In the 1990s, they were held up as corporate supermen, executives whose skills and brainpower made them so indispensable to their companies...
In the 1990s, they were held up as corporate supermen, executives whose skills and brainpower made them so indispensable to their companies that they were paid on a scale virtually unseen in history.
But in the new millennium, as the story has moved from the boardrooms to the courtrooms, they have portrayed themselves as having been fumblers, sloppy with their paperwork and unaware of crimes in their midst — yet still deserving of their gargantuan paychecks.
And for the most part, juries are not buying it.
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The conviction Friday of Dennis Kozlowski, the former chief executive of Tyco, on charges of grand larceny and conspiracy is underscoring what legal experts said is perhaps the most surprising consequence of the explosion in corporate pay during the 1990s: 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, and John Rigas, the former head of Adelphia Communications, on charges of conspiring to loot the company — 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 who is now a partner at McCarter & English in Newark, N.J.
“The assumption jurors will reach is that somebody who receives large compensation is playing a critical role at the company, and a defense that you were more cheerleader than ringleader is going to be very difficult for a jury to buy.”
At his trial, Kozlowski — who in the 1990s was celebrated as one of corporate America’s most aggressive deal makers — portrayed himself in his testimony as a slipshod, from-the-hip manager.
Tens of millions of dollars in payments to him, Kozlowski testified, had been approved by the board and were discussed informally with a single director, since deceased. He said he failed to pay taxes on the money because he had relied on his accountant and therefore had not been paying attention.
With the verdict, the jury rejected each of those arguments.
How they see it
“Most people on juries aren’t business owners. They are employees, and their bosses would never tolerate those kinds of excuses,” said John Fahy, a former federal prosecutor who is now a partner at Fahy Choi in Rutherford, N.J.
“To have someone making millions and millions of dollars saying, ‘I was disorganized; I wasn’t paying attention’ is something that jurors just can’t understand.’ “
None of this reaction, the legal experts said, stems from envy or a belief among jurors that high pay scales are, in and of themselves, evidence of criminality. Instead, it is a rational conclusion that executives would not be paid huge sums if they were inattentive or mismanaging the company.
“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, a former federal prosecutor and now a partner at Carter Ledyard & Milburn in Manhattan.
Kozlowski’s co-defendant in the case, Mark Swartz, Tyco’s former chief financial officer, fared no better with his defense that he thought the money he received from Tyco had been authorized. Swartz also was convicted.
The two men were charged with stealing $150 million from Tyco, a conglomerate whose products range from security systems to health-care devices, and taking in $430 million more by secretly selling company shares while inflating the value of the stock.
The defense of claiming ignorance or foolishness has been widely derided as difficult to believe. But legal experts said that, given the circumstances, the defendants were hard-pressed to argue anything else. There was no denying, for example, that Kozlowski received huge sums that he did not report on his taxes or in corporate filings.
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 Ebbers to argue that wrongdoing did not occur. Ignorance and sloppiness were the only defenses left.
“From a legal perspective, they had no other defense they could possibly use,” Fahy said. “They had to argue that they were disorganized or foolish.”
The compensation that has come back to haunt executives would be hard for most wage earners to comprehend. In addition to the amount he has been convicted of stealing, Kozlowski was paid hundreds of millions of dollars in salary and bonus, including more than $70 million in 2002, his final year at the company. Much of those payments came in the form of restricted stock.
The payments to Ebbers by WorldCom were also colossal. They included tens of millions of dollars in salary and bonuses, and the company also provided him with about $400 million in loans.
At his criminal accounting-fraud trial, Ebbers testified that he was not intimately familiar with the operating financial details of the company that paid him so generously, a position rejected by the jury.
Of course, there is no foolproof guide to what juries will do. Even now, there are signs jurors can struggle with deciding cases against highly paid former chief executives who maintain they were left in the dark about wrongdoing.
A federal jury in Birmingham, Ala., has been deliberating for 16 days in the criminal fraud case against Richard Scrushy, the former chief executive of HealthSouth; the jurors have told the judge in the case that they are unable to agree on a verdict for the charges stemming from a false-accounting scheme at the company.
No time on stand
The Scrushy case differs in one important respect from those involving Ebbers and Kozlowski: The defendant never took the stand to explain how widespread wrongdoing could take place at his company without his knowledge.
In other words, Scrushy has not explained to jurors the essence of his defense that he was duped by underlings, former executives who have pleaded guilty to fraud and testified against him. Instead, he has compelled prosecutors to prove that he knew of wrongdoing rather than trying to explain away why he did not. Deliberations resume tomorrow.
Staying off the witness stand proved to be of no benefit to Rigas of Adelphia. His lawyers argued that, at 79, he had been too old to understand some of the financial machinations within the company he headed; the jury rejected that argument and convicted him. He is to be sentenced tomorrow in U.S. District Court in Manhattan.
There is a lesson in all of this. Corporate executives who want the big pay had better turn in precision performances, legal experts said. 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,” 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.”