Read Taking Down the Lion: The Rise and Fall of Tyco's Dennis Kozlowski Online
Authors: Catherine S. Neal
Tags: #Biography & Autobiography, #Dennis Kozlowski, #Nonfiction, #Retail, #True Crime, #Tyco
The Tyco Board of Directors
Many of the troubles Tyco and Kozlowski faced in 2002 stemmed from the Board of Directors—how things were done, and had always been done in Tyco’s boardroom. When he testified during Kozlowski’s trials, Frank Walsh made it clear that in addition to the investment banking fee, he had other related-party transactions with Tyco—dealings that long predated the 2001 CIT acquisition. He spoke specifically of chartering two aircraft to the company for around seven years. When asked if others at Tyco knew of the arrangement under which a company Walsh owned benefited from Tyco’s charter payments, Walsh said, “It was no secret, most everyone was aware of it, everyone on the Board were [
sic
].” When Assistant District Attorney Scholl asked him how the people on the Board were made aware of the arrangement, Walsh said, “Many of them were transported on this plane and when we came to Board meetings, the plane was usually there along with other private aircraft and everybody knew it was, knew what the arrangement was, knew it was indirectly my plane.”
15
He did not mention in his testimony any formal disclosure of the charter payments to the Board. How could Walsh have known when the bye-laws were to be followed and when it was okay to disregard them? How would he have known the investment banking fee had to be disclosed when other related-party transactions did not? The expectations of Board members were wildly inconsistent.
That’s how the Tyco directors functioned (or dysfunctioned). Before Enron, formalities were hit or miss. Maybe they followed procedures. Maybe they didn’t. Maybe they expected the bye-laws to be followed. Maybe they didn’t. Maybe they read company policies and SEC filings. Maybe they didn’t. Maybe they recorded minutes of committee meetings. Maybe they didn’t. Maybe they knew how the CEO and CFO were compensated. Maybe they didn’t. Maybe they read the half-billion dollar retention agreement they entered into with Dennis Kozlowski in 2001. Maybe they didn’t. As their former CEO and CFO were being tried for serious crimes, including theft of the investment banking fee paid to Frank Walsh, the Tyco Directors’ testimony was telling:
I don’t know if, I don’t know when, I don’t know what the bye-laws require, I may have, I may not have, we may have, we may not have, I don’t know what he said, I don’t know when he said it, I didn’t read that document—it was voluminous.
The shockingly frequent response of Tyco Directors on the stand, under oath, during the criminal trials of Kozlowski and Swartz was “I don’t recall.” It’s difficult to understand how two men were stripped of a decade’s worth of earnings and thrown into prison on the strength of “I don’t recall.”
Many of the Directors either didn’t know or didn’t care that their counterparts on the Board had extra-directorial relationships with Tyco; a number of Directors
received money from Tyco for a variety of reasons over many years, and those relationships predated Kozlowski’s tenure as CEO. During Kozlowski’s first criminal trial, former Tyco Director Richard Bodman was asked if Joshua Berman disclosed to the Board all of the legal fees Tyco paid to Berman’s law firm over many years—”[I]sn’t it true that the board of directors never voted to make any of the payments that were made to board of director member Josh Berman, that you didn’t know about until 2002, isn’t that true?” Bodman replied under oath, “That may well be true. I really don’t know the answer to that.”
16
It’s unfortunate that Bodman didn’t see the announcements on Kramer Levin’s website in which the firm touted its long-standing relationship with Tyco and publicized its representation of the company in multi-million and multi-billion dollar acquisitions—Tyco Director Joshua Berman was listed on the website among the Kramer Levin attorneys who sold their legal services to Tyco.
During the January 16, 2002 huddle, after a number of Directors made it known that the Frank Walsh payment was a serious problem for them, Dennis Kozlowski offered his resignation.
17
Kozlowski told the Directors if they thought his effectiveness had been seriously eroded by the Walsh transaction, he would leave the company. But the Board didn’t want Kozlowski’s resignation.
18
Clearly, the Directors didn’t believe Kozlowski had done anything wrong, and certainly not anything criminal. If they did, they would have seriously violated their duties to Tyco shareholders by allowing him to remain in the most powerful position in the company. In her decision in
Tyco v. Walsh,
Judge Cote found that “[a]s of January 16, the board still had great confidence in Kozlowski’s leadership of Tyco and therefore the board chose not to pursue the issue of the payment to Walsh any further.”
19
By the end of January of 2002, all appeared to be forgiven. The Directors didn’t continue to chastise Kozlowski about the Walsh payment and the CEO’s attention returned to running the company. Kozlowski put the Walsh controversy behind him and focused on breaking up Tyco and on selling CIT. Director Peter Slusser wrote a supportive letter to Kozlowski on January 28, 2002:
Dear Dennis:
This letter is to restate my hundred percent support for the split up of Tyco.
Your logic is very clear. The parts are worth more than the whole. The odds are very high that this result will be proven as these businesses operate on their own. The split up is a brilliant move, and your shareholders will be well rewarded.
If you need additional directors for the spin-off of companies, I would like to put my hat in the ring.
Your corporate move is bold and it will reward your shareholders.
All the best,
Peter Slusser
20
On February 6, 2002, Slusser sent another letter to Kozlowski in which he wrote:
Dear Dennis:
The Annual Report for 2001 was outstanding.
You and your management continue to do a terrific job for your shareholders under difficult conditions.
Keep moving ahead.
All the best,
Peter Slusser
21
On February 19, 2002, Slusser sent yet another letter, this one addressed to both Kozlowski and Mark Swartz, in which he wrote: “You two did a terrific job on your analyst telecast today. Stick with your program. Tyco and its shareholders will win in the end. All the best, Peter.”
22
Slusser was not the only supportive Director. On February 21, 2002, during a Special Meeting of the Board of Directors in Pembroke, Bermuda, the Tyco Board passed a resolution to formally designate Tyco’s executive officers as required by the SEC.
23
NOW, THEREFORE, be it
RESOLVED that the Company hereby designates the following persons as “executive officers” and as officers for purposes of Section 16 of the U.S. Securities Exchange Act of 1934:
L. Dennis Kozlowski Chairman, President and Chief Executive Officer
Mark H. Swartz Executive Vice President and Chief Financial Officer
Mark A. Belnick Executive Vice President and Chief Corporate Counsel
24
The Directors wouldn’t have formally designated these men executive officers in fulfillment of federal securities law requirements if they had any suspicion that the payment to Frank Walsh was wrongful, would they? They wouldn’t have reaffirmed Kozlowski and Swartz in the top two spots in the company if they didn’t trust them.
In May of 2002, Director Peter Slusser once again gave Kozlowski a formal pat on the back. In a letter regarding an interview Kozlowski gave to Dow Jones on May 8th, Slusser wrote: “Dennis, Great job on your interview. $2.60 to $2.70 per share would be terrific for this fiscal year. In addition, your shareholders need your leadership for at least seven more years. Keep up the good work. Peter”
25
Seven more years—the length of time to which the company and Kozlowski agreed in the Retention Agreement signed a year earlier.
The Tyco Board of Directors met many times after the volatile January 2002 huddle. There were official meetings in February, March, April, and May of 2002. Over five months, and in all of those hours together, there were no suggestions that Kozlowski had done anything harmful, there were no discussions about ousting him, and the Board did not ask him to resign.
26
As Judge Cote observed in her opinion in
Tyco v. Walsh,
it was “hardly the kind of treatment that one would expect if the board were disavowing or even questioning the payment.”
27
But by the time Tyco Directors took the stand in Kozlowski’s criminal trials (they were
former
Directors by the time the first trial began), they seemed to have revised history. During his sworn testimony, former Tyco Director Richard Bodman said that once he learned of the payment to Frank Walsh in January of 2002, he considered Dennis Kozlowski untrustworthy and knew him to be a thief. When he was asked why the Board didn’t accept Kozlowski’s resignation when offered, why they didn’t ask for his resignation during the months following the January 2002 meeting, Bodman testified, “I was spending a great deal of time gathering facts along with other directors so that we knew exactly what difficulties we were facing.”
28
When asked if the $480 million Retention Agreement had anything to do with the delay in making decisions, Bodman testified that as of January 2002, he had never seen the agreement the Board had entered with Kozlowski a year earlier, and needed to read it before he made decisions about how to proceed. Bodman said under oath:
If we let Mr. Kozlowski go in an improper fashion or a fashion that suited him in that retention agreement, we might have owed him a great deal more of the shareholders’ money. And it didn’t make sense to me, wasn’t proper to me that a man should be paid more of the shareholders’ money on top of the money that he had already stolen from the company. So I said, among the other directors, we all sat down to review that agreement to make sure we knew what the conditions were. These are not agreements that are a sentence or two. They’re long. They’re
substantial. And they have tricky words in them. And in the end we were successful in accepting Dennis’ resignation without an obligation to spend more of the shareholders’ monies to get him out of there. It took awhile.
29
The Retention Agreement contained one provision that gave the Directors a way out of performing everything promised in the contract. Under the terms of the contract, if Kozlowski was terminated “with Cause,” the company would have no further obligations to him. “Cause” was defined as Dennis Kozlowski’s “conviction of a felony that is material and demonstrably injurious to the Company or any of its subsidiaries or affiliates, monetarily or otherwise.”
30
Is that what Bodman suggested in his testimony? Did the Tyco Board read the terms of the Retention Agreement and discover there was just one way to get rid of Kozlowski?
Bodman was questioned about the rationale and wisdom of the Board’s delayed plan to address the Walsh payment:
Q. And so you waited for four or five months, and worked with this thief during that period, correct, yes or no?
A. Yes.
Q. And you let the thief do other transactions in the name of Tyco during that period, yes or no?
A. Yes, we did.
Q. And you met with the thief three times in board meetings during that period and dealt with him, yes or no?
A. Yes, I did.
31
After the first trial ended in a mistrial, the Manhattan DA opted not to call Richard Bodman as a witness during the second trial.
* * *
In December of 2002, the SEC decided to bring a civil action against Frank Walsh for violating federal securities laws when he signed a registration statement that he knew contained material misrepresentations—i.e., the Form S-4 that disclosed investment banking fees going to Goldman Sachs and Lehman Brothers during the CIT acquisition with no mention of Walsh’s fee. The case was settled before it was filed. Walsh, without admitting or denying the allegations in the SEC’s complaint, consented to the entry of a final judgment that permanently barred him from acting as an officer or director of a publicly traded corporation and ordered him to pay Tyco restitution of $20 million (with an offset for any restitution he might have to pay as a result of a 2002 criminal action brought by the Manhattan DA—
People v. Frank E. Walsh,
Jr.
).
32
On December 17, 2002,
People v. Frank E. Walsh, Jr.
ended when Walsh pleaded guilty to a violation of New York General Business Law, agreed to pay $20 million
in restitution to Tyco, agreed to pay a $2.5 million criminal fine to the State and City of New York, and agreed to pay $250,000 to the Manhattan DA “in lieu of fines.”
33
His plea agreement did not require prison time. Walsh reportedly gave his allocution to the court and then handed an envelope with $22.5 million to prosecutors in satisfaction of the criminal penalties assessed.
34
Walsh was the first and perhaps the only corporate director to be charged with a crime related to any of the Enron-era scandals.
35
Walsh’s legal woes did not end with the SEC action and the criminal charges levied by the Manhattan DA. On June 17, 2002, Tyco filed a civil action against Walsh in federal court seeking recovery of the investment banking fee. The case was filed more than five months after the huddle in Boca Raton. After Walsh was ordered in December of 2002 to repay the $20 million as part of his criminal sentence, Tyco didn’t drop its lawsuit, even though the company received the relief they sought in the action. Instead, Tyco demanded interest on the $20 million (the $10 million he received and the $10 million that went to charity) from the date Walsh received payment, and the date Tyco made the contribution to the charitable organization, until Walsh pleaded guilty and paid restitution on December 17, 2002. (Tyco demanded interest from July 19, 2001 to December 17, 2002 at nine percent interest). In other words, Tyco demanded $4,286,084.81 in interest. The company also asked the court to order Walsh to pay Tyco’s attorney’s fees.
36