People v. Kozlowski
| Decision Date | 16 October 2008 |
| Docket Number | No. 137.,No. 138,137.,138 |
| Citation | 898 N.E.2d 891,11 N.Y.3d 223 |
| Parties | The PEOPLE of the State of New York, Respondent, v. L. Dennis KOZLOWSKI, Appellant. The People of the State of New York, Respondent, v. Mark H. Swartz, Appellant. |
| Court | New York Court of Appeals Court of Appeals |
In this appeal relating to the convictions of two former executives for crimes associated with corporate wrongdoing, we are asked to determine whether the admission of an attorney's testimony concerning certain facts related to a corporate internal investigation improperly conveyed to the jury an opinion regarding defendants' guilt. We conclude that this testimony— and the prosecutor's summation comments thereon—did not convey such an opinion. Second, we hold that Supreme Court did not abuse its discretion in quashing defendants' subpoena duces tecum, which sought the factual portions of certain interview notes and a memorandum prepared during the course of the internal investigation. Although defendants satisfied the minimal threshold showing necessary for enforcement, the materials defendants requested are shielded from production by the qualified privilege covering trial preparation materials (see CPLR 3101[d][2]). Finally, we do not reach the question whether the fines imposed under Penal Law § 80.00 violated Apprendi v. New Jersey, 530 U.S. 466, 120 S.Ct. 2348, 147 L.Ed.2d 435 [2000], because we conclude that if error exists it was harmless.
Defendants are the former chief executive officer (L. Dennis Kozlowski) and chief financial officer (Mark H. Swartz) of Tyco International Ltd., a publicly-held diversified manufacturing company. After a nearly six-month trial, a jury convicted defendants of 12 counts of first degree grand larceny (Penal Law § 155.42), eight counts of first degree falsifying business records (Penal Law § 175.10), one count of fourth degree conspiracy (Penal Law § 105.10[1]) and one Martin Act count of securities fraud (General Business Law § 352-c [5]).1 The principal charges concerned defendants' theft of four multimillion-dollar "bonuses" between 1999 and 2001.
Defendants' convictions arose primarily out of their abuse of two Tyco loan programs: the Key Employee Loan Program (KELP) and the relocation loan program. KELP allowed defendants and other executives to borrow funds to pay taxes due upon the vesting of restricted stock. The relocation loan program covered certain moving expenses incurred when the company transferred an employee to a new geographic area. Defendants did not, however, utilize these programs for permissible purposes. Instead, they incurred debts under them that were used to finance opulent lifestyles.
For example, in 2001, Swartz assisted Kozlowski in charging $12.75 million in purported KELP loans to cover the cost of nine paintings, including a Monet and a Renoir. These paintings were hung in a $30 million Fifth Avenue apartment that Kozlowski shared with his wife.2 Kozlowski also purchased a $7.2 million Park Avenue residence, which he later relinquished as part of a divorce settlement, by charging it to his Tyco relocation account as a no-interest loan. Additionally, Kozlowski utilized KELP loans to finance millions of dollars in jewelry purchases and an $8.3 million stake in a New Jersey sports partnership. Swartz similarly had millions of dollars in company loans transferred to his personal accounts to cover the costs of personal expenditures and investments. By August 1999, Kozlowski and Swartz owed Tyco $52.7 million and $17.4 million, respectively. To satisfy these obligations, defendants turned to Tyco's "Incentive Compensation Plan."
Under the Plan, defendants were entitled to a base salary regardless of the company's performance, but had the potential to earn "performance awards," or bonuses, by exceeding certain performance goals or "hurdles." These awards took the form of cash payments and the vesting of restricted stock. In general, Swartz's potential awards were half those of Kozlowski's.
Performance goals were established by Tyco's four-member Compensation Committee, under authority delegated to it by the corporation's board of directors. The Incentive Compensation Plan specifically provided that prior to any payments the Committee would certify that the performance goals had been satisfied. Such certification generally took place at the close of Tyco's fiscal year, which ended on September 30, when audited financial results were available.3 The Committee would review information packages prepared by employees working under the direction of defendants. In addition, Swartz would appear before the Committee to explain whether that year's performance goals had been satisfied. Following its review, the Committee—acting as a whole—would determine whether any bonuses were due defendants and record its awards in the official minutes.
These procedures were not employed with respect to the four so-called "mega-larceny" bonus counts, under which the jury convicted Kozlowski and Swartz of stealing $77 million and $44.5 million, respectively. Two of these bonuses—those paid in August 1999 and August 2000— took the form of reductions of debts that defendants owed Tyco. During the relevant time periods, defendants' loan balances were considerable. Even after they ordered bonus payments of $25 million (Kozlowski) and $12.5 million (Swartz) in August 1999, Kozlowski still owed $27.7 million and Swartz owed $4.9 million. Those amounts did not decrease over time. Indeed, in August 2000, when defendants facilitated a second round of "loan-forgiveness" bonuses, including a "tax gross-up," that were valued at $32.97 million for Kozlowski and $16.6 million for Swartz, their respective loan obligations stood at $25 million and $8.3 million.
The remaining bonus counts concerned payments made in November 2000 and August 2001. In the first, defendants ordered cash payments for themselves, totaling $17.2 million (Kozlowski) and $8.65 million (Swartz). In connection with the November 2000 bonus, defendants also received $8.2 million (Kozlowski) and $4.1 million (Swartz) worth of stock. The August 2001 bonus took the form of a vesting of restricted stock. After the bonus transaction was processed, defendants sold that stock for $8.2 million (Kozlowski) and $4.1 million (Swartz).
Common to all four of these bonuses was the absence of documentation in the information packets provided to the Compensation Committee or that Committee's minutes authorizing the bonuses that defendants received. In addition, every member of the Compensation Committee who was available to testify at trial denied approving these purported bonuses.
Defendants asserted, however, that the bonuses had been properly authorized. As to the first three bonuses, their claim rested primarily upon Kozlowski's communications with the late Philip Hampton, the former chair of the Compensation Committee.4 Kozlowski testified that he had explained the justification and mechanics of these bonuses to Hampton. According to Kozlowski, Hampton's response was that he was "fine with" the bonuses and that he would "handle" the authorization of the payments by "dealing with the issues" raised by the Compensation Committee and by requesting additional materials from Kozlowski and his subordinates, if necessary. Defendants proffered no documentation from Hampton or Kozlowski reflecting these assurances. Swartz did assert that he made certain presentations to the Compensation Committee and the board, but also offered no evidence to support that claim.
Hampton died prior to defendants' receipt of the August 2001 bonus. Kozlowski claims that this bonus was approved by Stephen Foss, then-chair of the Compensation Committee. After Kozlowski told him that the bonus had been approved, Swartz ordered that it be processed. Under the heading "FY 2001 Projected Incentive Plan Projected Payments," the Compensation Committee's October 2001 minutes contain a resolution stating that the restricted stock bonus "vested on June 20, 2001." But defendants had already sold this stock to a Tyco subsidiary in August 2001, long before the Compensation Committee passed this retroactive vesting resolution. There is no documentation or third-party testimony demonstrating that the Committee was aware at the time of passage that such sales had occurred.
In April 2002, Tyco retained the law firm of Boies, Schiller & Flexner LLP (Boies Schiller) to conduct an internal investigation into Kozlowski's payment of a $20 million investment banking fee to a member of the company's board, Frank Walsh.5 The May 17, 2002 retention letter memorializing this engagement states that it encompassed "any litigation arising from or relating to" a review and analysis of transactions between the company and "certain of its directors and officers." Such litigation, including a federal...
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