Jewish World Review April 28, 2003 / 26 Nissan, 5763

Ann Woolner

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Consumer Reports

A Tyco Brand of Loyalty Spells Trouble for Lawyer | (Bloomberg) A company pays $100,000 to the chief executive's wife and another $100,000 to his paramour, and the company's top lawyer finds out. He says nothing to the board and conceals it from the Securities and Exchange Commission, or so it's alleged.

Perhaps the lawyer saw nothing amiss. The money came from a key employee loyalty program, and who's more key than a CEO? As for loyalty, this CEO had loads of it -- so much that he showered generosity on two women at the same time.

OK, so that's not the standard definition of loyalty. Certainly it's not the view of prosecutors from the office of Manhattan District Attorney Robert Morgenthau, who have accused the CEO, Dennis Kozlowski, formerly of Tyco International Ltd., of disloyalty so extreme as to be criminal. He stole from the company he was running, his indictment says.

Indicted, too, are Tyco's former Chief Financial Officer Mark Swartz and, yes, the lawyer, ex-chief counsel Mark Belnick.

What got Belnick in trouble was a special, lawyer's kind of misplaced loyalty, prosecutors contend. Belnick's problem, they say, is that he mistook Tyco executives for his clients.

"Belnick's obligation as counsel to Tyco translated into an obligation to the corporation, not to its CEO and CFO,'' prosecutors said in court papers filed last week.

Instead of protecting his client, Belnick protected the people who were stealing from his client, say prosecutors.

"If you're the general counsel for the corporation, it's very clear. The ethical rules in every jurisdiction say you represent the corporation, and not the officers,'' says Richard Painter, a University of Illinois law professor and authority on legal ethics.

In the white-collar world, in-house lawyers are sometimes suspected of being more faithful to the house than to the law. Belnick's accused of disloyalty to both.

Charged with grand larceny, securities fraud and falsifying business records, Belnick's the only corporate lawyer indicted for concealing executive wrongdoing so far in the parade of business scandals that began rolling out in 2000. With 130 ongoing federal investigations into corporate corruption, plus state investigations, it's possible he'll get company soon.

Even before the Sarbanes-Oxley Act of 2002 imposed new requirements on company lawyers, ethics rules required them to report wrongdoing to senior management or to the board of directors, says Painter. If the misdeeds are serious enough, securities law says the company must disclose them to the investing public and the SEC.

Attorney-client confidentiality protects lawyers from having to report a client's wrongdoing to authorities. But, "if a lawyer is active in helping their company conceal this,'' Painter says, "it could be criminal.''

Under the prosecution's theory, Kozlowski and Swartz swindled $600 million from Tyco through illegal compensation and stock fraud, with Belnick serving as enabler, and a well-rewarded one at that. All three maintain innocence.

Kozlowski's alleged loot, reported in news stories and government documents last year, was lavish indeed, from a $6 million Park Avenue apartment to a $2,200 gilded trash can.

Now comes the claim from prosecutors of the $100,000 payments to the incoming and outgoing Mrs. Kozlowskis, among other suspicious expenditures of the key employee loyalty program.

Belnick learned in 2000 that the program paid Kozlowski's taxes and bought Super Bowl tickets. It spent $200,000 at Tiffany's and paid for dental work. It put a roof over the head of Kozlowski's daughter, no doubt an elegant one, at an annual rent of $347,600.

By that time, Belnick had also found out that Tyco was planning to fire him and had created a $5 million reserve in anticipation of Belnick's termination, the D.A.'s office says.

So, what did he do when he learned of the freewheeling spending by the loyalty program? Prosecutors say he concealed it from the SEC, which was investigating Tyco at the time, and made no mention to the Tyco board or any of its committees.

Nor did he tell the SEC or directors when he learned that a Tyco subsidiary was improperly using reserves to meet earnings forecasts, prosecutors say. They also say he reported nothing about a $2.5 million Tyco had paid a director, Michael Ashcroft.

The SEC closed the investigation, taking no action. Belnick went to Kozlowski, the D.A.'s office says, and walked away with $2 million in cash and 200,000 shares of Tyco stock worth $10 million. Instead of getting fired, Belnick got $10 million in interest-free, tax-free loans to buy a house in Utah, from which he would telecommute.

"Belnick systematically violated his duties as a lawyer for Tyco and then asked for and got money taken from his client without the permission or authority of anyone authorized to give it,'' the D.A.'s office wrote.

Belnick denies he did anything criminal and insists everything he received was earned and authorized. The new Tyco management disagrees, and says so in a lawsuit against Belnick.

Painter says he hasn't studied the Belnick case, but he says most corporate lawyers know their loyalty lies with the corporation, not its officers, and "don't cross the line.''

Still, he says, "there are a few that don't get that point.''

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Ann Woolner is a columnist for Bloomberg News. Comment by clicking here.


© 2003, Bloomberg News