Drawing Battle Lines in the Tyco Trial

The prosecution portrays Dennis Kozlowski and Mark Schwartz as corporate thieves. They earned every penny, insists the defense

By Nanette Byrnes

Former Tyco International CEO Dennis Kozlowski sat solemnly in the defendant's chair as his trial opened on Oct. 7. But as the lawyers presented their opening arguments to the jury, exorbitant CEO pay went on trial with him. At issue: Is the $170 million prosecutors claim Kozlowski and co-defendant Mark Schwartz siphoned from Tyco (TYC ) a case of larceny or justly earned, legitimate compensation?

New York Assistant District Attorney Kenneth Chalifoux told the jurors he would prove that Kozlowski, unsatisfied with hundreds of millions he received in unquestioned compensation, went on to steal millions more from Tyco shareholders. And though Chalifoux told the jury that Kozlowski's lifestyle wasn't on trial, he peppered his two hours of remarks with examples of the CEO's financial indulgences, such as having a full-time limo driver on call in New York, buying Harry Winston jewelry, boats, homes, and of course, throwing a now-infamous birthday party for his second wife, Karen, on the island of Sardinia.

Chalifoux, clean cut and youthful, made the state's case sound a bit like a rowdy house party by two unsupervised teens that went wildly out of control. He described Tyco as a corporation where communication was tightly controlled by Kozlowski and Schwartz, and where the board heard only what these two allowed to be shared.


  The pair forged a close-knit bond, according to Chalifoux, traveling together and investing in the same assets. They showed one face to analysts, investors, and even journalists, all the while hiding that they were splitting the take -- always two parts to Kozlowski, one to Schwartz. The plan became a way of "robbing Peter to pay Peter," Chalifoux said. "It was a calculated scheme that lasted for years."

When it was his turn to speak, Kozlowski's defense lawyer, Stephen E. Kaufman, offered a spirited rebuttal. Sure, Kozlowski made a lot of money, Kaufman argued, but he deserved it. The defense counsel recounted his client's personal history, painting Kozlowski as a modern-day Horatio Alger who rose from modest means to the top of the corporation through hard work and pluck. He paid his way through school working as a guitarist in a rock band, eventually landing at Tyco a few years after graduation, marrying a girl from the Bronx, and building a remarkable track record of business success, Kaufman told the jury.

Besides, Kozlowski did a great job, Kaufman declared, and deserved his paychecks. And in a plea for empathy that echoed Richard Grasso's defense of his $148 million compensation package as chairman of the New York Stock Exchange, Kaufman said Kozlowski even turned down additional pay the board wished to lavish on him.


  Loan programs that prosecutors allege Kozlowski abused may have been intended "primarily" to cover taxes owed on exercised share grants, but they weren't exclusively for that purpose, Kaufman told the jurors. Everything was noted clearly in the company books and reviewed by the outside auditor. "There's no second set of books," Kaufman said. "Criminals act in criminal ways, and these people did not."

Throughout the prosecution's case, Kozlowski and Schwartz sat at their respective tables, their jaws locked, their eyes serious, watching the jury. But as Kaufman spoke, Kozlowski at last allowed a smile.

Key to the trial will likely be the testimony of Tyco board members who were charged with setting executive pay. Prosecutors are expected to introduce as evidence minutes of the compensation committee's meetings. They say the minutes lack any reference to Kozlowski's and Schwartz's extraordinary compensation, buttressing their contention of financial subterfuge.


  The defense made much of one deceased board member, Phil Hampton, who Kaufman said he wishes he could call in defense. But of those who will testify, Kaufman tried to plant doubts about their testimony from the get-go. He wondered why they would turn against Kozlowski now after lavishing such praise on him in the 1990s and "stuffing money in his pockets."

The defense lawyer even compared them to Yankee fans who suddenly turned into Boston Red Sox fans after the Yanks beat the Minnesota Twins. In New York, those are fighting words.

Even as Kaufman tries to humanize his client, he faces a daunting challenge: Can he convince the jury that Kozlowski is just like them and not a sordid example of all the greedy CEOs who failed a generation of investors. "There's a danger of this trial being a form of vengeance," he said, "a form of retaliation."

Not just, perhaps, against the men who ran a conglomerate of fire-safety products, alarms, and medical devices, but against the simple concept that $170 million in bonuses, loan forgiveness, and other extra perks could possibly be considered decent pay, let alone legitimate. The trial is expected to take several months.

Senior Writer Byrnes is covering the trial for BusinessWeek in New York

Edited by Douglas Harbrecht

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