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Two former Tyco executives found guilty

Kozlowski, Swartz convicted of grand larceny, conspiracy

L. Dennis Kozlowski, who turned dowdy Tyco International into a giant conglomerate, and his finance chief were convicted yesterday by a New York jury of stealing $137 million from the company and earning $430 million through improper stock trades. Kozlowski and Mark H. Swartz were each found guilty on 22 of 23 counts, including grand larceny, conspiracy, and falsifying business records.

The convictions were disclosed after 11 days of jury deliberations and capped a three-year-old case that for many came to represent all that was wrong with corporate America. Instead of being remembered for their leadership of Tyco, which they managed for years from a two-story wood-frame building in Exeter, N.H., Kozlowski and Swartz may instead be forever linked to the conspicuous excess that characterized their last years at the company. A $6,000 shower curtain installed in a New York apartment that Kozlowski had the company buy and furnish for him has become a cultural emblem of greed.

''We are disappointed and will deal with this on appeal," said Swartz's attorney, Charles Stillman. Kozlowski's lawyer also said his client would appeal. Each former executive faces a maximum 25 years in jail for the grand larceny convictions, the most serious of the charges. Each was released on bail. Sentencing is set for Aug. 2.

The verdict is the latest in a string of federal and state prosecutions that followed the bursting of the stock market bubble in 2000 and the disclosure of massive accounting fraud at Enron Corp., the Texas energy firm. In March, former WorldCom Inc. chief executive Bernard Ebbers was convicted of fraud. A jury is currently deliberating in the trial of former HealthSouth Corp. chief executive Richard Scrushy, who also is charged with fraud.

According to the indictment by Manhattan District Attorney Robert Morgenthau, Kozlowski, Tyco's former chief executive, and Swartz awarded themselves $137 million in compensation that wasn't authorized by the board of directors. They also received more than $400 million by selling shares of Tyco stock while they made optimistic comments to investors.

Prosecutors charged the two with using Tyco as their personal bank. They said that in addition to their oversized salaries and bonuses, Kozlowski, 58, and Swartz, 44, abused company loan programs intended for executives who were relocating to instead buy jewelry and art, and to make personal investments.

They later forgave company loans to themselves without receiving approval from the company's board of directors, according to prosecutors. The excesses arguably reached a peak when Kozlowski threw a $2 million birthday party for his wife, Karen, on the Mediterranean island of Sardinia, half of it paid for by Tyco. Jurors watched parts of a videotape of the party, which featured guests cavorting in togas.

It was Kozlowski's sudden fascination with Impressionist and Old Master paintings that may have precipitated his downfall.

He was ousted by the board in June 2002 just before Morgenthau charged him with avoiding income taxes on his purchases of $13 million worth of paintings by having them shipped to Tyco's New Hampshire offices.

Swartz later resigned from the company, and the two were charged with a massive scheme to enrich themselves while misleading shareholders about the company's true financial condition.

The first trial of Kozlowski and Swartz ended in April 2004 when the judge declared a mistrial during jury deliberations after a juror made an ambiguous gesture to defense lawyers. She later received a threatening letter at home.

Tyco, which is based in Bermuda to take advantage of tax laws, subsequently moved its US headquarters to West Windsor, N.J. It is a major manufacturer of pipes, valves, electronic components, and healthcare supplies. Its best-known subsidiary is ADT Security Services Inc.

Several lawyers and academics predicted Kozlowski and Swartz would receive lengthy prison sentences.

''I don't think they're going to get 25 years, but they may well get something with two digits," said James A. Cohen, associate professor of law and director of clinical education at Fordham University School of Law. ''These are very serious offenses and they involved lots and lots of money."

Cohen said it is up to the presiding judge in the trial, Justice Michael Obus, to determine whether the two will remain free while they pursue an appeal.

Morgenthau's prosecutors, who were criticized for confusing jurors with too much information during the first trial, this time mounted a streamlined case.

They called about half the number of witnesses, and spent less time focusing on the details of Kozlowski's lavish apartment.

''This proves the theory that less is more," said Michael DeMarco, a partner at Kirkpatrick & Lockhart Nicholson Graham LLP in Boston.

Also, this time Kozlowski and Swartz both testified in their own defense. But the strategy may have backfired. Under questioning, Kozlowski said he could not explain why he signed a tax return that didn't include a $25 million payment from the company.

''It really helps when the prosecution can show the theft of a great deal of money," said Stephen G. Huggard, a lawyer at Palmer & Dodge LLP who specializes in defending those charged in white-collar criminal cases. ''Juries want to see money in the defendants' pockets."

Jeffrey Krasner can be reached at krasner@globe.com. Material from Globe wire services was used in this report.

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