Jail break

The collapse of Tyco left its general counsel facing prison. Anthony Davis and Pamela Jarvis report on the implications of Mark Belnick’s acquittal

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.

Life at Tyco goes on
Away from all the courtroom drama, it is business as usual for Tyco’s legal department. Or should that be business as unusual?

As revealed in The Lawyer, the manufacturing conglomerate is taking a hefty axe to its legal advisers. In some cases, such as product liability, Tyco reduced its list of 300 law firms to just one – Shook Hardy & Bacon. The legal model is in some ways similar to US chemicals group DuPont’s, which has one key law firm for one area.

However, the main difference is that Tyco has plumped for one law firm for each practice area, whereas DuPont has one key legal adviser for each geographic jurisdiction.

Tyco recruited a former DuPont in-houser Jim Michalowicz as its litigation programme manager at the beginning of this year. In addition, Tyco’s deputy general counsel (litigation) Gardner Courson hailed from McGuire Woods, which was a primary DuPont adviser. Both are heavily involved in realigning Tyco’s outside counsel in litigation, part of a process which has been overseen by general counsel William Lytton.

One other similarity between the two companies is that their partnership relationships also involve various fee arrangements. For example, Shook Hardy & Bacon receive a fixed fee, which is topped up with performance bonuses.

Tyco’s move is being watched by many like-minded companies. Some, such as Pfizer in the US, Orange and Centrica, have been influenced by the conglomerate.

But it is not just companies that are watching Tyco. Law firms are too and with the axe threatening to swing in Europe, Asia, Latin America and Australia, lawyers should be sitting up and taking notice.
Dearbail Jordan

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