In re Tyco Intern., Ltd. Multidistrict Litigation, Case No. 02-md-1335-PB.

• Citation: 535 F.Supp.2d 249
• Decision Date: 19 December 2007
• Docket Number: Case No. 02-md-1335-PB.
• Parties: In re TYCO INTERNATIONAL, LTD. MULTIDISTRICT LITIGATION.
• Court: U.S. District Court — District of New Hampshire

535 F.Supp.2d 249

In re TYCO INTERNATIONAL, LTD. MULTIDISTRICT LITIGATION.

Case No. 02-md-1335-PB.

United States District Court, D. New Hampshire.

December 19, 2007.

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MEMORANDUM AND ORDER

PAUL BARBADORO, District Judge.

Lead Plaintiffs¹ brought this class action against Tyco International, Ltd. ("Tyco"), its former auditor, PricewaterhouseCoopers, LLP ("PwC"), and five individual defendants: former Tyco Chief Executive Officer L. Dennis Kozlowski, former Chief Financial Officer Mark H. Swartz, former General Counsel Mark A. Belnick, and former directors Frank L. Walsh and Michael A. Ashcroft (collectively the "Individual Tyco Defendants"). They successfully negotiated a proposed settlement with Tyco and PwC, and now petition for final approval of the proposed settlement. The law firms representing, Lead Plaintiffs ("Co-Lead Counsel") have also applied for an award of attorneys' fees and reimbursement of expenses incurred in connection with the prosecution and settlement of this action. For the reasons discussed herein, I approve both motions.

I. BACKGROUND

I describe below only those facts and events necessary to place this settlement in context. The full extent of the alleged problems at Tyco during the relevant time period are described in detail in my orders certifying the class and disposing of defendants' motions to dismiss. See generally In re Tyco Ltd. Multidistrict Litig., 236 F.R.D. 62 (D.N.H.2006); In re Tyco Int'l, Ltd. Multidistrict Litig., No. MDL-02-1335-B, 2004 WL 2348315 (D.N.H. Oct. 14, 2004). In brief, plaintiffs allege that during the class period of December 13, 1999, through June 7, 2002, defendants misrepresented the value of multiple companies that Tyco acquired and misreported Tyco's own financial condition in ways that artificially inflated the value of Tyco stock. These fraudulent accounting practices, plaintiffs, allege, enabled the Individual Tyco Defendants to reap enormous profits by looting the company through a combination of unreported bonuses, forgiven loans, excessive fees, and insider trading. The looting, in turn, allegedly fostered a coverup by means of continued accounting fraud, materially false and misleading statements, and the omission of material information in various registration statements to cover up the misconduct all of which further-Matted the federal securities laws. Meanwhile, PwC allegedly failed to conduct its audits of Tyco's statements in accordance with Generally Accepted Auditing Standards ("GAAS") and falsely certified that Tyco's financial statements were fairly presented in accordance with, Generally Accepted Accounting Principles ("GAAP"):

A. Consolidated Complaint

Lead Plaintiffs filed their Consolidated Class Action Complaint making the allegations described above on January 28, 2003. They did so, about a year after this court dismissed a previous lawsuit against Tyco making similar allegations regarding the inflation of Tyco stock during the period from October 1, 1998, through December 8, 1808. See generally In re Tyco Int'l, Ltd., Sec. Litig., 185 F.Supp.2d, 102 (D.N.H.2002) ("Tyco I"), (granting Tyco's motion to dismiss, the original action).

B. Motion to Dismiss

In 2004, Tyco and PwC, filed motions to dismiss, adopting a "divide and conquer" strategy that treated the looting allegations and fraudulent accounting allegations as two separate, unrelated schemes. As to the looting allegations, defendants argued that the looting and attendant misconduct WAS mere self-dealing by the individual defendants at Tyco's expense, that it was not undertaken "hi connection with" the purchase of a sale or security, that the scienter of the individual defendants could not be attributed to Tyco, and that Tyco was net required' to disclose the looting. As to the accounting `fraud' allegations, defendants argued that the allegations were riot pled in sufficient detail to survive a Motion to dismiss — particularly with reaped' to causation. On October 14, 2004, lifter careful consideration, I denied the bulk of defendants' motions to dismiss, allowing Plaintiffs to' proceed on their theory that the looting and the' accounting fraud were interconnected.

In July 2005, after the Supreme Court clarified the requirements for establishing loss causation in securities fraud actions, see Dura Pharins., Inc. v. Broudo, 544 U.S. 336, 125 S.Ct. 1627, 161 L.Ed.2d (2005), defendants moved to revisit the motions to dismiss ion the question of loss. Causation. Under Dura, defendants argued, plaintiffs' theory, of loss causation (that revelations of looting, by the corporate principals caused investors to conclude that they could no longer credit the company's denials of accounting misconduct) was no longer sufficient. I denied this motion.²

C. Class Certification

Plaintiffs moved to certify the class on January 14, 2005. Among Tyco's objections to certification was' a novel "equity conflict" argument regarding the class members who presently hold a greater share of Tyco's stock than they did during the class period. Tyco argued that these "equity holders" stood to lose more as shareholders than they had to gain as class members because any payment by Tyco to the class would correspondingly reduce the value of their present holdings. Thus; argued Tyco, the interest of equity holders in protecting their present holdings conflicted with the interest of Lead Plaintiffs in recovering damages, and should therefore defeat class certification. I denied this motion because the equity holders (even though they had an interest in preventing others from recovering) nevertheless had a strong interest in recovering on their own claims against Tyco and, more fundamentally, because this potential harm to a subgroup, of the class should not bar the remaining class members from being able to proceed as a class. Tyco then filed an unsuccessful appeal of my class certification order in the Court of Appeals for the First Circuit. See In re Tyco Int'l, Ltd. Sec. Litig., No. 06-8022 (1st Cir. Sept. 22, 2006).

D. Discovery and Other Motion Practice

It would be difficult to overstate the volume of discovery in this case. Co-Lead Counsel propounded over 700 requests for admission, documents requests, and interrogatories; participated in over 220 depositions in New York, Florida, Massachusetts, and New Hampshire; and reviewed some 82.5 million pages of documents produced by defendants. This volume of discovery was necessitated by the breadth of plaintiffs' allegations, which spanned more than one hundred different allegedly fraudulent corporate acquisitions by Tyco. Moreover, because of the complexity of the alleged fraud, Co-Lead Counsel needed to retain expert consultants and forensic accountants to assist them in interpreting the information they obtained through discovery.

This discovery process was paired with aggressive, skillfully argued, and unusually challenging motion practice. Defense counsel matched the tenacity of Co-Lead Counsel, missing no opportunity to raise nonfrivolous objections or file nonfrivolous appeals of adverse decisions. This motion practice frequently explored complex, cutting-edge issues in which the state of the law changed even as this case was being litigated. In particular, the parties heavily litigated loss causation when the law in this area was in a state of flux. Plaintiffs' theory of the case requires the fact finder to draw a causal connection between the revelations of apparent corporate looting by Tyco's principals (amounts that were only a small portion of Tyco's corporate profits) and the precipitous decline in Tyco stocks. This theory is novel and exposed plaintiffs to a nontrivial risk of dismissal at the 12(b)(6) stage.

E. Settlement Negotiations

On January 13, 2004, Judge Donald E. Ziegler, retired U.S. District Judge for the Western District of Pennsylvania, assisted with an initial mediation attempt between Lead Plaintiffs and Tyco. That mediation failed because of the tremendous gap between Lead Plaintiffs' request for multibillion-dollar damages and Tyco's desire to settle for mere nuisance damages.

Starting in the fall of 2005, Lead Plaintiffs and Tyco agreed to a new mediator and a new mediation process. The new mediator was Judge Stanley Sporkin, retired U.S. District Judge for the District of Columbia and former Director of the Enforcement Division of the Securities and Exchange Commission ("SEC").³ After some initial failures to bridge the gap, Judge Sporkin adopted a new mediation strategy, appointing Eugene R. Sullivan, former chief judge of the U.S. Court of Appeals (Armed Forces), as "advocate" for Tyco and Marvin E. Jacob, certified mediator in the U.S. Bankruptcy and District Courts for the Southern District of New York and a former Associate Regional Administrator for the New York Regional Office of the SEC, as "advocate" for Plaintiffs.

The parties engaged in multiple mediation sessions under this new mediation setup, some lasting multiple days. In March 2007, after several relatively small moves, by each side over time, Judge Sporkin made another serious push to resolve, the case, working with each side in an effort to bring the decision-makers, to the bargaining table. Although the March 2007 mediation did not immediately result in a settlement agreement, both sides continued discussions until May 15, 2007, when they reached an agreement in principle to settle the claims for $2.975 billion in cash.

Lead Plaintiffs then used their agreement with Tyco in new, negotiations with PwC mediated by Judge Nicholas Politan, retired U.S. District Judge for the District of New Jersey. In June of 2007, Lead Plaintiffs and PwC reached an agreement in principle to settle for the sum of $225 million.

F. Damages Calculations

During the settlement negotiations, Dr. Mark E. Zmijewski⁴ prepared a report for plaintiffs estimating the damages suffered by the class. I describe...