fell outside the bounds of its four existing business sectors.

To this day, Kozlowski steadfastly maintains that the CIT deal was a strategic fit, as the company's existing customers could leverage CIT's services to finance their acquisitions from Tyco. Nonetheless, this acquisition marked the first in a series of controversies that ultimately precipitated Kozlowski's downfall.

The CIT deal was facilitated by Tyco board member Frank Walsh, who had established connections with CIT's CEO. Walsh initiated the introductions and oversaw the negotiations between Kozlowski and CIT. Typically, such transactions would involve the services of an investment bank, which would command a standard commission of approximately 1% of the overall deal value. In the case of the $9.2 billion CIT acquisition, this fee would have amounted to around $92 million.

However, Kozlowski and Walsh agreed upon an alternative arrangement – Walsh would be compensated for his role in facilitating the deal, but the specifics of his fee were not initially documented. Once the CIT transaction was finalised, the two men settled on a $20 million fee, with $10 million earmarked for Walsh and the remaining $10 million destined for a charity of Walsh's choosing. Effectively, Walsh received approximately one-tenth of what an investment bank would have charged for comparable services.

Walsh duly provided an invoice, and the $20 million fee was processed and accounted for in Tyco's books. According to Walsh and Kozlowski's accounts, the informal nature of their agreement, which was not formalised until after the CIT deal had concluded, resulted in the omission of Walsh's fee from the S-4 form – a document filed with the SEC by public companies to register material information pertaining to mergers and acquisitions.

As well as this, a discrepancy arose, in their respective testimonies. Walsh asserted that Kozlowski had instructed him to keep the deal between themselves, which Walsh interpreted as a directive to withhold the information from the other board members. Conversely, Kozlowski contended that his request for confidentiality was aimed at preventing Walsh from consulting with other investment bankers to solicit their input on an appropriate fee.

Notably, as the fee was duly invoiced and recorded in Tyco's books, other individuals within the company were aware of the payment, and none of them testified that Kozlowski had explicitly instructed them to conceal the information from the board.

Crucially, however, Kozlowski did not disclose the $20 million payment to Frank Walsh to the board in January 2002, 6 months after the deal, a revelation that ignited a firestorm of outrage among some board members.

The precise reasons behind their objections have never been satisfactorily explained. It could not be attributed to any conflicts of interest, as such conflicts were common among the board members and Tyco. For instance, one board member's law firm was retained by Tyco for nearly all of its mergers and acquisitions, resulting in substantial fees. Another board member leased helicopters and planes to Tyco, while his wife served as the real estate agent handling relocation services for Tyco employees.

The Walsh payment was discussed at an informal board meeting in January 2002, where other more pressing issues were also covered, including the CIT deal (which just 6 months in was already proving to be a mistake) and a proposal to break Tyco into 4 separate companies in order to release shareholder value.

When the discussion turned to the contentious Walsh fee, some board members demanded that Walsh either return the $20 million payment or relinquish his position on the board. Walsh promptly stood up, bid farewell with an "Adios," and exited the boardroom, severing his ties with Tyco.

Aware of the outrage among certain board members over the substantial fee paid to Walsh and the informal manner in which the arrangement was handled, Kozlowski acknowledged his mismanagement of the situation and offered his resignation. However, the board rejected Kozlowski's offer to step down.

Furthermore, the board approved the inclusion of the Walsh payment in Tyco's proxy statement, a decision that would have far-reaching consequences.

One might have expected this move to lay the matter to rest, but that was not the case. When Tyco's shareholders caught wind of the $20 million payment to a board member disclosed in the proxy statement, they were outraged. The backlash was swift and severe – Tyco's share price fell, and aggrieved shareholders initiated legal action against the board for approving the controversial fee.

It is essential to understand that the corporate landscape had undergone a seismic shift in the months following the collapse of Enron in December 2001. Companies that had experienced significant growth, such as Tyco, found themselves under intense scrutiny. Massive accounting frauds were coming to light, rumours were swirling, and boards of directors faced immense pressure from all quarters.

The shareholder lawsuit prompted the board to enlist the services of renowned attorney David Boies to investigate the Walsh payment in greater depth.

Thus, the combination of the Frank Walsh payment fiasco, the disastrous CIT acquisition, and the plunging share price laid the groundwork for the turbulent events that would unfold, with the summer of 2002 marking the beginning of Kozlowski's downfall.

It is worth noting that by May 2002, Tyco's share price had plunged to $28, a stark contrast from the previous year's high of $74.

As is often the case when individuals suddenly find themselves immensely wealthy, Kozlowski developed certain "notions," as the Irish would say. For him, this manifested in a desire to be perceived as a serious art collector, despite later admitting that he held no genuine interest in the art itself; rather, his motivation stemmed from bragging rights and prestige.

While Kozlowski was indulging in his art acquisitions, the Manhattan District Attorney's office was conducting an investigation into several New York art galleries suspected of failing to charge sales tax. Inadvertently, Kozlowski found himself ensnared in this probe.

In matters of sales tax, the onus typically falls on the seller to collect and remit the applicable taxes, not on the buyer to pay them. Nevertheless, this did not stop the Manhattan DA from indicting Kozlowski on charges related to the sales tax on the paintings he had purchased in June 2002.

Remarkably, not only did the DA charge Kozlowski, but they also granted immunity to the seller – the very party who should have faced prosecution for the alleged crime.

Furthermore, the DA never even interviewed Kozlowski regarding these charges; instead, they proceeded directly with indicting him.

Upon learning of the impending indictment, Kozlowski had to notify each board member of the charges he faced. Over the ensuing weekend, the board members convened an emergency telephone meeting. While some members advocated placing Kozlowski on leave until the resolution of the trial, others vehemently pushed for his immediate resignation, and this faction ultimately prevailed.

In a swift and ruthless decision, Kozlowski was effectively terminated over that fateful weekend – after dedicating 27 years to building and shaping Tyco into a corporate powerhouse, he was summarily dismissed without even being afforded the opportunity to discuss the charges with the board or outline his intended defence strategy. The board cut ties with Kozlowski and never spoke to him again.

The revelation from a 2011 interview with a former board member, who stated that "The employment agreements were an impediment since substantial severance payments would have been triggered without an ultimate conviction of guilt," sheds light on the board's true motivations. It becomes clear that, from the moment Kozlowski was indicted, the board's primary concern was the lucrative retention agreement they had extended to him. Having already faced a shareholder lawsuit over the $20 million Walsh payment, the prospect of being obligated to pay Kozlowski the substantial severance he was owed must have been a daunting one for the board.

The only viable path for the board to avoid triggering those substantial severance payments was to ensure Kozlowski's conviction on felony charges.

Fortuitously for the board, in the aftermath of the Enron scandal, when high-profile corporate trials garnered widespread attention and public scrutiny, the Manhattan DA was eager to claim a prominent corporate scalp and bask in the accompanying glory.

Such was the DA's zeal to prosecute Kozlowski that his initial indictment for the sales tax charges marked the first time in New York State history that a prosecutor had charged a retail customer with a crime for failing to pay sales tax – a flagrant violation of the established legal principle that places the burden of collecting taxes squarely on the seller, not the buyer.

On the morning of Monday, June 3rd, 2002, Kozlowski was officially indicted and charged with failing to pay sales tax.

Ultimately, in 2004, Kozlowski was cleared of these charges, with the presiding judge levelling scathing criticism at the Manhattan DA for their unprecedented and legally unsound application of the relevant statute.

However, that was 2 years down the line. The day after Kozlowski's indictment, the board instructed Boies, who was already investigating the Walsh payment, to expand the scope of his inquiry to include Kozlowski himself.

Boies subsequently produced a report that was promptly leaked to the media, unleashing a torrent of scandalous allegations against Kozlowski.

The report portrayed Kozlowski as treating Tyco's coffers as his personal piggy bank, using company funds to finance the purchase of a $17 million apartment on Fifth Avenue, along with $3 million in renovations and a staggering $11 million in furnishings, including extravagances such as a $15,000 dog umbrella stand, a $6,300 sewing basket, and, infamously, the $6,000 shower curtain.

Furthermore, the report accused Kozlowski of misappropriating Tyco funds to bankroll his second wife's notorious Roman-themed 40th birthday celebration in Sardinia, which allegedly cost a whopping $2 million.

These salacious and ostentatious details, once leaked, cemented Kozlowski's reputation as the poster child for corporate excess and unbridled greed – an image from which he would never fully recover. The public vilification reached its peak with the publication of a front-page photograph in the New York Post, accompanied by the scathing headline "Oink Oink."

Boies also shared his damning report with the Manhattan DA, who promptly decided to pursue charges against Kozlowski, Tyco's CFO Mark Swartz, and the company's chief counsel, Mark Belnick.

Kozlowski and Swartz were accused of stealing $132 million while Belnick was charged with taking a $17 million bonus and a $14 million relocation loan without proper approval. These were the primary allegations among other charges levelled against the executives.

Surprisingly, the federal government, which had previously prosecuted high-profile corporate cases such as Enron and Worldcom, chose not to take on the Tyco case.

One possible explanation for this decision is that many of the sensational details in the report, although scandalous, did not carry much weight in terms of criminal wrongdoing. For instance, the $17 million apartment on 5th Avenue, including its furnishings and artwork (such as three paintings worth $1.9 million), were all Tyco's property and had been properly accounted for in Tyco’s books. While Kozlowski did purchase five additional paintings for the apartment, he used a loan from Tyco, which he later repaid.

Kozlowski, who had an annual spending authority of $200 million, claimed that the apartment was meant for discreet meetings with potential acquisitions. He conceded that he should have kept a closer eye on the apartment's budget but maintained that he had delegated this responsibility, as he had with many other aspects of his life during that time.

In a similar vein, the notorious $2 million Sardinia party for Kozlowski's wife was split evenly between Tyco and Kozlowski, with the company covering expenses for its employees – a practice not uncommon for Tyco. Tyco’s party planner testified that the company regularly held events for top performing employees at luxurious resorts where a $2 million price tag was the norm.

Despite these stories tarnishing Kozlowski's reputation and portraying him as a greedy corporate executive, the federal government did not find sufficient evidence of criminal wrongdoing. Another potential reason for their decision not to prosecute could be that the alleged stolen bonuses were accounted for in Tyco's books and were part of the publicly disclosed executive compensation, calculated based on pre-agreed formulas. The primary accusation was that the bonuses were taken without the compensation committee's approval, so it would be difficult to prove criminal intent.

Interestingly, as with the sales tax charges, the Manhattan DA never interviewed Kozlowski regarding the larceny charges, a curious omission in a major criminal case. One would expect that when accusing someone of serious crimes, an effort would be made to hear their side of the story, potentially clarifying assumptions or even obtaining a self-incriminating statement.

Before Kozlowski's trials, two separate trials took place.

In late 2002 Frank Walsh quickly pleaded guilty to accepting a $20 million fee without board approval, despite five directors later testifying in 2004 that Kozlowski had the authority to pay Walsh without consulting them.

The second trial in 2004 involved Mark Belnick, Tyco’s chief counsel, who was accused of taking a $17 million bonus and a $14 million relocation loan without the compensation committee's approval.

Belnick asserted that Kozlowski had assured him the bonus was approved, but the compensation board members testified to the contrary. However, the jury did not find the board members' testimony credible, with one juror stating, "All the directors and committees didn't do their jobs. They can't have it both ways. They either did their job and knew what was going on, or they didn't."

Another juror in that trial stated: “Everything that he got was documented through e-mails and memos with the company’s signature. The evidence we had satisfied us that he got it the right way.”

Following Belnick's acquittal, the DA offered Kozlowski and Swartz a plea deal, which they rejected.

Before the first trial began, the judge dismissed 80 separate acts of enterprise corruption that the DA intended to charge Kozlowski and Swartz with, citing a lack of evidence.

The initial trial in 2004, which lasted six months, ended in a mistrial under unusual circumstances involving a journalist, a juror, and an alleged threat. In short, a journalist accused a juror of attempting to communicate with Kozlowski’s team, that journalist then named the juror and as a result of a threat of some sort to that juror from the member of the public, the judge declared it a mistrial.

The second trial began in January 2005 and lasted five months.

The prosecution had three crucial elements in their favour during the Tyco case:

Firstly, the CEO and CFO were paid enormous sums of money, and the public perception, particularly of the CEO, was that of a corporate fat cat who seemed to have used Tyco's funds to support his extravagant lifestyle.

Secondly, the prosecution had a board willing to testify that they hadn't approved the bonuses, and there were no minutes from the compensation committee meetings where the bonuses were discussed, implying that the bonuses were stolen.

Lastly, the manner in which the top executives were paid their bonuses and how they managed their personal finances using Tyco's executive treasury was complex and definitely gave the impression that it wasn't entirely above board.

Examining each element, it's undeniable that Kozlowski and Swartz were paid vast amounts of money. However, it's equally undeniable that these monies were based on pre-arranged formulas agreed upon by the compensation committee. The amounts they allegedly stole were identical to the amounts they were due in bonuses and were accounted for in Tyco's records.

Regarding Kozlowski's image problem, there was no way around it. Even though he delegated much of the spending related to the apartment and the party, he still approved these extravagances. While spending lavishly isn't a crime, the prosecutors successfully portrayed both defendants as corporate fat cats, which harmed their case. Unfortunately for Swartz, I believe that Kozlowski’s image also tarnished him.

Concerning the board's assertion that the bonuses weren't approved and there were no minutes to support Kozlowski's claims, let's examine this further. Kozlowski maintains that he discussed the bonuses with Philip Hampton, the chair of the compensation committee, who said that he had OK'd them with the board. However, Hampton passed away in 2001, making it impossible to confirm this conversation.

Regardless, Kozlowski's defence argued that even if the bonuses hadn't been approved by the entire board (i.e., if Hampton didn't discuss the bonuses with the rest of the board), there was never an intent to steal them, as the bonuses were not only known to the board and the compensation committee but also accounted for in Tyco's books.

Regarding the lack of minutes from the compensation committee approving the bonuses, Tyco's poor record-keeping practices suggest that this charge doesn't hold much weight. The head of HR testified that the minutes for each compensation committee meeting were written by an executive before the meetings took place and were ratified by the compensation board members weeks or often months after the actual meeting.

Tyco's audit committee never took minutes during Kozlowski's entire tenure as CEO, only starting in 2002 after the scandal broke. The board often left major decisions off the minutes, such as hiring David Boies, the January meeting discussing the sale of CIT, the break up of Tyco, and the Frank Walsh fee. No minutes were taken when the board agreed to sell $2 billion of Tyco shares to Lehman Brothers.

The absence of minutes from the compensation committee regarding the disputed bonuses proves nothing. It's important to note that the blame for this shoddy record-keeping and poor corporate governance lies squarely with Kozlowski, who was both CEO and Chairman. He had an aversion to bureaucracy and wanted Tyco to be nimble and not bogged down in paperwork to facilitate rapid growth.

The third element in the prosecution's case was the complexity of how top executives were paid their bonuses and how their personal finances were managed within Tyco. Many bonuses were funnelled through Tyco's KELP (Key Employment Loan Program) and relocation programs. KELP allowed employees to borrow funds from the company to satisfy tax liabilities related to the vesting of restricted Tyco stock shares.

Without doubt, Kozlowski and Swartz overused and abused the KELP and relocation programs, taking more loans than they should have. However, as pointed out in the trial, Tyco executives used and abused the KELP system in this way well before Kozlowski became CEO, and while it may have been bad practice, it wasn't illegal. Kozlowski and Swartz always repaid the loans with their bonuses, and this was well-documented.

Because they took loans and repaid them with bonuses that the DA claimed were stolen, the DA framed these loans as having been forgiven. Much was made of the fact that at the time of Kozlowski's firing, he still owed KELP $16 million. However, it's even more important to note that Kozlowski was owed $80-85 million in deferred payments from Tyco. This fact raises the question: if he was stealing money from Tyco, why was he leaving it in the company?

Another factor adding to the confusion and demonstrating how Tyco senior executives mixed their personal finances with the company's was their use of the executive treasury. Evidence presented in court showed that one person in the executive treasury handled all of Kozlowski's personal finances, from paying bills to managing his banking and applying for and paying off loans via the KELP program.

Having a company employee manage personal finances is not good practice and blurred the lines between Kozlowski and Swartz's money and the company's. While it wasn't illegal, it didn't help Kozlowski's case.

One crucial piece of evidence that damaged Kozlowski's credibility was his failure to include a $25 million payment, which was used to forgive a loan from Tyco, in his 1999 tax return. The prosecution spent two days questioning Kozlowski about this $25 million omission.

Kozlowski testified that he didn't notice the omission, and neither did his accountant. For the jurors and probably most of the public, it seemed inconceivable that a massively successful businessman, who started his career as an auditor and was responsible for a $130 billion company, could forget to include $25 million in his tax returns.

However, to me, it is credible. It rings true based on everything we know about Kozlowski up to this point. He delegated everything – from the organisation of his wife's birthday party to the decorating of the 5th Avenue apartment and all of his personal finances to the executive treasury. In fact, the person within the executive treasury testified that after Kozlowski was fired, he called her to ask for his bank account details and social security number.

Screwing up your tax forms is credible to me because when my partner and I were running our small company, we had an accountant whom I trusted completely. He handled my tax affairs, and whatever he gave me to sign at the end of the year, I signed without looking, despite his stern advice that I needed to double-check the figures and be fully aware of everything in them. I ignored his advice because I trusted him and was too busy. It was stupid, definitely, but it's also why I believe this could have happened to Kozlowski.

The two trials lasted a combined 11 months, with extensive testimony that undermined both the defendants' and the prosecution's cases. Kozlowski and Swartz did have credibility issues, especially with the entire board testifying against them. However, the more I investigated, the more it became apparent that the board also had significant credibility issues.

A key piece of testimony that totally undermined the board's credibility was when a board member admitted that weeks after learning about the bonuses that prosecutors say Swartz, the CFO, stole from the company, Tyco not only kept him on as CFO but also had him certify their accounts and paid him a $50 million severance. Would you allow someone who you believed stole from your company to continue working there, certify the accounts, and then give them a $50 million severance? It's simply not credible.

In the end, the jury didn't believe Swartz or Kozlowski. They believed the prosecution's case and the board members. The judge imposed a sentence of 8 1/3 to 25 years, along with restitution and fines totaling $167 million for Kozlowski and $72 million for Swartz.

Appeals were made but lost. The first appeal was lost because the judges believed the board's testimony and placed significant weight on the paintings Kozlowski bought, specifically mentioning the $12.75 million he used to purchase artwork that hung in the Tyco apartment. This is despite the fact that any paintings Kozlowski bought for himself were in his name, while the paintings bought with Tyco’s funds were in Tyco's name.

The second appeal was based on the fact that David Boies had interview notes with board members that the prosecution didn't request, and because the prosecutor never had these notes, they were not obliged to hand them over. Kozlowski’s and Swartz’s defence believed that these notes would prove their innocence but they lost this appeal.

Some may point to Kozlowski's second parole hearing, where he admitted guilt, but if my reputation had been as damaged as his, and admitting guilt meant the difference between spending another 17 years in jail or getting out, I would have done the same.

Kozlowski was released in 2014 after serving just over 8 years, while Swartz was released a few months earlier in October 2013.

I have significant issues with Kozlowski and Swartz's convictions. While there are definitely holes in their testimony, there are also substantial holes in the board's credibility. It's very hard for me to see where the criminal intent was in this case.

I've read numerous books on corporate scandals, and the red flags you'd expect to see simply didn't exist here. Not a single employee who worked under Kozlowski testified that he ever asked them to lie or hide anything. Even the board members had to admit that they were never denied any information they requested.

The amount they're accused of stealing matches exactly the bonuses they were due, and the company publicly disclosed what it paid the executives, with these totals derived from formulas agreed upon in advance. Apart from one instance where profits had to be restated (still within Generally Accepted Accounting Practices), no financial irregularities were found. No one in either trial testified that there was anything different in how the four disputed bonuses were paid, processed, or accounted for compared to all the other bonuses.

The analysis of why Kozlowski and Swartz lost their case is multi-faceted. The combination of factors – the post-Enron environment, Kozlowski's tarnished image, and Tyco's poor corporate governance and record-keeping practices – created a perfect storm that made it difficult for the defendants to overcome the prosecution's case, despite the holes in the board's credibility.

Kozlowski undoubtedly bears some responsibility for the sloppy corporate governance and the blurring of lines between personal and company finances. As the CEO and Chairman, he set the tone for the company's culture and practices. His aversion to bureaucracy and desire for rapid growth may have contributed to the lack of proper documentation and oversight.

As Kozlowski himself said, Tyco went from childhood to adulthood without passing through the adolescent stage and so internally, they hadn’t set up the systems and processes, the layers of bureaucracy for want of a better word, that are necessary in big instructions to prevent the type of conflicts that occurred during his reign - they lived with an “it has always been done this way” mentality, and this definitely contributed to his downfall.

David Boies' role was crucial in the outcome of the case. As the board's attorney, his primary objective was to protect their interests. By working with the DA to secure Kozlowski's conviction, Boies effectively shielded the board from the potential fallout of the $412 million retention deal. The $45 million fee paid to Boies over three years seems justified, considering the high stakes involved and the outcome he delivered for the board.

The fact that Tyco eventually had to settle civil cases resulting in over $3 billion being paid to shareholders underscores the complexity of the situation. However, these settlements occurred years after the event and in a different corporate climate. During the immediate post-Enron era, the public sentiment was heavily against high-profile executives, making it easier for the prosecution to build a case against Kozlowski and Swartz.

Boies did a great job for the board at that time, but at what cost to Kozlowski and Swartz, and at what cost to justice?

In conclusion, while there were credibility issues on both sides, the unique combination of factors at play – the public sentiment, Kozlowski's image, and Tyco's corporate governance failures – tipped the scales in favour of the prosecution. The case serves as a cautionary tale for executives and companies about the importance of maintaining proper documentation, clear boundaries between personal and company finances, and robust corporate governance practices.

Sources

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