Kozlowski Loses Appeal


This morning, the New York State Court of Appeals rejected the appeal of former Tyco executives Dennis Kozlowski and Mark Swartz.

The court held that testimony of an attorney who had investigated the case was not unduly prejudicial, nor was the prosecutor’s comments about that testimony on summation. With respect to subpoenaed Tyco director statements, although the defendants did properly lay the groundwork for the subpoena, and although the statements were not privileged, the judge still acted within his discretion in quashing the subpoena.

The former CEO and CFO were convicted in 2005 of nearly two dozen counts of first degree grand larceny, falsifying business records, conspiracy and securities fraud. The convictions stemmed from the improper use of Tyco funds for their own personal use.

They used a company loan program called KELP (“Key Employee Loan Program”) to buy $12.75 million worth of paintings by famous artists, millions of dollars of jewelry, and an $8.3 million stake in a sports partnership. Another loan program intended for normal relocation costs was used to buy a $7.2 million home on Park Avenue. Millions of dollars of elaborate personal expenses were covered by these “loans.” By the summer of 1999, the two executives owed more than $70 million to Tyco.

To pay that back, they gave themselves huge “loan forgiveness” bonuses, without using Tyco’s procedures for determining the amounts of such bonuses. Despite the great size of these bonuses, the entire debt was not eliminated. They then ordered more than $25 million in cash payments to themselves, plus over $12 million in stock. Tyco’s compensation committee did not receive necessary documentation, and every committee member who testified denied approving the bonuses.

After conviction, Koslowski and Swartz argued that they were entitled to a new trial. A lawyer who had taken part in the civil investigation testified that he’d had conversations with Swartz, who essentially admitted that what was done was improper. The lawyer also testified as to his own recommendations and advice to the Board during his investigation. In summation, the prosecution commented on the lawyer’s testimony, to the effect that the Board only found out about the embezzlement after the lawyers did their investigation. The defendants claimed that the lawyer’s testimony was essentially opinion, telling the jury how to decide the case, and the People’s summation bolstered that effect, creating impermissible prejudice.

The Court of Appeals disagreed, and found that “the testimony and summation complained of merely set forth facts enabling the jury to draw an inference of defendants’ guilt.” The lawyer did not present an opinion on guilt, but merely reported facts from first-hand knowledge. Facts that hurt the defendant are of course prejudicial, but prejudice is not necessarily improper. Prejudicial testimony here would only improper if the witness gave a personal opinion as to guilt.

The government’s comments, likewise, were not impermissible expressions of the prosecutor’s personal belief or opinion as to guilt, but rather “quite properly concentrated, in argument, on proved facts and circumstances and the inferences to be drawn therefrom.”

There was a second claim that a subpoena issued by the defendants had been impermissibly quashed. The court held that the defendants actually had met their burden to identify specific items and show that they were reasonably likely to contradict the People’s evidence. However, the documents sought were still privileged, and thus were not subject to production.

The privilege was not absolute, however. The materials were statements by director-witnesses, which the court held to be trial preparation materials. As such, they were not subject to the attorney-client privilege (as Tyco had argued). Nor were they subject to the absolute work-product privilege (as the government here argued). Instead, disclosure is entirely up to the trial court’s discretion.

The discretionary determination rests, oddly enough, on civil procedure: CPLR 3101(d)(2). That rule required the defendants to show that they could not get the underlying facts another way, without undue hardship. The defendants didn’t do so here, and so the judge properly exercised his discretion.

Clearly, a lot of creative thought went into the litigation and appeal of this case on both sides. There are still five years or so to go in the defendants’ sentence, so one might expect further creativity down the road.

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