Commentary: Will Kozlowski Beat This Rap?

By Gary Weiss

If ever a top executive seemed destined for a swift conviction and lengthy prison term, it would be Tyco International Ltd.'s former chief executive, L. Dennis Kozlowski. The allegations against him and two other Tyco executives, spelled out in Securities & Exchange Commission filings, lawsuits, and a Sept. 12 indictment by a New York State grand jury, are the stuff of tabloid headlines. But do the $6,000 shower curtains and allegedly improper loans add up to criminal conduct?

Not necessarily. Contrary to all the publicity, legal experts say Tyco's chief and his two fellow defendants may be able to thwart some of the most serious charges of corporate looting. For one thing, BusinessWeek has learned from persons familiar with the defendants' legal strategies that Kozlowski has a possible ace in the hole--authority under the law of Bermuda, where Tyco is incorporated, to make expenditures of up to $250 million without board approval, with even higher limits for acquisitions. Such a defense, if it prevails, could have implications for the growing numbers of U.S. companies incorporating there.

That's just one of the problems facing prosecutors in pursuing their cases against Kozlowski, former Chief Financial Officer Mark Swartz, and ex-chief corporate counsel Mark Belnick. Marcel Kahan, a professor of corporate and securities law at New York University, says there are two key questions: "Were the payments properly authorized? And if not, did [Kozlowski] know he was taking money he was not entitled to?"

Neither issue is a slam dunk for prosecutors. Tyco, in an internal investigation conducted by attorney David Boies, maintained that none of Kozlowski's abusive practices were authorized by or known to the board. Repeated calls to a Tyco spokesman requesting comment were not returned, but the company has maintained in lawsuits that Kozlowski's actions were illegal under Bermuda law. Kozlowski's lawyer, Stephen Kaufman, calls the charges against his client "unfounded and unfair." Lawyers for Swartz and Belnick say their clients committed no wrongdoing and had proper authorization for their actions.

Proving criminal intent could prove equally thorny. Lawyers note that Kozlowski could claim that his brand of corporate extravagance was not out of line with the widely publicized company-paid lifestyles of other CEOs--such as the lavish retirement package of former General Electric CEO Jack Welch.

Of course, the prosecution has some possible trump cards as well. In June, Kozlowski was indicted on sales-tax evasion charges that may prove difficult to shake. Cooperating witnesses could flesh out the DA's case. And a potential prison term in a tough New York penitentiary is often enough to induce guilty pleas in return for lighter sentences.

But even if prosecutors win, that will not put to rest the questions surrounding Tyco. "Where was the board of directors? Where were the auditors?" says Mark Connolly, New Hampshire director of securities regulation, whose office is probing Tyco. Those are far more serious questions than whether or not three men go to jail.

Weiss covers corporate crime.

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