In re Tyco Intern., Ltd., Securities Litigation
| Decision Date | 22 February 2002 |
| Docket Number | No. 00-MD-1335-B.,00-MD-1335-B. |
| Citation | 185 F.Supp.2d 102 |
| Parties | In re TYCO INTERNATIONAL, LTD., SECURITIES LITIGATION |
| Court | U.S. District Court — District of New Hampshire |
Joseph H. Weiss, Weiss & Yourman, New York City, Norman Berman, Berman DeValerio & Pease, Boston, MA, Frederick E. Upshall, Jr., Upshall, Cooper & Temple, P.A., Concord, NH, Paul R. Kfoury, Sr., Wiggin & Nourie, Manchester, NH, Steven G. Schulman, Milberg Weiss Bershad Hynes & Learch LLP, Jeffrey M. Haber, Bernstein Liebhard & Lifshitz, New York City, for Plaintiffs.
Edward A. Haffer, Sheehan Phinney Bass & Green, Manchester, NH, Stephen Madsen, Cravath Swain & Moore, Lewis J. Liman, Wilmer Cutler & Pickering, New York City, for Defendants.
The plaintiffs in this securities fraud class action contend that, from October 1, 1998 through December 8, 1999 ("the Class Period"), defendant Tyco International Ltd., acting under the control, at the behest, or with the knowledge of individually named defendants Michael A. Ashcroft Mark A. Belnick, L. Dennis Kozlowski, Robert P. Mead, and Mark H. Swartz, artificially inflated the price of Tyco's stock by misleadingly promoting Tyco as a "turn-around" specialist able to acquire and then wring profits from underperforming companies. In their second amended complaint, plaintiffs elaborate upon this contention by complaining of the existence of a Class Period scheme whereby defendants issued false and misleadingly positive public statements about Tyco's earnings-growth capacity (and the earnings-growth capacity of two companies Tyco acquired during the Class Period) while falsely "substantiating" the statements in Tyco's public financial reports by (1) causing the two, soon-to-be-acquired companies to overstate certain merger-related accounting reserves prior to the mergers, thereby making the earnings stated in the post-merger quarters look good by comparison to the pre-merger quarters; and (2) reversing the intentionally overstated reserves following the mergers, thereby making the earnings stated in the post-merger quarters look exceptionally good by comparison to the pre-merger quarters. Plaintiffs assert three claims for relief under §§ 10(b), 20(a) and 20A of the Securities Exchange Act of 1934 ("the Exchange Act"), 15 U.S.C. §§ 78j(b), 78t(a), 78t-1(a), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5. The Farmers Company, representing a subgroup of plaintiffs holding shares in one of the acquired companies prior to its merger with Tyco, also asserts three claims for relief under §§ 11, 12(a)(2), and 15 of the Securities Act of 1933 ("the 1933 Act"), 15 U.S.C. §§ 77k, 771(a)(2), and 77o.
Defendants have moved to dismiss the second amended complaint, arguing, inter alia, that the Exchange Act claims fail to satisfy applicable pleading standards supplied by the Private Securities Litigation Reform Act of 1995 ("PSLRA"), 15 U.S.C. § 78u-4(b), and that the 1933 Act claims are barred by the Act's one-year statute of limitations. I agree and grant defendants' motion.
At the outset, I wish to be clear about the nature of the record on which the ensuing discussion is predicated. First, in the second amended complaint, plaintiffs expressly rely on, and often quote directly from, a number of publicly available documents, such as press releases and SEC filings. Defendants have provided complete copies of many of those documents, and plaintiffs have not challenged their authenticity. Accordingly, the documents effectively merge into the pleadings, and I shall rely upon them for purposes of explicating the allegations in the second amended complaint without converting the motion to dismiss into one for summary judgment. Beddall v. State Street Bank & Trust Co., 137 F.3d 12, 17 (1st Cir.1998); Shaw v. Digital Equip. Corp., 82 F.3d 1194, 1220 (1st Cir.1996).
Second, at the November 20, 2001 hearing on the motion to dismiss, I asked plaintiffs to submit a chart, keyed to the second amended complaint, (1) detailing the specific statements plaintiffs regard as false and misleading; and (2) explaining why the statements are misleading. In doing so, I stated that my request was prompted by a desire to understand the nature of the fraud that had been alleged, and that I was not inviting plaintiffs to assert new arguments or to supply additional factual detail.
In response, plaintiffs filed a chart, spanning a total of 162 pages, containing numerous bracketed "examples" of alleged accounting malfeasance ostensibly designed to illuminate plaintiffs' generally stated allegation that defendants caused two acquired companies to overstate unspecified reserves prior to the mergers and then reversed those reserves post-mergers in order to create, with respect to each company, the appearance of a pronounced bottom-line turn around. See Document No. 67. These examples consist of a number of detailed argumentative allegations that, as shall be apparent from my discussion infra, should have been pleaded but were not. The passages are, in other words, an untimely effort to supply the specificity that is necessary to sustain a viable securities fraud complaint.
Defendants have not had an opportunity to respond in detail to these allegations, and it would be unfair to require them to do so now for three reasons: (1) plaintiffs have already had three opportunities to plead with sufficient particularity to withstand a Fed.R.Civ.P. 12(b)(6) motion, but have fallen well short of stating a viable securities fraud claim on each occasion; (2) plaintiffs do not adequately explain how the allegations in the bracketed passages are reasonably inferred from the Tyco financial statements upon which they are based; and (3) my review of the financial statements on which the allegations in the bracketed passages are based does not suggest that the inferences drawn are reasonable. I therefore shall not regard the argumentative allegations set forth in the bracketed passages to be incorporated within the second amended complaint, and shall limit my recitation of the background of this case to the factual and argumentative allegations actually made in or fairly implied by that pleading.
Tyco manufactures a broad array of products, e.g., fire protection systems, and provides services directly to consumers, e.g., electronic security services. Tyco's common stock is actively traded on the New York Stock Exchange under the ticker symbol "TYC."
Since 1992, Tyco has acquired hundreds of companies and/or product lines. As a result of its financial performance after these acquisitions, Tyco developed a reputation as a "turn around specialist," i.e., a company that can dramatically increase the profitability of the companies that it acquires. This case concerns two acquisitions Tyco made in 1998 and 1999.
On May 25, 1998, Tyco entered into an agreement with United States Surgical Corporation ("USSC") pursuant to which USSC would merge into a Tyco subsidiary. As part of the agreement, Tyco assumed $587 million of USSC's debt and gave USSC's shareholders 0.76 of a share of Tyco common stock for each share of USSC stock that they held. The acquisition, which was accounted for as a pooling of interests,1 was to become effective as of October 1, 1998 and was valued at approximately $3.9 billion.
On July 29, 1998, USSC filed a Form 10-Q with the Securities and Exchange Commission (the "SEC"). In this 10-Q, USSC's last quarterly statement prior to the effective date of the acquisition, USSC stated that its net income for the quarter ended June 30, 1998 had been $29 million, an increase of 37% over the same quarter in 1997. In addition, USSC reported that it had achieved a net income of $69 million during the nine-month period ended June 30, 1998.
On October 1, 1998, the effective date of Tyco's acquisition of USSC, Tyco issued a press release stating that the acquisition would provide "great opportunities for revenue growth and an immediate bottom-line impact." But in a Form 8-K filed with the SEC on December 10, 1998, Tyco reported that USSC had in fact experienced a net loss of $212 million for the year ended September 30, 1998.
On April 20, 1999, Tyco announced that its healthcare products division, of which USSC was now a part, had achieved earnings of $322.5 million for the quarter ended March 31, 1999. This represented an increase of 69% from the same quarter in 1998. In a press release, Tyco attributed much of this increase to the acquisition and successful integration of USSC: "The integration of [USSC] into the Tyco Healthcare Group continues to be ahead of schedule leading to increased margins this quarter."
On November 23, 1998, Tyco announced that it had reached an agreement with AMP, Inc. ("AMP"), pursuant to which AMP would merge with a Tyco subsidiary and each AMP shareholder would receive 0.7839 of a share of Tyco common stock in exchange for each of their AMP shares. This transaction, valued at $11.3 billion and accounted for as a pooling of interests, was Tyco's largest acquisition to that point. The deal was expected to be completed in the spring of 1999.
In a press release announcing the acquisition, defendant L. Dennis Kozlowski, Tyco's Chairman and Chief Executive Officer, stated:
The combination with Tyco provides AMP a clear path to becoming the lowest cost manufacturer, while providing attractive margin improvement resulting in double-digit earnings growth and strong cash flows for the foreseeable future .... The transaction will provide an immediate positive earnings contribution to our shareholders.
In meetings with securities analysts, Kozlowski predicted that the acquisition of AMP would add twelve cents per share to Tyco's profits for the fiscal year ended September 30, 1999, thirty-five to forty cents per share for the 2000 fiscal year, and fifty to sixty cents per share for the 2...
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