Jail break

This summer’s acquittal of Mark Belnick, former general counsel of Tyco International, was not as surprising as it seemed. Many thought that Belnick, a highly regarded New York lawyer with impeccable credentials, was doomed to be dragged down in the Tyco scandal.

He was charged with larcenously taking a $17m (£9.3m) bonus that had not been approved by the company’s board of directors and improperly failing to disclose interest-free loans from the company totalling more than $14m (£7.6m).

Why should the jury believe that Belnick – a former Iran-Contra prosecutor and senior partner in the prestigious firm of Paul Weiss Rifkind Wharton & Garrison – had not knowingly broken the law?

Belnick did not claim that Tyco’s directors had directly authorised his compensation. His defence was that he reasonably relied on the authority of chief executive officer Dennis Kozlowski to set his compensation, and on the advice of chief financial officer Mark Swartz that the loans were proper and did not have to be disclosed.

The six-month trial of Kozlowski and Swartz ended in a mistrial the month before Belnick’s trial began; retrial is set for January 2005.

After a two-month trial that included seven days of testimony by Belnick, the prosecution failed to convince the jury that Belnick’s trust in his superiors was misplaced.

One might expect the general counsel of a major publicly traded corporation to be intimately familiar with the compensation approval requirements of his employer. But as the case unfolded, it appeared that Belnick had no reason to suspect that his own compensation did not comply with these requirements, whatever they may have been.

Belnick’s compensation had been handled openly and routinely, under the auspices of the company’s financial personnel, HR department, outside auditors and in-house and outside counsel. To show lack of authorisation, the prosecution relied on company minutes that were incomplete and directors’ testimonies that were inconsistent.
Repeatedly, the board and compensation committee made decisions not at formal meetings, but at “huddles” at which no minutes were kept. The resulting impression was that Tyco’s directors were, at best, “asleep at the wheel”.

In his closing speech, Belnick’s counsel, Reid Weingarten of Washington DC’s Steptoe & Johnson, emphasised that the directors never asked about Belnick’s compensation. Weingarten noted that the directors had been “very happy to ride up the Kozlowski elevator in the 1990s”. He said: “They made a lot of money. They essentially served as a rubber stamp.” Weingarten added that the prosecution’s idea of how a general counsel would interact with his corporate superiors was “wildly unrealistic”.

To the prosecution, Belnick “wasn’t the general counsel, he was the inspector general”. But Weingarten said that Belnick “never saw his role as watchdog of the board”.

In acquitting Belnick, the jury seems to have accepted this view. After the trial, one juror said: “All the directors and committees didn’t do their jobs. They can’t have it both ways. They either did their job and knew what was going on, or they didn’t.”

Perhaps the prosecution thought the jury would simply accept the directors’ testimonies that they did not authorise Belnick’s compensation. Instead, the jury saw beyond that to the directors’ responsibilities, and apparently concluded that, if Belnick’s compensation was not authorised by the directors, that reflected more on them than on him.

There are several lessons here. First, New York juries are still able to focus on the evidence presented and to overcome the surrounding atmosphere of scandal. Second, in white collar criminal cases, it is hard to convict when the issue is one of mens rea and the accused can tell a convincing story. Third, public companies’ in-house counsel are responsible to the entity as a whole – it is perilous for them to deal only with senior executives. Counsel should establish a close working relationship with the board of directors, particularly in light of the Sarbanes-Oxley legislation which is applicable to both in-house and outside counsel and which has expanded lawyers’ duties to public companies.

Belnick still faces massive civil litigation, including suits by Tyco and the Securities and Exchange Commission, but at least has no risk of jail time.

Anthony Davis is a partner in Hinshaw & Culbertson and Pamela Jarvis is a partner in the Gregory P Joseph Law Offices, both in New York