The case against three former Tyco International Ltd. executives accused of looting the company could boil down to a blame game between the board of directors and the defendants, legal experts say.
Tyco documents show some board members knew of certain loans to top executives, knowledge which could help the defense. But those documents also include details of extravagance in how the money was spent, and that could hurt the defendants, according to former federal prosecutor Gregory Wallance.
“They’re bringing the charges in the middle of a climate of public outrage at executives pigging out at the expense of investors,” Wallance said. “The sheer magnitude of the money is going to be a problem for the defense.”
A recent Tyco filing with the Securities and Exchange Commission said former chief executive Dennis Kozlowski, former chief financial officer Mark Swartz and former general counsel Mark Belnick enriched themselves at the company’s expense. The company also has filed a civil suit against Kozlowski, seeking $730 million.
Prosecutors have accused Kozlowski and Swartz of stealing $600 million from Tyco, and both are charged with enterprise corruption and grand larceny. Belnick was charged with falsifying business records to conceal $14 million in improper loans.
The three men have pleaded innocent, and their lawyers have said any money they received was approved.
The king of excess was Kozlowski, Tyco maintains. One example cited by the company: a $2.1 million birthday party Kozlowski threw last year for his wife, Karen, on the Italian island of Sardinia. In documents filed with the SEC, Tyco says it footed half the bill.
Among the documents is an e-mail from Kozlowski to friends that listed an itinerary for the bash, characterized by indulgence and a touch of decadence.
“We have a lion or horse with a chariot for the shock value,” the e-mail says. “The guests come into the pool area, the band is playing, they are dressed in elegant chic. A waiter is pouring … vodka into his back so it comes out his penis.”
The party also would feature waiters, dressed in linen togas and wearing fig wreathes on their heads, passing out cocktails in chalices, and a pool decorated with floating candles and flowers.
“At the end, Elvis is on the screen wishing K a happy birthday and apologizing that he could not make it,” Kozlowski wrote.
The documents accused the executives of buying homes and luxury items with Tyco money, and Kozlowski in particular of giving $43 million of Tyco’s money to charities in his own name.
In another e-mail the company released, Kozlowski wrote to the president of the Shackleton Schools in Boston that he was pledging $1 million to the organization because he was impressed by its educational motto, “One Leader at a Time.”
The e-mails will prove highly useful to prosecutors in a trial where a jury is likely to include average wage-earners, said Jerry Reisman, a corporate fraud lawyer in Garden City, N.Y.
“It’s going to be difficult to overcome that image to such a jury,” he said.
Reisman said the three men are likely to argue that the years they spent building Tyco into a huge conglomerate left them entitled to money and perks.
“Kozlowski’s argument is going to be, `I built this company into a billion dollar company as chief executive and I have to maintain a certain lifestyle, which entitles me to have a fabulous home on Fifth Avenue and have parties on Sardinia,’ ” Reisman said.
“He’s further going to argue that this has been done routinely by large public corporations throughout the United States,” he said.
New York prosecutors have said they believe Tyco’s directors were misled by Kozlowski, Swartz and Belnick. But minutes from a Feb. 21 Tyco board meeting contradicted company statements to federal regulators last week that board members didn’t know about excessive pay packages allegedly arranged by Kozlowski.
Also, a source familiar with the investigation has said Tyco’s head of human resources, Patricia Prue, told company lawyers and investigators she was asked to rewrite committee meeting minutes to omit critical details.
New Hampshire regulators, in a letter Wednesday to Tyco, urged the company to force the nine board members who served under Kozlowski to resign. The regulators accused directors of failing to properly oversee Tyco’s financial affairs.
John Moscow, the prosecutor in New York who is handling the criminal case, said in an interview that the board could not be blamed for the executives’ actions even if it failed at its oversight duties or kept some important facts hidden from shareholders.
“When the board started asking questions, they got answers,” he said. “They did not disclose those answers. Whether they should have is not my problem.”
Still, Wallance, the former prosecutor, said the case will come down to whether the executives were authorized to take the money. “The government must prove that they helped themselves to the cookie jar and didn’t notify the board of directors, the custodian of the cookie jar,” he said.
“The defense is going to show that they did have approval, either pre-existing or they ran it by the board and nobody objected,” he said. “That could create a reasonable doubt in the minds of the jurors.”