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........--..„,..___/014\02 (aV 0 8 7 8
UNITED STATES DISTRICT COURTS OUTHERN DISTRICT OF NEW YORK - '
- - XALLAN CARLIN, .02-CV-on behalf of himself and ail •others similarly situated, .
•. -
Plaintiff, -: CLASS ACTION COMPLAINT
-against- : FOR VIOLATIONS OF: FEDERAL SECURITIES LAW
TYCO INTERNATIONAL LTD., L. DENNISKOZLOWSKI and MARK SWARTZ,
; JURY TRIAL DEMANDED
•Defendants. .
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Plaintiff, by and through by his attorneys, as and for
his Class Action ComplainL, alleges upon personal knowThdge as to
his own acts and as to all other matter upon information and. '
belief based upon, inter alia, the j.nvestigationnade by and,
through his attorneys, which investigation included, ambAcc, other.,
,-- .things r a review of reports filed with the Securities ' .nd Exange
Commission (in.71,11ding without llmiLtion, Form 10-s, Yorm10-Q's.,
and proxy staLements), publiEhed reporL, news articles, , ,41-101
informatiOn concerning the daily prices and trading voiliMe of Tyco
International Ltd. ("TYCO") securities, as follows:
JURISDICTION
1. The claims asserted herein arise under and pursuant to
Sections 10(h) and 20(a) of the Exchange Act 15 U.S.C. gg 78j (b
and 78t(a) and Rule 10b-5 promulgated thereunder hy the Securities—
and Exchange Commission 17 C.F.R. §240.1Db-5.
2. This Court has jurisdiction over the subject matter of
this action pursuant to 28 U.S.C. 1.331 and 1337, and Section 27
of the Exchange Act 15 U.S.C. § 78aa.1
VENUE
3. venue is proper in this district because many of the
material acts and injuries alleged herein occurred within the
Southern District of New York and the stock of TYCO is traded here,
and plaintiff and members of the class reside here.
4. In connection with the acts, conduct, and other wrongs 1
complained of herein, the defendants, directly and indirectly, used
the means and instrumentalities of intrstate commerce, including
the mails, telephone:, communications and the facilities of
interstate commerce.
THE PARTIES
5. Plaintiff Allan Carlin, resides in New York, and
purchased 2,010 shares of TYCO stock between February 2000 and July
2000.
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6. Plaintiff and class members relied or are deemed to have
relied on the market prices and on Defendants to prepare truthful
and complete filings.
7. Tyco International Ltd. ("TYCO") is incorporated under
the laws of Bermuda and maintains its executive offices in New
Hampshire. TYCO holds press conferences, meetings with analysts,
meetings with its investment bankers, its stock is traded, and it
transacts substantial other business in this District.
8. The individual Defendants (the "Individual Defendants"),
at all time relevant to this action, served in the capacities
listed below;
(a) Defendant Dennis Kozlowski ("Kozlowski-) served as
Chairman of the Board of Directors, President, and Chief Executive
Officer since July 1997, and throughout the class period.
(h) Defendant Mark Swartz ("Swartz") served as Chief
Financial Officer since July 1997, and throughout the class period.
9. By reason of Lheir management positions, Kozlowski's
membership on TYCO's Roard of Directors, their ability to make
public statements in the name of TYCO, and their control or
influence over the presentation and content of TYCO'S statements to
investors, the Individual Defendants were and are controlling
persons, and had Lhe 'Dower and influence 70 cause (and did cause)
TYCO to engage in 7.he unlawiul conduct complained of herein.
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CLASS ACTION ALLEGATI9NS1
10. This action is brought as a class action pursuant to Rule
23(a) and 23(b) (3) of the Federal Rules of Civil Procedure, on
behalf of plaintiff and all persons and entities who purchased,
converted, exchanged, or otherwise acquired the common stock of
TYCO from February 1, 2000 through February 1, 2002, both dates
inclusive (the "Class Period"). Rxcluded from the class are
defendants herein, members of the immediate family of the
defendants, any entity in which any of the defendants has a
controlling interest, and the legal representatives, heirs,
successors or assigns of anv of the defendants.
11. This action is properly maintainable as a class action
for the following reasons:
(a) The Class is so numerous that joinder of all members is
impracticable. TYCO's common stock has been actively traded during
the Class Period on the New York Stock Exchange, an efficient
market. There are at least thousands of members of the Class
located throughout the United States.
(b) ThCLC are common questions of law and fact involved
herein which predominate over any questions affecting only
individual members of The Class. These common questions of law and
fact include:
(i) Whether the federal securities laws wOre
violated by defendants acts as alleged herein:
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(ii) Whether the documents and filings
disseminated by defendants to the investing public in connection
with omitted and/or misrepresented material facts; and
(iii) The extent of injuries sustaned by-
members of the Class and the appropriate measure of damages.
(c) Plaintiff's claims are typical of the claims of the other
members of the Class. The damages suffered by plaintiff and all
iother Class members arise from and were caused by the same
violations and course of conduct, Plaintiff does not have
interests antagonistic to, or in conflict with, the Class,
(d) Plaintiff will fairly and adequately protect the
interests of the members of the Class and has retained competent
counsel experienced in class and securities litigation to
vigorously prosecute this action.
(e) A class action is superior to other available methods for
the fair and efficient adjudication of this controversy. Plaintiff
knows of no difficulty to be encountered in the management of this
action that would preclude its maintenance as a class action.
Furthermore, since the damages suffered by individual members of
the Class may be relatively small, the expense and burden of
individual litigation make it impracticable for the members of the
Class to seek redress individually for the wrongs they have
suffered.
(f) Notice can be provded to Class members via a combination
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of published notice and first class mail using techniques and forms
of notice simi1ar to thoso customarily used in class actions
arising under the federal securities laws.
12_ Plaintiff will rely, in part upon the presumption of
reliance established by the fraud-on-the-market doctrine in that;
(a) defendants made public] misrepresentations during the
Class Period, as alleged herein;
(b) the misrepresentations were material;
(c) shares of TYCO securities were traded on a developed
national stock exchange, namely the New York Stock Exchange, which
is an efficient markeL within the meaning of that term in the
context utilized herein;
(d) plaintiff and the Lher members of the Class purchased
their TYCO securities between the time defendants made the
representations and the time the truth was revealed, and made such
purchases without knowledge of the talsty of the
13. eased upon the foregoing, plaintiff is entitled to a
presumption of reliance upon the integrity of the market with
respect to the omissions alleged herein.
UNDERLYING FACTS
14. During the Class Period, TYCO, through . the Individual
Defendants and otherwise, made a series of positive statemenLs
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about TYCO, its management procedures, and its expected growth.
15. 'or but one example, on march 14, 2001, on CNBC's Power
Lunch, defendant Dennis Kozolowski represented on future guidance
with regards to the company moving forward in an economic downturn:
Around future guidance, we're comfortable withwhat we have for the guarter and the year. Ifyou quickly take a look at TYCO's $38 billionin sales from 20,000 feet, $9 billion is inhealthcare. That's going to do well throughthis economic downturn. We have $7 billion ofrecurring revenues on the security business.We have $2 billion of Ticom (ph) that's goingto go OUL int0 Lhe oceans of the world. Thisis the systems that we are deploying. Ourflow control business is up because we areexploring for more gas and oil right now aswell as power generation. And the last leg isour electronics, which is that piece of thebusiness that's having some difficulty. Duthalf of our electronics business is in Europeand that's doing very, very well. It isgrowing by over 25 percent for us right now.The other half that's in the J.S. does havesome slowdown in growth but it's still growingat 15 percent levels for us, not at the 40percent levels that we had last year, butcertainly at 15 percent levels. So we areseeing the slowdown in that part of it butit's aggregating to electronics growth of some20 percent. And that's why we continue tofeel good about this.
16. However, defehdanL8 failed to disclose (until partial
disclosures were made between October 2, 2001 to February 2002) a
series of material facts: (a) that TYCO would achieve its earnings
targets only through undisclosed acquisitions; (b) that the
Individual Defendants sold in excess of $100,000,000 of their
individual stock holdings to the Company; and (c) that TYCO's
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management procedures were to make large payments to insiders,
including a $20,000,000 payment Lc one director and his charity for
furthering the interests of TYCO.
17. In addition to the foregoing, in or about late 1999,
external rule changes required TYCO to cease i.e .'s aggressive revenue
recognition practice and recognize the revenues from its home and
office security contracts only as the monies thereunder were
received. The rule, Securities and Exchange Commission Staff
Accoun:ing Bulletin Number 101 ("SAD 101), issued on necember 3,
1999, states under the section entitled Revenue Recognition -
General:
Based on these guidelines, revenue should not berecogni7ed until it is realized or realizable and earned.
18. The bulletin further addresses the recognition of service
revenue for a hypothetical "Company A": 1
The staff believes that, provided all other revenuerecognition criteria are met, service revenue should herecognized on a straight-line basis, unless evidencesuggests that the revenue is earned or obligations arefulfilled in a different pattern, over the contractualterm of the arrangement or the expected period duringwhich those specified services will be performed,whichever is longer. In this case, the customercontracted or the on-going activity tracking service,not for the set-up activities. The sr_aff notes that thecustomer could not, and would not, separately purchasethe set-up servJces without the on-going services. Theservices specified in the arrangement are performedcontinuously over the contractual term of the arrangement(and any 9ubsequent renewals). Therefore, the staffbelieves tha :L. Company A should recognize revenue on astraight-line basis, unless evidence suggests that therevenue is earned or obligations are fulfilled in adifferent pattern, over the contractual term of the
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arrangement or the expected period during which thosespecified services will he performed, whichever islonger.
In this situation, the staff would object to Company Arecognizing revenue in proportion to the costs incurredbecause the set-up costs incurred bear no directrelationship to the performance of services specified inthe arrangement. The staff also believes that it isinappropriate to recognize the entire amount of theprepayment as revenue at the outset of the arrangement byaccruing the remaining costs because the servicesrequired by the contract have not been performed.
19. Throughout the Class Period, defendants were aware that
the adverse financial effect of the rule change would he
approximately $1,000,000,000. Further, TYCO had extensive
indebtedness and was very well aware of its cash flows and
prospective cash flow, including cash flows from home and office
security contracts.
20. But defendants failed to disclose this adverse financial
effect until partial disclosure was made in October 2001. On the
contrary, defendants kept announcing positive facts, "making n their
earnings projections, and using the inflated price of TYCO
securities to make $1.00,000,000 worth of undisclosed sales of
securities by the Individual 9efendants and to acquire other
companies,
21. As defendants belatedly announced portions of the
foregoing material facts between October 2001 and January 2002,
TYCO stock fell ny more than 4C plus percent.
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AS AND FOR A FIRST CAUSE OF ACTION AGAINST ALL DEFENDANTSFOR VIOLATIONS OF SECTION 10 (10 OF THE SECURITIES ANDEXCHANGE ACT OF 1934 AND RULE 10b-5 PROMULGATEDTHEREUNDER
22. 2laintiff repeats and realleges each and every allegation
contained above as though fully set forth herein_
23. The Defendants, individually and in concert, directly and
indarectly, by the use, means or instrumentalities of interstate
commerce and/or of the mails, engaged and participated in a
COnci nuous cour se cf conduct to conceal adverse material
information about the bUOineos, operations, and management
procedures of TYCO as specified herein.
24. The Individual Defendants purposely delayed disclosure of
the material facts. The delayed negative disclosure was intended
to manipulate market perceptions and constitutes a course of
conduct which was intended to and did: (i) deceive the investing
public, including plaintiff and other Class members, until February
2002; artificially inflate and maintain the price of the TYCO
shares; and (iii) cause plaintiff and other members of the Class to
purchase the TYCO shares at artificially inflated prices.
25. in furtherance of this unlawful scheme, plan and course
of conduct, defendants, and each of them, took the actions set
forth herein. In doing so, defendants (a) employed devices,
schemes and artifices to defraud; (b) made untrue statements of
material fact and/or omitted to state material facts necessary L0
make the statements not misleading ) and (c) engaged in acts,
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practices, and a course of business which operated as a fraud and
deceit upon the purchasers of the TYCO shares.
26. Alternatively, such defendants recklessly misled
plaintiff and the Class and prevented them from ascertaining the
true facts. If defendants did not have actual knowledge of the
misrepresentations and omissions alleged, then they were reckless
in failing to obtain such knowledge by deliberately refraining from
taking those steps necessary to discover them.
27. As a result of the dissemination of the materially false
and misleading information and failure tc disclose all the material
facts , the market price of the TY.:20 shares was artificially
inflated. In reliance on defendants' conduct and the market,
plaintiff and the other members of the Class acquired the TYCO
shares at artificially high prices and were damaged thereby.
28. Plaintiff and the Class members reasonably relied or are
legally deemed to have reasonably relied on defendants' omissions
of the previously alleged material facts. Plaintiff's acquisition
of the TYCO shares at an inflated price was the foreseeable result
of the aforementioned material omissions because said omissions led
to the boosting of the valuation of the TYCO shares.
29. By virtue of the foregoing, defendants violated 5 10(h)
of the Exchange Ac ,L, and Rule 101D-5 promulgated thereunder. Ac a
direct and proximate result of said violation, plantiff and the
other members of the Class suffered damages in connection with the
II
, purchase and sale of the TYCO shares during The Class Period.
AS AND FOR A SECOND USECA OF ACTION PURSUANTTO SECTION 20(a) OF THE EXCHANGE ACT AGAINSTTHE INDIVIDuAL DEFENDANTS
30. Plaintiff repeats and realleges each and every allegation
contained above as though fully set forth herein.
31. The Individual Defendants acted as controlling persons of
TYCO within the meaning of Eection 20(a) of the Exchange Act as
alleged heroin. Me Individual DefendanLs had the power to
influence and control and did influence and control, directly or
indirectly, the decision-making of TYCO, including the content and
rdissemination of the various s7a _ements that plaintiff contends are
false and misleading. The Tndividual Defendants were provided with
or had unlimited access C.0 copies of TYCO's reports, press
releases, public filings and other statements alleged by plaintiff
to he misleading prior Lo and/or shortly after these statements
were issued and had The ability to prevent the issuance othe
statements or cause the statements to be corrected.
32. in particular, ea.:711 of the defendants had direct and/or
operationssupervisory involvement in the day-to-day operations of TYCO and,
therefore, is presumed uo have had the Dower Lc control or
Influence the partiCulr transactions giving rise to the securities
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violation herein, and exercise Lhe same.
33. As set forth above, TYCO and the Individual Defendants
each violated §10(b) and Rule lobs by their acts and omissions as
alleged in this compTaint. By virtue of their positions as
controlling persons, the Individual Defendants are liable pursuant
to 5 20(a) of the Exchange Act.. As a direct and proximate result
of defendants' wrongful conduct, plaintiff and other members of
the Class suffered damages in connection with their purchases
and/or sales of the TYCO shares during the Class Period.
JuRY DEMAND
paaintiff hereby demands a trial by jury.
PRAYER FOR RELIEF
WHEREFORE, plaintiff prays for judgment as follows:
A. Declaring this action to be a plaintiff class action
properly maintained pursuant to Rule 23 of the Federal Rules of
Civil Procedure and certifying plaintiff as class representative
and his counsel as Class counsel;
B. Awarding plainitf and the class damages and statutory
compensation against each defendant, joinLly and severally, and in
favor of plaintiff and all other rrtmbers of the Class, in an amount
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to he determined uo at trial plus nre-judgmen7_ interest thereon;
C_ Awarding plainLifl and the Class the coots and expenses
of this lir_.igaLion, includiny reasonahle attorneys' fees, and
experts' tees and other cot S and disbursements; and
D. Awarding plainLiff and other members of the Class such
other and further r-lief as to this honorable Courr may seem jusc
and proper.
Dared: Now York, New YorkFebruary 4, 2002
LOVELL & STEWART, LLP
By . C. CA 6--7 c e l LC - - ' ! ' 7/1 Christopher ov11 (CL 255)
500 FiEth Avenue, Suite S800New York, NY 10022(212) G08-1900
Attorneys for Plaintiff
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