Former CEO L. Dennis Kozlowski, 57, and former CFO Mark Swartz, 43, remain on trial in Manhattan's state Supreme Court for allegedly stealing $170 million from Tyco by hiding unapproved pay and bonuses and by abusing loan programs.
They also are accused of illegally making another $430 million by pumping up the value of Tyco stock through lies about the company's finances from 1995 to 2002.
The two are still charged with grand larceny, falsifying business records and violating state business laws.
State Supreme Court Justice Michael Obus dismissed the enterprise corruption charge against the pair.
"The court does have serious reservations about the applicability of the enterprise corruption count," Obus ruled, adding it did not meet statutory requirements.
The enterprise corruption count was modeled after the federal RICO statute, often used to bring down organized crime operations or mobsters like John Gotti.
Although the enterprise corruption count was thrown out, it would not affect the amount of jail time facing the two executives if they are convicted. The other top count, grand larceny, carries the same 25-year penalty, and the pair could face up to 30 years in prison.
Obus's ruling came as the jury took a weeklong break before returning on Monday to hear final arguments in the extraordinarily lengthy case.
On Tuesday, defense lawyers had urged the trial judge in a session outside the jury's presence to dismiss all the charges, offering a variety of arguments. The judge rejected most of them.
Assistant District Attorney John Moscow alleged that Kozlowski and Swartz misused Tyco's relocation loans and Key Employee Loan Program (KELP) for purposes other than intended.
"The guys agreed they would take the money and call it a key employee loan," Moscow said. "That's what you call stealing."
KELP was created to help Tyco executives pay off tax bills from their stocks, rather than forcing the officials to sell off some of their Tyco stock to cover that expense.
But Swartz tinkered with the program provisions and diverted the money to pay for New York private schools — "and Tyco ends up paying for his kids' yearbooks," Moscow said.
Some of the looted money was used to purchase and decorate an $18 million Fifth Avenue apartment used by Kozlowski, prosecutors alleged. The opulent residence was home to amenities that included a $15,000 umbrella stand and a $6,000 shower curtain.
Kozlowski also allegedly used the money to finance an extravagant 40th birthday party for his wife, held on a Mediterranean island for 75 revelers. Swartz's take included an $8 million loan used to finance homes in Florida, New York City and New Hampshire, prosecutors alleged.
Tyco, which has about 270,000 employees and $36 billion in annual revenue, makes electronics and medical supplies and owns the ADT home security business.
By Samuel Maull