Risk Management

Kozlowski Declares His Innocence

Tyco's former CEO tells a Manhattan jury that he's innocent of stealing from the company, and what seemed like questionable tax accounting was a si...
Stephen TaubApril 28, 2005

After three years of silence, former Tyco International Ltd. chief executive officer L. Dennis Kozlowski took the stand in a Manhattan courthouse and declared that he was innocent of charges that he stole from the conglomerate that he once ran.

Kozlowski and former CFO Mark H. Swartz are accused of stealing $150 million from the company by improperly forgiving company loans to themselves and awarding themselves unauthorized bonuses, reported The New York Times.

Confounding legal experts, the 58 year-old denied that he pilfered a huge bonus or abused other loan programs, while asserting that his goal was to grow the company, according to published reports. Indeed, Tyco grew from a $20 million company into a $40 billion behemoth by the time Kozlowski left in June 2002.

“I’m here so I can explain to [the jurors] why I’m innocent of all the charges against me,” Kozlowski said, according to the Times. Asked by Stephen Kaufman, his lead attorney, “Did you commit any of the crimes charged in the indictment?” Kozlowski replied, “No, I did not,” reported the The Wall Street Journal.

The biggest headline to emerge from Kozlowski’s testimony came from his claim that he “could not explain” how $25 million in loan forgiveness was not reported as income on his 1999 tax form. He dismissed that omission as “a mistake,” according to reports.

“I just was not thinking when I signed my tax return that I had a loan forgiveness,” Kozlowski testified, said the Journal. Kozlowski explained that he missed that omission because he didn’t file his 1999 tax return until the following October. He also said that the error was missed by his accountants and a Tyco employee whose job it was to manage his personal finances, according to reports.

Kozlowski’s testimony was interpreted by some observers as a sign of desperation by his defense attorneys. Other pundits simply chalked it up to Kozlowski’s huge ego. Another theory is that his lawyers, who recalled that 11 of 12 jurors were prepared to convict Kozlowski at an earlier trial, wanted the former CEO to testify because his appearance on the stand would be “humanizing” in the eyes of jurors.

Kozlowski did not testify in the April 2004 case, which ended in a mistrial.

Furthermore, Kozlowski noted that others in the company were aware of the payouts. For example, he insisted in his testimony that Tyco director Philip — Hampton who is now deceased — knew about the bonuses that are alleged to have been stolen. Kozlowski also said he figured Hampton provided details to the compensation committee and other directors.

Regarding the $25 million bonus, Kozlowski pointed out that when he learned he was eligible for a $60 million bonus, he suggested to Hampton that he and Swartz use a portion of their bonuses to repay loans, added the Journal. “I did not ask Phil for any extra compensation or anything different,” Kozlowski asserted.

Eventually, Kozlowski said he agreed to take $2 million in cash and $25 million in loan forgiveness, deferring $35 million, according to the paper.

Kozlowski also described the celebrated birthday party for his wife in Sardinia that cost $2 million as “a combination of birthday party and a perk trip for people at Tyco and close friends.” He also insisted that he conducted at least two company meetings while he was there, and told Tyco’s finance department to bill him for personal expenses, said the paper.

Although Kozlowski noted that he paid at least $1 million for the party, he concedes that he “should have paid” for some of the personal guests. He also admitted that a pricey Manhattan apartment purchased in his name actually was owned by Tyco.

However, Kozlowski said that he did not personally approve the purchase of a number of extravagant items, such as the celebrated $6,000 shower curtain, said the Journal.