The corporate fraud trial of former Tyco International executives Dennis Kozlowski and Mark Swartz began Tuesday in New York City. The CEO and chief financial officer are accused of stealing $600 million in company money to pay for their extravagant lifestyles, including mansions, yachts, fine art, and even part of a $2 million 40th birthday party for Kozlowski's wife on the Mediterranean island of Sardinia.
Both men have pleaded innocent to charges of larceny and enterprise corruption - a charge usually aimed at organized crime figures. Their legal defense team is expected to argue that the money was actually a combination of loans and bonuses approved by the company's board.
Prosecutors say Mr. Kozlowski and Mr. Swartz paid themselves $170 million in unauthorized compensation and made another $430 million on their Tyco shares by lying about the conglomerate's financial health from 1995 until 2002.
The Tyco trial is the biggest so far in a series of corporate scandals that include Enron, WorldCom, HealthSouth and the home décor tycoon, Martha Stewart.
New York University law professor Harry First is a specialist on business crime. He says the Kozlowski case is the first major test case on corporate greed, and may have an impact on other recent corporate fraud cases.
"The importance of Kozlowski is that it is an individual actually going to trial in a corporate crime case," he said. "Many of these cases in the past, virtually all, have involved guilty pleas where the defendants were reluctant to go to trial. And this is different in that regard. So this is a way to test government prosecutorial theories as to whether crimes have actually been committed."
Mr. First says the Tyco case is also a test of whether jurors will see the inflated salaries of high-flying corporate executives as totally improper or consistent with how corporations act today.
"It's more than a backlash against salaries, although that will play at the trial because jurors can understand this," he said. "At the heart of the cases that are being brought involve fraud on the shareholders, involve shareholders being taken advantage of. And in the end, the public being taken advantage of in very serious ways. Trading occurs without full knowledge, people on the inside doing things the rest of us can't. Deals are done inside corporations that if they were revealed publicly to the shareholders and to the market would be seen as fraudulent."
The two Tyco executives face up to 30 years in prison if convicted.