Nov 20, 2020 in Case Studies

Dennis Kozlowski

Case Study - Module 7



This paper researches a white-collar crime related to criminal law and the business world. It discusses the scandal in Tyco, which used to be one of America's major corporations, with operating revenues of nearly 40 billion dollars and 240,000 workers. Tyco Laboratories started the operations in 1960, providing the experimental work for the American administration (Neumann, 2011).

Facts of the Case

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The major individuals responsible for the humiliation were Dennis Kozlowski and Mark Swartz. Dennis Kozlowski was hired by the organization in 1975 as assistant controller, and, finally, became chairman of the board in 1993 (Neumann, 2011). Kozlowski was recognized for extremely abundant style of living. Mark Swartz used to be the Chief Finance Officer of the organization. He worked under Dennis Kozlowski. It was understood during the trial that these two felons committed a fraud and worked against the companys shareholders.

The fraud started to uncover when the members of Securities and Exchange Commission or SEC were investigating the restatement of Tycos stock price. Dennis Kozlowski's business practices shocked the members of this commission (Neumann, 2011). Thus, in 1999, SEC started the investigation of Tyco's business, which resulted in the restatement of the organizations earnings. In January, 2002, dubious accounting practices were discovered (Neumann, 2011).

It turned out that the company had forgiven a $19 million no-interest loan to Dennis Kozlowski in 1998 and had paid CEO's income taxes on the loan. It was discovered that the Tycos stock price had been overestimated, and that CFO and CEO had sold shares worth one hundred million dollars and then publicly asserted that Kozlowski was holding them, which was a falsification told to the investors (Neumann, 2011).

The truth was uncovered by Robert Morgenthau, Manhattan District Attorney, who was checking Kozlowskis businesses for income tax evasion for fine art work he had bought. As Morgenthau kept investigating into the record keeping of the company, it was discovered that there were other instances of fraud, such as a ten-million dollar loan that was completely forgiven by the organization, and all the interest was billed to the company (USA Today, 2005).

Key Details about the Trial

When the deceitful actions of CEO and CFO were exposed, the organization filed the lawsuit against individuals who were involved. The entire trial occurred based on finding from the SEC. On October 7, 2003 the trial started (USA Today, 2005). The prosecution team asserted that Kozlowski and Swartz were crime bosses who looted the business, with no regard for anybody but themselves. The defense declared that the defendants were honest people, who were being depicted as felons by media. The jury was demonstrated a video showing extremely lavish lives the defendants had, particularly the fortieth birthday of Kozlowskis spouse (Neumann, 2011). The major hit to the defense was a photo of Kozlowskis 6,000 dollar shower curtain. The trial dragged on into April of 2004, when one juror, Ruth Jordan, made "ok" sign to the defense team. It was never discovered what the sign was supposed to mean; however, it justified mistrial (USA Today, 2005).

The following trial started on January 26, 2005 with new twist from prosecution (USA Today, 2005). Initially, they had focused on how the defendants spent the stolen money, rather than concentrating on the fact that they did steal the money. This time, there was no mentioning of the lavish life or expensive curtain (Warner, 2005). On April 27, 2005 Kozlowski testified that he was completely entitled to do what he did (Warner, 2005).This was a change as well, as Kozlowski had not say anything about it during the initial trial (Warner, 2005). Despite all efforts, on June 17, 2005, both felons were found guilty of eight counts of first degree falsifying business records, 12 counts of grand larceny, a count of fourth degree conspiracy, and Martin Act count of securities fraud (USA Today, 2005). The major charges concerned the stealing millions of dollars in "bonuses" in 1999-2001 (Crawford, 2005).

All charges occurred mainly out of exploitation of relocation loan program and key employee loan program or KELP. CEO and CFO took out several loans and forgave them by naming them "bonuses", but none of these loans were accepted by the board of directors (Crawford, 2005). The loans were to be utilized for relocation expenses, and KELP was a loan program created to assist the major employees in paying taxes on stock options. Rather than utilizing loans for these aims, they were spent on spendthrift life, expensive works of art, ownership in the professional baseball team and many other personal expenses (Neumann, 2011).

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Fairness of the Sentence

The defendants were found guilty of all but one of the charges that were brought against them, which is quite fair. The sentence passed on to Kozlowski was 8.33 years to 25 years (Crawford, 2005). Additionally, both defendants were forced to provide 134 million dollars in restitution for their deeds. Thus, Kozlowski was to pay 70 million dollars and Swartz was to pay 35 million dollars. Besides the sentence, the additional punishment was that Kozlowskis wife visited him only once in jail to let him know that she wanted a divorce (Warner, 2005).

The sentence is fair as the organization did not collapse. Tyco is still working, mainly due to the fact that it was a lawful business to begin with. It was not any sort of a pyramid scheme but a workable organization, which performed in a real business environment, driven by enthusiastic employees on the operations level.

Moreover, both defendants are ruined now. They owe more restitution than they are worth, they are old, and no company will ever trust them to manage anything again. They will never be capable of coming back to previous lifestyle and will be forced to lead the life of ordinary people. Thus, it is a quite fair punishment for these people as it will force them to experience the harm which they caused to Tyco and the common men. Many employees lost their retirement and jobs due to Kozlowskis and Swartzs fraudulent deeds, and both previous CEO and CFO should have none as well. The restitution will assist Tyco in restoring those jobs and retirement plans.

Ethical Issues Related to This Case

The unlawful and also unethical conduct took place when CFO and CEO were taking transactions which were not permitted by the board of directors. The board of directors was to support each bonus, or loan forgiveness, as the bonus reward. However, five former Tyco directors asserted that they knew nothing of the doubtful payments (Crawford, 2005). The loans utilized by CFO and CEO were also abused. They were supposed to be used for replacement expenses but were utilized to purchase luxurious things for living.

One of the most obvious ethical infringements which were made in this case was the fact that Dennis Kozlowski was persuading shareholders that he hardly ever sold his stock. His aim was to force investors to pump more money into the organization, but he was not holding own stock, as he understood that his acts were dangerous and irresponsible.

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One more moral violation committed by Kozlowski was the donations to charity. He kept asking for leniency based on the sum of money which he had given to charity. It was strange that nobody pointed out that the money he was providing was stolen from other people, and the donations were in fact merely the tax shields for his deceptive operations. Kozlowski was acting on boards of the non-profits that he gave to charities and gained additional benefits from that as well. His plans were completely unethical and he played with other humans for own personal gain. Thus, the defendants did not care about the outcomes of their deeds, and even though they utilized the money to help non-profit organizations, they still benefitted from this by evolving tax shield.

To make a conclusion, Dennis Kozlowski and Mark Swartz had both mens rea and actus reus. The actus reus was due to the fact that they committed the guilty act. They were accountable for the crime of stealing from Tyco. The mens rea became obvious as the prosecution started revealing paperwork trail, which proved that Kozlowski was forgiving loans so that both felons could enjoy the plentiful style of living. There was not merely the performance of the forbidden action but also criminal intent to do so. Thus, there was the intent to do damage, and Dennis Kozlowski and Mark Swartz were fairly convicted.


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