The Rise and Fall of Dennis Kozlowski
With every passing month, Tyco International Ltd.'s (TYC ) Leo Dennis Kozlowski looms larger as a rogue CEO for the ages. His $6,000 shower curtain and vodka-spewing, full-size ice replica of Michelangelo's David will not be soon forgotten. At the office, too, Kozlowski's excess was legendary. He was the most prolific corporate acquirer ever, gobbling up 200 companies a year--nearly one every business day--at the height of his hyperactivity. If Wall Street saw Tyco's seventyfold increase in market cap under Kozlowski as proof of his genius, who was he to disagree? In 2001, Kozlowski proclaimed his desire to be remembered as the world's greatest business executive, as a "combination of what Jack Welch put together at GEand Warren Buffett's very practical ideas on how you go about creating return for shareholders."
Kozlowski's claims to greatness were shredded this year by his indictment on two sets of charges brought by Manhattan District Attorney Robert M. Morgenthau. The first startled in the pettiness of the greed it exposed: A mogul worth at least $500 million chisels New York City out of $1 million in sales tax due on fine art. But the second indictment, handed down on Sept. 12, shocked in the scale of corruption alleged. In essence, prosecutors accused Kozlowski and former Chief Financial Officer Mark Swartz of running a criminal enterprise within Tyco's executive suite. The two were hit with 38 felony counts for pilfering $170 million directly from the company and for pocketing an additional $430 million through tainted sales of stock. "My client believes that the charges filed against him are unfounded and unfair," says Stephen Kaufman, Kozlowski's lawyer. Swartz also pleaded not guilty. Both Kozlowski, 56, and Swartz, 42, declined to be interviewed.
The story of Dennis Kozlowski's rise and fall--told here more completely than ever before--is a tragicomedy for our times. The history of American business contains few figures who were unhinged by greed as theatrically as was Tyco's burly ex-boss. But perhaps because Kozlowski is so apt a symbol of Bubble Era excess, the question of why he did what he did has gone unanswered and, in fact, has rarely been raised in print. In hopes of completing the unmasking begun by the twin indictments, BusinessWeek spent three months researching every aspect of Kozlowski's life. What emerges is a portrait of a man who was at once more admirable and more deceitful than the debauched Roman emperor of a CEO that the world has come to know and disdain.
For most of the 27 years that Kozlowski worked at Tyco, he was an exceptionally enterprising and effective manager. So what happened? "The bull market made me do it" is not a defense that will play in court, but the defects of judgment and character that brought Kozlowski down did not show themselves until the Great Bubble started forming and CEOs were exalted as capitalism's 24-carat linchpins. Egged on by insatiably demanding investors, admiring analysts, and fee-hungry investment bankers, Kozlowski had become irrational exuberance personified by the late 1990s. The more he was paid in reward for Tyco's soaring stock price, the more he spent on luxuries--and the more he allegedly stole.
In the end, Kozlowski's orgy of getting and spending even warped his business judgment. After two decades of surefooted dealmaking, he closed out his tenure with a bizarre fandango of wrongheaded acquisitions and strategic U-turns that devastated Tyco's share price even before his first indictment. The $90 billion drop in Tyco's stock this year exceeds Enron Corp.'s entire market value at its peak.
In an era of rampant financial trickery, Kozlowski's misdeeds were remarkable for their brazenness. It's not that Kozlowski, who trained as an auditor, wasn't a master of financial convolution; Tyco exploited every legal accounting loophole and tax-avoidance scheme imaginable after shifting its charter to Bermuda in 1997. Yet unlike Enron, WorldCom, Global Crossing, and other fallen idols of the day, Tyco has not been charged with fraudulent bookkeeping. It is entirely possible that investigators eventually will find that Kozlowski cooked the books with the worst of them, but the crimes of which he now stands accused are not a whole lot more complicated than taking bags of cash from an unlocked vault.
Where were the guards? DA Morgenthau will not discuss the Tyco case directly but implies that it reveals fundamental flaws in American business. In the past, corporate crooks tended to act on their own, Morgenthau says. "Now, you've got a lot of people involved, and that's the lawyers, accountants, executives, the board of directors. The whole system seems to have broken down." Add business regulators to Morgenthau's list. The Securities & Exchange Commission did not get around to investigating Tyco until early 2000 and did not find anything untoward when it did. The press, including BusinessWeek, also bears some blame for generally portraying Tyco as a lean and mean profit machine.
Kozlowski appeared on this magazine's cover for the first time in 2001, under the headline "The Most Aggressive CEO." A bruiser in pinstripes, "Koz" certainly looked the part: the CEO as middle linebacker. But it is apparent now that he was every bit as cunning as he was aggressive. Says a source close to Tyco's board: "Dennis doesn't come out and tell you how smart he is. He talks with you and gives you the feeling he is learning from you. That is the art of seduction. He's not an intimidator; he's a seducer."
There are not many native-born Americans who literally cannot go home again, but Dennis Kozlowski is one of them. The west-central Newark neighborhood in which he grew up in the 1950s and 1960s was demolished virtually in its entirety during and after the race riots of 1967. Where the two small apartment buildings that were home to the Kozlowski family--568 South 10th Street and 605 South 19th Street--once stood, all you will find now are weed-filled vacant lots.
Kozlowski has frequently described himself as the son of a Newark cop turned police detective. In writing about Tyco's CEO, this seemingly simple statement often has been used to imply not only that he sprang from humble circumstances but also that he was home-schooled in an emphatic moral code, that right was right and wrong got you arrested. However, it turns out that Leo Kelly Kozlowski, Dennis' father, never was a police officer in Newark or anywhere else. It was Dennis' mother, Agnes, who worked for the Newark Police Department--but as a school crossing guard. Journalism is not psychoanalysis. But you don't have to put Dennis on the couch to conclude that the shadowy, even paradoxical figure of Leo Kozlowski is the key to understanding his wayward son.
A second-generation Polish-American, Leo Kozlowski started out as a reporter for the Associated Press, boxed under the name "Kid Kelly," and even rode with a polo team owned by tobacco heiress Doris Duke. But by the time that Dennis was born in 1946, Leo had taken full-time work as an investigator with Public Service Transport, a privately owned predecessor company to New Jersey Transit. Kozlowski did not tell people what he did for a living for fear that it would inhibit his ability to ferret out false accident claims brought against his employer, says his close friend Peter C. Pietrucha, a retired lawyer. "A lot of people who knew Leo did not know what he did," says Pietrucha, who provided Kozlowski with his cover, telling all who asked that Leo worked as his investigator.
According to Pietrucha, Public Service periodically loaned out Kozlowski to the FBI for special assignments, including the infamously violent 1968 Democratic national convention in Chicago. Leo also moonlighted as a prosecutor's detective--not in Newark, but in adjacent Bergen County--and "had a couple of bullets in him to prove it," Pietrucha says.
At the same time, Leo also had a second career as a kind of Newark ward heeler, delivering the Polish vote to Republican candidates. The longtime president of the Polish American Republican Club of New Jersey, Kozlowski was familiar to generations of GOP candidates for local and state office. "Leo was sort of a wheeler-dealer, I guess," says Stanley Grabowi, who knew Leo from the local "nest" of the Polish Falcons of America. (Kozlowski was the group's treasurer.) "He was not a guy to make speeches, but he did have a strong personality. When Leo was around, you knew it, let me put it that way." Not everyone took to Kozlowski, who was more arm-twister than charmer. "I remember him as a hard man, not a nice friendly person that you could talk to," says the Reverend Bogumil Chrusciel, the pastor at St. Stanislaus, a Catholic congregation that is still functioning in the Kozlowskis' old neighborhood.
The bottom line on Leo Kozlowski is that he was both a practiced deceiver and a public persuader--a dichotomy that also would come to define his CEO son, albeit in a much less benign way. "Leo was straight up and up," Pietrucha says. "I'm surprised about Denny, but what can you do?"
Both Pietrucha and Grabowi say that Leo, who died in 1990, was hugely proud of his son's accomplishments in business. For his part, Dennis lauded his father in an interview with BusinessWeek in 2001 as a diligent provider "who worked his whole life until he retired at 65." However, he also mischaracterized Leo as a Newark cop.
The most striking thing about the young Dennis is how little he seemed to resemble his hard-nosed father, except physically. Friends from the neighborhood and from school remember him as an easygoing, even comical kid who did well in school without ever breaking a sweat. Elected "class politician" by his graduating class at West Side High in 1964, Kozlowski was as popular with his black classmates as his white ones. "Koz had a great heart," says Fred M. Dowling, who says it would have been dangerous for him to set foot in Kozlowski's neighborhood, and vice versa. "Tell him that he has friends from high school who've got his back."
Kozlowski went on to Seton Hall University, a Catholic school in South Orange, N.J. He continued living with his parents but paid his own way through school by playing electric guitar in a band, among other gigs. An accounting major, Kozlowski pulled down B's, joined two fraternities, and again seemed content to be one of the guys. "Dennis could be extremely funny and didn't mind if the joke was on him," recalls John J. O'Reilly, one of his Delta Sigma Delta frat brothers. "In fact, he laughed even harder when it was."
Many of Kozlowski's college buddies went straight from campus to Vietnam after graduating in 1968. Reserve Officer Training Corps was mandatory during the first two years at Seton Hall, but Kozlowski opted out as a junior and a search of military records indicates that he did not serve. Kozlowski, who had earned a single-engine pilot's license while attending college, has said that he moved to Arizona after college in a fruitless attempt to find work as a commercial pilot--an account that sounds incomplete at best.
In any event, in 1970 Kozlowski took an auditing job in New York City with the conglomerate SCM Corp. Within a few years, he had moved up to director of audit and analysis for Nashua Corp., a photocopier manufacturer based in the New Hampshire city of the same name. "He was a smart young guy who could really help a business," recalls William Conway, Nashua's former CEO. "Any problem that came up in the company--in administration, selling, manufacturing--he always had suggestions about how to fix it."
Kozlowski's latent ambition really began to kick in in 1975, after a headhunter invited him to come down to Waltham, Mass., and meet Joseph Gaziano. The chairman and CEO of Tyco Laboratories was a jumbo-size, profane Massachusetts Institute of Technology-educated engineer who exaggerated the ferocity of his appearance by shaving his head weekly. Gaziano also had a taste for the high life, with a prize collection of perks including a jet, a helicopter, and three luxury apartments. Kozlowski was entranced. "He was very engaging," he recalled in a 2001 interview. "So I signed up for what I thought would be a year or two."
But by 1977, Kozlowski was so keen to advance at Tyco that he started taking night classes at Rivier College, a Catholic college in Nashua. He completed only three classes, though he claimed to have earned an MBA from Rivier in a questionnaire submitted for the 1988-89 edition of Who's Who in America--an inconsequential but prophetic deception.
Founded in 1960 as a scientific research lab, Tyco had transformed itself into a high-flying conglomerate in the 1960s by acquiring two dozen companies of all sorts. Most of the lemons among them had been divested by 1973, when Gaziano's hiring initiated a second bout of deal mania. The conglomerate structure had fallen into disfavor, but Gaziano yearned to be the next Harold Geneen, the mastermind of superconglomerate ITT Industries Inc. (ITT ) Gaziano pulled off a half-dozen big acquisitions in his decade as CEO but sabotaged his own grand ambitions by launching hostile takeover bids for too many well-defended companies. In 1982, Gaziano succumbed to cancer of the heart. He was just 47.
Gaziano was replaced by 41-year-old John F. Fort III, who also had an MIT degree but was Gaziano's opposite in every other way. A coolly analytical, abstemious New Englander, Fort rationalized the heaping pile of assets that Gaziano had haphazardly acquired, shifting Tyco's focus from growth to profits. "The reason we were put on earth is to increase earnings per share," Fort declared, to Wall Street's delight. The new CEO grounded Gaziano's air force and flew coach. At Fort's Tyco, even company cars and country club memberships were taboo.
That Kozlowski thrived under both Gaziano and Fort was a testament not only to the breadth of his talents but to his eagerness to succeed. "Gaz" was a seminal influence on Koz, who admired and to some extent emulated the older man's daring and defiant individuality. As a CEO himself, Kozlowski would share Gaziano's mergers-and-acquisitions obsession, though not his self-defeating predilection for hostile deals. Under Fort, Kozlowski transformed himself from number-crunching staff man to crack operating executive, implementing the new CEO's profits-first agenda with a vengeance.
Kozlowski made his mark as president of Tyco's largest division, Grinnell Fire Protection Systems Co. In short order, Kozlowski cut overhead to the bone, did away with 98% of the written reports required by his predecessors, and remade Grinnell's compensation system. Salaries were set low, but now each manager could earn a bonus pegged to the earnings of his profit center. He could also be fired. To emphasize the stakes, Kozlowski held a banquet at which he presented awards not only to the best warehouse manager but also to the worst one. "It was kind of embarrassing watching a guy go up," says R. Jerry Conklin, a former Grinnell executive. "It was like his death sentence."
Over the course of the 1980s, the last remnants of happy-go-lucky Koz of West Side High and Seton Hall vanished, just like the old neighborhood in Newark. As Kozlowski climbed the ladder at Tyco, what might be termed the inner Leo increasingly emerged. He now was a corporate tough guy, respected and feared in roughly equal measure.
In 1985, Kozlowski moved with his wife of 14 years, the former Angeles Suarez, and two young daughters into a $900,000 colonial-style house in North Hampton, a sylvan old-money enclave on the New Hampshire Seacoast. The Seacoast is an insular, show-me sort of place, but the Kozlowskis were quickly accepted. "They were a real pleasure to deal with," recalls Chris Moutis, a restaurant owner who has known the Kozlowskis since the mid-1980s, when he waited on them regularly. "Angie was Laura Petrie [of The Dick Van Dyke Show fame] come to life--a lovely, lovely woman."
Even as Kozlowski was out-Forting Fort as an operator, he began rebuilding the Tyco deal machine. Fire control was a mature, cyclical business, but Kozlowski transformed Grinnell into a fast-growth company by buying out its competitors one by one. Fort and Joshua Berman, Tyco's outside counsel and longtime board member, were importantly involved in negotiations, but Kozlowski "was the person who got the deals executed," recalls Robert A.G. Monks, a Tyco director from 1983 to 1994. "It was very clear these deals were value-adding....What was startling was the speed with which acquisitions were integrated into Tyco."
Fort put Kozlowski on Tyco's board in 1987 and promoted him to president and chief operating officer two years later. In 1990, Tyco made its biggest acquisition yet, paying $360 million for Wormald International, a global fire-protection concern based in Australia. Wormald proved something less than the prize it had seemed, and Tyco's dependence on nonresidential construction hurt it badly during the recession of 1991.
Oddly, this rare stumble set Kozlowski up for a power play that landed him in the corner office. In Kozlowski's view, Tyco had merely hit a few nasty speed bumps on the road to greater glory. However, Fort wanted to brake the Tyco deal express and play it safe. A rift opened between Tyco's CEO and its most talented executive. Kozlowski, then 45, made no threats, delivered no ultimatums. He didn't have to. He simply made certain that every director understood that he had ambitious plans for Tyco. "It was clear that you couldn't go on with two heads who were not really in sync," says a source close to the board. "So the board made a decision....Needless to say, Fort was not pleased."
But Kozlowski proved himself an adroit political operator, maintaining Fort as an important ally even as he took his job from him. The 51-year-old Fort resigned as CEO in mid-1992 and as chairman a few months later but agreed to remain on the board, lending credibility to Tyco's spinning of his ouster as a triumph of succession planning. Remarkably, Fort would remain a director over the next 10 tumultuous years, implicitly endorsing by his continued presence Kozlowski's increasingly radical departures from Tyco tradition.
Kozlowski's ascension to the top job at Tyco coincided with the breakdown of his marriage, which appears to have been no less a turning point in his gradual transformation from regular guy to free-spending Master of the Universe. The Kozlowskis would not divorce until 2000, but they separated some time in the early 1990s, after Dennis took up with Karen Lee Mayo, a statuesque waitress who looks a bit like the actress Kim Basinger. Kozlowski met Mayo at Ron's Beach House, a first-rate restaurant in North Hampton. Mayo, in her early 30s, was married, too--to Richard Locke, a lobsterman from an old, well-known Seacoast family. Locke had his suspicions but no proof until Karen and Koz were spotted holding hands during a U.S. Open telecast from New York.
After leaving Locke for Kozlowski, Mayo quit waitressing, acquired a beach condo and a personal trainer (who later went to work for Tyco), and began spending lots of money in Portsmouth's finest shops. Whether by choice or necessity, Kozlowski and his new paramour kept a low profile. "I never once saw them at a benefit or a restaurant opening, which are a big deal here," says one socially prominent Seacoast resident. "In fact, I never saw them anywhere."
By the time that Kozlowski and Mayo married in 2000, they had all but left the Granite State behind, preferring to divide their time among palatial homes in Boca Raton, Nantucket, Beaver Creek, Colo., and New York City, where the Kozlowskis made a short-lived foray into high society. "They might have had a social presence someday at the rate they were going, but they weren't especially good at it," says David Patrick Columbia, editor of the New York Social Diary Web site. "I mean, they bought all this art, but it was bad art. They got greedy: They wanted to do it all right away."
Kozlowski stepped up to CEO with a keen understanding of Tyco's basic weakness and a plan for fixing it. By now, Tyco was a $3.1 billion company organized into four divisions: fire protection (53% of revenues); valves, pipes, and other "flow control" products (23%); electrical and electronic components (13%); and packaging materials (11%). However, this appearance of diversity was an illusion; a staggering 80% of Tyco's revenues came from the notoriously volatile commercial construction industry. Kozlowski set out to reduce Tyco's reliance on construction and accelerate its growth by acquiring companies in noncyclical businesses.
In 1994, Kozlowski broke decisively with the conservatism of the Fort era by proposing that Tyco lay out nearly $1 billion to acquire Kendall International Inc. A 90-year-old maker of disposable medical supplies, Kendall hardly fit the profile of a growth company. Just two years removed from Chapter 11 bankruptcy, its sales were rising at a tepid 3% to 4% a year. But demand for medical supplies was robust, and Kozlowski believed that he could whip Kendall into shape. Even after Tyco's board had reluctantly assented, Kozlowski still had to persuade many of its largest investors to give him the benefit of the doubt. "I got beat up unmercifully. So I rented a house on Nantucket and spent my summer flying around to meet with shareholders," recalled Kozlowski, whose powers of persuasion again proved equal to the task.
The CEO had taken a career-making gamble and hit the jackpot. Kendall formed the nucleus of Tyco Healthcare Group, which would grow through acquisitions of its own to become America's second-largest producer of medical devices, behind only Johnson & Johnson. The addition of Kendall alone caused Tyco's earnings to nearly double in 1995, to $214 million. The board rewarded Kozlowski with a hefty raise to $2.1 million and also awarded him a big block of shares under a new restricted-stock-ownership plan. This scheme raised the bar on Tyco's compensation well above past standards, but Fort voted for it, as did every director.
Not long after the Kendall deal closed, Kozlowski promoted Mark Swartz to chief financial officer. As director of mergers and acquisitions, Swartz had played a key role in the transaction, turning around a key report analyzing its intricacies in less than 24 hours. Swartz, then 35, had joined Tyco in 1991 from Deloitte & Touche. Like Kozlowski, he was an auditor who had risen rapidly without benefit of an Ivy League degree or an MBA. Swartz not only was financially astute but more polished and analyst-friendly than Kozlowski, who happily relied on his CFO to take the lead in romancing Wall Street. All in all, Swartz developed an extraordinarily close working relationship with Kozlowski that established him without question as Tyco's second-most-powerful executive.
In mid-1995, shortly after elevating Swartz to CFO, Kozlowski persuaded his board to let him move Tyco's headquarters from Exeter, N.H., to Manhattan. High atop 7 W. 57th St., Tyco occupied offices that were lavish even by high-roller standards, with spectacular views of Central Park. But because Tyco did not publicize its new address, Koz was able to continue to promote the company's humble hunting lodge of a building on the outskirts of Exeter as a symbol of its thrift. "We don't believe in perks, not even executive parking spots," he bragged in 2001 as he squired one visitor around Exeter, long since downgraded to a backup role.
This was only half a lie. Even as Kozlowski was piling on the plush at headquarters, he set earnings goals for Tyco's operating divisions that forced them to pinch pennies. This double standard--and Tyco's strictly-by-the-numbers management--tended to antagonize the top executives of acquired companies, most of which Tyco radically shrank to boost cash flow immediately. "I think they didn't grasp the human capital issue," says Richard V. Snyder, a former executive of electronics giant AMP, which Tyco would buy for $11.3 billion in the late 1990s. Tyco "immediately gets rid of anything that it feels is not revenue-producing. It's like it buys [a company], strips out the loin, and jettisons everything else."
It was the shift of Tyco's headquarters that appears to have prompted Kozlowski to begin lining his own pocket, albeit quite modestly at first. At the CEO's urging, the board approved a standard relocation plan to move employees to New York. According to prosecutors, Kozlowski worked with several key lieutenants to set up a second, more generous subsidy scheme for themselves. Tyco's human-resources department helped Kozlowski implement the plan, which allegedly was kept secret from the board.
The additional cost to Tyco was negligible--at least until Kozlowski and his cronies began buying and furnishing expensive Upper East Side apartments on the corporate dime--but Kozlowski had nudged open a Pandora's box. With the $6 billion acquisition of ADT Security Services Inc. in 1997, he blew the lid right off the hinges.
Over the years, Kozlowski had often promised to put the CEOs of acquired companies on Tyco's board but had rarely delivered. Yet after acquiring ADT, he made room for three of its directors, including Lord Michael Ashcroft, its founder and CEO. An Englishman of great if studied charm, Ashcroft used his yacht, the Atlantic Goose, as a kind of traveling office. In his global pursuit of tax advantage, he set up ADT in Bermuda and became a naturalized citizen of Belize, even serving for a time as the tax haven's ambassador to the U.N.
Associating with a man of such bravado apparently inflamed Kozlowski's greed. He structured the acquisition as a reverse takeover, enabling Tyco to assume ADT's Bermuda registration as the first step in creating a network of offshore subsidiaries to shelter foreign earnings from U.S. taxes (page 68). Kozlowski also put Ashcroft's two colleagues on Tyco's compensation committee, which had four members all told. Tyco promptly shed the last remnants of its Fort-era restraint as it retooled its compensation policies to emulate ADT's. The changes worked hugely to Kozlowski's benefit as Tyco's stock soared. His total compensation rose from $8.8 million in 1997 to $67 million in 1998 to $170 million in 1999, ranking him second among all CEOs and far ahead of his idol, Jack Welch.
And why not? From 1997 through 2001, Tyco's revenues rose by 48.7% a year, five times faster than General Electric's, while its pretax operating margins improved to 22.1%, easily topping GE's 16.4%. One could argue that Kozlowski deserved to make more than Welch. But it appears that Kozlowski took the argument one step further, convincing himself that he deserved more money than he himself was making. Abraham Zeleznik, a psychoanalyst and professor emeritus at Harvard Business School, suggests that Kozlowski was undone by a rampant sense of entitlement: "By entitlement I mean an aspect of a narcissistic personality who comes to believe that he and the institution are one" and thus "that he can take what he wants when he wants it."
According to the indictment, Kozlowski's thievery escalated markedly after Tyco shifted 40 more employees from Exeter to Boca Raton, where ADT had a swank office. Once again, Tyco charges, Kozlowski set up an unauthorized relocation plan and also began abusing the company's Key Employee Loan Program, which had been established to help execs pay taxes due upon the vesting of restricted shares. From 1997 through 2001, the CEO allegedly used the loan program and the covert New York and Boca Raton relocation accounts like revolving credit lines, dipping into one or the other for hundreds of millions in interest-free funds.
Kozlowski laid out $29.8 million to build a mansion in Boca and an additional $30.8 million to buy and furnish an apartment on Fifth Avenue in Manhattan. He topped off his collection of airplanes and speedboats by shelling out $15 million for Endeavor, a rare 1930s-vintage yacht. He spent upwards of $20 million on fine art, including $3.9 million on a middling Renoir that he pretended to ship to Tyco's office in New Hampshire, which has no sales tax. He gave Karen $1.5 million to start a restaurant in Boca Raton, and the 40th birthday party he threw for his new wife in 2001 on the Mediterranean island of Sardinia cost $2.1 million. According to Tyco, Kozlowski misappropriated $43 million in corporate funds to make philanthropic contributions in his own name, including $5 million to Seton Hall, which named its new business-school building Kozlowski Hall.
It's an old story, but still true: Money cannot buy happiness. Bob Monks, an outspoken admirer of Kozlowski's during his tenure on the Tyco board, was working in the little office that he maintains in South Florida in January, 2002, when Kozlowski called out of the blue and invited himself over. The CEO spent a half hour with Monks discussing the latest unhappy developments at Tyco. "He seemed very distraught," Monks recalls. "And he said he was very lonely."
Why didn't a whistleblower emerge from Tyco, as happened at Enron and WorldCom? For starters, Kozlowski had a talent for designing an undercover operation, just like dad. Tyco's highly centralized structure served to severely limit the people truly in the know. The company had more than 200,000 employees, but only about 400 worked at headquarters, and not many of them regularly interacted with Kozlowski. Sources close to the ongoing investigations suggest that not even Swartz was fully apprised of the CEO's machinations. "There were probably from 5 to 10 other people who knew that something was up," says one such source. "But the extent of their knowledge varied greatly." One of the most knowledgeable was Patricia A. Prue, Tyco's top-ranking human-resources manager. Prue has received immunity from prosecution, according to the New York Times.
Kozlowski also used Tyco's extraordinarily generous bonus system to co-opt many key executives at headquarters and in the field. In effect, he twice bought the loyalty of the most strategically positioned employees, cutting at least 50 of them in on his under-the-table largesse. It is not clear how many of them understood that their relocation perks and "special bonuses" may not have been approved by the board. But Mark Belnick, a respected New York lawyer whom Kozlowski lured to Tyco in 1998 to serve as general counsel, allegedly signed a secret employment contract tying his compensation to the CEO's. According to Tyco, Belnick was paid a staggering $20 million in 2000 and also dipped into the covert New York relocation loan program for $10 million to buy and renovate a home in Park City, Utah, for his wife and son. Belnick was indicted along with Kozlowski and Swartz but charged only with falsifying business records. He has pleaded not guilty.
In December, 1999, the SEC began an investigation into Tyco's handling of some 120 acquisitions. The following summer, however, after an exhaustive yet narrowly focused probe, the agency sent a letter informing Tyco that it was not taking action. The SEC's terse statement hardly qualified as an endorsement, but Tyco encouraged this interpretation. This close call seems to have emboldened Kozlowski to the point of recklessness. Within months, he had forgiven some $100 million in outstanding relocation loans, and for the first time he began publicly touting Tyco as the second coming of GE.
In 2001, Kozlowski took his emulation of GE to a ruinous extreme in acquiring CIT Group for an outlandish $9.2 billion. The notion of buying CIT, the poor man's GE Capital, originated with Tyco board member Frank E. Walsh Jr., who was friendly with Albert R. Gamper Jr., CIT's CEO. Dipping into his seemingly bottomless slush fund yet again, Kozlowski paid Walsh, a fellow Seton Hall alum, a $20 million fee for a deal that would prove a flat-out disaster. (Tyco would divest CIT in 2002, booking a total loss of about $7 billion.)
Tyco's other directors did not learn of the payment to Walsh until Jan. 9 of this year--about six months after it was made--when Swartz mentioned it in a rough draft of a proxy statement. "Everything changed," says one well-placed source. The board suddenly was "confronted with the reality that, my God, this guy is doing things that we don't know about." When the board challenged him, Kozlowski claimed that he had made an innocent mistake--but at least had talked Walsh down from the $40 million he had initially wanted. Walsh refused to give the money back and left the board. Tyco sued Walsh and brought in the lawyer David Boies and his firm to start turning over every rock. Walsh declined to comment.
On Jan. 16, Kozlowski called his directors to Boca Raton to discuss a desperate plan to boost Tyco's sinking share price by breaking the company into four parts. The directors had their doubts but gave their approval four days later at a board meeting in Bermuda. The plan "will release value," Kozlowski predicted with a touch of defiance in an announcement on Jan. 22. "We believe there is over a 50% upside compared to [Tyco's] current market value." But the hastily concocted plan both puzzled and alarmed investors, who feared that Tyco was running short of cash. Within a few weeks, CIT effectively had been frozen out of the commercial paper market, forcing it and Tyco to draw down more than $13 billion in bank lines. By early March, Kozlowski "was a changed person," says one Tyco insider. "Normally, he is very decisive, but now he was like a deer caught in the headlights."
In April, investors were flummoxed again when Kozlowski performed yet another about-face. Tyco was going ahead with the CIT sale, but not the bust-up, he said, prompting more catcalls from the Street. "We now know that it was a mistake," he admitted in an abject letter to shareholders. "I take full responsibility." A majority of directors now were convinced that Kozlowski had to go, but there was disagreement about when to act. By early May, Kozlowski could feel the noose tightening. Belnick had been notified of Morgenthau's rapidly advancing investigation into the sales-tax allegations. But in public, anyway, Kozlowski maintained a brave front. On May 9, at his request, he met with the editors of BusinessWeek, insisting that he would never resign as CEO. And on a snowy Saturday morning a week later, he delivered a commencement address at St. Anselm College, a small Catholic college in Manchester, N.H., to which Tyco had given $1 million. "As you go forward in lifeyou will be confronted with questions every day that test your morals," Kozlowski said. "The questions will get tougher, and the consequences will become more severe. Think carefully, and for your sake, do the right thing, not the easy thing."
In the end, it was Morgenthau who forced the issue. On May 31, a Friday, Kozlowski told his board that he was about to be indicted. On Sunday, June 2, the board demanded their CEO's resignation. Kozlowski complied without a word of argument or explanation. "He was devastated," says one colleague. Just two days later, a flustered and angry Kozlowski appeared on television screens all over America, as bailiffs led him into the courtroom for arraignment on the tax-evasion charges.
Kozlowski's tale is far from finished, but already it is clear that his fate and that of the empire he created have diverged. Many investors and other observers believe that Tyco has a future, though new CEO Edward D. Breen Jr. and his management team still must work their way through the massive debt left behind by Kozlowski and cope with the continuing investigations into Tyco's accounting and tax policies. No one believes that Tyco will ever regain the high growth rates or massive market cap that it achieved under Kozlowski. But most of the businesses that he built up--including health care and the security unit that includes ADT--seem likely to survive and prosper, albeit as part of a far more conventional corporation.
Kozlowski's future is much grimmer. No doubt he will mount a vigorous defense in court. But if he's found guilty, he'll face as much as 25 years of hard time in the New York prison system, not a Club Fed. Even if he is acquitted, history's verdict will not be kind.
In some ways, Kozlowski actually outdid Welch, his idol. Certainly, he transformed the third-rate conglomerate that he inherited to a greater degree than Welch changed GE, which was renowned as America's best-managed corporation long before "Neutron Jack" happened on the scene. But Kozlowski ended up betraying his own talent and the company to which he devoted almost his entire career. It has been a steep and humiliating descent for the man who once vowed to become the greatest CEO ever.
Read a Letter to the Editor about this story.
By Anthony Bianco, William Symonds, and Nanette Byrnes
With David Polek in New York