By Ben White
Washington Post Staff Writer
Tuesday, September 20, 2005
NEW YORK, Sept. 19 -- A state judge on Monday sentenced former Tyco International Ltd. executives L. Dennis Kozlowski and Mark H. Swartz to 8 1/3 to 25 years in prison for looting the company of hundreds of millions of dollars to pay for lavish parties, luxurious homes and extravagances such as a $6,000 shower curtain.
In a case that came to symbolize corporate greed, state Supreme Court Judge Michael J. Obus also ordered Kozlowski and Swartz to pay nearly $240 million in fines and restitution. Kozlowski and Swartz were immediately taken into custody and led from a packed courtroom in handcuffs as family members of both men sobbed. The men are likely to serve at least part of their sentences in one of New York's 16 maximum-security state prisons.
The sentences for Kozlowski and Swartz follow lengthy terms meted out to other white-collar defendants convicted in a wave of criminal cases that followed the collapse of the Internet bubble and multibillion-dollar frauds at companies such as WorldCom Inc. and Enron Corp.
Former WorldCom chairman Bernard J. Ebbers, 64, was sentenced to 25 years in prison for orchestrating an $11 billion accounting fraud at his company. Because of Ebbers's age, that could amount to a life sentence. John J. Rigas, the 80-year-old founder of Adelphia Communications Corp., received 15 years in prison for stealing millions from the cable company for personal extravagances, hiding more than $2.3 billion in debt and lying to investors. Rigas's son and former Adelphia chief financial officer Timothy J. Rigas was given 20 years in prison for his role in the scheme.
Prosecutors and many shareholder groups say long sentences are necessary to deter future abuses and restore investor confidence. But some defense lawyers question the extent to which a few high-profile cases will deter bad behavior at smaller public companies that present less tempting targets for prosecutors. "Officers and directors of major corporations, multinational corporations, clearly get the message," said defense attorney Jacob S. Frenkel. "The question is whether the message has been conveyed thoroughly to officers and directors at small and mid-size companies."
Kozlowski and Swartz will be able to cut one-sixth off of their 8 1/3 -year minimum sentence if they behave well and take part in prison programs, said Linda Foglia, a spokeswoman for the state Department of Correctional Services. That would reduce the point at which they can be paroled to six years and 11 months. Inmates are eligible to apply for work release two years before their first possible parole date, and parole officials will decide how much of the 8 1/3 to 25 years the former executives must serve. Several legal experts said it was unlikely either man would serve more than 10 years in total.
There is no parole in the federal system, under which many other white-collar defendants have been tried and sentenced.
Though their sentences may be cut shorter than other executives', the time Kozlowski and Swartz spend behind bars may be in a harsher environment. Obus did not specify where the two former executives will serve their terms. He said that decision would be made by state corrections officials. But he said he did not view either man as a security risk, indicating he would not object if they are sent to a lower-security facility.
Former prosecutor David Gourevitch, however, said there were no facilities in the state system comparable to federal minimum-security prisons such as the one where entrepreneur Martha Stewart spent her five-month sentence.
"In the federal system, outside of maximum-security places, generally people are physically safe. I don't think anybody would say that about New York state prison," Gourevitch said. "And from a state perspective, this is one of the longest sentences in a corporate fraud case that I can recall."
Foglia said that in most cases, defendants sentenced to more than six years are sent to maximum-security prisons. She said it would be several weeks before the state decides where to send Kozlowski and Swartz. In the meantime, they will stay at a holding facility known as the Tombs in Lower Manhattan and then be sent to Rikers Island, the temporary jail for New York City inmates before they are sent to state prisons.
In June, a jury found former Tyco chief executive Kozlowski, 58, and former chief financial officer Swartz, 45, guilty of criminal counts of grand larceny, conspiracy, securities fraud and eight of nine counts of falsifying business records.
Obus imposed the same prison sentence on both men. He ordered Kozlowski to pay a $70 million fine and Swartz to pay a $35 million fine. He ordered both men to repay Tyco a combined $134.4 million in restitution of illegal bonuses and other illicit payments.
Kozlowski and Swartz each made brief statements in court Monday, asking Obus to be lenient. Lawyers for each also pleaded with the court to recognize the former executives' charitable works and the scores of letters sent on their behalf by friends and family.
Prosecutors, by contrast, asked Obus to send a message that corporate theft will be treated the same as grand larceny committed with a handgun. They asked for the maximum term of 15 to 30 years for both men.
In imposing the sentence, Obus said, "The heart of this case is basic larceny" and described the charges as "extremely serious." He expressed befuddlement at Kozlowski's and Swartz's plights, at one point asking, "how the defendants, with all they had going for them, managed to get themselves into this disastrous position."
Attorneys for Kozlowski and Swartz said they would seek to have their clients released on bail pending appeal of their convictions. At the sentencing hearing on Monday, state prosecutors said the Securities and Exchange Commission staff had recommended that the agency bring an accounting fraud case against Tyco. Tyco has said it expects to settle the SEC suit and has set aside $50 million for that purpose. The SEC often simultaneously files and settles accounting cases.