“Oh God, What Now?”
In addition to their collective perception of unfairness, anger about the size of the fee, and concern with the manner in which it was paid, the unexpected reactions of some Directors to the Frank Walsh payment had a lot to do with its timing. The dust from Enron’s implosion was everywhere, and it polluted the air in the Tyco boardroom. Plus for the first time in more than a decade, things weren’t going well. For ten years, it seemed everything fell in Tyco’s favor. But the company’s fortune had shifted, and the fates turned cold. As of January of 2002, everything went wrong.
* * *
On January 28, 2002, Global Crossing declared bankruptcy.1 Like Tyco, Global Crossing was a Bermuda-based corporation. (In 1997, Tyco became a corporate citizen of Bermuda during a reverse merger with ADT Limited, an electronic security business then based in Bermuda. The ADT merger was one of the largest and most successful mergers and acquisitions during Kozlowski’s tenure as CEO.) Global Crossing also operated in several of the same industries as Tyco. The two companies were intertwined; Global Crossing bought cable from Tyco, sold the circuits on the cable, after which Tyco installed the cable. Kozlowski explained, “When Global Crossing went bankrupt, Tyco investors got spooked. They were investors in Global Crossing as well as Tyco.”2
When Global Crossing failed, the price of Tyco stock fell. The bankruptcy undoubtedly made Tyco shareholders anxious and played a part in the declining stock price. But the company was simultaneously and negatively affected by so many things during the first half of 2002, it’s impossible to pinpoint the extent to which any single factor caused Tyco’s stock price to suffer.
The first several months of 2002 became extraordinarily difficult for Tyco and Kozlowski. After the Walsh investment banking fee was disclosed, after the announcement of Global Crossing’s bankruptcy, while dealing with the post-9/11 economy amid allegations of Enron-like accounting irregularities and other rumors floated by short-sellers and journalists, and with the company’s announced plans to split into four separate publicly traded corporations, the value of Tyco stock continued to tumble. In his testimony during the trials, Brad McGee, who was the head of investor relations and Tyco’s spokesperson for several years, summarized the number and nature of rumors present in the immediate post-Enron environment. McGee said, “There were rumors concerning whether or not there was an SEC investigation of the company, rumors concerning whether there was any type of off balance sheet financing vehicles. There were rumors concerning how we accounted for dealer accounts. There were a whole host of rumors, mostly issues that [had] been affecting other companies where people were trying to apply them to us.”
McGee explained that “we drew down on backup bank lines and there were rumors in the market of whether Tyco was going to declare bankruptcy. Rumors in the market that our auditors quit. Rumors in the market Dennis quit. Rumors in the market Dennis fired [CFO] Mark [Swartz], and rumors Mark had quit. There was a lot of anxiety concerning the stock and every hour there was a different rumor we had to face.” Asked if any of the rumors were true, McGee said definitively, “No they were not.” McGee emphasized that he had a duty to Tyco shareholders to address false information and rumors that surfaced because the faulty information could have a devastating effect on shareholders. He explained that Tyco managers were responsible for providing complete and accurate information. “As part of that,” McGee said, “we have to make sure information in the market about the company that is not accurate is corrected.” McGee also made it clear to the jury that market perception was the key driver of stock price.3
Mark Maremont was a reporter for the Wall Street Journal who wrote prolifically about Tyco for a number of years out of the newspaper’s Boston bureau. Kozlowski believed Maremont had a grudge against Tyco because so many of Maremont’s articles appeared to him to be unduly negative, and Kozlowski saw in the articles what he knew to be sensationalized versions of the facts.4
McGee explained that “Mark Maremont always wrote with an investigative bent. Before he was with the Wall Street Journal, Maremont was an investigator. His mind-set was to look for a scandal.” McGee recalled that “there were times when Maremont had no choice but to write very positive news about Tyco and he did it, but it seemed he reported good news about us begrudgingly.” McGee had to deal regularly with Maremont and his articles and said after a number of years, “when anyone told me that Mark Maremont was on the phone for me, I’d think ‘Oh God, what now?’”
“I can still read an article from the Wall Street Journal,” he said, “and know it was written by Maremont without looking at the byline.”5
Maremont authored an article that appeared in the Wall Street Journal in early February of 2002 reporting that Tyco failed to fully disclose 700 acquisitions. Kozlowski was shocked at the blatantly inaccurate information reported by what was once a reputable source of business news. Even David Tice, the short-seller who questioned Tyco’s acquisition accounting methods for several years, said the information in Maremont’s article was wrong. Tice, whose Prudent Bear fund was described as “a well-known short-seller of Tyco stock,” was quoted in a CNNMoney article as saying “Tyco is really correct here. They did make the required disclosure in their cash flow statement as far as how much money they spend net of the cash they received of those companies, so I can see Tyco’s point.”6
Dennis Kozlowski said, “Mark Maremont seemed to want to make a career out of destroying Tyco. The kinds of expenditures he sensationalized in his article were very small—like when Tyco bought out ADT independent reps with 50 accounts. Those are the types of acquisitions that Maremont complained about. Yes, we disclosed them in our financial statements. No, we didn’t issue a press release when we bought out a guy in Texas with a handful of home security accounts. If Tyco issued a press release every time the company spent small sums of money, Tyco press releases would have become meaningless and when the company needed to announce something material, something significant, it would’ve been overlooked due to the sheer volume.”7
Even as he cast aspersions about Tyco on the pages of the Wall Street Journal, Maremont quoted in his article an accounting professor from Pennsylvania State University’s Smeal College of Business who said that “Tyco’s acquisition disclosures seem to be adequate under accounting rules, because investors were properly given the net cash spent on all its deals.”8
The day Maremont’s article was published—February 4, 2002—Tyco’s CFO Mark Swartz and head of investor relations Michele E. Kearns wrote a “shame-on-you” letter to the editor of the Wall Street Journal:
To The Editor:
Today’s story by Mark Maremont, “Tyco Made $8 Billion of Acquisitions Over 3 Years But Didn’t Disclose Them,” is blatantly false and malicious. The 240,000 employees of Tyco, to say nothing of your readers and the entire investment community, expect and deserve far better from The Wall Street Journal.
With regard to acquisitions made but not announced in 2001, the spending you call “undisclosed” was indeed disclosed by Tyco in its 2001 cash flow statement (page 46 of Tyco’s 2001 Annual Report), in note 2 (page 54 of Tyco’s 2001 Annual Report) and the MD&A section (page 31 of Tyco’s Annual Report). Similar disclosures for 2001 and all prior years are contained in each appropriate Tyco Annual Report on Form 10-K and Quarterly Report on Form 10-Q.
With regard to the quality of Tyco’s disclosures, we concur with Professor Ketz, who according to your story said, “Tyco’s acquisition disclosures seem to be adequate under accounting rules, because investors were properly given the net cash spent on all its deals.” But this isn’t just about complying with the rules. In our extensive discussions with Mr. Maremont, we asked him to give us examples of other companies similar to Tyco that do a better job than Tyco on these types of disclosures. He was unable to provide a single example. Furthermore, at the end of our several hours of conversation with Mr. Maremont, he stated: “I understand exactly what the situation is. It’s all right there in the cash flow.” Bottom line: beyond the inflammatory headline, and given that the story itself concedes that everything that must be disclosed is disclosed, we fail to see the news value of the story you gave such prominence to in today’s paper.
Perhaps it’s a sign of the extraordinary times we’re in that it seems necessary to remind The Wall Street Journal that there is a stark difference between issuing a press release and making disclosures. Tyco made over 350 acquisitions in 2001. Of these, over 90% were for less than $50 million. For a company with 2001 revenues of $36 billion, it makes no sense to issue press releases on transactions of this size. Many also involve private sales where, as is customary and common, we are bound from making public announcements by confidentiality agreements signed with the selling individuals or families. All of this was told to your reporter. Surely The Wall Street Journal is not suggesting that Tyco issue a press release each time it buys a small, privately held fire protection contractor or alarm company. And if indeed you are suggesting that, are you suggesting it to other companies as well, or just to Tyco?
In the current extraordinary market environment, more than ever, The Wall Street Journal has a responsibility to inform rather than sensationalize. In our view, and judging by the reactions to your story we have received this morning from many of our investors and analysts, today’s article failed that test.9
In addition to having an immediate negative effect on the value of Tyco stock, the prolific amount of false information circulated in 2002 caused long-term problems. For example, the spin and inaccurate reporting found in sensationalized stories and the misstatement of facts included in dozens of articles eventually found their way into a multitude of lawsuits filed against Tyco, its Directors, its independent auditor, and against Kozlowski, Swartz, Belnick, and Walsh. The allegations included in complaints filed in many state and federal courts were lifted from articles like the one Mark Maremont wrote in February of 2002—sometimes the information appeared word for word in court documents.
For instance, these “facts” from Maremont’s article appeared in the complaint for a class action securities action that ultimately settled for $3.2 billion:
2. The Tyco Defendants’ Failure to Disclose Numerous Acquisitions During the Class Period
148. In addition to engaging in manipulative accounting, Tyco failed to disclose the sheer number of companies it was acquiring, and the amount it was paying for each. According to a February 4, 2002 report in THE WALL STREET JOURNAL (“Tyco Made $8 Billion of Acquisitions Over 3 Years but Didn’t Disclose Them”), defendant Swartz admitted that Tyco had spent about $8 billion over the three previous fiscal years on more than 700 acquisitions that were never announced to the public. . . . 10
With the permanency of everything that appears on the Internet and the general assumption that if something was published, it must be true, what originated as clearly inaccurate, false, untrue, unfair, sensationalized, and sometimes malicious lies were over time transformed into “the truth.” For example, if erroneous information that appeared in an outlet like the Wall Street Journal was copied by an attorney into a complaint filed with a court—the inaccurate information represented as a statement of fact (it was in the Wall Street Journal, so it must be true, right?)—others relied on the facts stated in a court document, the information then appeared in a dozen new articles, which led to its inclusion in textbooks used in the finest business schools in the United States, and what was in reality clearly inaccurate information over time transformed into the accepted truth. And that kind of “truth” lives forever in cyberspace.
Matt Lauer of NBC’s Today Show, when interviewed for an October 2013 Esquire magazine article, shared his frustration with the same phenomenon—fiction transformed into accepted facts. Lauer was the target of rumors floated by the media when his co-anchor Ann Curry was fired from the morning show in 2012. Lauer said, “The way the media treated what happened with Ann Curry was a disappointing learning experience. I was disappointed by the laziness of the media, the willingness to read a rumor, repeat that rumor, and treat it as a fact.11
* * *
More difficulties befell Tyco in early 2002 when the company’s formerly stellar credit rating was downgraded. Temporally related to Maremont’s Wall Street Journal article, the rapid drop in the price of Tyco stock, and the company’s use of its backup credit lines, Standard & Poor’s lowered Tyco’s rating and put the company on “credit watch” in February of 2002. Fitch and Moody’s followed suit.12 Kozlowski’s Tyco found itself in unfamiliar territory. Just a year earlier, Businessweek ranked Tyco the number one performing company in the S&P 500.13 But its newly downgraded rating made it impossible for Tyco to retain that coveted spot. In addition, the downgrade prevented CIT (by then renamed Tyco Finance) from upgrading its ratings, which increased the finance unit’s cost of money.14 Without access to cheap capital, CIT was not performing as it should. For its own sake and Tyco’s, the finance company had to be sold soon after it was integrated into the Tyco conglomerate. Times were tougher than at any other point during Kozlowski’s tenure as CEO. But the worst was yet to come.
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 Slusser20
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 Slusser21
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 Counsel24
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
In an opinion based on the clearest findings of fact and what is very likely the most legally sound reasoning found among the dozens of court decisions that emerged from the Tyco scandal, Judge Cote ruled for Frank Walsh in Tyco’s civil action against him. The court described accurately that “[m]any board members were deeply distressed to learn that a payment of this magnitude had been made by Kozlowski to a director, but the board took no other steps at the meeting either to ratify the payment or to seek its return.”37
The court found that “[a]s a fiduciary to Tyco, Walsh had a duty to disclose to Tyco’s board that he stood to benefit personally from its approval of Tyco’s acquisition of CIT. Indeed, § 64(7) of Tyco’s Bye-Laws requires directors of the company to disclose potential conflicts of interest to the board,” and Judge Cote held that “[a]lthough Walsh breached his fiduciary duty by failing to disclose his receipt of the $20 million payment, Tyco’s board implicitly ratified his breach. It did so through its public filings and statements signaling approval of the payment, as well as its failure to seek return of the payment until months after learning of it.”38 In a succinct and accurate summary, the court opined:
In 2001, when Tyco paid Walsh and his designated charity $20 million in connection with the acquisition of CIT, Tyco’s Bye-Laws permitted its board “to grant special remuneration” to a director who “perform[s] any special or extra services” for Tyco. No later than the January 16, 2002 board huddle, Tyco’s directors possessed “full knowledge” of the relevant facts—the circumstances of the payment to Walsh and the amount of the payment. Fully informed as to the relevant facts, the board members presented Walsh with a choice: he could return the payment, or he could keep the money and leave the board. Walsh chose the latter course of action. For all he knew when he left the January 16 huddle, the board had allowed him to keep the money on the condition that he resign as director. Indeed, the board did not take any action after Walsh left the huddle other than refusing to permit Walsh to be re-nominated to serve on the board at the upcoming shareholders meeting. No mention whatsoever of the payment was made at the official board meeting held on January 20, just a few days after the board huddle at which the payment was discussed with both Walsh and Kozlowski. Further, Tyco’s proxy statement disclosing the Walsh payment, filed promptly after the board learned of the payment at its January 16 huddle, contains no statement that the board disapproved of the payment or was seeking its return. Nor does it reveal that the payment was only reported to the board after it had already been made. Rather, the only reasonable reading of the disclosure is that both the company and the board found the payment to be appropriate under the circumstances; the proxy statement reports that Walsh was “instrumental in bringing about the acquisition” of CIT and that the $20 million payment was made in return “[f]or his services” in the transaction. If the board had any reservations about the legality or propriety of the payment, then it would have been expected to disclose those reservations in the proxy statement, for instance, by indicating that it had begun an investigation of the payment and the appropriate course of action to be taken to recover it.39
The court pointed to express statements made by then Director Josh Berman: “Berman’s statements in February 2002 in defense of the wording of the proxy statement confirm that the board implicitly ratified the payment. Berman told Belnick that he was trying to ‘steer a middle course’ in which ‘the Board just doesn’t ratify, doesn’t not ratify.’ In other words, the board’s press releases and SEC filings would suggest to the public that the board approved of the payment, but the board would not pass a resolution expressly confirming the payment. This is the very definition of implied ratification; the board’s actions suggested its approval of the Walsh payment without expressly confirming it.”40
The court was confident that the Board didn’t do anything until May of 2002 and that its action in May was “best seen as a reaction to the firestorm of negative publicity that was descending on Tyco” at that time. The court identified the former Directors’ revisionist history and stated that “[t]hese after-the-fact assertions are insufficient to overcome the historical record that in January 2002, with full knowledge of the payment, the directors decided not to pursue recovery. . . .”41
Following a bench trial (where the judge acts as both judge and jury) on October 12 and 13, 2010, all of Tyco’s claims against Walsh were denied.42