Dan Ackman - Kozlowski

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October 25, 2007

COMMENTARY

Free Dennis Kozlowsk= i

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By DAN ACKM= AN
= October 25, 2007; Page A23

It's hard to rally muc= h sympathy for L. Dennis Kozlowski. Apart from his criminal conviction, the ex= -CEO of Tyco International is best remembered for buying a $6,000 shower curtain, throwing a $2 million birthday party for his (much younger) = wife, and for having Tyco buy an $18 million apartment on Fifth Ave= nue, tacking on another $5 million to spruce the place up. Still, his conviction, which will be appealed today, is questionable at best. Despite millions for his defense, Dennis Kozlowski was railroaded.<= /p>
Kozlowski wasn't convicted for overspending, nor f= or defrauding investors -- the most common charges leveled against cor= rupt CEOs. He was convicted instead of grand larceny, that is, of steali= ng his bonuses, which were certainly oversized. But even if you believe the worst about Kozlowski and his co-defendant former Tyco CFO Mark Swartz, they were paid according to a contract, and that is not stealing.

If this is the case, how was Kozlowski convicted?<= /p>
The charges against Kozlowski started when he was indicted for sales tax evasion -- not paying NYC tax on multimillion-dollar paintings by claiming they were being shipped to New Hampshire. Those charges got the ball rolling. Kozlowski was fi= red and the Tyco board hired superstar lawyer David Boies to conduct an internal probe. At the time, the company appeared to owe Kozlowski = more than $200 million in deferred payments -- a matter still in dispute. Like most such internal investigations, Mr. Boies's probe wound up absolving those who'd hired him, and he heaped blame on the now abs= ent Kozlowski.

The results of the investigation -- including the = crazy spending on what was the CEO's pied-à-terre -- were leaked to the newspapers. A much larger indictment followed in rapid successi= on, this one for stealing, or "looting," as it was oft-charac= terized in the media. The Enron saga still fresh, the bald, ruddy-cheeked Kozlowski became the poster boy for corporate greed and abuse. As w= ith everything about Tyco and Kozlowski, the numbers were eye-popping. = The CEO had been paid as much as $170 million in a single year. A legal= and public-relations steamroller was in full motion.

The trials -- there were two, with the first endin= g in a hung jury -- focused on the testimony of Tyco directors. Several directors denied that they ever approved the huge bonuses doled out= to Kozlowski and Swartz. They didn't know how much the CEO was being p= aid, the directors said. Mr. Boies, who the board paid millions to fight against Kozlowski, testified, too. This clear conflict of interest = is now a major point in Kozlowski and Swartz's appeal.

Kozlowski's lawyers tried to prove the directors d= id know about the bonuses. Part of their problem was that the director= who they said knew the most had died, letting the district attorney bill their defense as a shameless ruse.

But it was all beside the point. There is no quest= ion that Kozlowski was paid according to the incentive compensation pla= ns that were duly approved by the Tyco board in 1994 and again in 1997. The plans rewarded the CEO and CFO with bonuses based on improvemen= ts in company earnings, cash flow and earnings per share. Excessive? That's an understatement. But though the record-keeping was careles= s, nothing was secret: The contract and the payments were all on the books.

Partly because Tyco was growing so fast, largely f= rom acquisitions, even a small percentage of the growth amounted to sums that were princely, even by CEO standards. But that was the deal, whether the board members remembered the deal or not.

In the wake of the Enron scandal, and faced with K= ozlowski's myriad bonuses, corporate-loan programs, Renoirs, Monets and $15,000 umbrella stands, it's hard to fault the jury for smelling a rat and following its nose. But the key question was a legal question: Can a payment recorded on a company's books, disclosed in proxy statement= s, and pursuant to contract, be stolen? Michael Obus, the trial judge, never gave an answer and threw it all to the jury.

Unlike Enron or Worldcom, Tyco never went bust. An investor who held Tyco shares during Mr. Kozlowski's 10-year tenure would have quintupled his stake. (The stock fell on the scandal, but recovered within 18 months.)

Now, his funds forfeited or frozen, the wife for w= hom Kozlowski threw the infamous party is divorcing him. He and Swartz, denied bail pending appeal, went to prison. Despite months of trial, over 800 pages of legal briefs, and the gaudy sums at play, the cas= e is not complicated. Let's hope the appeals judges, benefiting from time and distance, can send this prosecution back to square one.

Mr. Ackman is a lawyer and a journalist.=

URL fo= r this article:
http://online.wsj.com/article/SB1193= 27633686670790.html

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