Criminal executives to pay the price

June 22, 2005

Ignorance will be no defence for wrong-doing by company chiefs, reports Kurt Eichenwald.

The conviction of Tyco's Dennis Kozlowski on charges of grand larceny and conspiracy and the jail sentences handed out on Monday to Adelphia founder John Rigas and his son Timothy are underscoring what legal analysts say is the most surprising consequence of the explosion in corporate pay during the 1990s.

That is, a heightened expectation that executives know how to do their jobs and understand what is happening at their companies.

Indeed, coming after the convictions of other top executives - including Bernard Ebbers, the former chief executive of WorldCom, on charges of accounting fraud - the Kozlowski verdict demonstrates that, at a criminal trial, high pay scales can serve as the government's Exhibit A of the defendant's potential knowledge of wrongdoing.

"One of the perils of being paid an enormous amount of money is that people will ultimately conclude that you're worth it," said Robert Mintz, a former federal prosecutor. "The assumption jurors will reach is that somebody who receives large compensation is playing a critical role at the company, and a defence that you were more cheerleader than ringleader is going to be very difficult for a jury to buy."

At his trial, Mr Kozlowski - who in the 1990s was celebrated as one of corporate America's most aggressive deal makers and who had come to personify the company he had transformed - portrayed himself in his testimony as something of a slipshod, from-the-hip manager.

Tens of millions of dollars in payments to him, Mr Kozlowski testified, had been approved by the board and were discussed informally with a single director, since deceased.

He claimed he failed to pay taxes on the money because he had relied on his accountant and therefore had not been paying attention.

With their verdict, the jury rejected those arguments.

"There is an inconsistency between someone who takes the position that he built a company from scratch but forgets certain things that jurors find important and material," said Ira Lee Sorkin, another former federal prosecutor. "They are going to wonder how anyone could have risen to the top of the world, earned justifiably the pay and not known what was going on."

Mr Kozlowski's co-defendant, Mark Swartz, Tyco's former chief financial officer, fared no better with his defence that he believed the money he had received from Tyco had been authorised. Mr Swartz was also convicted.

The two men were charged with stealing $US150 million ($193.4 million) from Tyco, a conglomerate whose products range from security systems to health care devices, and taking in $US430 million more by secretly selling company shares while inflating the value of the stock.

The defence of ignorance or foolishness has been widely derided as difficult to believe. But legal analysts said that, given the circumstances of the cases, the defendants were hard pressed to argue anything else.

Similarly, in the WorldCom case, with the former chief financial officer, Scott Sullivan, testifying about his role in that company's accounting fraud, it was impossible for Mr Ebbers to argue that wrongdoing did not occur. Ignorance and sloppiness were the only defences left.

The compensation that has come back to haunt corporate executives would be hard for most wage earners to comprehend. In addition to the amount he has been convicted of stealing, Mr Kozlowski was paid hundreds of millions of dollars in salary and bonuses, including more than $US70 million in 2002.

The payments to Mr Ebbers of WorldCom were also colossal. Not only did they include tens of millions of dollars in salary and bonuses, but the company also provided him with about $US400 million in loans. At his criminal accounting fraud trial, Mr Ebbers testified that he was not intimately familiar with the operating financial details of the company that paid him so generously - a position that was rejected by the jury.

But staying off the witness stand proved to be of no benefit to Mr Rigas of Adelphia. His lawyers argued that at 79, he was too old to understand some of the financial machinations within the company he headed; the jury rejected that argument.

There is a lesson in this. Executives who want the big pay had better turn in spectacular, precision performance. Otherwise, if a scandal blows up inside the company, their own compensation may prove their undoing.

"Any highly paid corporate executive had better move swiftly to make sure they have a firm grasp on the finances of their company," Mr Mintz said. "Because at the end of the day, these cases go to show that they are going to be held to a very high standard that may come back to haunt them."

The New York Times
