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Former Tyco Executives' Convictions, Fines Upheld by N.Y. High Court
Former Tyco Executives' Convictions, Fines UpheldNew York state's high court has upheld the convictions of two former Tyco executives for improperly enriching themselves with more than $100 million in loans, bonuses and stock sales. The court rejected the plea of ex-CEO L. Dennis Kozlowski and ex-CFO Mark J. Swartz for a new trial. The pair contended that attorney David Boies was improperly allowed to testify at their trial about his firm's internal investigation at Tyco and whether Tyco directors had authorized Kozlowski and Swartz's compensation.
New York Law Journal2008-10-17 12:00:00 AM
The New York Court of Appeals Thursday upheld the convictions of two former Tyco International executives for improperly enriching themselves with more than $100 million in loans, bonuses and stock sales.
The court unanimously rejected the plea of ex-chief executive officer L. Dennis Kozlowski and ex-chief financial officer Mark J. Swartz for a new trial. The pair contended, in part, that attorney David Boies was improperly allowed to testify at their trial about his law firm's internal investigation at Tyco and whether Kozlowski and Swartz were authorized by company directors to receive their compensation.
Each man is serving 8 1/3 to 25 years in state prison following their 2005 convictions for grand larceny, securities fraud, conspiracy and other charges in a case that became a symbol for corporate greed earlier this decade.
The defendants argued that Boies, Schiller & Flexner worked hand-in-glove with prosecutors in the firm's internal investigation of Tyco and that Boies' testimony about how forensic accountants often work with prosecutors to ferret out "wrongdoing" cast an impermissible "patina of officialdom" over Boies' statements in court.
The court Thursday disagreed.
"This background testimony was not unduly prejudicial," Judge Carmen Beauchamp Ciparick wrote in People v. Kozlowski, 137, and People v. Swartz, 138. "Indeed, such testimony is generally admissible, especially where, as here, it provides helpful context for the jury about complex subject matter, such as an internal investigation."
Boies Schiller had as many as a dozen attorneys working on the internal probe after being called in by Tyco's board in 2002 amid suspicions that some executives received improper compensation. The firm was hired to gather information to help Tyco defend itself against anticipated shareholder suits.
Boies testified at trial about his own credentials to conduct internal corporate investigations and about interviews he conducted with Tyco board members, Swartz and others, and whether the company's board of directors or compensation board had approved the payments to the defendants beforehand.
Boies also testified that he found "no documentation" that bonuses paid to Kozlowski and Swartz in 1999, among other payments, were approved by Tyco's board. Contrary to the defendants' claim, Ciparick wrote, such an observation "does not constitute a legal conclusion of guilt" by Boies.
"In sum, Boies recounted facts, which the jurors, in light of their experience, could use to test the merits of the charges levied against defendants," she wrote.
After their first trial ended in mistrial in 2004, Kozlowski and Swartz were found guilty in 2005 of 22 of 23 counts. Kozlowski, 61, was ordered to pay fines of $70 million and Swartz, $35 million.
Defense lawyers argued before the Court of Appeals last month that Boies' testimony was obviously an important factor in the second trial. In the first, his testimony covered three pages of trial transcript; in the second trial, 75 pages.
The convictions were upheld by a unanimous Appellate Division, 1st Department, panel in People v. Kozlowski.
Among the questionable transactions recited by Judge Ciparick in her ruling Thursday were bonuses in 1999 of $25 million for Kozlowski and $12.5 million for Swartz that were received in the form of the forgiveness of company loans and payments the executives made to themselves in 2000 and 2001 totaling nearly $26 million.
Swartz also helped Kozlowski secure $12.75 million in loans from Tyco in 2001 that were used to buy paintings, including a Monet and a Renoir, Ciparick noted.
The men argued that they were entitled to the bonuses because of enormous revenue gains Tyco made during the period and that the loans and other payments were accepted at the company.
Kozlowski had exited Tyco by the time Boies and his attorneys were called in. Swartz was still chief financial officer, though Boies recommended he be discharged, which he was in September 2002, one day before he was indicted.
Swartz also received a $50 million severance package, which he argued was evidence that Tyco's board did not believe he had done anything wrong.
The defendants sought through a subpoena duces tecum the release of 28 pages of interview notes and memorandum prepared during the Boies Schiller investigation.
The trial judge, Manhattan Supreme Court Justice Michael Obus, quashed the subpoenas on the grounds that the defendants had failed to show they could not have obtained the "substantial equivalent" of the facts through their own interviews with Tyco directors without "undue hardship."
The Court of Appeals affirmed Thursday that Justice Obus was within his discretion in quashing the subpoenas and rejecting the defense's argument that qualified immunity was waived on the documents as trial preparation materials when Tyco shared them with prosecutors prior to their presentation of the case to a grand jury.
"Defendants cite no authority for the proposition that disclosure of historical privileged documents waives the privilege covering trial preparation materials created in a subsequent internal investigation," Ciparick wrote. "We decline to so hold."
The belief of the defense that Boies Schiller shared with prosecutors the substance of interviews with Tyco board members -- interviews the defendants suspected might have indicated that the board had prior knowledge of the payments to Kozlowski and Swartz -- was denied in testimony by the company's counsel and two assistant district attorneys, Ciparick noted.
"Certainly, it is possible for attorneys to assist prosecutors without divulging their trial preparation materials," she wrote. "Absent some other proof, we conclude that Supreme Court properly held that defendants had not established any disclosure of Boies Schiller work product to the People."
At trial, all of Tyco's board members testified that they did not know of and did not authorize the bonuses and other contested compensation to Kozlowski and Swartz. The only exception was Phillip Hampton, the former lead director of Tyco's compensation committee, who died in 2001.
Kozlowski testified that Hampton authorized several of the contested payments, though no written record of such authorization exists.
The court Thursday also ruled that the size of the fines levied against the defendants was not excessive because it was in line with the amounts of improper payments received by the two.
Kozlowski and Swartz are serving time in different medium-security state prisons.
Nathaniel Z. Marmur of Stillman, Friedman & Shechtman represented Swartz.
"We were very disappointed and we firmly believe in Mark's innocence," Marmur said.
John S. Martin of Martin & Obermaier defended Kozlowski.
Assistant District Attorney Amyjane Rettew argued for Manhattan District Attorney Robert Morgenthau.
Daniel J. Castleman, chief assistant Manhattan district attorney, said Thursday that prosecutors thought they had a "pretty strong case."
"We are gratified that the court affirmed the convictions," Castleman said. "We are not surprised, but it is always good when the court agrees with our position."