Kozlowski's Comedown


By Nanette Byrnes It was the same businessman's attire he has worn to power lunches and deal negotiations, something just right for addressing the shareholders' meeting of the company he headed for just shy of 10 years. But on June 4, L. Dennis Kozlowski donned his expensive blue suit for another purpose entirely: to raise his right hand and plead not guilty under the harsh lights of a criminal courtroom in downtown Manhattan.

Charged with conspiracy, tampering with physical evidence, falsifying business records, and sales tax violations, Kozlowski seems to personify the most extreme case among the recent wholesale rejection of the hard-charging executives lionized in the 1990s. Once, he was a highly paid golden boy of the go-go era, someone who got dull businesses like fire-alarm manufacturing to punch out quarter after quarter of earnings growth, fueled by the energy of hundreds of acquisitions.

Today, he's a poster boy suspect for white-collar crime, accused of going to elaborate lengths to avoid $1 million in sales taxes on paintings by artists like Renoir and Monet, which adorn the walls of his luxurious Fifth Avenue apartment.

THE CASE. Kozlowski, who resigned as CEO of troubled conglomerate Tyco International just a day before the arraignment, rushed down the stairs of the court's back entrance after the session and into an utterly changed life. Shouldering his large frame through the "perp walk" of jostling TV crews and photographers, he looked angry. His only answer to the questions reporters hurled after him: a curt "No comment."

Only an hour earlier, the same media members had jammed into a small corner conference room to hear Manhattan District Attorney Robert M. Morgenthau lay out the case against the one-time boardroom star. With the air-conditioning switched off and the windows closed to accommodate the rolling cameras, reporters representing everything from local tabloids to Britain's Financial Times strained, sweating to hear the incredible tale.

Initially, the investigation hadn't focused on Kozlowski, Morganthau said. Launched in January, it stemmed from curious transactions discovered by the New York State Banking Dept., which it suspected was a money-laundering scheme. During the investigation, the DA's office found something else: a plan allegedly perpetrated from the summer of 2000 through last June by Kozlowski and a team of unnamed art gallery managers, art advisers, and even an art trucking company.

Because New York doesn't tax art purchased for use in other states, the alleged goal was to get the paintings signed for in New Hampshire, where Tyco's executive offices are located, Morgenthau said.

RICH COMPENSATION. What makes these accusations all the more shocking is that Kozlowski was one of the highest-paid executives in the world. In the past three years alone he has made $332 million, including salary, bonus, and long-term compensation such as exercised stock options for 1999, 2000, and 2001.

Although some of the paintings were in Tyco's name, the most valuable were insured by Kozlowski, some paid for with money borrowed from a fund of executive stock options. "At a time when the city is in fiscal crisis and the state is in fiscal crisis, for someone who is that highly paid to avoid $1 million in taxes is a serious crime, and it will be treated seriously," said Morgenthau.

One time, Morgenthau said, five boxes were built and shipped empty to New Hampshire, allegedly to avoid sales tax on $12.7 million worth of paintings, including a work by Claude Monet valued at nearly $4 million. On another occasion, three paintings were picked up from Newark Airport, just outside New York City, and driven by truck to Tyco offices in Exeter, N.H., where Kozlowski's assistant allegedly signed for them.

The paintings, allegedly never taken out of the truck, were then driven back to Kozlowski's New York apartment. In December, 2001, an untaxed $425,000 painting by La Farge was allegedly taken off a wall in the apartment, brought to Tyco's offices, where an employee allegedly signed for it, and then immediately returned and reinstalled in the Fifth Avenue apartment.

"TOO MUCH WINKING." If Kozlowski's sins are like those of his company, which was lambasted for moving its headquarters to Bermuda in 1997 as a way to avoid corporate taxes, he nonetheless stands alone on these criminal charges. After posting a $3 million bond for bail and agreeing to surrender his passport to his lawyer, Stephen E. Kaufman, Kozlowski was told to be back in court on June 26.

Once hailed as the next Jack Welch, he's now keeping company with quite a different crowd. While Kozlowski stood before the judge, at the back of the courtroom was a tearful, handcuffed woman facing her own charges.

In describing Kozlowski's alleged deeds, Morgenthau drew a comparison with Tyco's corporate tax avoidance. "Over the years, there's been too much winking at this type of activity," he said. Then he urged Congress, the White House, and the Securities & Exchange Commission to take up the issue.

Meanwhile, Morgenthau's office is continuing its investigation, and he would not rule out further charges against Tyco or other individuals. Either way, Kozlowski's legacy is in tatters. Byrnes is a New York-based associate editor for BusinessWeek


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