Fourteen

Internal Investigation

There’s an ancient African proverb that considers the encounter between a hunter and his prey. In the Ewe-mina, Igbo, Togo, and other cultures, hunters were considered powerful and respected members of their communities and were even believed to possess supernatural powers. They were also known to tell great stories of their kills and were praised and admired for their conquests. But even as villagers celebrated the hunter, it was with awareness that they would never know all that happened during the hunt.1

A young boy questioned his grandfather, “Is it true that the lion is the king of the jungle?”

The old man looked at his grandson curiously and said, “Yes, my son, that is true, why do you ask?”

“Well, Grandfather,” said the boy, “if this is true, then why is it that in all the stories I read and all the ones I hear, the hunter defeats the lion. How can this be true?”

The old man looked at his grandson and said, “And it will always be that way, my son, until the lion tells the story. Until then, tales of the hunt shall always glorify the hunter.”2

* * *

The large majority of reports about Dennis Kozlowski’s departure from Tyco state that Kozlowski resigned. But Kozlowski said he was fired over the phone at around midnight on the first Sunday in June of 2002.3 In the end, the words spoken and heard that night through the chain of people who relayed information between the Tyco Board and Kozlowski don’t really matter. Even if Kozlowski wasn’t expressly fired, there’s no doubt that he was constructively discharged—the Board made it impossible for him to continue as CEO and Chairman, which was the same as firing him.

If a severance agreement was negotiated between Tyco and Kozlowski over the phone that Sunday evening in June—and the Directors claimed there was a verbal agreement—it was very quickly breached because Tyco did not perform. The company where he worked for twenty-seven years didn’t provide Dennis Kozlowski any severance or any of the benefits promised in his employment contract. In addition, the Directors did not comply with several provisions of that contract, the January 2001 Retention Agreement, which detailed the processes by which Kozlowski could resign and through which he could be fired.4 Anything that occurred outside of the contractually defined process was presumably unenforceable or a breach of the agreement.

On June 3, 2002, Tyco issued a press release announcing “ . . . that L. Dennis Kozlowski resigned as Chairman and Chief Executive Officer for personal reasons. Mr. Kozlowski also stepped down from the Board of Directors.” In the same press release, the company announced that “[a]t the request of Tyco’s Board, John F. Fort has agreed to assume primary executive responsibilities during an interim period while a search for a permanent replacement is completed.” In his newly assumed role of interim CEO, Fort made his priorities known when he said, “We plan to complete the IPO [initial public offering] of CIT by the end of June.” Fort also confirmed his support of a long-term operating strategy to focus more on organic growth. Of Kozlowski’s sudden departure, Fort said that “[d]uring his tenure, Dennis Kozlowski grew Tyco to a $36 billion manufacturer and service provider operating in over 100 countries. We wish him well and thank him for his contributions.”5

* * *

Tyco faced ongoing difficulties. Already dealing with a litany of serious challenges, the Directors’ problems were compounded when legal actions were filed against them in April of 2002 over the Frank Walsh payment, breathing new life into an issue that appeared to have been put to rest. As external pressures intensified, tensions among Tyco insiders grew. In her interview for the Harvard Business School case study, former Director Wendy Lane said, “We didn’t know what we didn’t know, so we started to investigate a number of things.” Lane explained that the Audit Committee, of which she was a member in 2002, asked for a review of accounting methods, which eventually were found to be compliant with Generally Accepted Accounting Principles (GAAP).6

Lane said when the Board learned that a senior manager was building a house that was “too expensive for his compensation level,” the Compensation Committee asked for additional information on executive compensation and requested records of executives’ use of company loan programs. She described an environment of suspicion and doubt, noted that prominent attorney David Boies had been retained by the Board, and said that as investigations unfolded, “certain inter-relationships were surfacing between various board members and management, such as investments and sales of houses.” The case study quoted Lane as saying that she “did not know what to think or whom to trust.” She also explained how the Audit Committee reviewed the details of corporate expenses, corporate expense accounts, and activity in the loan programs after which Lane interviewed both internal and external auditors who were fully aware of the payments and loans the committee questioned.7

In a similar description of the atmosphere and the mind-set of the Board in the late spring and early summer of 2002, John Fort testified that “the company was almost daily under siege in the press with rumors and accusations. The stock continued to fall. Then we reconsidered the break up, announced that we changed our mind on the break up. This was probably in April. The stock continued to fall. The press continued to be just very difficult on us.” He recalled that “[i]n February, I believe, we changed the composition of the Nominating [and] Governance Committee and shortly after that I became lead director [to replace Frank Walsh]. I was already on [the Nominating and Governance Committee], Richard Bodman was on it, we added Michael Ashcroft and Joshua Berman, and we had four people on that, and one of the things was what to do—how should we pursue getting our money back [from Frank Walsh] and how we should do it.” That’s why the Board, through its Nominating and Governance Committee, initiated the 2002 internal investigation at Tyco.8

When the Board decided to launch the investigation, the scope was limited to the Frank Walsh investment banking fee. Interestingly, the Nominating and Governance Committee decided not to use the law firm Tyco’s top lawyer Mark Belnick hired to conduct the investigation. Belnick had engaged Washington, DC-based Wilmer Cutler & Pickering, where William McLucas, the former head of enforcement at the SEC, practiced. McLucas was Tyco’s outside counsel during the successfully concluded SEC investigation in 1999–2000. But instead of using Wilmer Cutler, the Committee decided to bring in David Boies.9

David Boies

In the findings of fact in Tyco v. Walsh, the U.S. District Court for the Southern District of New York detailed how Tyco came to hire David Boies to conduct the internal investigation into the Walsh payment. Three and a half months after the January 2002 Board of Directors’ huddle, the four members of the Nominating and Governance Committee—Ashcroft, Berman, Bodman, and Fort—met via telephone on April 29, 2002 and decided to recommend to the full Board that action be taken to recover the investment banking fee paid to Frank Walsh. As part of that discussion, the four Committee members made it known to the full Board that they expected to supervise any legal action that was initiated, and the Committee promptly retained Boies, Schiller & Flexner. The Committee asked the law firm to complete the internal investigation in about six weeks.10

As a well-known and successful litigator, David Boies accumulated a long list of impressive accomplishments and awards—and a great deal of media attention. He is best known for his work in some very high-profile cases. In the late 1990s, Boies served as Special Trial Counsel for the U.S. Department of Justice during the Microsoft antitrust case. In perhaps his most high-profile performance, Boies argued before the U.S. Supreme Court on behalf of former Vice President Al Gore in the case that determined the outcome of the 2000 presidential election. In addition, Boies was instrumental in litigation that expanded marriage rights to same-sex couples.11

The Tyco Compensation Committee unexpectedly hired a ‘big gun’ when they brought in David Boies to handle the Walsh investigation. Former Tyco CEO and Director Josh Berman explained the choice: “We were determined to get the $20 million back from Frank Walsh. It was wrong, dead wrong of him to take that money, and it was our responsibility to get it back.” Berman said, “I brought in Boies. By reason of his reputation, I believed our decision to hire him would convince Walsh that we were serious. Boies had credibility with the Board and with Walsh.”12

It was also somewhat surprising that Boies took the job; it didn’t seem the kind of work that was in the prominent litigator’s wheelhouse. According to Boies biographer Karen Donovan, Boies and the members of his firm did not have the “depth of experience” to handle the Tyco matter compared to the ousted law firm Wilmer Cutler. Donovan wrote that despite the case being outside his forte, “ . . . Boies could not pass up Tyco, or, for that matter, most cases in the spotlight.” She also explained that “Boies’s representation of Tyco spawned a new crop of Boies headlines, like the one that appeared in a profile of him in the Sunday edition of the New York Times in June 2002, under the headline ‘Company in Trouble? Just Let Him Loose.’”13 That’s exactly what the Directors did after they hired David Boies.

In May of 2002, Tyco Chief Corporate Counsel Mark Belnick advised Boies that he didn’t believe a lawsuit against Frank Walsh, which Boies had advised the Board to initiate, was in the company’s best interest.14 There seemed to be growing tension between Belnick and Boies, and by extension, between Belnick and the Board. Mark Belnick was fired on June 10, 2002, a few weeks after voicing his opinion to David Boies.15 As it did with Kozlowski, the Board fired Belnick with no warning and no opportunity to discuss the rationale for the termination. Belnick recalled that a Tyco Director came to his office in New York and said, “You’re fired, and you’ve got two minutes to get out,” after which two large security guards physically removed Belnick by grabbing his shoulders and escorting him out; the company’s top lawyer was paraded past his colleagues as he was led from the building.16

After he was acquitted in 2004 of charges brought by the Manhattan DA as a result of the Boies internal investigation, Belnick gave an interview to New York Magazine. “I was trying to do the right thing all the time at Tyco,” he explained, “[t]hat’s all I ever wanted to do. My end was to make Tyco a model of corporate governance.”17

With Kozlowski and Belnick gone and David Boies advising them, the Directors seemed to become more engaged and significantly more aggressive. On June 17, 2002, a week after Belnick was fired, Tyco filed an action against Frank Walsh. The Board had waited more than five months to sue the former Director, and the timing of their delayed action appeared to be related to shareholder lawsuits filed against them. (Tyco’s claims against Walsh were dismissed eight years later.)18 In its new and more aggressive form, the Board also expanded the internal investigation that was originally focused on Walsh into a probe of Tyco’s top management—two of whom (Kozlowski and Belnick) were no longer with the company.

Not long after the Board expanded the scope of the Boies investigation, and in the unavoidable spotlight focused on Tyco as a result of Kozlowski’s sales tax indictment and sudden departure from the company, the Directors found themselves under attack. During the summer of 2002, information surfaced about many questionable financial transactions between individual Directors and Tyco—the conflicts of interest that were commonplace at the company for many years suddenly became serious problems. In addition to what was portrayed as self-dealing by some of the Directors, the media reported details of company loan programs and of the total compensation the Board paid and executive perquisites it provided to Tyco executives. There were implications that the Board failed to provide proper oversight and that the Directors might be civilly and even criminally liable for neglect of their duties. Multiple sources reported that the Manhattan DA might charge the Directors with securities fraud, racketeering, and other serious crimes.19

Years later during the executives’ criminal trials, former Director Stephen Foss was asked about some of the tensions that affected the Board at that time.20 Foss told the jury about a letter written by Patty Prue. Patricia “Patty” Prue was the head of human resources. In June of 2002, she wrote a letter to the Board of Directors that read: “As you know, I plan as always to assist you and the Board with whatever requests you have in conjunction with my role as head of Human Resources. However, as a result of the fact that I was recently pressured by Josh Berman to engage in conduct which I regarded as dishonest, and which I refused to do, I will decline to have any personal contact with him in the future. In addition, I ask that Josh not go to my staff with any requests for information or directions.”21

According to a September 2002 article in the New York Times, Prue told a grand jury that the company’s attorneys and Berman “put pressure on her, unsuccessfully, to get her to doctor the minutes of a compensation committee meeting.” The article reported that those minutes proved that all three members of the Compensation Committee knew about loans the company made to Kozlowski, Swartz, and Belnick, even though the Boies investigation had reported that the three executives concealed those loans. The Directors’ knowledge of executive pay and perks was the key issue in the criminal trials of Kozlowski, Swartz, and Belnick. New York Times journalists Andrew Ross Sorkin and Jonathan Glater wrote, “ . . . [T]he compensation committee minutes and the accusations from [Prue] may undermine the credibility of the board and the Boies report, which makes no mention of either.”22

Former Director Foss told the jury that the Board took no formal action as a result of Prue’s letter and request.23 Josh Berman denied Prue’s accusations and said she misunderstood his request.24 Notably, Berman was not a member of the Compensation Committee, and he was not one of the Directors whose decisions and knowledge were included in the meeting minutes in question. In other words, if he asked that the minutes be altered, it would have been to cover up for others, but not for himself.

* * *

On July 25, 2002, about eight weeks after the company announced Kozlowski’s departure, the Tyco Board appointed Edward D. Breen the company’s next Chairman and Chief Executive Officer. Breen was the former President and Chief Operating Officer of Motorola, Inc.25 Kozlowski was out, Breen was in, and yet Tyco shareholders were far from happy. Investors had good reason to be upset. The day Breen was hired, Tyco stock closed at $11.63. A year earlier, on July 25, 2001, the stock had closed at $72.55.26 How quickly things had changed for Tyco shareholders.

On Breen’s first day as CEO, angry representatives of the company’s largest institutional shareholders confronted him in Tyco’s New York offices and demanded that Kozlowski-era Directors be replaced.27 Ralph Whitworth of Relational Investors LLC, then with ownership of seven million Tyco shares, threatened a proxy fight. Whitworth had the backing of other institutional shareholders. For example, Bill Miller of Legg Mason Funds Management told the Wall Street Journal that
“[e]very one of those old board members should tender their resignations immediately.” Miller stated, “I am perfectly prepared . . . to vote for a different slate if that’s what it takes.”28 Whitworth was quoted in an article that appeared in the New York Daily News in August of 2002 saying “[e]ither they knew what was going on or they were asleep at the switch—both are terminal.”29

In 2011, former Director Wendy Lane told business researchers, “If you are under attack as a director you do not want to resign.” She explained further by stating that “. . . if you resign you lose control over not only the information flow but the information itself, the litigation process and settlement or adjudication proceedings. There is also an implication you were at fault.”30

Dennis Kozlowski agreed completely with Lane’s assessment of what happens to an individual who isn’t present during a time of crisis. Once Kozlowski was out of the company, information about him seemed to procreate as quickly and prolifically as colonies of wild rabbits. After June 3, 2002, no one at Tyco would speak to the departed CEO. He had no access to the information that David Boies was accumulating and interpreting—all done without including Kozlowski in the investigation.31

Kozlowski said, “I knew David Boies was hired to investigate the Frank Walsh payment. That was going on while I was still there and I didn’t object to the investigation.”32 Kozlowski never spoke to David Boies—not before he left the company, and not after. “I was supposed to meet with him a couple of different times when I was still at Tyco, but I had to reschedule. I was trying to sell CIT. That was my priority at that time, so when I had to be at a meeting with Dick Fuld of Lehman Brothers or on a call with Warren Buffett, I canceled everything else and I was at the CIT meetings.” Kozlowski admitted that, at the time, he was consumed with selling CIT and had very little interest in the internal investigation. Kozlowski wondered over the years, as he sat in prison, if David Boies held those rescheduled meetings against him.33

Being outside the company during the internal investigation put Kozlowski at a huge disadvantage. He had no ability to provide input, he wasn’t asked to explain anything—he had no idea what was happening at the company where he spent twenty-seven years of his life. And as Wendy Lane explained, “[T]here is also an implication you were at fault.”34 Kozlowski said, “I didn’t know anything about the scope of the investigation being expanded—I didn’t know that I was part of the internal investigation until sometime in August [of 2002].”35

Leaks and Spin

Throughout the summer of 2002, someone involved with the investigation (it had to be someone at Tyco, or someone with the Boies firm, or someone in the DA’s office) was feeding information from inside the company to the media. The $6,000 shower curtain, Kozlowski’s art purchases, the locations and sizes of his personal homes, charitable contributions Kozlowski authorized (reported by the media as if Tyco was the only large corporation to ever make sizable charitable contributions), the Directors’ questionable financial dealings with the company—many details allegedly found during the investigation were leaked to and reported by the media. At the time, the only criminal allegations against Kozlowski were for failing to pay sales taxes. Because he was the first consumer ever charged in New York, it seems the media could have given Kozlowski the benefit of the doubt until the charges were adjudicated. But the media isn’t restricted by the constitutional right to due process. The media can make allegations, prosecute, and convict without an indictment, arraignment, or trial.

A scathing article appeared on the front page of the Wall Street Journal on August 7, 2002. In a sensational account of spending and looting, Tyco-phile reporter Mark Maremont and his co-author Laurie Cohen reported and ridiculed Kozlowski’s lavish lifestyle. Maremont and Cohen cited as their sources “people investigating the company” and “people familiar with the company.”36 There were no named sources.

The Wall Street Journal’s compelling headline—“Executive Privilege: How Tyco’s CEO Enriched Himself—Mr. Kozlowski, Ex-Chief, Got Secret Loans, Spent Firm’s Cash as His Own—A $6,000 Shower Curtain”—drew readers into a tale of Enron-era excess and extravagance. Maremont and Cohen claimed that Kozlowski “regularly reached into Tyco coffers to finance his extravagant lifestyle and polish his image.” Interestingly, the unnamed sources cited in the August 2002 article—the “people investigating the company”—told Maremont and Cohen that “Tyco paid for the Fifth Avenue duplex,” that Tyco “bought the Fifth Avenue duplex,” and that 950 Fifth Avenue was what “Tyco considered a corporate apartment.”37 At some point, those “people” must have forgotten because repeated testimony during the criminal trials was that the Fifth Avenue apartment was a secret about which only Kozlowski and Swartz had knowledge.

Maremont and Cohen wrote that “[t]he allegations against Mr. Kozlowski follow a wave of disclosures of CEO hubris and greed. Like other top executives who have come under fire in recent weeks, Mr. Kozlowski allegedly took advantage of the 1990s boom to help himself to a smorgasbord of financial rewards.”38

“The allegations? What allegations?” Kozlowski recalled thinking when he saw the Wall Street Journal article. “Whose allegations?” According to Kozlowski, he didn’t know he was being investigated when the article appeared in the Wall Street Journal in August of 2002. Kozlowski had been in Nantucket all summer crafting plans for a private equity fund. He had no knowledge of anything going on at Tyco; he didn’t know there were problems inside the company.39 But according to the Wall Street Journal, and unbeknownst to Kozlowski, there were already “allegations” of serious wrongdoing. In fact, Maremont and Cohen stated that “Mr. Kozlowski’s brazen use of a public company as his personal cash machine looms as a particularly egregious case [of CEO hubris and greed].”40

Maremont and Cohen’s word choices appeared to unnecessarily and inaccurately imply wrongdoing—they transformed innocuous information into a scandal they seemingly uncovered through investigative reporting. For example, they wrote of Kozlowski that “ . . . he quietly put his doctor and fitness trainer on the Tyco payroll . . .”41 The Tyco employees in question weren’t his doctor and his trainer. According to a company spokesperson, the doctor and the fitness trainer to whom the article referred were hired as part of Tyco’s corporate wellness program.42

In a 2013 article titled “Your Company Wants to Make You Healthy” written by Wall Street Journal reporter Jen Wieczner, the newspaper reported that “[n]early 90% of employers offer wellness incentives, or financial rewards or prizes to employees who work toward getting healthier, according to a recent survey from Fidelity Investments and the National Business Group on Health.”43 Wieczner wrote about corporate wellness programs at Caterpillar Inc., JetBlue Airways Corp., and Johnson & Johnson. All were cast in a positive light. None of the three were accused of quietly hiring individuals to run their wellness programs, as if it was scandalous or criminal to do so.

The Maremont and Cohen article mentioned that the U.S. Attorney in New Hampshire investigated the claims made about Kozlowski and Tyco. However, the U.S. Attorney did not pursue any criminal charges as a result of that investigation. Maremont and Cohen also disclosed Kozlowski’s assertion that Tyco owed him “tens of millions” of dollars in deferred compensation—money Kozlowski had earned but that was held by Tyco at the time he was ousted in June of 2002.44 However, the journalists didn’t chastise Tyco for keeping Kozlowski’s earnings and they didn’t investigate Kozlowski’s claims.

On the evening of August 7, 2002, the day Maremont and Cohen’s article appeared on the front page of the Wall Street Journal, Maremont gave an interview that was broadcast by NPR’s All Things Considered during which he talked on the air about Kozlowski’s spending and his lavish lifestyle: birthday parties, mansions, and fine art. Maremont once again used words like”quietly” and “secretly” as he told listeners that Kozlowski wrongfully took more than $100 million from Tyco.45

More than ever before, his status as a public figure caused problems for Dennis Kozlowski in 2002. The magazine covers, press interviews, and newspaper articles that had been written about him over the prior several years came back to hurt him. The whale had surfaced, and the media threw many harpoons.

Just like the February 2002 Wall Street Journal article about hundreds of “undisclosed acquisitions”—a story Tyco and others quickly and vehemently refuted—Maremont and Cohen’s August 7, 2002 article had an immediate negative effect on the value of Tyco stock. TYC dropped five percent and the volume of trading increased by around a million shares on the day the article ran.46 The “people investigating the company” weren’t acting in the best interest of Tyco shareholders when they leaked sensational information, some of which was untrue, some of which was unrelated to any criminal charges that were or would be alleged, most of which was spun by the media, and all of which was used to portray Dennis Kozlowski as a thief, a liar, a scoundrel, and a criminal.

Kozlowski was tried in the court of public opinion based on selective information leaked by nameless “people investigating the company” and then spun onto the front page long before he was afforded any type of due process. The leaks weren’t good for Tyco, they weren’t good for Tyco shareholders, and they hurt Dennis Kozlowski, which begs the question: Who benefited from the smear campaign?

* * *

After he was named CEO, Ed Breen began ridding Tyco of Kozlowski-era Directors and employees. One of the first to go was CFO Mark Swartz. By all accounts, Swartz played a significant role in assisting David Boies and his team with the internal investigation during the summer of 2002. However, on August 1st, he was presented with a severance package and a request for his resignation.47

When he took the stand in his own defense during his second criminal trial in 2005, the former CFO recounted the day he was asked to leave. Swartz said, “David Boies told [me and the other Directors] in the meeting on August first due to all the focus on the company and press attention, the most they could pay out at that point was 50 million dollars and his hope was that the balance of 25 million, once things quieted down in a few months would be paid to me.”48 That day, Swartz signed an agreement with Tyco in which he waived his right to enforce the 2001 Retention Agreement, and in which the company, among other things, agreed to give Swartz all amounts due him under the company’s deferred compensation program, the value of his 401(k), the value of his executive life insurance policy, and amounts due under the senior executive retirement program. In total, the Directors, as advised by David Boies, agreed to pay Swartz $50 million in severance. Mark Swartz signed that agreement on August 1, 2002. Signing on behalf of Tyco: an attorney from Boies, Schiller & Flexner.49

The agreement included Swartz’s resignation from the Board, but he continued in his role as CFO for another month and a half, until September 11, 2002. Over those weeks, he fulfilled all of his normal duties; he handled SEC filings, he worked on Sarbanes-Oxley requirements with the new CEO, he spoke with shareholders—he did everything he had done as CFO for many years. During his trials, Swartz told the juries that when he left work on his last day with Tyco, it was to fly “to New York . . . to be arrested the following day in connection with my job as CFO of Tyco.” Swartz then told the juries that “Ed Breen and David Boies had offered a Tyco provided airplane for [my wife] Karen and me to fly home from New York.” When asked if he took them up on their offer, Swartz said, “We did.”50 It was an interesting and pricey perk offered to a man the company and the Manhattan DA just accused of stealing from the company, in concert with Dennis Kozlowski, more than $170 million.

David Boies and the Manhattan DA

In an article that appeared in the American Lawyer in 2005, Andrew Longstreth explored the increasingly common arrangement in which an attorney who is hired to conduct a corporate internal investigation coordinates the investigation with a prosecutor. Longstreth described this type of private attorney as “a fact-finder with a badge—the newest (and highest paid) government agent.” The article noted that corporations have been known to enter agreements with the government in which both sides share information related to their investigations. Prosecutors get what they want—access to the findings of the law firm that conducts the internal investigation—and the corporation is able to claim privilege for any evidence discovered during the investigation that the company doesn’t want to reveal or that doesn’t advance the prosecutor’s case.51 For the corporation and the prosecutor, it’s like having your cake and eating it too. Unfortunately, it denies anyone charged with crimes as a result of the investigation access to evidence that would be available but for the arrangement between the prosecutor and the private attorney.

David Boies testified that from the first day his firm was engaged by Tyco’s Nominating and Governance Committee, he cooperated fully with the Manhattan DA. Boies said he began sharing information with the DA on June 3, 2002 (the day Kozlowski was ousted from Tyco in anticipation of his imminent indictment on sales tax charges) and his cooperation continued up to and including the day Boies was on the stand, which was April 11, 2005. Of working with prosecutors during a corporate internal investigation, Boies said, “You want to work closely with them and you identify them early and you bring them into the investigation.”52

Boies told the jury that over the nearly three year time period, he provided all documents the DA requested and he consulted with the DA’s office regularly before, during, and after the Manhattan DA indicted former Tyco CEO Dennis Kozlowski, former CFO Mark Swartz, and former Chief Corporate Counsel Mark Belnick on September 12, 2002. Boies also confirmed that his law firm received from Tyco $45 million in legal fees in less than three years.53 That’s an average of more than $1.3 million per month.

The most serious problem created by the triangular corporation-private attorney-prosecutor cooperative relationship is that it creates an evidentiary loophole. Prosecutors are required to provide anyone accused of a crime any and all exculpatory evidence that the prosecutor possesses. However, when evidence of alleged wrongdoing is filtered through an investigating private attorney, any evidence that tends to incriminate the accused may be turned over to the prosecutor, and the corporation may withhold from the prosecutor and from the defendant any evidence that tends to disprove guilt. Prosecutors have no duty or ability to turn over to the defendant evidence they do not possess. And the private attorney who conducted the internal investigation along with the corporation may claim the evidence is privileged or work product, the work of an attorney prepared in anticipation of litigation; both are protected. The attorney may choose not to turn over the evidence, even if he or she knows it will prove the accused is not guilty.

In this scenario, exculpatory evidence exists, but the person accused of a serious crime has no opportunity to see it, or to present to a jury evidence that would prove he or she is not guilty.

The Indictment

Internal investigations like the one conducted at Tyco during the summer of 2002 generally take federal investigators and regulators many months or even years to complete. However, the Manhattan DA, with the full cooperation of David Boies and Tyco, put together a massive indictment in about three months. On September 12, 2002, Dennis Kozlowski and Mark Swartz were jointly indicted in ninety pages of dramatic allegations that read like a script from Law & Order or The Sopranos.

The first thirty-five felony counts included in People v. Kozlowski and Swartz were charges typically reserved for the prosecution of organized crime figures. The Manhattan DA charged the former CEO and CFO with enterprise corruption, the New York State equivalent of charges under the federal Racketeer Influenced and Corrupt Organizations Act (RICO). The DA accused Kozlowski and Swartz of running a criminal enterprise out of Tyco corporate offices. The indictment labeled it the “Top Executives Criminal Enterprise” or “TEXCE.” According to the indictment, “Defendant Kozlowski was the boss of the criminal enterprise,” and “Swartz was chief of operations of TEXCE.” The indictment claimed TEXCE was created and operated for the purpose of obtaining money by theft, fraud in the sale of securities, and other frauds, and was operated from January 1, 1995 through, on, or about September 9, 2002. The DA named eighty separate acts of enterprise corruption that covered the first fifty-eight pages of the indictment.54

It is worth noting that the former executives were charged by a local district attorney. Considering the scope, seriousness, and nature of the allegations, this type of prosecution is far more common in federal court, not a state court. Professor Christo Lassiter of the University of Cincinnati College of Law, a criminal law scholar and expert on white-collar crime, said it was “very usual—even rare that Kozlowski was criminally prosecuted by a local DA but not by a U.S. Attorney.”55

In an article that appeared in the journal of the American Bar Association in 2010, criminal defense attorney Roger L. Stavis, of the New York firm Gallet, Dreyer & Berkey, was quoted as saying “There have been many instances over his long tenure as DA where [Morgenthau] creatively applied our state criminal statutes to bring cases which the U.S. attorney could have and would have brought under the broader federal criminal statutes—if they fit.”56 Morgenthau was known throughout his career for aggressively prosecuting white-collar crime. If he could make charges fit against Kozlowski and Swartz in 2002, charging the high-profile, wealthy corporate executives was consistent with his modus operandi.

If there was evidence of the magnitude alleged in the Manhattan DA’s indictment, federal prosecutors almost certainly would have charged the Tyco executives. They did not. But with Morgenthau’s history of going after those in positions of power and trust, and considering the post-Enron environment where most every elected official, like the Manhattan DA, wanted to be seen as tough on white-collar crime, the aggressive prosecution of Kozlowski and Swartz in the State and City of New York was for Morgenthau the right time, the right defendants, and the right place.

All eighty enterprise corruption charges were thrown out before Kozlowski and Swartz went to trial. There was no evidence to support those charges. However the remaining felony counts were serious crimes for which the former executives would face a judge and jury. Twice.