"We are going to get every dime back that was illegally taken or
taken without authorization. I was bagged by Dennis and Mark." That's Dennis
and Mark as in Kozlowski and Swartz of Tyco infamy. The quote is from Peter
Slusser, a Tyco director who spoke to me this week.
Slusser is a traditional, old-line investment banker who I've
known since the mid-1970s when we both worked for Paine Webber. Because of
Slusser's button-down Ivy League image, and his reputation for probity and
integrity, I've wondered on the record how in the world he could have signed
off on a $45 million severance package for Swartz, Tyco's CFO who was under
grand-jury investigation at the time he received the package and was later
indicted on fraud charges.
The deal, in fact, was made on the very day Swartz was forced
out of the company. Tyco's compensation-committee board, of which Slusser is
a member, certainly knew that Swartz was under criminal investigation by
Manhattan District Attorney Robert Morgenthau when they handed him the sweet
So, isn't this an example of the exact sort of corporate-board
malfeasance that should be prosecuted by federal and local authorities, as
well as the SEC? Slusser said no. It was the David Boise law firm, now
representing Tyco, that negotiated the Swartz deal on Aug. 1 and presented
it to the Tyco board on Aug. 14 as a fait accompli.
"It was the best deal they could work out," Slusser told me. "We
knew full well that the company would get paid back through arbitration."
Still, I asked, shouldn't the board have adjourned this decision
in light of Swartz's criminal investigation? "I had a lot of reservations
about it," said Slusser. "But he was owed the money in a pro forma sense, so
we went through with it. However, he'll never be able to keep it." For the
record, Tyco is now suing Swartz and Kozlowski to regain stolen monies,
including fraudulently earned severance packages.
Last Sept. 13, Morgenthau charged Dennis Kozlowski and Mark
Swartz with stealing more than $170 million from Tyco. He accused them of
running a "criminal enterprise" aimed at defrauding investors. The two were
charged with numerous counts of grand larceny, enterprise corruption and
falsifying business records. They were also charged with illegally obtaining
more than $400 million by selling Tyco shares while concealing information
from investors about executive compensation and loans. They could each face
a maximum of 30 years in jail for robbing the company to buy yachts, fine
art, mansions and other real-estate investments with their ill-gotten gains.
Slusser said he and other directors were furious at the covert
actions of Kozlowski and Swartz, which included unauthorized bonuses,
forgiven loans and grossed-up tax-related payments of mortgage-loan
balances. "(Their actions) were hidden from the board and, probably, from
the accountants, as well," Slusser said. "(Kozlowski and Swartz) totally ran
the financial apparatus. There were no checks and balances because the board
was kept in the dark."
Slusser said he is astonished at the whole turn of events at
Tyco, the diversified industrial conglomerate. He related how brilliantly
Kozlowski and his team seemed to be running the company. After the stock
increased tenfold, Business Week called Kozlowski one of the top executives
in the United States
"We admired Dennis and Mark, but that was before we discovered
the skullduggery," said Slusser. "No one had an inkling that these things
were going on. ... We were paying them so much king's ransom. Why did they
need more? There is no rational explanation."
I asked Slusser if he could put this in the context of the
current reform movement to improve corporate governance. "Well," he said,
"if you are dealing with guys who are crooked, they'll stay up all night to
fool you. For a short while, they'll get away with it, but eventually
they'll get caught."
Caught indeed. Under current law, both Kozlowski and Swartz are
likely to be put away for some time for using Tyco as their own piggy bank
and then cooking the books to hide their illegal insider dealing from the
board of directors and their shareholders. The same can be said for Tyco's
former general counsel, Mark Belnick. From the Justice Department in
Washington all the way down to the local level, we are witnessing the
toughest prosecution of white-collar crime in American history.
Add to that new regulatory legislation from the federal
government and the unrelenting market pressure of an 85 million strong
investor class, and you have a tidal wave cleaning up the accounting fraud,
corporate corruption and moral amnesia of the 1990s.
As Slusser noted, business execs who are bound and determined to
break the law will do so. But today, in this newly dawning era of corporate
morality, they will eventually be caught. And, let me add, punished