Trials and tribulations: Attorney Mark Belnick talks about Tyco

In an early morning speech recently, attorney Mark Belnick recounted his career as a litigator at a powerful New York firm, and the events that made him a defendant in one of the Tyco corruption cases. Acquitted on criminal charges, Belnick served his message like a cup of black coffee to the W. P. Carey MBA — Executive Program students in the audience: cutting corners ethically leaves you with no place to stand when things go wrong.

In an early morning speech recently, attorney Mark Belnick recounted his career as a litigator at a powerful New York firm, and the events that made him a defendant in one of the Tyco corruption cases. Acquitted on criminal charges, Belnick served his message like a cup of black coffee to the W. P. Carey MBA — Executive Program students in the audience: cutting corners ethically leaves you with no place to stand when things go wrong.

Once a partner in the New York firm of Paul, Weiss, Rifkin, Wharton & Garrison where he was the prot g and friend of the legendary Arthur Liman, Belnick lists service as the Deputy Chief Counsel to the U.S. Senate Iran-Contra Committee on a long and distinguished record of success. Former associates called him a straight arrow. But when the lawyer took a late-career turn away from litigation to become general counsel of Tyco International, he found himself on stage for one of the decade's numerous dramatic corporate corruption cases.

In August 2002 Belnick was indicted for grand larceny, allegedly taking a $17 million bonus from Tyco without board authorization and for failing to disclose a $15 million loan from the company. Time in one of New York State's maximum security penitentiaries — a nightmare compared to the federal white-collar lock ups — loomed. Two years later a jury found him "not guilty." The situation was a "perfect storm," Belnick said, that he could not have weathered if he had let his standards slide.

Indeed, others who played parts on that stage are paying a price for their actions. CEO L. Dennis Kozlowski and CFO Mark H. Swartz are currently serving sentences for stealing from the company. Tyco settled SEC civil charges in 2006 with a payment of a $50 million penalty. Belnick settled his civil charges with the SEC by agreeing to a fine of $50,000 and a five-year ban from serving as a corporate officer or director. Shareholder suits are still pending against Tyco.

Ethical practice

During 26 years at Paul, Weiss, the vaunted international corporate and litigation firm, Belnick built his reputation for success and ethics. A profile in New York Magazine quoted a Paul, Weiss associate describing him as a lawyer who "wouldn't even go near the line." Belnick talks about Paul, Weiss in reverential terms. It is "probably one of the best litigation firms in the U.S.," he said, "certainly in the top three on anyone's list."

"It was at Paul, Weiss where I learned to litigate, and also learned to litigate ethically," he continued.

"We litigated zealously, we litigated fiercely, we worked hard — I spent the usual 20 hour days as an associate growing up in the firm. But the notion of telling a lie in court, of deceiving a court, of changing a document, of doing anything that was other than the straight line was inconceivable, and anyone caught doing that, it would have been the end of his or her career promptly."

Belnick indicated that gain at any cost does not define success. "No one really wants to practice law that way, because anybody can cheat," he said, "but winning and representing your client correctly is a lot more important to do than finding something wrong to do that benefits your client." Belnick was approached by Kozlowski in 1998 to take the job of chief corporate counsel, which was a new position for Tyco.

A holding company, each of Tyco's companies had its own counsel, yet the overarching entity did not. "There were wonderful lawyers in the divisions, and outside counsel," he said, "but no chief corporate counsel." Kozlowski, Belnick said, came up through the ranks and lacked the Ivy pedigree that many of his peers at the top possessed. "Wall Street always had some worries about him," Belnick noted.

He speculated that was probably part of the reason he was offered the job — he brought credentials and a history of affiliation with a prestigious firm. The offer came with an enormous compensation package, and the promise that he could set tough ethical standards, fire offenders and choose outside counsel.

So he went to work, and by his account the first year was rough. Tyco employees who were used to independence didn't enjoy the new constraints he imposed. Kozlowski, he discovered, supported his efforts but "never waved the banner in front of me." His goal was to set up at Tyco the toughest compliance standards in the world.

The ethics test

In 2001, Tyco learned that a defect in sprinklers manufactured by one of its divisions would make the systems inoperable. The defect was projected to kick in around the eighth or ninth year — outside of the five-year warranty. Belnick's recommendation was to recall all of the sprinklers immediately and offer free repair. He met resistance from executives who could foresee a high price tag, but despite the potential cost, Tyco took his advice and bit the bullet.

The company ultimately spent $150 million on repairs — less than projected — but reaped large public relations benefits with customers and regulators. This was the 'come clean' approach that Belnick indicated he was trying to embed in Tyco's culture — the tactic he said he had implemented earlier in the face of an SEC investigation of Tyco's accounting practices surrounding acquisitions. Tyco had what Belnick called a "chairman's board."

Directors were "independent," he said, but all were friends of Kozlowski. One of the board members was a partner in a law firm that had handled virtually all of Tyco's acquisitions, which numbered 200 – 300 per year. "This is how it was done in the old days — firms had senior partners sit on boards," Belnick said. It was, Belnick said, "a huge conflict of interest." By the 90's the practice was less common, but Tyco was a holdover. Belnick said "no more," and began hiring other firms to handle the acquisitions — a decision that turned out to be unpopular with some on the board.

When the 2000 SEC investigation was initiated, Belnick's first move was to ask Kozlowski and Swartz if the company had anything to be worried about. When they said that there was no systematic accounting fraud, Belnick recommended hiring a tough outside attorney, opening up the books and cooperating fully. A safe room was created for the outside counsel — former SEC enforcement chief William McLucas. Again, the move was opposed by board members, who wanted to stall the SEC.

Later, questions would be raised about the documents released to the SEC, including the so-called "girlfriend document" showing "loans" totaling $100,000 to the woman who later married Kozlowski. Belnick determined that they were "non-responsive" and did not have to be turned over to the SEC. Still, Belnick's approach reduced the amount of time Tyco's stock was under a cloud and ended up with the SEC closing the investigation.

From chief counsel to defendant

In September 2001, with the SEC investigation a fresh memory, Belnick's three-year contract was up. He had intended to retire, but Kozlowski made him an offer that was irresistible. It included the $17 million bonus, and a loan for a house in Utah that was to be his "magnet house," an attraction for his children and hoped-for grandchildren. Just a year later he was under indictment. During that year Enron collapsed, and the disaster widened with discoveries of wrong-doing at WorldCom, Global Crossing and others.

"Stories were everywhere about executive fraud," Belnick said. Tyco saw its stock fall following an erroneous media report that it was under another SEC investigation which it had allegedly failed to disclose. There was no investigation at that time, but the stage was set. During that time, stories were surfacing about Kozlowski. Belnick found out that Kozlowski had paid director Frank E. Walsh some $20 million to work on a merger without informing the rest of the board.

Belnick insisted that the company hire outside counsel to determine what needed to be done about Kozlowski and the board member. At that point he was "thrown out" of the board meeting and was excluded from further meetings on the subject. By his own account he was "too arrogant to realize that I could not win a fight with the board." Belnick brought McLucas' firm back to investigate while the board employed its own firm.

In the end, Kozlowski and Swartz were convicted of stealing from the company but Belnick prevailed at trial. Belnick's defense was a fallback on his record of ethics, arguing that there was no criminal intent in his actions at Tyco. Now back in the practice of law, Belnick offers litigation and consulting services from his Manhattan office. He says Tyco itself is still strong.

"Whatever you've heard about Tyco, all of its divisions are still intact and last quarter it tripled its earnings — it's still a good company," Belnick told the students." It was a tragedy for the stockholders, who were stampeded by the media into selling their stock." And, although some still wonder why he did not simply leave the troubled corporation, Belnick asserts that he behaved ethically — which, he said, saved him.

"The overall message," Belnick said, "is that if I had not practiced ethically, if there had been a decay in a tooth that was raw, given the dental flossing I went through by the district attorney and others who were convinced that there must be something wrong, then I never would have come out of it unscathed."